An Iconic Brand Throttles Up Cash Returns

Harley-Davidson-stockMotorcycle giant Harley-Davidson (NYSE: HOG) is revving up its cash returns to shareholders.
Harley announced last week that it plans to buy back 15 million of its own shares. This comes in addition to its previously approved 20 million share buyback authorization, which had 15.9 million shares left remaining for repurchase as of June 16. That means, in total, Harley’s new authorization makes approximately 30.9 million shares available for repurchase.
That is a significant level of the company’s total share count. The 30.9 million shares that will be bought back represent 14% of the company’s shares outstanding.
In an era of historically low interest rates, investors are pressuring companies like Harley that have excess cash on their balance sheets to return some of that cash to shareholders. This makes sense, of course, in two key ways.
First, companies with net cash on the books aren’t earning much, if anything, on those cash balances, because of the low-rate environment. In addition, investors aren’t earning much on other investments either, such as fixed income. That means investors are starved for income, and they are increasingly targeting corporate balance sheets as a source of yield.
Harley is one such company that investors have had in their cross hairs for cash returns, and they are likely pleased with the motorcycle manufacturer’s recent buyback announcement.
Harley has also aggressively increased its dividend in recent years. The company delivered dividend increases of 24% in 2012, 35% in 2013, 30% in 2014 and 12% so far this year. After such prodigious dividend growth, the stock currently offers a 2.1% dividend yield.

Is HOG a Dog?

However, there is a bearish argument regarding Harley’s generous cash returns. It’s likely that the company is returning so much cash at such a rapid pace because it wants to keep shareholders happy, as growth is starting to slow down.
Harley is a highly profitable company, but it’s nevertheless facing a structural challenge that threatens future growth. Specifically, demographic and generational shifts are a major issue going forward. Younger consumers, particularly in the United States, simply aren’t buying motorcycles like their parents and grandparents did.
For instance, Harley’s U.S. motorcycle sales declined 1.6% in the fourth quarter last year, and then fell 0.7% in the first quarter this year. Because of these declines, Harley has resorted to aggressive discounting to sway buyers. While that has kept revenue intact, it also has the prospect of eroding the company’s premium brand. For this reason, Harley recently reduced its full-year growth rate of motorcycle shipments.
In response to sluggish U.S. sales, Harley has targeted international markets for growth, where demand for motorcycles remains strong. The percentage of revenue derived from outside North America is now 32%, up from 18% in 2004.
But even here, there are problems – namely the strong U.S. dollar. The rising dollar against international currencies is a huge pain for companies that conduct a significant amount of business overseas. That’s because the strengthening U.S. dollar makes international revenue worth less when it’s converted back into the domestic currency. This is a large part of why Harley revenue fell 3.8% in the first quarter.
These various issues are why Harley-Davidson stock is down 12% year-to-date. But the aggressive cash returns to shareholders could accelerate the stock from here. While it may take some time for Harley to produce higher growth, at least shareholders are being paid well to wait.

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