Increasing dividends to offset disappointing earnings news can be an effective strategy, but it doesn't seem to have worked for Tox Free Solutions Limited (ASX: TOX) today.
Shares in the industrial services and waste management company slumped 4% to $2.70 during lunch time trade after management posted a 2% drop in underlying earnings per share (EPS) to 17 cents, but lifted its full year dividend payment by 42% to 8.5 cents through a 4.5 cents a share final dividend.
The company's EPS was below consensus expectations of 18.45 cents but the dividend was well ahead of the average analyst forecast of 7 cents a share.
Total revenue of $407.3 million for 2014-15 was slightly ahead of consensus as strong demand for its services in the east coast of the country partially offset waning earnings from resource-focused Western Australia.
The performance of its Waste Services business was particularly pleasing as that division saw a 17% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $62.1 million and a 20% increase in revenue to $250.1 million as the company enjoyed strong growth in Queensland through its commercial waste and regional operations.
Existing contracts to clients in the iron ore and energy sectors are also unaffected by the commodities slump as waste services tend to be non-discretionary.
Tox Free's civil infrastructure facing business, Industrial Services, is also holding up thanks largely to work it is doing on the National Broadband Network; but its waste treatment Technical and Environmental Services Division is the main drag as it is most exposed to the resources sector.
But management is trying to paint an upbeat picture. Demand for total waste solutions is generally unaffected by economic cycles and the company expects the market to grow by around 5%.
Further, its iron ore clients in the Pilbara are ramping up production – and the greater the mine output the more waste it produces. The start-up of key gas projects like Gorgon will also underpin demand for Tox Free's services.
While Tox Free does have a reasonably defensive business, the consensus downgrades that are likely to flow from its latest results don't sit well with me as it shows its business is not as immune to the market volatility as what many might have believed.
I suspect the stock is trading on a 2015-16 price-earnings multiple of around 15x and a yield of around 4.5% if franking credits are included.
Given that the latest results have exposed Tox Free's soft underbelly, I don't think the stock is cheap enough to be worth considering.
There are better options out there.
