Medifast’s generous dividend has attracted the attention of investors – particularly since the company is a major player in the massive weight-loss industry.
However, Medifast (NYSE:MED) has drifted away from its early structure. It transitioned from physician-prescribed nutrition supplement products to a direct-to-consumer model, and one of its most critical distribution channels involves multi-level marketing (MLM).
MLMs have been under scrutiny, and the model is controversial. That’s enough to give would-be Medifast investors pause. Is Medifast stock dividend safe? Or will the company lose its “coaches” and become a target of the anti-MLM movement like LuLaRoe, Rodan + Fields, Herbalife, Advocare, and Nerium?
Is Optavia And Medifast The Same Thing?
Medifast has gone through a number of name changes since it was founded by physician William Vitale in 1980. The original product package included therapeutic nutrition combined with behavioral counseling that was intended to support weight loss in overweight and obese patients.
The name Medifast has been in place since 2001, just after the sales model changed. In 2000, the company eliminated physicians as distributors and began selling directly to consumers. The model delivered early success, and Medifast introduced personal coaches into the mix. The coaches were responsible for promoting Medifast’s Take Shape for Life products and facilitating its Habits of Health System.
By 2010, Medifast was growing rapidly and gaining admiration on multiple fronts. Among other accolades, Medifast was ranked at the top of Forbes’ America’s Best Small Companies list. In 2022, it was 23rd on Forbes’ America’s Best Mid-Size Companies list. By the time the 2023 list was compiled, Medifast didn’t make the cut.
Optavia was introduced by Medifast in 2017. It was a brand-new product line that replaced Take Shape For Life. Optavia products include a wide array of prepared foods that are advertised as delicious and nutrition-dense. Coaches, enrolled through the multi-level-marketing program, connect with consumers to sell the food and provide related behavioral support.
According to Medifast, the company has touched more than two million lives, and it is “the market leader, by revenue, in the United States $7 billion weight management industry.”
Medifast has a market cap of $1.12 billion as of April 2023. It’s worth noting that this is a substantial drop from June 2022, when Medifast’s market cap totaled more than $2 billion.
What Is The Medifast Controversy?
Both Medifast and Optavia have suffered through a series of scandals. The biggest for Medifast was charges of false advertising back in 2012. Medifast was forced to pay millions in civil penalties by the time the case was resolved, and the loss prompted the launch of the all-new Optavia brand.
There have been questions about Optavia Habits of Health’s safety, as calorie and water intake are severely restricted, and the highly processed food compares poorly to a healthy whole foods diet. Some consumers have reported muscle loss, nutrient deficiency, and hair loss, among others, as side effects of strict adherence to the program.
Of course, many Optavia participants are enthusiastic about their results. The program promises fast weight loss, and by most accounts, it delivers. The difference in participant experience may come down to the coaches, none of whom are medical professionals or nutritionists. Instead, per the MLM model, they are everyday entrepreneurs who paid the $200 fee to become an Optavia coach.
Is Medifast Stock A Buy?
From a numbers perspective, Medifast has an impressive story. With the exception of 2022, top-line revenue growth has increased by double-digits year after year, particularly once Optavia came to market, as follows:
2018 – 66.1 percent
2019 – 42.4 percent
2020 – 31.0 percent
2021 – 63.2 percent
2022 – 4.8 percent
The sharp drop in 2022’s revenue growth was reflected in the company’s share price, which fell more than 42 percent in the last 12 months and almost ten percent year-to-date in 2023.
Other highlights from the 2022 earnings report include:
Total Revenue – $1.6 billion
Net Income – $143.6 million
Non-GAAP Adjusted Net Income – $163.5 million
Earnings per Share (EPS) – $12.73
Non-GAAP Adjusted EPS – $14.50
Cash, cash equivalents and investment securities – $87.7 million
Interest-bearing debt as of December 31, 2022 – $0
In his prepared remarks, Medifast Chairman and Chief Executive Officer Dan Chard indicated a strong showing in Optavia’s customer satisfaction and customer retention. He said that in 2023, the company would focus on growth and productivity among coaches. It’s worth noting that when broken down by active coach, average revenue came in at $5,538 apiece for the fourth quarter.
Guidance for the first quarter of 2023 includes revenue between $300 million and $320 million as compared to fourth-quarter 2022’s $337.2 million. Diluted EPS is expected to be between $1.75 and $2.40 per share, as compared to fourth-quarter 2022’s $2.41. (The non-GAAP adjusted EPS was $3.70 for the fourth quarter.)
The declining share price has scared off investors who are concerned that Medifast stock will go down even more. Are they right?
Will Medifast stock drop further?
Those who are bullish on Medifast note the lavish 6.37 percent dividend yield – and the fact that the payout ratio is 49.89 percent. That bodes well for the safety of the dividend. On top of that, shareholders have enjoyed annual increases in Medifast’s dividend each year for the past eight years. That’s uncommon after the challenges that came during the 2020-22 period.
More importantly, analysts are fairly united in their opinion that Medifast is undervalued, which means higher potential returns when Medifast stock recovers. The calculations come up in Medifast’s favor on nearly every metric. When a dividend model is considered, the company’s intrinsic value totals $224 per share. Using a five-year discounted cash flow forecast, fair market value comes in at $194.
Even if Medifast is evaluated by price-to-earnings, price-to-sales, and revenue multiples, the stock is valued at $175 per share. In every case, that’s a significant upside as compared to the current price of just over $100 per share.
With obesity on the rise in the United States, there are many reasons to believe that Medifast’s market leading position guarantees long-term gains. That may be true, and investors may have been too hasty in selling off their Medifast stock when the price dropped.
However, MLMs are built on a shaky foundation, so risk-averse investors may be better off with one of Medifast’s competitors, like Weight Watchers. Alternatively, there are stocks geared towards improving physical fitness such as Planet Fitness, as well as pharmaceutical companies that offer weight loss medications – for example, Novo Nordisk and Eli Lilly.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.