MSC Industrial Expects Dividend to Remain Safe as Demand Surges for Safety and Janitorial Products
On April 8, MSC Industrial (MSM) reported earnings that were better than feared and voiced support for the dividend. Here's what Treasurer John Chironna said on the conference call:
Turning to our ordinary dividend. We have ample liquidity to continue running the business and paying the current level of our dividend in all but the most severe scenarios.
We have conducted numerous best and worst-case sensitivity analyses and revenues would have to decline somewhere in the range of 40% to 50% before our operating cash flow turn negative.
At these levels, we would take additional cost down actions and could sustain multiple quarters given our liquidity position.
As a distributor, MSC can generate a lot of cash in a downturn because it can reduce inventory purchases while also selling down its existing stockpile.
However, with many businesses across America temporarily shutting down, it wasn't clear how MSC would perform in this environment.
Management said that a little over 20% of MSC's customers have temporarily closed (mostly metalworking customers in the automotive supply chain). Another group of customers are operating but have restricted access to any visitors from the outside.
It's not an easy environment for sales, and MSC noted that its revenue declined at a mid-teens pace the last two weeks for March.
Yet management said that orders for March were actually up high-single digits over the prior year and even increased during the last two weeks of March.
MSC has faith that these orders will come through and translate into sales during the months of April, May, and June, "which would offer us a growth tailwind to buffer any additional softness that may be yet to come."
MSC sells over 1.7 million products, with about 70% of its revenue generated from the manufacturing sector. Despite many areas of weakness, demand is surging for safety and janitorial products, especially from government customers.
As you can see, MSC sells thousands of products in these categories, including towels, tissues, wipes, soaps, cleaners, sanitizers, gloves, and respiratory masks.
Management said that MSC has built up a strong presence in these businesses over the years. Safety and janitorial products historically "were in the teens" as percentage of MSC's overall revenue, making them the third biggest category for the company. Government customers account for about 7% of sales.
Coupled with MSC's solid cash flow performance during downturns and its healthy liquidity, this should help the company weather the storm and keep its dividend intact. Management also stated that the firm has contingency plans to reduce costs further if the situation deteriorates from here.
Valuation expectations continue to look modest and the dividend should remain safe, so we plan to continue holding our shares of MSC Industrial in our Long-term Dividend Growth portfolio.
However, as we discussed last July, we would eventually be open to upgrading into a business that has more within its control and better long-term growth prospects.
