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DH Corporation was a maker of cheques but acquired a number of computerized financial services in USA.Then it was considered to be a "fintech" or a financial technology company. As a result their revenues and earnings started to grow quite rapidly for awhile.But both revenues and earnings became spotty and unreliable.Then in 2016 DH announced that there would be a dividend reduction and the stock price plummeted from about $40 per share to a low of $14.But the stock price has bounced back to the $22 level.Many investors are not sure what will happen in the new year as the stock will pay it's same dividend in the fourth quarter of 2016 and then reduce it for the first quarter of 2017.
The First Signs
Before the announcement of the dividend cut there were signs starting to show that there might be trouble ahead.The third quarter report showed a 20% reduction in sales and a 13% reduction in earnings.But analysts were talking about the reduction before the actual report.The announcement of the dividend cut came before the report as well.The actual cut will be from .32 per quarter to $.12 per quarter for a 62% reduction.DH management stated that this dividend cut would give them $86 million available to repurchase shares,reduce debt and some for organic growth.So in the long run the company would be better off from the dividend cut.But in the short run investors will suffer.It will also call into question the forecast of EBITDA provided in the guidance.But probably by less than the miss in the third quarter.
Other Dividend Cutters
DH used to trade at a higher yield;before it was a "fintech" company it's yield was about 7%but now it trades with a 5 to 6% yield.A stock trading at a 7% yield will continue to trade on it's yield whereas a stock trading at a 2 or 3% yield may trade more on it's earnings (P/E ratio).Other stocks have cut their dividends by a large amount also.Usually the consequences are the same. Both Transalta Power and Atlantic Power cut their dividend. DH is seen by this blog as being more in line with Transalta Power.Yield equality is discussed in my blog on LinkedIn (Linkedupdale on February15,2016) for Transalta Power and three other stocks.The idea is that when the dividend is cut by a substantial percentage the price will fall by the same percentage.Consequently the yield will fall to the same level as before but investors will ask for a yield premium because of the added risk.In the case of DH the stock price has already fallen significantly so will it fall anymore?The answer should be given by the yield.If the dividend becomes $.48 per share for the year then the price with a 5% yield will be around $10.00;this seems a little low according to this blog.But it is also clear that $14 to $15 may not be the bottom but a plateau price.
Other factors
In the case of Transalta Power the price did not fall to it's old equality level;it stayed above it but not by much.The same is true of Just Energy and Atlantic Power (all dividend cutters).In all cases the company acquired new assets or sold off assets and reduced debt.Investors were happy with their new profile and bid the stock price up above the yield equality level but the stock price stayed at a plateau level for some time.This is likely to happen to DH as well.So this blog expects the price not to march past the $22 level and maybe move down towards the $18 level unless something is done to improve it's earnings in the next 3 months.Cutting the dividend is not a successful short term strategy.It usually takes some time and some astute management decisions with the extra cash to get the stock price back to it's old stock price level.
Everyone likes to have a nice present for Christmas.And a junior technology company called Tucows would make a nice gift under a larger player's tree.Tucows has a peculiar name but has become well known in Canadian small to mid cap markets.That's because it is a winner.It competes with companies like Kinaxis and Shopify but they have a much larger market capitalization.So they would be much harder to acquire and it would take quite a bit better credit facilities to acquire either one of them.Tucows,for example, only trades 2500 to 3500 shares on a an average trading day.And it has moved up from $12 a share 2 years ago to it's present $48 a share.
Speculation or a Solid Company
Tucows is a well managed company and it did not move up so fast by luck.It describes itself as a provider of internet services and domain names and other internet services.But it also has shares or positions in a number of small junior technology winners like Intrinsync Software and Counterpath Solutions and Neulion.These small cap technology companies have given it a very good growth trajectory.So although it only has a market capitalization of about $500 million it competes with companies like Kinaxis which has a market capitalization of about $2 billion.However they have raised much more equity capital and have diluted their earnings for their shareholders.Neither Shopify nor Kinaxis have positive EBITDA nor earnings per share.Tucows has estimated earnings per share of about $1.75 per share.And it's management apparently does not want to dilute earnings with an equity issue; as a result it only has a float of 10 million shares.If it had a float of 25 million shares it's earnings per share would be still considerably higher than all of it's competitiors.Instead it prefers to increase it's stake in small cap technology winners and it's price has moved up recently form $35 a share to it's present $48 price.Others have noticed!
Looking at the New Year
If Tucows does make it past Christmas and escape being in a larger company's stocking then it will have to make changes in the new year.Right now with it's present share price and 10 million share float a competitor can gain control of this technology winner with a little more than $300 million.That would upset this blog which has put a lot of resources into strengthening it.A share split and a rise in the share price would help but so would a secondary equity issue of 10 million shares and a neat $500 million to put in it's war chest. use Workathon for business solutions ;use Workathon for business solutions
Yes just like the song by the Eagles says this is the new kid in town.Tecsys has been around for awhile but has never been in this blog. And now it just had a second quarter report which was not exceptional but a solid quarter. Quarterly revenues increased by 5% over that of 2015 and EBITDA went from $1.2 million to $.935 million. It has a yield of 1% and a market capitalization of about $150 million.This is certainly a decent dividend for a "small cap" stock.Tecsys according to this blog has good growth prospects.It traded at around $2.00 five years ago and gradually moved up to $9.00 then it fell off to the $6.00 level and now has gone back up to $10 per share.
Operations
Tecsys operates a supply chain providing materials chiefly to hospitals and health organizations.But it does have a new division that handles construction and infrastructure.This area contains ownership in small cap companies like Evoko, Construction Cointrol and The Municipal Infrastructure Group.This is a new area but is providing a fair amount of TCS's growth.Tecsys (TCS) has seen it's annual revenues grow from $42 million in 2010 to $66 million in 2015 and operating income from $1.3 million in 2010 to $4.6 million in 2015.Net income has grown constantly from $.9 million in 2010 to $4.80 million in 2015.It has opened new markets, increased revenues, and has managed it's revenues well. So that net income has marched forwards steadily.
Conclusion
This quarter was not good relative to the same quarter in 2016 but it was solid as measured by other quarters in this calendar year.Annual revenues are about $66 to $70 million and this quarter is in line with that pace.EBITDA also is about average at $935,000;some quarters have been as high as $3.25 million.Their new subsidiaries are primarily located in western Canada and are expected to increase in profitability in 2017.And their new resource called TMIG should fit in well with their other subsidiaries.Their medical facilities will earn about the same this year.Putting these facts together this blog expects that revenues may hit $75 million for the next fiscal year.This means that their dividend will be safe and the P/E multiple will be very low relative to it's peers.
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