Dixons Carphone shares suffer vote of no confidence

Its problems are not new and efforts to arrest the decline in its share price have proved fruitless. Richard Hunter, head of markets at interactive investor, asks whether this time is any different. 

Dixons Carphone has ambitious and aspirational plans, but these are coming at a cost, as evidenced by earlier profit warnings and recently flat reports.

The presence of the likes of Amazon means that Dixons Carphone is likely to lose on price, such that it needs to differentiate itself in other ways. To date, that has been through the physical store presence it provides, allied with its expert staff within. 

That being said, the company is now planning to concentrate on additional channels where it believes growth is possible. Within this update, it has clearly set out its stall to focus on its online and credit offerings and, in particular the mobile part of its business.

The strategy to consolidate its competitiveness, which starts from a position of strength given its scale, will take some time to come through, even if successful. 

Meanwhile, from a results perspective, the company has swung to a half-year loss after restating its financial position and separating the UK & Ireland electrical and mobile businesses, which has resulted in impairments, particularly to the goodwill figure. Unfortunately, this overhaul has tested the patience of investors to the extreme, as evidenced by the initial share price reaction to the news.

Source: TradingView (*) Past performance is not a guide to future performance

More positively, the dividend yield of around 7.5% is a reasonably compelling case to believe in the transformation plan and, even after the reduction announced today, the yield will remain punchy at 4.9% and the dividend well-covered. Reverting to cover of three times earnings means a 40% cut to the dividend this year.

Revenues also edged higher for the period, the company remains a market leader in some of its channels and within the strategic update is a clear mandate to focus on margins in the immediate future. 

The full-year profits estimate has also been maintained and, as would be expected, the outlook comments on implementing the transformation are upbeat.

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Unfortunately, this statement has laid bare the fact that Dixons Carphone has many plates to spin at a time when competition in the sector is intensifying. The market consensus of the shares has recently drifted to a 'cautious buy', with some downgrades becoming possible if the stock falls into the "jam tomorrow" category. 

In the meantime, even prior to today's sharp decline, the shares had lost 10% over the last year, as compared to a 12% dip for the wider FTSE 250 index. 

With its exposure to higher end products, let alone the increasing political and economic uncertainty arising from European negotiations, the shares may remain embattled for some time yet.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.