Dorel Industries (TSX:DII.B) stock plunged over 32% today on news that the company has been forced to stop paying a dividend due to U.S. tariffs and their effects on Chinese imports.
The Montreal based company hasn’t seen price levels like this since the mid 1990’s, and third quarter results are expected to be far below analyst estimates.
Investors love dividends, and as such a stock is prone to a massive downswing in the event the dividend is cut. However, Dorel Industries did not only cut its dividend, it completely eliminated it. The company used to pay a quarterly dividend of $0.15, but with an 8.78% yield, it was clear the dividend was getting dangerously high.
There are a lot more problems with Dorel than just its dividend however. While U.S. tariffs have wreaked havoc on the company, revenue has been stagnant for more than 5 years now. The company has posted annual revenue between $2.57 and $2.67 billion on an annual basis over the last 5 years, and gross profits were nearly 10% lower in 2018 than those posted half a decade ago.
If investors didn’t see this dividend slash coming, they should have. However, there are too many investors, primarily those who are just learning how to buy stocks, don’t understand that dividend are far from a guarantee.
What is the consensus on Dorel Industries now?
Lots of investors think a single day drop like this is a solid opportunity to buy the Canadian stock.
But, I would be avoiding the small cap company at all costs. Dorel is trading at extremely low valuation metrics, which is one of the main reasons why we stress not using these alone. With a price to book of 0.37, a price to sales of 0.08 and a 5 year PEG of 0.71, all signs point to a lot of growth not priced into the stock.
However, with negative profit margins, shrinking revenue and EBITDA and increasing tensions between the United States and China, this may be a stock you want to avoid for now.
What does Dorel Industries do?
Dorel Industries Inc. is a Canadian company that sells juvenile products, bicycles, and furniture. The company operates across North America, East and South Asia, Europe, Oceania, Israel, and South America. Its segments include Dorel Home segment; Dorel Juvenile segment; and Dorel Sports segment. Dorel Juvenile segment generates most of the revenue which is engaged in the design, sourcing, manufacturing, distribution and retail of children’s accessories which include infant car seats, strollers, high chairs and infant health and safety aids. The vast majority of the company’s revenue is generated in North America. Dorel’s major brands include Safety 1st, Maxi-Cosi, and Tiny Love.