News of an immediate dividend suspension didn't sink the James Hardie Industries plc (ASX: JHX) share price. If anything, the building supplies group surged 4.5% to $21.74 this morning on the news.
In contrast, shares in its peers are moving in the opposite direction. The Boral Limited (ASX: BLD) slipped 0.4% to $2.70 while the CSR Limited (ASX: CSR) share price fell 0.9% to $3.38 at the time of writing.
As I speculated last month, the cancelation of dividends by ASX growth companies like James Hardie due to the COVID-19 pandemic was likely to be positively received. This is especially so if it meant shareholders would be spared from a dilutive capital raising.
Good guidance
But this isn't the only reason for the positive share price reaction. In fact, the lowering of the company's profit guidance may have contributed more to the share price jump.
Management is now expecting FY20 net operating profit to come in between US$350 million and US$355 million. This compares with its previous forecast of US$350 million to US$370 million.
Investors are relieved that profits are taking a bigger hit due to the coronavirus shutdown in many of James Hardie's key markets, particularly the US.
Double-digit growth
The tightened guidance also means the group's full year results will be well ahead of last year when it posted a net operating profit of US$301 million.
Pleasingly, demand for its products remain strong in North America and Europe. Asia Pacific is largely flat, although its Australia operations are also seeing good performance.
There are precious few S&P/ASX 200 Index (Index:^AXJO) companies that can boast of a double-digit profit growth in the face of the worst global recession since the great depression!
Shoring up the balance sheet
Dividends aren't important to shareholders either. The yield is so low in normal times that few would even think about these distributions.
But savings from suspending the payouts until further notice will help shore up James Hardie's balance sheet during these highly uncertain times.
The group has been hit by higher than expected integration and operational costs in Europe and unexpected expenses from government-mandated closures of manufacturing plants in Spain, New Zealand and the Philippines.
Foolish takeaway
Management is further swinging the axe to cut capital expenditure to US$80 million to US$95 million from an average US$240 million, while implementing cost control measures globally.
James Hardie is one of my favourite picks in the sector for its strong track record. The stock is seldom cheap, and despite today's bounce, it's still trading 32% below its February peak.
