Sell Guess?: Don't Get Tricked By Its Silly Dividend Yield

Guess? (TICKER: GES) reported earnings yesterday after the market close and missed both EPS and revenue consensus estimates. Retail is having a challenging time and the miss was not a big surprise. Given the bad environment retailers operate in, I am surprised by the big drop AH since I was convinced a miss and a horrible guidance were already priced in.
The dividend yield is luring inexperienced investors:
A lot of "investors" look at P/E and dividend yield without taking into account free cash flow generation and the balance sheet.
I am convinced that without the dividend yield of roughly 7% the stock would be trading below $5. GES' management is trying anything they can think of to keep the stock price up. They are returning cash that was earned over the last couple of years to shareholders in the form of dividends. There is nothing wrong with that, BUT at the moment and in the foreseeable future GES will only be slightly cash flow positive. The company is reducing operations in the weak U.S. market while investing in the growing European and Asian ones. These capital investments pull down free cash flow generation. Assuming the company is paying around $77 million in dividends each year, most of it has to be drawn from the balance sheet.
As of January 28 2017 GES had $396 million of cash and $203 million of long term liabilities on its balance sheet (yes there is more to consider than just bank debt). This corresponds to $2.30 of net cash per share.... Read more

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