National Beverage follow up: After the special dividend, what’s next?

In our November 9, 2012 article on National Beverage (NASDAQ:FIZZ), we noted that the company has an outstanding record of creating value for long term shareholders, and that it was highly likely that a special dividend would be declared before 2013.  If you have not read this article, you might want to read it here before proceeding.

I wanted to provide a brief update, as the special dividend we anticipated was declared on November 23, (Which for the author was a slightly early birthday present!), and the exact dividend amount of $2.55 was just released today.

Let’s check out the impact this announcement had on National Beverage’s stock price:


The stock price of National Beverage (+15% on the day of the announcement) now significantly reflects the release of the special dividend to shareholders.  This significant short term gain raises the question:

Is the original National Beverage article now best viewed as a short term trading recommendation?

Before I answer this, I want to review some additional statements the CEO made in the original press release, and also the statements made today.   Here are CEO Nick A. Caporella’s statements from November 23rd:

  • “Our Board views itself as ‘Guardians’ of the shareholders and, as such, will continue to explore all remedies to enhance shareholder values. The range of distribution, while protecting the integrity of our balance sheet, are shareholder values that we will not compromise,”
  • “Final services for President Kennedy’s — ‘What You Can Do For Your Country’ were held November 6, 2012. Will traditional ‘Golden Standards’ also go the way of that challenge? Can the walls of a Fortress Balance Sheet be astute talent or dynamic creative and insure the same Philosophical Security to the investor? Does shareholder equity have a significant effect on a company’s ability to create, innovate and make profits? Or . . . should it be the Idea — the generation of Cash Flow and the magnet that attracts genius to the Team . . . that comprise the real granite walls of the Fortress . . . on the Fortress Balance Sheet?”
  • “Is tomorrow’s Enterprise Value determined by the brilliance of the idea, management’s creativity and the magnitude of free cash flow? I certainly hope so . . .” continued Caporella.
  • “Confusion, upset, dilemma, change, challenge . . . All are provocateurs for the Opportunistic and the Innovator! The benefactors are those who engage in novel thought, for they rest upon — Excellence! We are effervescently engaged — We are National Beverage Corp.! Just part of our DNA . . .” smiled Caporella.

The above statements make clear that Caporella has considered the important issues.  The first priority of any financial decision (from an owner’s perspective) is to support the ongoing value-creating activities of the business.  It is critical that financial decisions not compromise owner’s value over the long term for the sake of a short term gain.

Caporella then goes on to contemplate the true nature of business value.  It is a fascinating question:  Does a business’s value and strength come simply from asset and balance sheet items, or is value primarily found in the “fortress” of intangible items like creativity, innovation, and the ability to create future cash flows?

From my perspective the issue is clear.  An operating business does need a sound financial base, but the real business value lies in the proprietary “non-tangible” items that make it special and unique.  It is these qualities that allow for an above average return on investment.

What about the value of a special dividend?  To some it seems illogical that simply taking money off of the balance sheet (or using leverage to partially fund a dividend) and returning it to investors would create value.  For those interested in an analysis of how this can at times create value, click here.

The press statement released today contains some important additional color on the special dividend situation.   I have pulled out the most pertinent facts:

  • The record date has been moved to the close of business November 7th
  • If the need arises, the majority shareholder has committed to providing additional equity – which will provide a significant safeguard to the balance sheet
  • The dividend will for the time being be financed with credit facilities currently in place, rather than long term debt

An increase in the float of National Beverage stock has the potential to increase its valuation down the road.  This is because (do to the concentrated ownership) the float for the stock is very small.  This makes it difficult for institutions to purchase as much of the company as they would perhaps like to own.   When I see cutting edge hedge funds such as Renaissance Technologies on the institutional ownership roster, it is easy to surmise that there will be demand if available float increases.

With the Federal Reserve suggesting that short-term rates will be held low for an extended period of time, National Beverage should have adequate time to either pay most of the credit facility down, or lock in favorable long-term interest rates.

I believe National Beverage will continue to create value in the future and is still reasonably priced.  It has a solid portfolio of brands and an “owner focused” management team with a rock-solid track record of creating value.   Indeed, Mr. Caporella’s enthusiasm for future opportunities is contagious.  As such, the long term recommendation contained in the prior article still stands.

Current National Beverage strategy:  Buy or add to position on dips and hold for the long term.

PS:  I will be celebrating the “early birthday present” from National Beverage with a tall glass of National Beverage’s LaCroix “Pure” flavor sparkling water on ice – My favorite National Beverage product!

Disclosure:  I own shares of National Beverage (FIZZ)

Disclosure:  Updated after initial publication to address a misinterpretation of the November 29th press release.

 

 

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