Endeavour Group tumbles to all-time lows as strategy reset cuts dividend outlook
Endeavour's strategy reset trimmed the dividend policy to 50-75%, well-below its historical payout ratio of 70-80%.
Source: Market Index
Mentioned
KEY POINTS
- Endeavour's revised dividend payout ratio of 50-75% of underlying NPAT marks a major step down from the historical 70-80% range, reducing forward yield expectations for income-focused holders
- Management is targeting $300 million in cost savings by FY29, exiting most wine production assets, and redirecting capital toward higher-returning Hotels refurbishments with a 15% year-two ROI target
- Endeavour shares finished the Wednesday session down 4.8% to a record low of $2.93. The stock is now down 20% year-to-date and down 27.8% in the last twelve months
Endeavour Group (ASX: EDV) is asking shareholders to swap dividend cheques for a turnaround story, and the market just isn't buying it.
The owner of Dan Murphy's, BWS and ALH Hotels dropped as much as 6% on Wednesday after unveiling a three-year transformation plan that includes lower dividends, a big cost-out program, and the exit of most of its wine production assets.
The share price has basically moved from the top left of your screen to the bottom right over the past four years, and it's now down 20% year-to-date.
Endeavour price chart since 2021 demerger from Woolworths (Source: TradingView)
Investor day strategy update
The Investor Day presentation laid out three priorities: Reset the multi-brand retail strategy, unlock growth in Hotels, and simplify operations.
In a nutshell:
$300 million of cost savings targeted by FY29, with $100 million expected in FY27
Exit of most of the existing winery and vineyard portfolio, including Chapel Hill, Oakridge and Josef Chromy, with Pinnacle Drinks re-positioned to support Retail and high-performing brands
Dividend payout ratio cut to 50-75% of underlying NPAT
Lifting capital deployment to Hotels through refurbishments, light-touch renewals and whole-of-venue repositionings
Hrdlicka said the company had "examined the business through a number of lenses and made the tough choices required to deliver the Group's next phase of growth," pointing to "significant untapped potential" in the retail liquor brands and Hotels.
A lower payout ratio
On paper, the strategy reads as a net positive for a stock trading at records. Costs are coming out, capital is being redirected to the higher-returning Hotels business (management is targeting 15% year-two ROI on pub refurbishments), and the wine production exit removes a capital-heavy, low-returning distraction in an oversupplied and structurally challenged category. Citi flagged the Pinnacle question back in January, suggesting Endeavour could go further than a strategic pause and exit the operation entirely.
But the dividend policy change is a big deal.
Despite its share price underperformance, Endeavour has been a staple income-oriented large cap since its 2021 demerger from Woolworths. Since then, the company has consistently paid out ~70-80% of its underlying NPAT.
The new 50-75% payout ratio is much wider and lower than the historical range, and UBS modelling in May expected that 70-80% range to hold well into FY30, implying a yield of 4-5% at current prices.
In FY25, Endeavour paid out 18.8 cents per share in dividends, at a 79% payout ratio and a yield of approximately 5.1%. If we apply the lower end of the new policy to that year, this implies a full-year dividend of just 11.9 cents per share, or a yield of 3.2%. It's a very material change for income-oriented investors and funds.
To what end
Plenty of analysts have been calling the bottom, but none have succeeded, as the stock makes another fresh all-time low today.
In January, Citi upgraded the stock to Buy, citing: "The strategy of trying to 'buy the last downgrade' is fraught with risk. However, yesterday's promotion-led downgrade was somewhat expected and, unless there is a further deterioration in trading conditions or additional investment is required into price or something else, we see potential for yesterday's update to be the last downgrade in the near term."
Fast forward four months, and Endeavour announced a relatively mixed Q3 sales update on 4 May, with solid retail growth, offset by a deterioration in hotels momentum.
"The strength of the Dan Murphyʼs and BWS brands and our ability to capture demand around celebration occasions were again evident in our Retail trading results over the Easter holiday period," noted Hrdlicka. Meanwhile, sales momentum in hotels softened in March, with sales growth across March and April decelerating to 1.5%.
The bottom line: The strategy update sounds good on paper but carries significant execution risk. Meanwhile, a swathe of retailers flagged a material deterioration in trading conditions around late March, as the US-Iran conflict, soaring oil prices and further RBA rate hikes took a significant toll on consumer confidence and spending patterns. Throw in a lower dividend payout ratio into the mix, and no wonder the stock is down 4.8% to record lows today.
