NEW YORK (TheStreet) -- Avon Products (AVP - Get Report) stock is retreating 11.19% to $2.69 on heavy trading volume on Thursday afternoon following reports that the company may need to eliminate its dividend because of lower free cash flow, according to Barron's, citing a Fitch Solutions report.
The report shows the company has "adequate" liquidity, but its credit default swap spreads, which is a measurement of the amount investors would spend for credit protection, have reached record levels, Barron's noted.
"Five-year CDS widened 22% over the past month as of November 11, to a record wide 1,109 basis points," the report added. "Those levels underperform the broader North America consumer goods sector (3% wider)."
Last week, Avon reported a loss of 11 cents per share for the 2015 third quarter because of unfavorable foreign exchange rates.
"As the company evaluates the foreign exchange impact on cash and cash flow into 2016, the $100 million or so in dividends could be in jeopardy," the Fitch report noted, Barron's added. "While a dividend cut would be positive for creditors, it is also a signal of increased pressure on liquidity."
So far today, 17.65 million shares of Avon have exchanged hands, compared with its average daily volume of 10.28 million shares.
Separately, TheStreet Ratings team rates AVON PRODUCTS as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:
We rate AVON PRODUCTS (AVP) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally high debt management risk, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The debt-to-equity ratio is very high at 55.23 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, AVP has a quick ratio of 0.60, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Personal Products industry and the overall market, AVON PRODUCTS's return on equity significantly trails that of both the industry average and the S&P 500.
- AVP's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 69.34%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- Net operating cash flow has decreased to $88.20 million or 16.39% when compared to the same quarter last year. Despite a decrease in cash flow of 16.39%, AVON PRODUCTS is still significantly exceeding the industry average of -84.44%.
- AVP, with its decline in revenue, underperformed when compared the industry average of 0.4%. Since the same quarter one year prior, revenues fell by 16.7%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- You can view the full analysis from the report here: AVP