Juniper Networks: Assessing The Dividend As We Approach Q4 Earnings Numbers (NYSE:JNPR)

Intro

We wrote about Juniper Networks, Inc. (NYSE:JNPR) back in February of last year, when we deemed the stock a hold at that juncture. The reason for our caution at the time stemmed from Juniper’s share-price action which seems to be changing after a strong bull run since early 2020. As we see below and although shares are roughly only down 3% since we penned that piece 11 months ago, shares eventually lost their 200-day moving average in May of last year before finally registering a bottom close to $25 in October of 2022. Since then, Juniper Networks shares have come roaring back, although momentum has seemed to have stalled somewhat well short of Juniper’s 2022 highs.

This gives us a prime opportunity to go through the trends of the key metrics that make up Juniper’s dividend. In last year’s commentary, we witnessed slowing growth in the dividend, although free cash flow continued to cover the payment. Suffice it to say, if we can see encouraging trends across Juniper’s income statement, the cash-flow statement, and the balance sheet, this would bode well for future growth both in the share price and the dividend. Let’s get to it.

Dividend Yield

Juniper’s dividend yield comes in at 2.64%, which is slightly lower than the company’s 5-year average of 2.78%. Many income-orientated investors use the dividend yield as a barometer of whether the company’s stock is expensive or not. Based on historic payouts, we expect a quarterly increase to $0.22 per share in Juniper’s next fiscal quarter. Therefore, a forward amount based on a revised $0.88 per share per year would equate to a forward dividend yield of 2.76%, which is right in line with that 5-year average (fairly valued at present).

Dividend Growth

If indeed, we get our $0.01 increase per share in the quarterly dividend, this would equate to a 4.76% 12-month increase in the dividend. This incremental growth has been the standard for some time now, but investors may be looking for more purchasing power protection here, especially when one factors in Juniper’s present valuation, especially on the cash-flow side which we see below

Dividend Pay/Out Ratio

Although the cash-flow payout ratio gives the quickest snapshot into whether the dividend is sustainable or not, Juniper’s lack of a credible ratio at present must be investigated on its own merits. For example, unlevered free cash flow of $149.5 million was not enough to cover the $267 million of dividends over the past four quarters. The damage from a cash-flow perspective was done in Q2 when supplier payments as well as inventory purchases resulted in the company going through almost $270 million of cash. The company followed up with the generation of $51 million of operating cash flow in Q3 but this number again came in below the net profit figure of $120+ million. In short, management stated on previous calls that it expects operating cash flow to come in around the same levels as net profit. We will see if the trend improves here in Q4.

Balance Sheet & Growth Expectations

On the balance sheet, we see that shareholder equity came in at $4.338 billion at the end of Q3 and the number of shares outstanding dropped to $324.5 million. Long-term debt came in at $1.688 billion at the end of the third quarter. Although we witnessed a nice bump in equity growth over the second quarter, growth in book value is not increasing as investors would like.

This means gross interest expense remains pretty elevated on the income statement ($15.2 million in Q3) as cash found other homes (such as inventory in Q3 which rose sharply to $519 million). Therefore, the crux of the matter is the following. Juniper reported a convincing earnings beat in Q3 with $0.37 in GAAP earnings per share on revenues of $66.3 million. Moreover, the GAPP estimate of $0.43 per share in Q4 continues to increase as margins continue to expand.

What is the price of this growth, though, is a whole other question. The cash-flow statement, for example, clearly shows that generated cash over the past four quarters went out the door, primarily by share buybacks and dividend payments. The more cash which goes out the door, the less cash can be invested and the slower book value can grow over time. Suffice it to say, we need to see more of the company’s bottom-line profits converting into cash flow. We need to see a big improvement in this area in Q4 and beyond.

Conclusion

Although Juniper Networks, Inc.’s net earnings are easily covering dividend payments, elevated working capital requirements of late have resulted in less generation of cash flow compared to previous years. If this trend does not reverse any time now, Juniper Networks, Inc.’s recent December top could very well hold for some time. We look forward to continued coverage.