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Adelaide Brighton shows how to cut dividends by raising it

Call it a slight of hand if you like but Adelaide Brighton Ltd. (ASX: ABC) declaration of increased dividends and revenues just isn’t cutting it with investors this morning – nor should it!

The Adelaide Brighton share price crashed 5.1% in early trade to $4.72 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) gained 0.2% – making the ABC share price one of the worst performers on the top 200 index.

Other construction material suppliers like the James Hardie Industries plc (ASX: JHX) share price and Boral Limited (ASX: BLD) share price are also in the red but their declines are modest in comparison.

The question now is whether the strong rally in the Adelaide Brighton share price since the start of January (its up 13%) will come unstuck.

A dividend lift is a dividend cut

The cement and lime supplier reported a 4.6% increase in revenue for 2018 (its financial year is the same as the calendar year) and it declared a final and special dividend totalling 15 cents per share.

This lifts the total dividends paid in 2018 to 28 cents per share, which technically is a very respectable 14.3% increase over 2017.

But there’s the rub. The final dividend component of 11 cents per share is 1 cent lower than last year. In my mind, it’s a bizarre strategy to cut the regular dividend and not the special dividend.

It makes me think that management is preparing investors for a dividend cut in future periods, and perhaps that was the intention although I would have still rather trim the special dividend instead as that would introduce less doubt about the underlying strength of the business.

At risk of a consensus downgrade

The dividend isn’t the only thing not to like. Management reported a 5.7% drop in underlying earnings before interest and tax (EBIT) to $273.5 million as softer cement and lime earnings were not fully offset by strength in its concrete, aggregates and joint venture earnings.

While conditions in the construction market were favourable in New South Wales and Victoria in 2018, South Australia and the Northern Territory were flat while demand fell in Western Australia.

Another piece of bad news is a likely consensus downgrade for 2019. Management is forecasting “stable” demand for construction materials this year, which implies relatively flat earnings. Profits could even dip as cost pressures build and if companies like Adelaide Brighton can’t pass on higher costs to customers.

In contrast, brokers polled on Reuters are forecasting around a 10% increase in earnings per share for the group. These expectations will likely have to come down.

The stock is also not cheap if flat earnings for 2019 eventuate. Even with the morning share price drop, the stock is trading on a price-earnings of around 16 times, which is around a 10% premium to our market.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and James Hardie Industries plc. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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