Ugh. I’d sell this one.

Dividend cut for a past "Idea of the Month," with little visibility on next year, means I want to cut losses

By Travis Johnson, Stock Gumshoe, November 12, 2012

I just posted this in response to a reader’s question about Data Group (DGI.TO DGPIF), and since this is a stock I profiled as an Idea of the Month not that long ago, I thought I should make sure everyone has a chance to notice it. Here’s what I posted in response to a reader’s question about how Data Group looks going forward, after their massive dividend cut caused the share price to fall another 30% or so:

“… 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.’

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“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 ...

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