Shares in banknote and passport producer De La Rue (LSE: DLAR) fell by 25% when markets opened this morning, after the firm slashed its interim dividend by 41% and cut its forecast for underlying pre-tax profits by 26%.
The firm says that while volumes are strong in its currency division, which accounts for around 65% of sales, pricing pressure has intensified, resulting in lower profit margins than expected.
Similarly, De La Rue said that growth in its Solutions division had been slower and at lower margins than expected.
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Dividend blues
Today’s profit warning indicates that De La Rue expects underlying pre-tax profit to fall from £77.3m last year, to around £57m this year.
As a result, the board has decided to cut the interim dividend by 41% from 14.1p to 8.3p, and will “reappraise the level” of the final dividend.
Assuming the final payout is cut by the same amount as the interim payment, De La Rue’s full-year dividend could fall to 24.9p, giving a prospective yield of around 4.5%.
Not a complete surprise
It’s worth noting that there were some signs that De La Rue’s dividend was under pressure. The company had not increased its payout since 2010, and De La Rue’s dividend was not covered by earnings in 2012 or 2013.
The company’s £168m pension deficit has also been a burden — in 2012/13 the firm paid an extra £16.2m into the scheme, while in 2013/14 it paid in £11.5m — almost 20% of pre-tax profits.
Coded warning?
In July, De La Rue reassured investors that “the Board’s expectations for 2014/15 remain unchanged”. However, the firm also said that profits would “have a higher than usual weighting towards the second half’.
In my view, investors need to pay close attention to comments like this: is there a good reason to expect profits to improve in the second half, or is the board simply delaying the inevitable profit warning?
Worse to come?
De La Rue says that ‘difficult market conditions’ are expected to continue next year, and I expect more bad news from the firm over the coming months.
De La Rue’s new chief executive, Martin Sutherland, starts work on October 13. I would be very surprised if Mr Sutherland doesn’t issue further bad news on, or before, November 24, when De La Rue’s interim results are expected.
