Shares of Green Plains (NASDAQ: GPRE) fell more than 12% today after the company suspended its dividend. The decision will save approximately $20 million per year for the business. While it's not exactly the type of news that shareholders want to hear, especially considering the annual dividend yield was just shy of 4%, management is making the right move for the long-term health of the company.
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Well, sort of. Management intends to redirect the cash flow toward capital investments aimed at increasing operating efficiency by significantly lowering ethanol production costs. However, Green Plains said it would also prioritize an existing share repurchase program, which might raise some eyebrows among shareholders.
As of 11:59 a.m. EDT, the stock had settled to a 9.5% loss.
Today's news isn't too surprising for investors that have been following along with business updates from the ethanol leader in the last year. Ethanol prices have sunk to their lowest levels since 2002, which has forced Green Plains to divest assets, pay down debt, refocus on its core strengths, and attempt to drive ethanol production costs sharply lower. The dividend was likely to be a casualty of that financial reality sooner or later.
Management attempted to blunt the news of the suspended dividend by simultaneously announcing a debt offering for $105 million in gross proceeds. Roughly $58 million will be used to repurchase older debt notes that were about to come due, which will effectively push the maturity date to 2024. Another $40 million will be used to immediately repurchase Green Plains stock under an existing $100 million share repurchase program, of which $80 million remained.
On the one hand, Green Plains stock is relatively cheap right now. Shares trade at half of book value, so buying back stock could prove valuable. On the other hand, investors might be right to question why management isn't instead using the infusion of capital to accelerate operating efficiency plans.
Consider that management has for years talked about a bolt-on technology for turning corn byproducts into high-protein animal feed products. The technology is expected to boost ethanol margins by as much as $0.10 per gallon, which would add up to a $110 million windfall across the company's 1.1-billion-gallon-per-year production footprint. However, the high-protein technology will only be installed at 1 of 13 ethanol manufacturing facilities owned by Green Plains by the end of 2019.
Are the cost savings now expected to be lower, or is management trying too hard to woo short-term thinking on Wall Street with share repurchases?
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