TTEC Holdings (TTEC) Dividend Cut

TTEC Holdings (TTEC) cut its dividend due to high debt and interest rates, leverage, and elevated costs, which limited its ability to improve its balance sheet and issue the dividend.

The company’s trials have pressured the share price, down over 90% from its peak in mid-2021. The yield rose to over 10%, a percentage typically associated with a distressed company. The share price fell as investors sold this dividend stock because of mixed results and fears of a dividend cut. However, we do not expect another decrease soon.

Overview of International Flavors & Fragrances 

TTEC Holdings (TTEC) is an IT company that builds customer experience (CX) solutions for clients in multiple industries worldwide. It operates through two business segments: TTEC Digital and TTEC Engage. The firm was previously known as TeleTech Holdings but changed its name in 2018. 

Total revenue was $2,463 million in fiscal year 2023 and in the past twelve months.

Dividend Cut Announcement

TTEC Holdings (TTEC) announced a dividend cut on February 29, 2024. The software and consulting company’s semiannual dividend was $0.52 per share before the announcement. The dividend is now $0.06 per share, a nearly 88.5% reduction. In the quarterly results, the CEO said,

“TTEC’s board of directors’ decision to reduce the dividend reflects a prudent shift to prioritize our capital deployment towards continued investments in sustainable growth initiatives and debt reduction associated with strategic acquisitions. As revised, the dividend is in line with our stock price and the dividend yield typical for our industry and the broader market. I am confident we are well positioned to emerge stronger as we exit 2024.”

Further, in the fourth quarter conference call transcript, the company CEO, Kenneth Tuchman, added,

“Now transitioning to our capital deployment strategy, we have always tried to optimize our capital structure to the benefit of our shareholders, whether it be M&A, share buybacks, or dividend to maximize shareholder value. Given the current environment, earlier this week, our board made the decision to prioritize our capital initiatives and debt reduction associated with strategic acquisitions. The decision was based on the continuous economic headwinds, persistently high interest rates, which we expected to begin to normalize by now, and the desire to reduce our debt in order to continue investing in the future.”

Effect of the Change

By executing a ~89% dividend cut, TTEC Holdings (TTEC) is clearly attempting to reduce its cash obligation for the dividend to pay down debt. The firm’s debt has more than doubled since 2020. As a result, its interest coverage has plummeted, and the leverage ratio has risen. Higher interest rates have caused annual interest payments to soar over six times since 2021. In addition, the dividend payout has climbed. Consequently, the company lost its 9-year dividend increase streak and is no longer a Dividend Challenger.

Challenges

Rising debt and interest payments combined with greater dividend distributions have caused TTEC Holdings to experience problems. Debt has become expensive because of interest rates. Further, even though sales have risen, expenses have climbed faster, affecting gross and operating margins and free cash flow. 

Too Much Debt and Leverage

TTEC’s total debt more than doubled from 2019 to 2023. At the end of 2019, total debt was $479 million. However, by the end of 2023, total debt was $1,134 million. Consequently, leverage rose to ~3.32X. Values more than 3.0X generally signal a company facing challenges. Additionally, interest coverage dived to ~1.78X, a too-low value.

The firm must obviously address its debt issues before returning cash to shareholders.

Rising Interest Rates

Another issue related to leverage is rising interest rates, making debt more expensive. Higher debt and interest rates caused payments to surge from $12.38 million in 2021 to $78.32 million in 2023.

Tough Economic Climate

Lastly, we believe that TTEC is facing a difficult economic climate. The IT consulting industry is competitive, and the firm has no advantage over its peers. Also, in an inflationary environment, clients are scrutinizing their expenses.

Dividend Safety

TTEC’s dividend safety was trending lower before the announcement. The IT consulting company receives a dividend quality grade of ‘F’ from Portfolio Insight. Hence, it is at the bottom of all stocks tracked. Moreover, as seen on the chart below from Portfolio Insight*, the dividend yield had soared to 10%+ before the cut. Percentages at this level are typically indicative of a distressed company. investors seeking to avoid a dividend reduction should bear that in mind.

After lowering the dividend by nearly 89%, the forward dividend yield is around 1.2%, matching the company’s industry peers. The semiannual rate is $0.06 per share. The forward dividend yield is surprisingly lower than that of the S&P 500 Index.

The annual dividend now requires about $5.64 million ($0.12 yearly dividend x 47 million shares) compared to $49.23 million in 2023. In addition, the dividend payout ratio will shrink to below 10%, a minuscule value. We expect the annual difference to be used to deleverage and improve the balance sheet.

The dividend is clearly in a better position now, and we do not expect TTEC Holdings (TTEC) to conduct another cut soon.

Final Thoughts on the TTEC Holdings (TTEC) Dividend Cut

Like many companies experiencing higher debt and interest rates, TTEC Holdings (TTEC) slashed its dividend. Although revenue is rising, higher costs and interest expenses have impacted earnings per share and free cash flow. Hence, the company faces challenges in servicing debt and paying dividends in parallel. As a result, TTEC Holdings (TTEC) cut its dividend.

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