Why Avon Products, Inc. Stock Dropped (Again) Today

By Steve SymingtonFool.com

What:Shares ofAvon Products dropped 14% Thursday after credit-data company Fitch Solutions voiced concerns about the cosmetics specialist's financial condition, and warned its dividend is at risk.

So what: Specifically, Fitch noted that five-year credit-default swapsreferencing Avon debt -- essentially a form of insurance should Avon default on that debt -- have widened 22% during the past month as of Wednesday to a "record wide 1,109 basis points." That easily underperformed the broader North American consumer-goods sector, where five-year credit-default swaps widened just 3%. So far this year, Fitch elaborated that credit-default swaps referencing Avon have widened 130%, marking "a steep increase in the cost of protection."

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This shouldn't be terribly surprising to investors after Avon releasedpainful third-quarter resultslast week, saying that foreign currencies largely propelled a 22% decline in revenue, to $1.7 billion. On a constant-currency basis, Avon's sales would have fallen a much more modest 2%. Meanwhile, Avon's adjusted net loss came in at $50 million, or $0.11 per share, and the company reduced its guidance for operating margin and free cash flow for the full year.

Now what: But arguably even worse going forward is that Avon also declared a $0.06-per-share quarterly dividend along with that report, equating to an annual payout of roughly $104 million to investors, or a yield of roughly 9% as of this writing.

At risk of stating the obvious, Fitch's latest report suggests, "As [Avon] evaluates the foreign exchange impact on cash and cash flow into 2016, the $100 million or so in dividends could be in jeopardy. While a dividend cut would be positive for creditors, it is also a signal of increased pressure on liquidity."

As it stands, even with shares of Avon down more than 70% year to date, I feel the need to reiterate my stance that investors would be wise to avoid Avon stock as its struggles continue to compound.

The article Why Avon Products, Inc. Stock Dropped (Again) Today originally appeared on Fool.com.

Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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