Growth Stocks: DH Corp. cuts dividend

Earnings for this financial-services company missed the consensus estimate in the latest quarter as banks cut back on new technology spending.

DH CORP. (symbol DH on Toronto; www.dh.com) was primarily a printer of cheques until 2013. Then, in light of falling demand for paper cheques, it began to focus on electronic banking systems. As part of that transition, in May 2014, the company changed its name from Davis + Henderson Corp.

We’ve often pointed out the inherent risk in expanding through acquisition. DH provides an example of how this growth strategy may backfire.

The company now sells software for managing payments, approving loans and mortgages, and servicing debt. DH has more than 8,000 clients—mainly financial institutions—in over 70 countries. They include 29 of the world’s top 50 banks as well as specialty lenders, credit unions, governments and corporations.

The company has used acquisitions to fuel its shift to software:

In January 2013, DH added to its 33% interest in Compushare Inc. by buying the remaining 67% stake for an undisclosed amount. Compushare was a California-based firm that provided computer services, including web-based technology, to financial institutions.

In August 2013, DH bought Hartland Financial Solutions for $1.2 billion U.S. That business made software used in lending, banking and compliance. The Hartland purchase added over 5,000 U.S. bank and credit union customers.

For the three months ended September 30, 2016, DH’s revenue rose just 0.6%, to $417.7 million from $415.1 million a year earlier. However, earnings declined 18.9%, to $52.8 million from $65.2 million. On more shares outstanding, per-share earnings fell 19.7%, to $0.49 from $0.61. That widely missed the consensus estimate of $0.61.

Growth Stocks: Stock falls on weak earnings

With the release of those lower-than-expected results, the stock plunged over 40% in late October 2016. DH also cut its outlook for all of 2016 and 2017.

The lower earnings are mainly because many banks (especially in Europe and Asia) have slowed their investments in new software and technology because of weak economic growth. As well, the company continues to see falling demand in Canada for paper cheques as consumers and businesses shift to electronic payment systems. Slower mortgage activity in Canada has also affected earnings.

DH expects these trends to continue in the fourth quarter of 2016 and into 2017.

The slow growth has raised fears DH will have trouble servicing its long-term debt of $1.9 billion; that’s a high 119% of its market cap. In fact, its reduced earnings outlook has prompted the company to slow its debt repayment. DH is now in discussions with its lenders to revise the terms of its loans. The company will likely succeed in winning those new terms, but it still could decide to cut its dividend of $1.32 a share. It currently yields a very high 8.6%.

Relying on acquisitions as a growth strategy is a particularly serious risk. That’s especially true when a company is trying to reduce its dependence on a leading position in a declining industry by establishing a new foundation in a related industry that is flourishing. When an industry flourishes, after all, competition can get fierce.

DH’s cheque-printing activities give it long-established links with the financial industry, of course. But its executives and salespeople may lack connections, or clout, with those in charge of buying software and computer services. 

TSI Network recommendation: We don’t recommend shares of DH Corp.

For our recent report on a Canadian growth stock that has had a big surge, read Earnings soar for Spin Master.

For our views on safety-conscious growth investing, read How growth investors can cut the overall risk of their portfolios.

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