DH Corp. slashed its quarterly dividend on Monday and the shares rallied – making it clear that investors are now approaching this beaten-up stock with a fresh perspective.
Forget about buying into a story of stable profits and steady dividends. This has become a stock for bargain-loving turnaround enthusiasts who believe the news can't get much worse – and Monday's 8-per-cent pop looks like a good start.
DH Corp., formerly Davis + Henderson, is best known as a company that prints cheques. This was a good business to be in when everyone relied upon them to pay bills and transfer money, but it is not so reliable today.
Cheque volumes fell about 12 per cent in the most recent quarter alone, which is why the company has been repositioning itself over the past decade as a diversified financial technology provider.
Today, DH Corp. derives revenue from everything from mortgage application services to payment processing to cash management – largely unseen financial plumbing that provided steadily rising annual profits over the past four years.
But at the end of October, DH Corp. stunned investors when it reported a third-quarter profit of just $16.6-million, down 46 per cent from last year's third quarter.
The share price plunged 43 per cent in a single day, even as its chief executive officer, Gerrard Schmid, assured investors that he remains "very encouraged by our growth prospects."
Since then, investors have been hit with more bad news. Earlier this month, DH amended debt covenants with lenders, agreeing to pay a higher rate of interest in return for a more manageable funding target.
And on Monday, the company reduced its quarterly dividend to just 12 cents a share, down from 32 cents a share previously – a remarkable reversal given that income-oriented investors have for years been able to depend on the stock.
But as DH Corp.'s dividend story ends, it's turnaround story begins. The shares, which had been exploring five-year lows earlier this month, are now moving back up – albeit from depressed levels. They rallied more than 8 per cent on Monday, for the biggest gains on the broad S&P/TSX composite index.
Why? Observers had largely expected the dividend cut, which means that it may have brought some relief: The lower quarterly payout implies that DH Corp. can save more than $85-million, which the company will redirect toward share buybacks (it would certainly be buying low), debt repayment and capital expenditures.
"Bottom line, the dividend cut will accelerate the deleveraging process, a positive in our view," Dylan Steuart, an analyst at Industrial Alliance Securities, said in a note.
But perhaps more importantly, investors may be approaching DH Corp. as an entirely different sort of stock.
"In our opinion, while eliminating the dividend may scare off income-oriented investors, we think it would signal management's commitment to solidifying the equity value of the business and could attract those investors interested in what is turning into a levered transition story," Taso Georgopoulos, an analyst at Veritas Investment Research, said in a note published after the release of DH Corp.'s third-quarter results in October.
Trouble is, these previous income-oriented investors had a long track record of big cash payouts to support their upbeat views on the stock.
Turnaround enthusiasts, on the other hand, have nothing more than the hope that the company's fortunes will improve – or that DH Corp. will either sell itself or carve off assets.
For now, DH Corp. is managing expectations with a fourth-quarter forecast of relatively flat revenue growth and declining profit (before interest, taxes, depreciation and amortization). It is staying quiet about 2017.
The uncertainty may add to the allure of a once-great stock that has fallen into the bargain bin – but the risks are real.