The fourth-quarter for Cascades (TSX: CAS) was certainly underwhelming, to say the least, for investors for the stock. Cascades stock has now fallen into oversold territory, with its current relative strength index (RSI) at 24 as of writing. This puts it well below the 30 threshold needed to hit that oversold status.
And it has investors worried. Especially about the dividend, with a yield currently sitting at 4.57%. And also, of course, over its returns, with shares now down 6% in the last year as of writing, and 29% since earnings.
Image source: Getty Images
What happened
The recent drop comes down to earnings. Cascades stock has been seeing its recent price decline for some time, but recently it was a lot heavier after earnings didn’t meet estimates. The sustainable packaging and materials company reported lower-than-expected earnings, as well as forecasted a significant decline in earnings for the first quarter of 2024.
This anticipation for lower profitability could possibly have led to investors selling their shares. But coupled with broader market weakness, especially in the building materials sector, this could create even more of a downturn.
What’s more, higher interest rates have made the company even less attractive, with even more challenges for Cascades stock down the line. This scenario led many analysts to downgrade the stock after disappointing guidance.
So what happened with earnings?
Alright, so what exactly happened with earnings to cause the drop in share price? Overall, sales increased slightly year over year to $1.1 billion for the fourth quarter. However, the net loss also rose to $57 million compared to $27 million the same time last year.
Adjusted net earnings decreased significantly year over year, dropping to $5 million from $22 million the year before. And overall, its performance was down. While tissue papers saw strong performance, it was the only business. Containerboard saw lower sales and profitability, with specialty products producing merely stable performance. What’s more, the company went on to say that 2024 should be just as bad, if not worse.
Analysts weighed in stating that the company would be downgraded. Weak container board performance and lowered 2024 revenue guidance were the biggest issues, with Cascades stock struggling to bring back investor confidence. In general, there will be an emphasis on the need for improved market conditions and strong execution for Cascades stock to recover.
Is the dividend in danger?
Based on all this, is Cascades stock in danger of lowering its dividend? There are a few items we should look at here. First off, while overall profitability decreased in the fourth quarter, the company still operates with positive cash flow. This can be used to support dividends. Debt reduction is also underway, and a healthier financial position will strengthen the case that the company can maintain its dividend.
Investors should pay close attention to its container board performance to see if the company can improve in this area, as it’s a huge contributor to the company’s revenue. And, of course, there is the overall economic uncertainty to think of as well.
As for metrics, Cascades stock operates with a secure 25.4% payout ratio. It also provides a 4.57% dividend yield, which is higher than its 3.1% five-year average, but not by a significant margin. While debt remains on the higher side, it’s manageable with management bringing it down.
Overall, Cascades stock’s dividend looks safe. Shares, on the other hand, do not. Not for 2024 at least.
