How hard will DH be hit by yield equality?

 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.

                           

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