NEW YORK (CNN/Money) -
Eastman Kodak used to be a so-called Dog of the Dow because of its high dividend yield, which at least attracted some value investors. Now it's just a plain old dog.
Kodak announced Thursday morning that it would cut its dividend by 72 percent, taking its yield from 6.7 percent (the highest of any Dow stock) to just 1.9 percent (ranking it in the bottom third).
Kodak slashed its dividend as part of a new strategic plan. The company wants to position itself as a growth company and intends to spend heavily on digital imaging in the consumer and healthcare markets to reverse several years of revenue declines.
But the company faces two key challenges as it tries to reinvent itself. First, it is moving into crowded, competitive markets. Second, even with savings from the dividend cut, it doesn't have a lot muscle to make inroads.
Growth strategy is risky and expensive
The company said it plans to make a bigger foray in the ink-jet printing market to cash in on the digital photography craze. Kodak (EK: Research, Estimates) is also bulking up in healthcare imaging, announcing earlier this week that it was buying imaging technology from privately held MiraMedica that helps radiologists highlight potential disease. It also agreed to buy software company PracticeWorks, which makes imaging tools used by dentists and oral surgeons, for $500 million in July.
Including these deals, Kodak said Thursday that it intends to spend as much as $3 billion on acquisitions and investments to reach a sales target of $16 billion and earnings per share goal of $3 by 2006.
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Easier said than done. Those are incredibly lofty aspirations for a company that is expected to post sales of $12.7 billion this year and earnings per share of $1.78.
Some other not-so-small companies such as Dell, Lexmark, Epson, Canon and Hewlett-Packard are already major players in the printer market. And despite HP's many faults, the one thing that nobody disputes is that it knows how to sell printers.
As for acquisitions, should that really be a focus for Kodak? True, the dividend cut will help fund its growth strategy (the company estimated that it will save $2.1 billion between now and 2006 thanks to the lowered payout) but Kodak still has only $800 million in cash on its balance sheet and $3 billion in debt, half of which is short-term.
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Kodak said during an analyst meeting Thursday to outline its new strategy that it expected to borrow an additional $1 billion within the next few weeks and use a majority of that sum to pay off short-term debt.
But Burnham Securities analyst David Liebowitz pointed out during the question and answer session of the analyst meeting that Kodak's timing for refinancing its debt was a bit suspect, namely that Kodak should have taken advantage of lower interest rates earlier in the year.
Making matters worse, Standard & Poor's lowered its ratings on Kodak's short-term and long-term debt Thursday morning. Rival fixed income research firm Moody's cut Kodak's ratings last week. Both companies cited Kodak's increased acquisition appetite as a potential negative, since it will likely make it tougher for Kodak to keep reducing its debt load.
Credit downgrades are bad news for companies because it makes it more expensive to borrow money. Kodak's long-term bonds are now rated just one step above junk status by both firms.
Bad development for the stock
It is going to be an uphill battle for Kodak, despite its brand name, to reinvent itself, given its financial constraints and the fact that it waited so long to make a significant strategic change.
In a recent research report, Carol Levenson, an analyst for independent fixed income research firm Gimme Credit, wrote that Kodak is "destined to become a business school case study" since it "apparently misread the market it practically invented."
And the analyst meeting Thursday appeared to do little to satisfy the skeptics. Joan Lappin, president of money manager Gramercy Capital, said during the Q&A session that she expected to "hear a happy story that would give investors hope that the great past of Kodak would lead to a great future" but was disappointed to hear "a lot of ifs" instead.
The stock plunged nearly 13 percent on Thursday, but buying the dip seems a risky move. Like fellow Dow underpeformer AT&T, Kodak is hopelessly stuck in a business whose hey-day is long behind it.
But at least Ma Bell raised its dividend recently.
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