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Is this 16% dividend yield a brilliant bargains for ISA investors or a terrible trap?

De La Rue (LSE: DLAR) is a big yielder that carries some compelling numbers at current prices. On top of its P/E ratio of 4.2 times for the fiscal period to March 2020, the money printer boasts a quite astonishing corresponding dividend yield of 16.6%.

Shares with such a lopsided earnings multiple and payout yield are often considered dividend traps that are strong bets to slash shareholder rewards. And in my opinion, De La Rue is a classic example of one of these stocks. And latest trading details this week illustrated why.

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Danger ahead

The market has become accustomed to the FTSE 250 firm issuing profit warnings and its latest such release raised plenty of fresh questions. In it De La Rue advised that adjusted operating profit for the six months to September would be in the “low-to-mid single-digit millions,” although no reason for this latest downgrade was given. Comparable profit in the 2018 period clocked in at £17m, which itself was down 36% from a year before.

As a consequence, the business said that profit for the full year will be significantly lower than market expectations” and that it is currently conducting a detailed review of the business. Stay tuned for the release of its half-year statement on November 26 as it’s bound to be explosive.

I’ve long warned about De La Rue’s shaky long-term outlook as the advent of technology makes cash payments more and more redundant. Still, the sheer scale of the banknote printer’s demise has taken even this bear aback, its share price sinking by almost 70% over the past year alone.

 There’s clearly plenty of reason to be afraid looking further down the line too. City analysts had already been expecting a 19% earnings decline for the current financial year and a similar drop for fiscal 2021. These numbers clearly face the prospect of significant downgrades in the weeks and months ahead. 

Dividends to be cut?

However, what really threatens De La Rue’s share price in the near future is the possibility of a sharp dividend cut, something City consensus has so far been unwilling to suggest.

It’s not just that the business faces long-term pressure in its bill-printing business, revenues from which have worsened in this particular year following the Venezuelan central bank’s refusal to settle its account. De La Rue last month sold its International Identity Solutions division for £42m, removing some much-needed diversification from its core operations, while its colossal passport contract with the UK government is also in its final stages.

Now’s clearly not the time for the company to be languishing under a debt mountain, but this is unfortunately the case (net debt had doubled to £107.5m as of March). Broker predictions of another 25p per share dividend for this year look in serious jeopardy, even if the sale of its ID unit has provided a bit more financial wiggle room. And to compound matters, the current dividend prediction is covered just 1.4 times by anticipated earnings, well below the widely-regarded security benchmark of 2 times and above.

De La Rue’s clearly a share to be avoided like the plague, an analogue share that’s looking painfully adrift in an increasingly-digital world. So forget about that big dividend yield and put your investment cash to work elsewhere.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.