EVA - Enviva: Dividend Cut Means I'm Selling Even With Massive Buybacks

2023-05-04 16:46:36 ET

Summary

• I, like many others, bought Enviva Inc. for its high yield and dividend growth.
• As of today, those dividends are gone.
• The company has buyback authorization worth 20% of its market cap, but it won't be employed.
• I'm moving on to better investments elsewhere.

Enviva Inc. (EVA) announced Q1 2023 earnings Thursday, and the company saw a growing net loss for the quarter and decided to suspend all dividend payments . While I believe the company may have some upside thanks to a $100 million buyback authorization (representing >20% of the company's remaining value), the likelihood of it being employed is shrinking, along with Enviva's damaged financials.

First Quarter Earnings

Enviva's first quarter net loss grew to $116.9 million, more than twice the company's loss ($45.6 million) for the same quarter a year ago. Though it did manage to grow its revenue, rising costs have been squeezing the company for some time and continue to do so. Though the company managed to grow its revenue, the operating cost squeeze has undermined most of this benefit, despite the company's excellent contract backlog. Finally, we saw shareholder equity cut in half to $129 million from $286 million a year ago.

Dividend Cut Means I'm Out

I haven't written about Enviva before on Seeking Alpha, but I did purchase a few shares a while back because I thought the company's dividend looked very attractive and the regulatory environment around biomass (regardless of debates surrounding its actual value) appeared supportive to Enviva's future. However, the company's deteriorating financial situation has concerned me for a while.

The company freezing its dividend payouts (rather than raising them each quarter as was long the case) was a first sign, but this earnings report was the final straw for many investors, including myself, as evidenced by the cratering stock price this morning.

The company has announced an end to its quarterly dividends , in order to "retain approximately $1 billion in incremental cash flow during the period 2023 to 2026."

One Potential Silver Lining: Buybacks

The one upside of the absolute collapse in the company's share price is perhaps its buyback program. Enviva has $100 million in buyback authorization for shares that are now worth less than $500 million.

Unfortunately-or perhaps wisely for the company's sake-share repurchases have been dropped down to third priority on the company's new capital allocation priorities:

Changed capital allocation priorities to direct cash flows from the business to highest-returning opportunities. In order of management priority: (1) effectively managing liquidity and leverage, (2) improving operating cost and productivity of current asset platform, (3) returning capital to stockholders through share repurchases, and (4) accelerating, when appropriate, investments in new fully contracted wood pellet production assets

As a result, I don't foresee the company executing any repurchases any time soon. Furthermore, even if it did repurchase 20% of its outstanding shares, I do not think it would bring investors back to the company absent the prior capital priorities already being sorted out.

The Takeaway

Enviva has a few things going for it: it has a solid contract backlog, the EU still classes biomass as 100% renewable, LNG pressure, and the dividend cut will free cash flow to repair the company's financials. However, my decision is simple: I bought Enviva for two reasons, the mid-term upside for biomass adoption and the strong dividend. The company has completely axed the second. Consequently, I'm out. I may take another look at Enviva down the road once the company has stabilized itself, but for now, I believe I can better employ my cash (or what's left of it) elsewhere.

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