Will Toll Brothers build a dividend?
With a spare $2 billion in cash, the homebuilder faces with a unique problem. What will it do with the money?
Home building companies have had a very rough few years as real estate values have cratered, home values continue to decline and fewer borrowers qualify for mortgages. So homebuilder Toll Brothers (TOL) is faced with a unique and somewhat strange problem -- what to do with a spare $2 billion in cash on its books.
It's a good problem to have, of course. But Toll Brothers needs to be careful with the course it plots. The company has posted four straight quarterly losses, and each time those shortfalls were even worse than Wall Street's rather bleak expectations. It will be a while before the clouds part, so TOL is going to need a safety cushion going forward.
Still, there's little doubt that money could be put to work instead of just sitting around gathering a few percentage points of interest. So what will Toll Brothers do with the money? Here are some of the options floated by the company.
Option #1 -- Invest in future growth.
Buying land from foreclosing lenders and other distressed sellers is one option. After all, property is going for bargain prices right now if buyers can close the deal. The $2 billion in Toll Brothers' wallet means financing is certainly not a problem. Along the same lines, the company is considering putting up the roads, sewer and infrastructure on existing TOL land. Without any homes to use the systems, they will be in top shape even if it's a few years before building ramps up again -- and that's money and time Toll Brothers won't be spending later on these projects.
Option #2 -- Invest in the company itself.
Paying down debt or buying back shares is another option. Without paying the service on current loans, TOL will have an easier time maintaining its books. That's not just good short-term, but it saves money in the long run, too. Similarly, buying back shares would give the company a boost. Not only would this give TOL a short-term bump in stock price, but it also would send a positive message to the rest of Wall Street as to the long-term prospects of this company. Toll Brothers' stock is still off about 30% from its 52-week high, so this would be the time to "buy low" in anticipation of selling high later.
Option #3 -- Give the cash to shareholders.
Currently, Toll Brothers doesn't pay dividends so shareholders shouldn't be expecting anything in their stockings. However, one way to boost demand for shares is to promise a dividend is on the way since conservative investors will clamor for a piece of the $2 billion payout.
If I were in charge of Toll Brothers, I would put my money back into the company. The market is rallying, so buying back shares could be very profitable for Toll Brothers. Besides, a move like that sends the message to investors that the company thinks nothing is a better investment than its own shares. Confidence like that can be contagious.
Personally, I think spending that money on future growth is a bit of a gamble. It could be years before housing stabilizes. Besides, TOL has plenty of existing land to worry about paying taxes on and maintaining. If Toll Brothers' inventory was lower this would be a good plan, but by last count the company controlled over 17,000 home sites in the U.S.
A special dividend is intriguing, since it would certainly make a splash and pique investors' interest. However, though it's the season of giving, I would have a tough time parting with all that cash and getting nothing in return.
Though it's anybody's guess what Toll Brothers will choose, I have a feeling the higher-ups will agree with me on the dividend. Not to be a grinch, but $2 billion is a lot to just give away -- even if it's the holiday season.
Get more on Toll Brothers and six other housing stocks to sell here.
At the time of this writing, Louis Navellier did not own shares of TOL in personal or client portfolios.
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