written by reader DGPIF

By bosley, November 10, 2012

Travis
Data Group just nosedived after reporting earnings yesterday. What do you think of its future potential?

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Travis Johnson, Stock Gumshoe
November 12, 2012 9:41 am

Hi Brad — that was a surprise for me (obviously), here’s what I said when I suggested this one in August: “I don’t expect Data Group to have to cut the dividend … but if they do, then it will turn out that we’ve picked this one poorly or too early.”

So now the dividend will be about half as large, and the company says they’re slashing the dividend so they can balance the div against their growth needs — that makes sense in a broad sense, since they were effectively spitting out most of their free cash flow in the dividend before … but my premise for investing was that their business might be stable enough that they shouldn’t have to cut the dividend.

There are good things in the balance sheet — their debt has not risen, they’re still paying their interest, they haven’t issued new shares. But the company that I saw as walking along the edge fairly confidently has signaled that things are bad enough that they’re willing to take a 30-40% cut to their share price in order to preserve internal financial flexibility. That tells me that they think business is getting worse and they have to be ready to invest more to keep their revenue stable or growing — that’s not what they’re saying, but it’s what I’m hearing.

That could be an abundance of caution on my part, but if I owned this one personally I would sell it now — either my assumptions were wrong, or the company is being very long-term focused and simply willing to take the share price hit because they see opportunities to grow. Either way, the company looks like it was maintaining the same generally stable revenue that would have allowed for the dividend to continue … but they chose not to continue it anyway. I wanted a stable company with a heavy, gushing cash dividend flow, not a company that’s possibly floundering and trying to preserve capital for their own plans.

The dividend for next year will be 30 cents, so the yield is still over 10% … so it’s possible that this might be worth considering after we see how their plans are going to play out, but for those who bought it in the $4s my thesis failed and I’d sell.

👍 18072
kwoodj
Irregular
November 15, 2012 12:12 pm

It just keeps dropping! Down to $1.96 this morning.