Medifast Inc: Little-Known Stock Just Delivered a 51% Dividend Increase
MED Stock Now a High-Yield Stock
With a market capitalization of just over $1.0 billion, Medifast Inc (NYSE:MED) isn’t really big enough to make headlines in the financial media.
However, the company recently did something that deserves income investors’ attention: it gave a big “pay raise” to its shareholders.
On December 3, Medifast announced that its board of directors approved a quarterly cash dividend rate of $1.13 per share. The amount represented a 51% increase from Medifast stock’s previous quarterly payout of $0.75 per share.
The new dividend will be paid on February 6, 2020 to shareholders of record as of December 27, 2019. (Source: “Medifast, Inc. Announces 51 Percent Increase in Quarterly Dividend,” Medifast Inc, December 3, 2019.)
“This dividend increase is reflective of the consistent underlying strength of our business, which continues to deliver double-digit revenue growth in the health and wellness category,” remarked CEO Dan Chard. (Source: Ibid.)
For those not in the know, Medifast is a nutrition and weight loss company headquartered in Baltimore, Maryland. The company has been around for nearly four decades. It sells its products through multiple channels, such as web sites, multi-level marketing, and franchised weight loss clinics.
Medifast may not be a familiar name to income investors, but it’s hard to deny the fact that the company has churned out some serious dividend growth.
Medifast set up its regular dividend policy in December 2015, with its first quarterly distribution of $0.25 per share paid in February 2016.
Since then, the company has increased its dividend every single year, by a total of 352%. (Source: “Dividend History,” Medifast Inc, last accessed December 6, 2019.)
With MED stock trading at $89.36 per share, its newly announced quarterly distribution rate translates to an annual yield of five percent.
Considering that the average S&P 500 company pays just 1.8% at the time of this writing, Medifast stock is now a true high-yield stock. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed December 6, 2019.)
Medifast Inc Runs a Growing Business
Obviously, in order for a company to afford sizable dividend hikes, it also needs a growing business. The good news is, that’s exactly what Medifast has.
According to the company’s most recent earnings report, Medifast generated $190.1 million in revenue in the third quarter of 2019. The amount not only represented a 36.5% increase year-over-year, but also marked a new record for the company. (Source: “Medifast, Inc. Announces Third Quarter 2019 Results,” Medifast Inc, November 7, 2019.)
Medifast has been capitalizing on its scalable coach-based distribution model. In the third quarter, the total number of active earning “OPTAVIA” coaches (OPTAVIA is the biggest brand of the company) was 32,200, up 9,600 from the year-ago period.
The company also managed to translate its top-line growth to the bottom line.
For the reporting quarter, Medifast earned a net income of $15.9 million, or $1.32 per share. The per-share figure is up 15.2% from a year ago.
Most importantly, the bottom-line number easily covered the $0.75 per share dividend declared during the quarter.
And that’s not all. On top of paying these over-sized dividends, Medifast also returns cash to investors through its share repurchase program.
The company bought back 225,000 shares in the third quarter. Following those buybacks, management also authorized an additional two million shares for repurchase. That brings the total number of shares remaining under the program to 2,369,000.
As Medifast continues with its stock buyback program, it would reduce the number of shares outstanding, thus allowing each remaining investor to own a slightly larger portion of the company.
According to an earlier investor presentation, from 2014 to the second quarter of 2019, Medifast had spent a whopping $85.0 million on stock repurchases. (Source: “Investor Presentation September 2019,” Medifast Inc, last accessed December 9, 2019.)
Medifast Inc (NYSE:MED) Stock Chart
Chart courtesy of StockCharts.com
Of course, if you take a look at the above Medifast stock chart, you’ll notice that the company’s share price tumbled on its last earnings release.
And that was mostly due to its updated guidance. Management now expect Medifast to generate revenue of $700.0 to $710.0 million and earnings per share of $5.80 to $5.90 in full-year 2019.
Previously, their guidance range was earnings of $6.75 to $6.95 per share on $730.0 to $750.0 million of revenue. (Source: Medifast Inc, November 7, 2019, op. cit.)
But here’s the thing: even if the company achieves the lower end of its new guidance range and earns $5.80 per share in 2019, the amount would still easily cover the $3.38-per-share dividend it declared for the year.
Also, one of the reasons Medifast revised its guidance was credit-card-related bad debt.
In the company’s earnings conference call, Dan Chard said: “At Medifast, we experienced some issues in the second and third quarters related to a highly organized automatic scheme using stolen identities and credit cards to transact business on our e-commerce sites. Each of these transactions was pre-approved prior to shipment by the payment processor and subsequently, reported to Medifast as utilizing a stolen card.” (Source: “Medifast’s (MED) CEO Dan Chard on Q3 2019 Results – Earnings Call Transcript,” Seeking Alpha, November 7, 2019.)
If the company can move past this short-term headwind, it should have no problem delivering more impressive numbers.
And there’s already a major catalyst for MED stock: international expansion.
In July, the company made its foray into the Asia-Pacific markets by launching its integrated coach model in Hong Kong and Singapore.
By tapping into the multi-billion-dollar global health and wellness market, Medifast could take its business to a whole new level.
As it stands, Medifast stock could be a good opportunity for dividend growth investors.