Six Flags Entertainment Corporation (SIX) announced that it has suspended its dividend and share buybacks after several years of aggressively returning cash to shareholders. Neither action is surprising. The coronavirus-induced shutdown of the U.S. economy likely put a serious strain on the company’s finances. Most companies are trying to conserve cash and maintain liquidity. Six Flags is no exception. On April 7, 2020, Six Flags suspended the quarterly regular cash dividend from $0.20 per share to zero. The dividend suspension was tied to a $131 million incremental increase in the revolving credit line. Note that this was on top of a dividend cut earlier in the year, as discussed below. The specific statement from the company was as follows:
To enhance its liquidity, the company is taking proactive steps to address its capital spending for calendar year 2020, including deferring or eliminating at least $40 – $50 million of discretionary capital projects planned for 2020. In addition, as part of the revolving credit facility increase, the company has agreed to suspend the payment of dividends and the repurchase of its common stock until the earlier of December 31, 2021, or such time as the company terminates the incremental $131 million of the new revolving credit facility commitments.
Overview of Six Flags
Six Flags Entertainment Corporation was founded in 1961 and is currently based in Texas. The company owns and operates regional theme parks. Currently, it owns and operates 26 parks in the U.S., Mexico, and Canada. Total revenue was $1,488 million in 2019.
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Six Flags is Trying to Preserve Liquidity
This action of suspending the dividend combined with other actions should help Six Flags preserve liquidity. The dividend cost the company approximately $279 million in fiscal 2019. The company had already reduced share repurchases to about $5 million in 2019 after several years of robust buybacks. The company has also taken other actions to preserve liquidity including (1) eliminating nearly all seasonal labor costs, (2) a 25% reduction in salary for all executives and salaried employees, (3) a 25% reduction in scheduled hours for all full-time hourly employees to 30 hours per week, (4) intention to eliminate a $30 – $40 million of additional non-labor operating costs, (5) and deferring or eliminating $40 – $50 million of capital projects. Combined these actions should enhance Six Flags’ liquidity through the coronavirus crisis.
Note that all of Six Flags’ parks were closed on March 13, 2020 until at least mid-May. When combined with the above actions, Six Flags’ cash flow requirements each month are relatively low at about $30 – $35 million per month. Further, there is no debt maturing until 2024. The company had $23 million of cash on hand and $420 million available in the revolver. This means that the company can make it through this year and into 2021 with cash on hand and the revolver, if needed, even if Six Flags’ parks do no reopen until later this year or even next year.
This is important as the mid-May reopening is tentative. It is likely subject to lifting of restrictions by different states. This is not in Six Flags’ control. Attending an amusement park is not ‘essential’ and is largely categorized under discretionary spending. Additionally, ‘social distancing’ is probably more difficult to enforce at an amusement park. Hence, at this point, it is not clear if the mid-May reopening of Six Flags’ parks is realistic or not.
Six Flags Lost Dividend Contender Status
It was not suspending the dividend that resulted in Six Flags losing Dividend Contender status. Notably, the streak of dividend increases ended earlier this year when the company cut the quarterly regular cash dividend from $0.83 per share to $0.25 per share. This was in response to an earnings miss at end of Q4 FY 2019 and slowing organic growth. The cut ended Six Flags short tenure as a Dividend Contender, or a company that raised the dividend for 10 consecutive years.
In hindsight this cut in early 2020 was probably not surprising. The payout ratio has been near or over 100% almost every year since 2013. In fiscal 2019, the payout ratio was roughly 156% based on diluted earnings per share of $2.11 and a dividend of $3.29 per share. The difference must come from debt. Obviously, this is unsustainable over long-term. My criterion for a safe dividend is a payout ratio of 65% or less for obvious reasons. Volatility in earnings can lead to an unsustainable dividend.
In addition, cash flow coverage of the dividend was poor. In fiscal 2019, Six Flags generated about $410 million in operating cash flow. Capital expenditures were roughly $144 million. Hence, free cash flow was $266 million. The dividend required $279 million giving a dividend-to-FCF ratio of about 105%. This was well above my threshold of 70%. It also indicates that the company needed to use debt to pay the dividend. Again, this points to the importance of a sustainable dividend.
It is likely that the regular cash dividend of $0.25 per share would have been safe under normal circumstances. The large cut reduced both the payout ratio and dividend-to-FCF ratio to sustainable levels. Furthermore, there was no long-term debt maturing until 2024. But of course, these are atypical times. The triple whammy of COIVD-19, oil price wars, and transportation restrictions leading to park closures is a ‘Black Swan’ event. Unfortunately, from the context of consumer discretionary spending, it is arguably a worst-case event. This points to the importance of a sustainable dividend and the concept of dividend safety. Ultimately, it is no surprise the Six Flags suspended the dividend.
Final Thoughts on Six Flags Suspended Dividend
At this point, after Six Flags suspended its dividend, it is not a dividend growth stock or an income stock. The incremental increase of the revolving credit line led to the dividend suspension. It also placed a restriction on paying the dividend until Six Flags terminates the $131 million increase in the revolver or December 31, 2021, whichever is earlier. Furthermore, it is unclear at this point, the value of the future quarterly dividend or if it will increase annually. In my opinion there are better dividend growth opportunities at this time.
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As a final note, please take a look at my Coronavirus Dividend Cuts and Suspensions tracker. I update it every week. There are now over 100 companies on the list since end of February.
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