Estée Lauder: Dividend Cut on China Woes

The Estée Lauder (EL) Companies cut its dividend because of continued weakens in the Chinese prestige-beauty market, leading to sequentially lower sales. The American market is also pressured. The firm previously omitted its dividend during the pandemic in 2020, so the growth streak was only three years. 

The company’s end market challenges have caused the share price to drop substantially from its peak in December 2021. The share price fell as investors sold this dividend stock because of worries about when their end markets will recover, and a potential dividend cut as safety decreased. Another cut may occur in the future, depending on economic conditions.

Overview of The Estée Lauder Companies 

Estée Lauder manufactures, markets, and sells globally. Its products include skincare, makeup, perfume, and hair care products. The firm was founded in 1946 in New York City. It sells products through multiple brand names like Estée Lauder, Clinique, Origins, M·A·C, Bobbi Brown Cosmetics, La Mer, Aveda, Jo Malone London, TOM FORD, Too Faced, Dr. Jart+, and The Ordinary.

Total revenue was $15,608 million in the fiscal year 2024 and $15,451 million in the past twelve months.

Dividend Cut Announcement

During the first quarter fiscal 2025 results announcement on Thursday, October 31^st, The Estée Lauder Companies (EL) reduced its dividend payout. The company’s quarterly dividend rate was $0.66 per share before the announcement. The dividend is now $0.35 per share, a 47% reduction. In the quarterly results on October 31^st, the announcement stated,

“With the complex prestige beauty landscape, including the particular difficulty in forecasting the timing of market stabilization and recovery in mainland China and Asia travel retail, the Company is reducing its dividend to a more appropriate payout ratio. The dividend reduction also affords more financial flexibility for the incoming leadership team to reaccelerate the Company’s profitable growth trajectory. The Company continues to view dividends as an important piece of its capital allocation strategy at an appropriate payout ratio. Today, the Company declared a quarterly dividend of $.35 per share on its Class A and Class B Common Stock, payable in cash on December 16, 2024 to stockholders of record at the close of business on November 29, 2024.”

Later, in the earnings call transcript, the company stated,

” Additionally, we are reducing our dividends to a more appropriate payout ratio, which will also create more financial flexibility for our incoming leadership team to re-accelerate our profitable growth trajectory. “

“As you read in our press release this morning, we declared a quarterly dividend of $0.35 per share, a reduction from our previous quarterly dividend of $0.66 per share as we reduce our dividend to a more appropriate payout ratio given our earnings outlook.”

“As we looked at recognizing the level of uncertainty that we are experiencing for the balance of the year, which caused us to pull our guidance. We thought it appropriate at this time as well to look at the dividend. When you think about paying $0.66 dividend with the earnings, the $0.14 that we had in the quarter…And obviously, what we guided for the second quarter, it was appropriate for us to rightsize the dividend at this time to make sure. Obviously, we don’t have a liquidity problem to your point, but recognizing the prolonged situation in terms of pressure in our markets, rightsizing the dividend still a very good dividend yield for investors.”

Effect of the Change

By executing a 47% dividend cut, Estée Lauder sought to lower its dividend to provide financial flexibility in the face of a prolonged downturn in China. The annual streak was only three years in length because one quarterly dividend distribution was held constant in 2020 during the pandemic. However, the cut in the fourth quarter distribution effectively ends that streak. The result is less free cash flow is required for the dividend payout.

Challenges

Estée Lauder is facing a difficult economic environment in China, a major end market. Sales in the United States are also weakening.

China

Sales in the prestige beauty market in China are declining. Moreover, consumer sentiment is fragile because of the stagnant economy. Hence, sales in the category declined sequentially. That said, Estée Lauder is gaining market share. Sales in Asia travel are also pressured and below the pre-pandemic levels.

United States

Additionally, sales growth in the prestige beauty market in the United States is slowing. Inflation-driven price increases caused growth, but the effect is wearing off. In addition, the company is struggling with market share losses.

Dividend Safety

Estée Lauder’s dividend safety was declining because of lower revenue and earnings per share. Earnings per share peaked in fiscal year (FY) 2022 at $7.24 but plunged dramatically to $2.59 in 2024. They are expected to fall further to $1.79 per share in FY 2025. 

As a result, as seen in the chart below from Portfolio Insight*, the dividend yield climbed rapidly to over 4%. Although this percentage is not a value usually associated with distress, it was much greater than the 5-year average of 1.15%. After reducing the dividend by approximately 47%, the estimated forward dividend yield is around 2.2%. The quarterly rate is $0.35 per share. However, the yield is still higher than the S&P 500 average.

The annual dividend now requires about $502.6 billion ($1.40 yearly dividend x 359 million shares), compared to $947 million in FY 2024. In addition, based on consensus 2025 estimates of $1.73, the dividend payout ratio will contract to around 81%. We expect the annual difference in cash flow requirements to be used to enhance liquidity and the balance sheet.

Although the dividend is in a better position and more secure now, the payout ratio is still elevated and above our target value of 70%. In addition, the beauty giant receives a dividend quality grade of F’ from Portfolio Insight. Hence, Estée Lauder is in the bottom percentile of dividend stocks tracked. We view the equity as at risk for another dividend cut.

Final Thoughts on the Estée Lauder (EL) Dividend Cut

Before the pandemic, Estée Lauder was historically a dividend growth stock. However, continued weakness in China and Asia has created significant challenges for the firm. The recently announced China stimulus may help matters in the future, but it will be several quarters before the effect takes hold. However, the current flat sales and EPS decline have been severe. As a result, Estée Lauder cut its dividend.

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