MATX - Treasuries Make More Sense Than Matson Inc.

2023-10-19 13:58:59 ET

Summary

• Matson, Inc. shares have returned about 34.1% in the past 5 months, but investors can earn higher risk-free returns elsewhere.
• The company's financial results show a decline in revenue, operating income, and net income compared to the previous year.
• A comparison between Matson stock and Treasury Notes reveals that the dividend would need to grow at a CAGR of 25.4% to match risk-free cash flows, which is unlikely.

It’s been over five months since I recommended investors avoid Matson, Inc. ( MATX ) in favour of a risk free investment, and in that time, the shares have returned about 34.1% against a gain of about 4.5% for the S&P 500. That is emotionally painful. I’m willing to push past the pain, though, and work out whether or not it makes sense to swallow my pride and buy the shares at the moment. I’ll make that determination by reviewing the latest financial results and by reviewing alternatives available to investors. After all, if an investor can earn a higher, risk-free return elsewhere, it makes sense to continue to eschew these shares, stock price jump or no stock price jump. Finally, I feel compelled to also write that the returns here have been “good” or “bad” depending on your frame of reference. This is not to excuse my faintheartedness earlier, but to point out that if someone bought these shares when excitement was highest in early 2022, they’re either flat or down significantly. In my view, this offers a valuable insight into why we want to avoid stocks when people are most excited about them.

I know that my writing can be effortful to wade through. For that reason, I put a thesis statement very near the beginning of each of my articles. This summarizes my thinking in a paragraph that I hope is simultaneously “handy”, and “dandy”, and allows you to decide whether the “juice” from the rest of the article is worth the mental “squeeze” of being exposed to my tiresome sense of humour. You’re welcome. I think the company is on the financial downswing relative to the happy time (for this company) of 2021-2022. That written, things are still going very well relative to the period 2014-2019, so I expect the year will end somewhere between these two extremes. I’m also encouraged by the fact that the capital structure is much cleaner, and that the dividend remains very well covered. The problem for me is that an investor can receive significantly more cash from a risk free Treasury Note at the moment than they can from this stock. Receiving less cash for the joy of taking on extra risk in stock ownership is not something that floats my proverbial “boat”, forgive the pun, so I’m going to continue to favour fixed income investments over this stock. Thus ends my thesis statement. If you read on from here, that’s on you. I don’t want to read any complaints in the comments section about my writing style or proper spelling.

Financial Snapshot

When I sat down to write this article, I looked at the stock performance and immediately an expectation formed in my mind about great financial results. Boy, were my expectations subverted! Relative to the same period a year ago, revenue, operating income, and net income were down 39%, 85.4%, and 84% respectively. In spite of this, the dividend is higher by about 3.3%. The result is that the payout ratio has jumped from 3.3% to over 19%. On the bright side, the capital structure has been cleaned up nicely given that long term debt is down by about $132.7 million, or about 23%. That is an impressive feat in such a short time in my view.

When we compare the most recent period to the pre-pandemic era, things look less dire in my view. Revenue and net income for the first six months of 2023 are actually up 36% and a whopping 271% higher than they were in 2019. So, it seems to me that the company has improved materially from its pre-pandemic performance, but has crested the wave of 2021-2022’s revenue and profitability, forgive the pun. To put some numbers on this in order to drive the point home, consider that between the years 2014 to 2019, the company generated an average of about $2 billion a year in revenue. For the first half of 2023, the company generated about 74% of that. So, I think the company is in a permanently improved situation relative to the 2014-2019 period, but I think the 2021-2022 era is done.

The Stock Versus The Treasuries: Let’s Get Ready To Rumble

Before getting into the meat of this analysis, I think it would be worthwhile for me to point out some of my working assumptions. First, I assume that investors seek the highest, and safest returns available to them. They would generally prefer more cash in the pocket of their jeans, or their polyester action slacks, or their Adidas track suits etc.. Whatever fashion “vibe” happens to float your particular boat, I’m assuming you’d prefer more cash from your investments than less. I’m also assuming you don’t want to take on excessive risk in order to achieve those returns.

I am also assuming that you’re comfortable buying an asset class other than stocks. I’m assuming that in order to grow dividends at a rapid pace over the next decade, a given company will also need to grow earnings near the same rate. This is the most controversial of my assumptions, but I’m willing to stand by it until someone makes a convincing argument against it. Finally, I will point out that my motivation for doing this particular analysis is driven by the “dividend yields are lower, but dividends can grow, unlike your Treasury Notes.” I want to put some numbers on that assumption.

Given that investors are able to put their capital to work in a Treasury Note as easily as a stock, I think we should review these two investments side by side to compare the cash flows each would spin off. I’m not going to comment on the relative riskiness of each because I assume I don’t need to belabour the point that Treasury Notes are much less risky investments than a particular stock.

In the table below, I’ve made a comparison between the capital tied up in either 100 shares of Matson stock or a 10-Year Treasury Note. Given that the yield on the stock is currently about 1.43%, and the 10-Year Treasury is currently 4.96 %, I want to answer the question: “at what rate will dividends on the common stock need to grow to match the cash flows that an investor can receive risk free?” I present the answer to that question below for your reading pleasure.

Please pay attention to the row labeled “Req’d Rate.” This is the rate of growth necessary to boost the dividend from its current level so that cash flows will be identical to the cash flows received by the Treasury Note holder. In order for the cash received from dividends to match cash received from Treasury Notes, the dividend would need to grow from current levels over the next decade at a CAGR of about 25.4%, or just over 7.5 times what they are now. That is excessive in my view, and I doubt it will happen. I conclude, therefore, that a Treasury Note investor will receive more cash than the stock investor. I’ll remind you yet again that stockholders take on risks that Treasury Note holders do not. So, the stock investor is being paid less to take on more risk. That’s generally not a condition in which I like to find myself, so I’m going to continue to pass on these shares.

Now, you might reply to this analysis with the argument that the payout ratio is low, and that management probably will goose the dividend from here. Both of those points are fair, but I would feel compelled to reply with something like:

1. A decade is a long time. Just because the payout ratio is low now doesn’t mean it will always be.

2. You’re relying on management largesse. They may choose to spend money on a buyback, and those aren’t universally great for shareholders.

3. Every stock on the planet has risks that a Treasury Note simply doesn’t have. So, to compensate for the risk of share ownership, you should demand more than the cash from the Treasury Note. Thus, you should reasonably expect something like a CAGR well over 25.4%, which would be very optimistic in my view.

Given all of the above, I think there’s a chance that shares may continue to rise in price. The problem, from my point of view, is that I’m old enough to remember that the market giveth, the market taketh awayeth. If we anchor only on what is reasonably predictable (i.e. cash flows from each investment), Treasury Notes make far more sense at this point in my view. I think shareholders are paying more in units of risk to receive far less cash returns, and that seems silly to me.

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