During the Wednesday trading session, Coty Incorporated (COTY) shares fell by 15%, eventually tumbling to $3.65 level. This is the third consecutive day of decline in the stock price. One of the reasons behind this collapse was disappointing quarterly results, which the company published on Monday. According to the report, the firm lost more than 23% of its revenue, compared to the year earlier. Organic sales also fell by 19.5%. The loss per share has reached $0.08.
However, the list of bad news did not end there. The company announced that it was selling its 60% stake in hair care and professional beauty business for $4 billion. The deal includes $3 billion in cash and $1 billion in convertible shares of KKR. In the short term, this can significantly improve Coty’s balance sheet. Having some cash at hand is always helpful, especially in times of economic downturn. However, the problem is that the firm has lost one of its important sources of income. It is far from guaranteed that Coty will be able to invest those sums in its brands in a way to earn some decent returns.
It is much more likely that the management will retain a significant portion of those funds to confront the current crisis. This can be a wise choice considering the current challenging circumstances. However, some analysts might concede that as a result of this transaction the company might lose some of its long term profitability.
Current Valuations of Coty Stock
As we can see from this chart, one of the problems with COTY is that the decline of the stock has not begun with the outbreak of the COVID-19 pandemic. The fortunes of Coty’s shares peaked around 2016 when it reached $30. After that, the stock was in a steady downtrend and nowadays it trades near $3.65. So during the last 4 years, it has lost more than 85% of its value.
The company still maintains a $0.50 dividend per share. So at the moment stock has quite an attractive dividend yield of 13.7%, which is rather rare in the case of the S&P 500 stocks. However, those payouts to shareholders might not be sustainable if the company does not restore its profitability.