A Dog of the DRIP Fights Back

12/20/2011 9:30 am EST


Charles Carlson

Editor, DRIP Investor

The door-to-door consumer business has been hammered by a bad global economy, online shopping, and some cultural challenges, but the queen of the sector is calling again, says Charles Carlson of DRIP Investor.

Avon Products (AVP) is a global beauty company, with over $10 billion in annual revenue. Avon markets its products in more than 100 countries through approximately 6.5 million active independent Avon sales representatives. Avon’s product line includes beauty products, as well as fashion and home products.

Avon stock has fallen sharply since peaking in early May at around $31 per share. The firm has missed analysts’ estimates in three of the last four quarters.

The September quarter was especially difficult. Net income in the quarter fell 1%. The firm attributed the soft results to implementation of a software system in Brazil, which disrupted business there.

Due to the Brazil issue and the weak economy, the firm no longer expects to have mid-single digit revenue growth in 2011, according to CEO Andrea Jung. The firm said it is assessing its long-term business plan and will give an update in its first quarter of 2012.

That the firm canceled its outlook for 2012 was disconcerting to investors. Also disconcerting was news that the US Securities and Exchange Commission is investigating the firm’s contact with financial analysts in 2010 and 2011 and matters related to Avon’s own probe into bribery in China and other countries that began in 2008.

Avon stock is clearly in the doghouse, and it will take at least a couple of decent quarters to get investors to return to the stock. The upside is that a lot of bad news is factored into these shares. Also, the price decline has lifted the stock’s yield to more than 5%. Avon pays a quarterly dividend of 23 cents per share.

Analysts expect 2012 profits of $1.83 per share, which handily covers the dividend payment. However, there is some concern that a reassessment of the company’s long-term plans could result in a dividend cut, so there is some risk to the dividend.

Admittedly, it is tough to recommend Avon given its current problems. Still, there is probably good value here for patient investors.

Minimum initial investment in Avon’s direct-purchase plan is $500. The firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $50 for ten consecutive months.

There is a one-time enrollment fee of $10. Purchase fees are $5 ($2.50 if made with automatic monthly investment) plus 3 cents per share. Each reinvestment will incur a fee of 5% of the amount being reinvested (maximum $3) plus 3 cents per share. Selling fees are $15 plus 12 cents per share.

The plan administrator is Computershare. For enrollment information call (800) 446-2617 or visit Computershare online at www.computershare.com.

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