IFF dividend cut

International Flavors & Fragrances (IFF) Dividend Cut

International Flavors & Fragrances (IFF) cut its dividend because of high debt, leverage and share count, limiting its ability to improve its balance sheet and pay the dividend.

The company’s challenges have pressured the share price, down about 50% from its peak in October 2021. The yield rose to over 5%, near a decade high, as the share price dropped. Investors have exited this dividend stock because of poor performance and fears of a dividend cut. However, we do not expect another reduction soon.


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Overview of International Flavors & Fragrances 

International Flavors & Fragrances (IFF) is a nearly 200-year-old specialty chemical company. After two significant acquisitions, the firm expanded its product portfolio and geographic reach. It bought Frutarom in 2018 and DuPont Nutrition and Biosciences in 2021. Today, it is a market leader in manufacturing and selling flavors, scents, enzymes, binders, and polymers for consumer products. It operates in four segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions. Many of IFF’s products are found in food, soaps, detergents, perfumes, cosmetics, beverages, etc.

Total revenue was $11,479 million in fiscal year 2023 and in the past twelve months.

Dividend Cut Announcement

International Flavors & Fragrances (IFF) reduced its dividend on Wednesday, February 21, 2024. The retailer’s quarterly dividend was $0.81 per share before the announcement. The dividend is now $0.40 per share, a nearly 51% reduction. In the quarterly results, the company stated,

“The Company is right-sizing the dividend to enable faster deleveraging of the balance sheet and provide improved financial flexibility. IFF’s dividend is an important part of its capital allocation framework, and the Company is committed to providing a competitive yield.”

Further, in the fourth quarter conference call transcript, the company CEO, Erik Fyrwald, said,

“Now, as I said earlier, we are committed to reducing our level of debt. We have therefore announced an update to our dividend policy to reduce the quarterly dividend by approximately 50% to $0.40 per share. This is not a decision the board and management have taken lightly, as we know the dividend is important to shareholders.”

“However, it will enable us to reduce debt faster, strengthening our capital structure, which will create additional long-term value. This will also give the company greater financial flexibility, which will, when required, give us the ability to make more high-return growth investments.”

Effect of the Change

By announcing a 50% dividend cut, International Flavors & Fragrances (IFF) is clearly attempting to lower its debt and reduce leverage. The firm used significant debt for acquisitions, causing leverage to skyrocket to 5.7X in 2021. The value has declined but remains elevated. The share count also more than doubled, resulting in more cash flow directed toward the ordinary dividend. In addition, the company lost its 21-year dividend increase streak and is no longer a Dividend Contender.

Challenges

An earlier IFF CEO attempted to expand into higher-growth businesses through acquisitions. The Frutarom and DuPont Nutrition and Biosciences revenue more than doubled. However, it used cash, debt, and shares to make the purchases. Debt has become expensive because of interest rates. The share count also spiked, requiring more cash flow for dividend distributions.

Lastly, the economic climate was tougher than expected because supply chain disruptions and inflation affected margins while volumes declined.

Too Much Debt and Leverage

IFF’s debt has more than doubled from 2020 to 2021 after the DuPont purchase. At the end of fiscal year 2020, net debt was $4,076 million. However, by the end of the fiscal year 2021, net debt was $11,488 million. Consequently, leverage rose to ~5.73X. Values more than 3.0X are generally a signal of a distressed company. Additionally, interest coverage declined to ~2.35X, a meager value.

Although the company has sold businesses to improve the balance sheet, net debt is still lofty at $9,393 million. The leverage ratio is roughly 4.9X.

Rising Interest Rates

Another issue related to leverage is rising interest rates, making debt more costly. More debt combined with higher interest rates caused payment to surge from $132 million in 2020 to $380 million in 2023.

Cash Flow of the Dividend Payout

IFF employed stock to make its acquisitions. As a result, the cash required to pay the annual dividend soared from $323 million in 2020 to $826 million in 2023. The larger amount consumed a significant percentage of free cash flow.

Tough Economic Climate

Lastly, IFF has faced a challenging economic climate. Volumes for some products are lower, and higher prices have not compensated for the decline.

Dividend Safety

IFF’s dividend safety was low before the announcement. Before the cut, the pharmacy retailer received a dividend quality grade of ‘F,’ from Portfolio Insight. Thus, it was at the bottom of all stocks tracked.

After lowering the dividend by nearly 51%, the forward dividend yield is now around 1.99%, matching the company’s peers. The quarterly rate is $0.40 per share. The forward dividend yield is higher than that of the S&P 500 Index.

The annual dividend now requires about $408 million ($1.60 yearly dividend x 255 million shares) compared to $826 million in 2023. In addition, the dividend payout ratio will reduce to below 50%. We anticipate that the annual savings will be used to deleverage and improve the balance sheet.

The dividend is clearly on better footing now, and we do not expect International Flavors & Fragrances (IFF) to implement another cut in the near term.

Portfolio Insight - Dividend Yield History IFF
Source: Portfolio Insight*

Final Thoughts on International Flavors & Fragrances (IFF) Dividend Cut

The desire to expand into higher-growth end markets caused IFF to increase net debt and leverage. Moreover, the share count rose dramatically. Hence, the company has struggled to service debt and pay dividends concurrently. As a result, International Flavors & Fragrances (IFF) cut its dividend.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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