Wyndham Destinations (WYND) Dividend Cut

Wyndham Destinations (WYND) recently cut its dividend. It is one of the 394 companies (as of this writing) on the list of coronavirus dividend cuts and suspensions. The timeshare company was raising the dividend at fairly fast clip starting in 2009. In fact, the stock was a Dividend Contender having raised the dividend for 10 consecutive years.

But Wyndham operates in an industry that is being materially impacted by the COVID-19 pandemic. Travel, hospitality, and leisure companies are being adversely affected by local government restrictions and many consumers that are unwilling to travel by air. Further, travel and vacations are largely discretionary expenses and consumers are putting those off. Wyndham managed to pay to its mid-June dividend.

However, the timeshare company cut its third quarter dividend paid in mid-September by about -40% to $0.30 per share. It is unlikely that the dividend will be raised for the fourth quarter.  Wyndham will lose its Dividend Contender status. That said, the stock is probably still a dividend growth stock over the long-term.

Overview of Wyndham Destinations

Wyndham Destinations is a timeshare and vacation ownership company that was founded in 1990 and changed its name to Wyndham Destinations in 2018. The company provides hospitality services in the U.S. and internationally. The company operates in two segments, Wyndham Vacation Clubs (formerly Vacation Ownership) and Panorama (formerly Vacation Exchange). The Vacation Clubs segment develops and sells vacation ownership interests to consumers and provides property management to owners. The Panorama segment offers vacation exchange services to owners. Wyndham also offers travel booking through its Panorama platform. At end of June 2020, Wyndham operated over 230 vacation club resorts (161 in the U.S.), 4,300+ affiliated exchange properties, and had 878,000 owners. It bills itself as the largest exchange network with over roughly 4 million members. Major competitors include Hilton Worldwide (HLT) and Marriott International (MAR). Total revenue in 2019 was $4,043 million.

Wyndham Dividend Cut

Wyndham announced its dividend cut without much fanfare in the second quarter earnings release. The regular quarterly cash dividend was cut from $0.50 per share to $0.30 per share, a 40% reduction. The specific statement from the company in a press release was

Wyndham Destinations, Inc. (NYSE: WYND) announced today its Board of Directors declared a cash dividend of $0.30 per share on its common stock, payable September 30, 2020 to shareholders of record as of September 15, 2020.

Similarly, the statement in the Q2 2020 earnings release was minimal. The company stated:

Dividend — The Company paid $43 million in cash dividends to shareholders ($0.50 per share) on June 30, 2020 to shareholders of record as of June 15, 2020.

The Company expects to recommend a third quarter dividend of $0.30 per share for approval by the Company’s Board of Directors in August. All declarations of quarterly cash dividends are subject to final approval by the Board of Directors.”

If we take a look at the second quarter transcripts from the conference call, there is some additional information on the dividend.

Two weeks ago, we amended the financial covenants for our revolving credit facility through March 31, 2022. The covenant relief provides flexibility by raising the first lien coverage ratio, while allowing us to maintain our ability to pay our dividend, subject to a $250 million liquidity covenant, which increases by $0.50 for every $1 of dividends paid. We also retained some flexibility to act on acquisition opportunities up to $250 million. We proactively amended our revolver due to the continuing and potentially extended uncertainty in the United States around the timing and magnitude of the economic recovery.

We have the right to elect out of the credit agreement at our discretion, at which time any restrictions resulting from the amendment would be lifted. We paid our second quarter dividend of $0.50 per share on June 30, and the company expects to recommend a third quarter dividend of $0.30 per share for approval by the company’s Board of Directors in August. We are paying a dividend because we believe in the underlying strength of our business, cash flow and liquidity. We believe the dividend at this level is attractive to both current and potential shareholders and is sustainable.

What are the main points here? Overall, the company has a fairly high level of debt. The leverage ratio (Net Debt/EBITDA) was about 5.3X at end of 2019. Recent debt raises increased cash on hand on the balance sheet but also long-term debt. However, it is the decline in revenue and earnings due to the coronavirus pandemic that has caused EBITDA to decrease and concurrently lead to an increase in the leverage ratio to about 47X. It is unlikely that EBITDA and cash flow will increase rapidly to levels before the pandemic. Occupancy was approximately 60% in July and net arrivals were 30% lower than the prior year. Uncertainty is still too high in the minds of consumers and the effects of federal stimulus is starting to fade limiting the recovery.

Wyndham’s Dividend Safety

Is the new dividend safe? Right now, the company is running quarterly losses in 2020. First quarter earnings per share were ($1.54) and second quarter earnings per share were ($1.92). The regular quarterly cash dividend was $0.50 per share so the dividend was obviously not covered by earnings. The new dividend is not covered by earnings either.

From a cash flow perspective, the old dividend was not well covered after accounting for capital expenditures. The problem is that operating cash flow in the first quarter was $57 million and in the second quarter was $73 million. The dividend required about $43 million meaning that after accounting for $21 and $18 million in capital expenditures the dividend-to-FCF ratio is over the 70% threshold that I consider to be safe. The new dividend requires 60% of $43 million or roughly $26 million. This significantly improves the dividend coverage and safety from the context of free cash flow assuming similar cash flow numbers to the first and second quarters.

Final Thoughts on Wyndham’s Dividend Cut

Wyndham likely had little choice but to cut the dividend. Despite recent improvements in occupancy and net arrivals relative to earlier months in the pandemic consumer confidence is still down and coronavirus infections are still up. People are also still reluctant to travel by air. The company was performing well at the start of the New Year. But resort closures likely impacted March, April, and May.

During economic downturns Wyndham’s top and bottom lines usually take hit if we use the Great Recession as an example. Hence, I still feel there is some risk for Wyndham’s dividend even after the current cut. I personally feel that until there is a sustained downward trend in new infections Wyndham will face challenges.

Related Articles on Dividend Power

• Marriott International (MAR) Dividend Suspension
• Kimco Realty (KIM) Dividend Cut