After 38 years of increases, is this growing dividend under threat?
Just over a year ago, in October 2010, I sang the praises of PZ Cussons (LSE: PZC), a FTSE 250 firm that makes personal healthcare products and consumer goods.
A dividend dynamo
PZ Cussons has a number of well-known 'bathroom brands', such as Imperial Leather and Pearl soaps, Cussons baby lotion and Carex hand-wash. The company's history goes back 132 years to 1879, when it was named Paterson Zochonis, after its founders' surnames. The firm's name changed to PZ Cussons in 2002.
What makes PZ special is its absolute commitment to raising its yearly dividends to shareholders.
In fact, in 25 Years Of Rising Dividends, I revealed that PZ had raised its dividend for at least 25 years in a row. Later, in an interview with the group's finance director, my Foolish friend Maynard Paton discovered PZ had actually raised its payout for a straight 38 years in a row. That's a record to be proud of!
Now for the bad news
In this new age of austerity, retailers and consumer-goods companies are suffering as shoppers tighten their belts, snap shut their purses, or trade down to unbranded products. As a result, PZ issued a profits warning in a trading update released this morning.
In the half-year to 30 November, the mid-cap stated that its core markets (the UK, Indonesia and Nigeria) had "achieved continued momentum with good revenue growth in the period". However, "a continued high level of raw material costs and adverse exchange-rate movement have impacted margins."
In other words, PZ has absorbed rising material costs, rather than passing on these extra expenses to consumers. In addition, PZ warned that "trading conditions in Australia, Greece, Thailand and the Middle East have been challenging." As a result, the group's margins have fallen, as have its profits expectations for the half-year.
As I write, PZ Cussons shares have tumbled by an eighth (12.5%) to 301.5p. However, this dive was on very low volume, with under £2 million of shares traded -- a tiny proportion of PZ's market value of nearly £1.3 billion.
Is the dividend under threat?
PZ Cussons goes on to warn that, "The trading environment will continue to be difficult, given increasing pressures on consumer spending power in all markets, continued high levels of promotional activity in developed markets and the UK in particular, and ongoing high level of input costs."
As a result, brokers will be quick to downgrade their 2011/12 forecasts, hence the steep slide in PZ's share price.
Despite this disappointing news, PZ's dividend looks safer than houses. With a forecast dividend yield of 2%, covered 2.4 times, it would take a big setback for the firm to stop raising its payout or even cut it. What's more, the business is in a strong financial position, today reporting "negligible net borrowings".
However, even after this morning's share-price fall, I'm in no rush to buy PZ's shares.
I am dissuaded by two things: first, the recent margin erosion, because margins can be slow to rebound once they start falling. Second, PZ trades on a chunky price-earnings ratio -- currently forecast at 19.5, but certain to rise after today's warning.
In summary, although I'm something of an admirer of PZ Cussons, I'm far from tempted to buy at the current £3 mark. Were the shares to fall closer to £2, they'd become a much more appealing opportunity on my dividend-dynamo watch list!
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