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.
Dividend blues
Todays 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 Rues full-year dividend could fall to 24.9p, giving a prospective yield of around 4.5%.
Not a complete surprise
Its worth noting that there were some signs that De La Rues dividend was under pressure. The company had not increased its payout since 2010, and De La Rues dividend was not covered by earnings in 2012 or 2013.
The companys 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 Boards 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 Rues new chief executive, Martin Sutherland, starts work on October 13. I would be very surprised if Mr Sutherland doesnt issue further bad news on, or before, November 24, when De La Rues interim results are expected.
Finding a safe dividend
When markets closed last night, De La Rue shares offered a tempting prospective yield of 5.6%. Today, the yield is much lower — although we don’t yet know how much lower.
Building a portfolio of companies paying a safe, reliable dividend is a highly-effective way to generate a retirement income, but there are certain rules you should follow to minimise your exposure to costly dividend cuts.
In “How To Create Dividends For Life“, the Motley Fool’s income experts set out five golden rules for building a dividend portfolio with the potential to outperform the market.
To receive your copy of this valuable FREE, no-obligation report today, click here now.
Roland does not own shares in De La Rue .
