It might seem counter-intuitive to see shares in information technology consultancy DWS Ltd (ASX: DWS) gain this morning when management reported a big drop in interim earnings and dividend.
But DWS did indeed climb at the open and is up 1.8%, or 2 cents, to $1.11 in late morning trade after it turned in a 24% drop in net profit to $5.1 million and lowered its dividend by 17% to 3.75 cents a share for the six months to end December 2014.
There's even a risk that DWS will fail to meet consensus estimates unless there's a notable improvement in second half trading conditions, with analysts penciling in earnings per share (EPS) of 9.6 cents and full year dividend of 8.5 cents a share for 2014-15.
DWS reported a normalised interim EPS of 4.27 cents and management continues to warn of subdued conditions in the current half of the financial year.
However, everything has a price. Even if management paid the same dividend in the second half, the stock would still be trading on a very generous yield of nearly 10% once franking credits are included.
Stocks that trade on double-digit yields are typically considered "dividend traps" because the market has not factored in a likely cut to future dividends.
But it would seem that too much "dividend risk" had been factored into DWS' share price and some of this is being unwound today.
DWS's bottom line result is also not as bad as the headline number suggests as it includes a one-off writedown in value of its joint venture with Borealis. If not for this, net profit would be down 16% instead of 24%.
Further, DWS has a strong balance sheet with no debt and cash of $16 million. Management has been buying back its shares on-market and said it will continue to do so as long as it makes financial sense. The average buy back price is $1.06.
Management is also on the lookout for potential acquisitions and has invested in developing higher margin offerings, such as proprietary and cloud-based solutions, as opposed to integrating off-the-shelf software.
These growth opportunities could take time to pay off, but DWS' relatively generous dividends mean investors are being paid to wait.
DWS' share price is down 15% in the last six months.
