It’s been an eventful week for DH Corp (TSX:DH).
The company released earnings after the market closed on Tuesday that severely disappointed investors. Revenue ticked down slightly, but EBITDA fell by more than 14%. EBITDA margins also fell from approximately 30% to 26%.
It experienced weakness on two major fronts. The first is cheques. Even though the company has diversified, it still gets a significant amount of revenue from printing cheques for Canada’s banks. It had previously expected this revenue to fall about 5% this year. Results were much worse, with a 12% decline in volumes reported.
The other thing that concerned investors was in lending software. DH’s software is used by lenders across the country to process mortgage applications and to manage payments. Revenue in that division dropped 6.7% versus the same quarter last year.
Investors chose to sell now and ask questions later, sending DH shares more than 40% lower in Wednesday’s trading. They recovered somewhat on Thursday.
DH has been a dividend stalwart for years now, delivering steady payouts for income investors. Can it continue paying its suddenly very lucrative 7.3% yield?
Free cash flow thus far in 2016 has been approximately $60 million, versus dividends of $32 million. That gives the company a payout ratio of a little higher than 50%. If results continue to disappoint, cash flow will suffer. We just don’t know how much.
At this point, the payout looks fine. But if the weak parts of the business remain tepid, the dividend could be at risk.
