Why a special dividend couldn’t save the Adelaide Brighton Ltd. (ASX:ABC) share price today

Paying a special dividend isn’t enough to win you friends in this market as Adelaide Brighton Ltd. (ASX: ABC) just found out.

Shares in cement and lime supplier slumped 6.8% to $6.28 in lunchtime trade – making it the third worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after medical facilities operator Primary Health Care Limited (ASX: PRY) and nickel miner Western Areas Ltd (ASX: WSA).

Upping its interim dividend by half a cent to 9 cents per share and paying a 4 cents special dividend on the top couldn’t appease shareholders who were troubled by its lower than expected FY19 profit guidance even though the miss works out to be 5% or less.

That’s the problem with outperforming stocks trading on relatively lofty price-earnings (P/E) multiples. It doesn’t take much to rock the boat.

Before I delve more into that, here are some highlights from Adelaide Brighton’s half-year result announcement this morning:

  • First-half revenue rose 11.7% to $807.2 million while underlying net profit increased 9.8% to $85.2 million. This is about in line with consensus.
  • Improved demand from residential and infrastructure construction in South Australia, Victoria, New South Wales and Queensland contributed to the growth while Western Australia and Northern Territory experienced “stable” demand.
  • The 4 cents special dividend was likely a surprise to many but so will the fact that its 13 cents total payout in 1H18 represents all of its profits from a basic earnings per share (EPS) perspective.
  • Higher volumes and prices for its products more than offset rising energy and import costs. Complaints about energy prices are making a mark on earnings in corporate Australia during this reporting season.
  • What should also please supporters is that higher costs have not stopped the company from delivering better earnings before interest and tax (EBIT) margin as EBIT increased 15.3% vs. the 11.7% revenue uplift.

However, management poured cold water on investors when it said full-year net profit will range between $200 million to $210 million, which is a slight miss.

This wouldn’t be so bad if Adelaide Brighton wasn’t trading at over 20 times P/E before today’s big fall. That’s at the top end of its P/E range over the past five years.

The good news is that consensus earnings downgrades may not be very significant given the good demand outlook for its products from infrastructure projects.

It is also reassuring that management hasn’t brought up the risk of a slowing housing construction market.

While the weaker Australian dollar is likely to keep pressure on import costs, at least Adelaide Brighton is better placed than its offshore competitors who wholly import products into this market.

However, I think the stock will need to fall further before it looks good value. This is probably somewhere under $6 a share.

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