Green Plains Drives Ethanol Into Dividend Hall of Shame

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It’s one thing when a company sells more debt to fund operations. It’s another thing entirely when a company sells more debt and also announces that it is suspending its common stock dividend. Green Plains Inc. (NASDAQ: GPRE) has officially joined the Dividend Hall of Shame.

After hitting a 52-week low on more than 12-times its average volume, the prospects for the Omaha, Nebraska-based ethanol producer are looking less than rosy. Green Plain currently has an ethanol production capacity of roughly 1.1 billion gallons per year, and it has 13 plants strategically located across the U.S.

The reason that Green Plains’ board of directors offered to explain the suspension its quarterly cash dividend was so the company could retain and redirect cash flow to its “Project 24 opex equalization plan,” as well as for the deployment of high-protein technology and for its stock repurchase program.

One issue to consider here is that Green Plains is losing money and the few analysts who follow the company expect it to lose money in 2019 and 2020. The company also had $343.4 million in long-term debt at the end of this March. That dividend of $0.12 per common share per quarter may have been unsustainable with a prior 3.8% yield, but suspending that dividend sends the message that things might not get better for quite some time.

Todd Becker, president and chief executive officer of Green Plains, said:

As part of our capital allocation plan, we believe suspending our cash dividend enables us to expedite our investments into our Project 24 initiative, which is expected to significantly reduce our ethanol production operating costs, and support deployment of our high-protein feed technology across our production platform. We are confident that by suspending our dividend, we can prudently direct this cash flow to opportunities within our business to create greater shareholder returns over the near and long term.

We intend to immediately deploy capital to repurchase stock pursuant to the remaining availability of approximately $80 million under the $100 million program authorized by the Board of Directors in August 2014.

Unfortunately, share buybacks are viewed by some investors as one-time events. Steady dividends are supposed to be a signal of a board’s confidence in the stability of future operations.

Also announced on Tuesday afternoon, the company announced the pricing of its offering of $105 million worth of convertible senior notes due 2024. The deal had been increased from the initial $100 million, and Green Plains has granted the initial not buyers a 30-day option to purchase up to an additional $20 million worth of notes.

Green Plains laid out the use of proceeds as approximately $40 million to repurchase approximately 3.2 million shares of common stock in privately negotiated transactions. The repurchases were also said to be allocated out of the remaining $80 million of availability under a previously authorized $100 million stock purchase program from 2014. Green Plains further said that approximately $57.8 million of the capital would be used to repurchase the outstanding $56.8 million outstanding amount of its 3.25% convertible senior notes due October 1, 2019 in privately negotiated transactions. The remainder of the capital will be used for general corporate purposes.

Shares of Green Plains were last seen trading down almost 9% at $11.38 on Wednesday’s close, with 6.2 million shares being about 12-times normal trading volume.

The senior unsecured notes will bear interest at a rate of 4.00% per year and mature on July 1, 2024. Conditions of redeeming and conversion of the new notes were listed as follows:

On and after July 1, 2022, and prior to the maturity date, the company may redeem, for cash, all, but not less than all, of the notes if the last reported sale price of the company’s common stock equals or exceeds 140% of the applicable conversion price on (i) at least 20 trading days during a 30 consecutive trading day period ending on the trading day immediately prior to the date the company delivers notice of the redemption; and (ii) the trading day immediately before the date of the redemption notice. The redemption price will equal 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of a “fundamental change” (as defined in the indenture for the notes), holders of the notes will have the right, at their option, to require the company to repurchase their notes for cash at a price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The notes will be convertible, at the option of the holders, into consideration consisting of, at the company’s election, cash, shares of the company’s common stock, or a combination of cash and stock (and cash in lieu of fractional shares). However, before January 1, 2024, the notes will not be convertible unless certain conditions are satisfied. The initial conversion rate will be 64.1540 shares of the company’s common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $15.59 per share of the company’s common stock), representing an approximately 25.0% premium over the last reported sale price of the company’s common stock on The Nasdaq Global Select Market on June 18, 2019. The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, the company may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including the company’s calling the notes for redemption.

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