L Brands management just finished its conference call. We were not satisfied, again. Few of the analysts attending the CC asked questions we wanted management to answer with the exception of the question asked regarding dividend consistency. Management responded by showing temporary comfortability with its dividend policy despite the high payout ratio and yield. We remain highly skeptical of the company’s policy and believe, as stated in our detailed report on L Brands, that management should slash its dividend by half accompanied by a slash in capital expenditures. 

The company’s 2018 guidance of $2.45 to $2.7 EPS, although partially expected by the street, pushed shares 12% lower at the moment. We believe that VS lower margins is a temporary issue and should be overshadowed by BBW’s strong performance over the coming quarters (operating margin for BBW is 17% while that of VS is 6%). However, it may take between 4 and 8 quarters for BBW’s performance to overshadow VS’s underperformance as BBW still accounts for 33% of sales while VS accounts for 57% of total sales. 

The company guided for an $800 million in FCF for the current year, however, we estimate that the sustainable FCF which does not take into account supplier’s payments extension is around $570 million to $630 million. As such, we do not believe that the dividend is completely safe as the company needs approximately $680 million to fund its current dividend payments. We remain bullish on LB stock as we believe that the current stock price assumes a worse-than-possible scenario. In addition, we still believe that LB management should be changed and replaced by a more youthful team (PINK CEO Denise Landman will retire at the end of the year and will be replaced by BBW’s Amy Hauk) as the company needs fresh ideas. We also believe that the company’s CFO  should be changed given the company’s reckless financial policy. We also suggest that management should appoint an executive CEO besides L Brands’ founder Les Wexner to run VS division. 

Last but not least, it's important to remind potential investors that Leslie Wexner and his wife, Abigail, own around 47 million (17% of shares outstanding) shares which under the current dividend of $0.6 per quarter per share equates to around $113 million in annual payments. This means that the company's founder, who is turning 81 next month, is highly benefiting from this excessive dividend which is being paid at the expense of long-term investors. As such, we urge the company's institutional investors to force the company's management to change its policy regarding the dividend (more details are provided in the Premium report). 

Speaking of that, we recommend our readers to subscribe to our Premium service in which a full-detailed analysis for our top stock picks can be accessed. Also, our service includes an access to equity research by top Wall Street firms such as; RBC Capital Markets, Credit Suisse, JP Morgan, Wells Fargo, and William Blaire.