SMS’s 7% dividend yield

Information technology services provider SMS Management & Technology (ASX: SMX) has seen its shares fall 6.8% today in the wake of a company presentation by Chief Financial Officer Mr Rick Rostolis at the Morgan Stanley 2013 Emerging Companies Conference.

The company announcement wasn’t marked as “sensitive”, however in light of the savaging of the share price perhaps in hindsight it should have! The market would appear to be unimpressed with the last few slides of the presentation which addressed the March quarter results and expectations for the June quarter. Mr Rostolis said that SMS now expects five larger multi-year projects which were scheduled to have made a contribution to FY13 earnings to instead first make a contribution in early FY14.

While the presentation amounted to a downgrading of expectations, investors were already aware that the IT services sector is doing it tough at present, as governments and corporations delay critical spending, in some cases until after the election. For long-term investors the mark-down to SMS’s share price could offer an attractive entry point. The company is debt free, is a tier one provider of IT services and given its excess cash pile, has the potential to maintain its dividend. On current pricing, SMS is trading on a 7% dividend yield.

SMS is exposed to the growing demand for cloud computing. The cloud and increased Internet usage has the potential to benefit a number of companies as diverse as Integrated Research (ASX: IRI), Next DC (ASX: NXT) and iiNet (ASX: IIN). While that doesn’t guarantee profits, it could make sense for investors to get exposure to companies which stand to benefit from the increased demand for the cloud and internet services.

Foolish takeaway

IT software and hardware infrastructure are essential to modern day businesses. While some companies can delay upgrading to better IT systems for a period of time, in the long run they must inevitably ‘spend money to make money’ and this gives IT service providers such as SMS a positive future outlook.

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Motley Fool contributor Tim McArthur owns a share in SMS.

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