PetMed Reviewing Dividend Policy as Company Shifts Focus to Growth Strategy

PetMed Express, also known as 1-800-PetMeds, is a leading online retailer selling pet medications and other animal-related products to over 2 million customers. 

While the company is considered one of the nation's largest pet pharmacies and serves an essential need, the firm's earnings have faded in recent years due to intense competition from much larger rivals such as Walmart and Chewy. 

This earnings contraction caused the online pet pharmacy's payout ratio to spike above 100%, leading to us downgrading PetMed's Dividend Safety Score from Borderline Safe to Unsafe last fall.

In an attempt to reverse the firm's faltering earnings, PetMed on January 17 announced plans to acquire rival PetCareRx, an online retailer of pet medications and supplies. 

This acquisition should help PetMed Express expand its customer base, increase market share, and grow earnings by eliminating overlapping expenses. 

The deal is an all-cash $36 million transaction, representing roughly one-third of PetMed's available cash and around 10% of the firm's current market cap.

This transaction is not large enough on its own to disrupt PetMed's debt-free balance sheet or current dividend policy. 

But management commented that the payout would be reviewed in upcoming board meetings and considered relative to alternative uses for that cash, like further M&A activity, to spur what has been allusive growth.

Considering the lack of dividend coverage we addressed in more detail last September and the softening language around the dividend by management, we are again downgrading the firm's Dividend Safety Score from Unsafe to Very Unsafe.

Given the mounting pressures of supporting a dividend no longer covered by earnings and a management team that seems to be pivoting to a growth strategy, we wouldn't be surprised to see PetMet significantly reduce or even suspend the payout.

This could cause the micro-cap stock's investor base to quickly reshuffle away from income investors. And remaining shareholders need to have confidence in management's acquisitive growth strategy to create value, which comes with its own risks.

Conservative investors attracted to PetMed's 6.5% dividend yield may want to consider safer alternatives like Whirlpool (4.5% yield) or Leggett & Platt (5.0%). While neither company is immune to the softening economy, each has a well-covered and attractive dividend.

We will continue to monitor PetMed and provide updates as needed.