Can RPS rebuild after dividend blow?

After its big dividend cut, RPS Group adds to the pain for investors with caution over 2020 prospects.

With its long record of 15% annual dividend growth now a distant memory, RPS Group (LSE:RPS) gave investors a fresh jolt today as it warned against expecting a profits revival in 2020.

The professional services firm has just endured a miserable year, with political uncertainty in the UK and Australia among several headwinds contributing to today's 25% decline in full-year underlying earnings per share to 12.31p, alongside £23 million of one-off items.

The full-year dividend of 4.42p costing £10 million has also been cut from 9.88p or £22.1 million in 2018 after August's announcement that it was rebasing the pay-out. Income investors with long memories will recall RPS's proud record of growing its dividend by 15% every year for two decades up until 2015.

The new progressive dividend policy will now aim to pay 40% of adjusted earnings rather than the 60% that had built up following those years of steady dividend growth. Today's award still means RPC trades with a dividend yield of 2.8%.

The shares have been on something of a rollercoaster ride over the past 12 months, with the multi-year low of 107p in June and dividend setback in August offset by a subsequent recovery on signs of more stable trading conditions towards the end of the year.

The stock was back under pressure today, falling 14% to 147.8p on the company's verdict that 2020 trading will be similar to last year's before an acceleration in growth in 2021.

Joint house broker Numis Securities downgraded its 2020 earnings forecast by 10% in response, but thinks the market outlook should improve as the year progresses.

Factors in RPS's favour include the start of the water industry's AMP regulatory cycle in England and Wales, which should boost the company's UK services business after a lull in 2019. There's also optimism that headwinds in Australia will reduce as its property market stabilises.

Australia accounted for less than 12% of profits in 2019, compared with more than 20% the previous year, after RPS's project management business was affected by the impact of the country's Federal election on major defence project spending.

And in a further blow for RPS following its acquisition of Corview, public sector infrastructure spending was hit by state elections in Victoria and New South Wales.

The strongest performance of last year came from RPS's energy division, which lifted profits by 25% to £11.1 million on the back of a recovery in oil and gas markets. RPS operations also cover sectors including property, transport, water, defence and government services.

It was founded in 1970 and now employs 5,000 consultants and service providers.

CEO John Douglas said the intention going forward was to build a business that is capable of delivering mid-single digit rates of organic growth and a double-digit operating margin.

He added: “As we enter 2020, trading conditions in our markets are generally satisfactory and we anticipate more stable results from our segments. We will continue to invest, especially to deliver better connectivity, but we will do so in a measured way.”

Analysts at Liberum retained their price target of 170p following today's results, which is based on shares currently trading with a price/earnings multiple of 14.2 times.