Dividend Power

Tuesday, 13 January 2015

Wm. Morrison - the axeman cometh

Wm. Morrison: So, after five years, time has run out for CEO Dalton Philips. The move of Andrew Higginson (ex-Tesco FD, but untainted so far) in the Chairman’s role, has been brought forward. Almost before he gets his feet comfy under the desk, Higginson has announced that Dalton Philips has exited stage left. No successor has been announced with the search just getting underway. Maybe Philips was a trifle unlucky in that he joined Morrisons at the time that Lidl and Aldi were really starting to get noticed. He found a company with second tier computer systems, no home delivery service, no loyalty card scheme and no convenience stores. He has addressed all these, but maybe not well enough or quickly enough. I remember one rival being shocked and amused that Morrison’s were making simple errors such as putting convenience stores on the wrong side of the street for local footfall patterns. The tie up with Ocado on home delivery seemed loaded on favour of Ocado. He also dabbled in diversification (e.g. Kiddicare) to no avail. Perhaps history will say that he didn’t act fast enough and maybe the presence of a critical Ken Morrison as Honorary President inhibited him. For now though, the verdict has to be that he leaves with a tarnished reputation.

All the above over-shadowed this otherwise low key trading update, in which the LFL (ex-fuel) sales for the six weeks to 4^th January were revealed as -3.1%. At the same time (previously reduced) guidance was maintained with pre-tax profits for the year to 31^st January 2015, to be in the range £335m-£365m, with net debt of £2.3bn-£2.4bn. If this translates to around 11p of eps, then that is a PE of c17x, with the shares having bounced to around 185p. That doesn’t look enough to guarantee the 13p of dividend paid out last year, even though, in a fit of chutzpah, the interim was put up almost 5%. With changes in the board room, the standard pattern would now be for expectations for the year to 31^st January 2016 and beyond to be taken down to a level from which progress can be made. So this is another situation where income investors are faced by great uncertainty in an industry in disequilibrium. There really seems little rush to invest. (Neil Cumming^,13^th January 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk Twitter: @DividendPower

Friday, 9 January 2015

A little bit of UK consumer economics

A little bit of UK consumer economics: Politicians and central bankers are scared stiff of deflation, with Japan being seen as the modern example of the resultant economic porridge. So with deflation in our supermarkets and energy costs coming down, the overall inflation rate is set to stay well below the MPC’s 2% central target. Indeed Mark Carney may be sending regular postcards this year to George Osborne explaining sub 1% inflation rates. So the prospect of UK interest rate rises seems to be being pushed away again, which will suit the government just fine in the run up to May’s election.

In rough and ready terms the average UK household disposable income is £150-£160 per week. Mike Coupe at Sainsbury, this week quantified the benefit of recent fuel and food price drops at £10 per week per household. This is a c6.5% increase at a time when wage rates are just beginning to pick up. So the good news is that consumers have more money to spend (not all of it will go to savings and debt reduction). The bad news for consumer companies is that their customers have better price information than at any time in history. Yes, “Black Friday” was a success in terms of publicity and sales but probably only brought forward future sales and completed them at miserable margins. We are all used now to checking “brick” prices against “click” prices before we purchase and the seller is on the back foot.

So the successful consumer companies have to offer something in particular. It may be ambience, service and choice (John Lewis) or convenience and price (Lidl or Aldi). None of these are UK quoted companies though. In the quoted space, Next has been a good operator at combining on-line, store appeal and price (as the share price shows), whilst M&S shows what happens when a dull clothes offering meets bland stores. When you look for stocks exposed to the slightly flusher UK consumer and not competing purely on price, the pubs and restaurants leap out. In general people like going out and there is plenty to choose from, with some companies such as Greene King offering something at almost all price points. Others such as Marston’s, Mitchell & Butler and JD Wetherspoon also fit the bill. As a broad suggestion it is this ‘eating out with a drink’ consumer theme which investors should look at, with many of the sector’s shares not looking that expensive. (Neil Cumming^,9^th January 2015)

Thursday, 8 January 2015

Supermarkets - shoppers are the main winners

Supermarkets: So, we have now had trading statements from Sainsbury’s and Tesco, covering the Christmas period. Amidst the depressing stats about how many mince pies obese Britain ate, has anything much changed? Well, clutching at straws, it seems to be getting worse slower as negative LFL’s ease. However, more and more I am seeing comment that LFLs may be a red herring (probably also soon to be reduced in price) as their use is devalued by the noise created by on-line sales and click and collect services. The bad news is that there is still deflation in the system and the simple old sales line is still heading in the wrong direction. This seems to be particularly so in core food sales in store, with the blow being softened by non-food sales. The problems of over-spacing will take years to unwind, with Tesco being especially bloated.

At the same time, whilst the sales line flounders, the margin issue is getting worse. I read today that Sainsbury after its headline price cuts is now cheaper than Tesco on a ‘typical basket’ of shopping. Well I can’t see Tesco putting up with that, with the natural order likely to be restored after its latest salvo of price cuts announced today. Not that any of this will make Lidl and Aldi quake in their boots, implying that more needs to be done before equilibrium with the discounters is established. Tesco’s move is backed by cost saving measures (including moving from Cheshunt to Welwyn Garden City but leaving many ‘colleagues’ behind with a remaindered UB40 download). Tesco can at least also hack bits off with Blinkbox going to TalkTalk and Dunnhumby on the block, but these are not a solution to the core issue. They are one-offs that will not in themselves restore profit margins. Another Tesco cost saving is waving goodbye to the final dividend this year, with the bigger temptation of an equity issue still there.

Obviously there are broker forecasts aplenty out there, but these are fluid and could well have further to fall. With returns on capital looking sparse, balance sheets puce, sales down and margins falling, the outlook for dividends (let alone growth thereof) is glum. So, for income investors, it is still too early to wade back into the melee. For years we worried about what damage a full scale price war would do to the industry and now we are finding out. (Neil Cumming^,8^th January 2015)

Thursday, 18 December 2014

Dixons Carphone - SIMs, iPads and ....fridges??

Dixons Carphone: In all honesty this is a bit of a sighting shot for me. Dixons have had a near death experience in the recent past, whilst Carphone Warehouse placed their faith in the Best Buy joint venture before filing for a quickie divorce. So now these two have set up home together and we are left to decide if it is love or just marriage on the rebound. On fundamentals, I am still trying to get my head around why a bricks ‘n’ clicks electrical retailer (whose bricks are largely out of town) makes a natural partner for a mobile device seller based largely on the High Street. Maybe PC World is the link, but it just feels like two very odd bedfellows, with the financial logic outweighing the industrial logic.

Anyway, these debut results are for the 31 weeks to 1^st November 2014 and show LFL revenues up 5%, with Q2 up 9% and stable margins. This drove pro-forma pre-tax profits up 30% at £78m, with basic eps at 7.1p. On the back of this a dividend of 2.5p has been declared. The Chief Executive’s statement starts off “It is clearly a symbolic moment in the history of our great new shared enterprise to be reporting our ...results”, which seems rather flowery. More unusual corporate language was that the UK division posted a “barnstorming performance”, with Northern Europe doing well and Southern Europe picking up.

I guess that the analysts are on a learning curve, but their forecasts for the year to April 2015 centre on 22p, a PE of 20x at 440p. So, a three times covered dividend of 7.33p would be a yield of 1.7%. Profit growth for the following year (FY2016) is put at 25%, so whilst the multiple is high you do get fast forecast growth for it. I’m not sure how sustainable that growth rate (and rating) will be, once the first flush of Western Europe economic recovery and corporate synergy benefits run their course. With these valuations leaving little room for disappointment, I wouldn’t rush out to buy the shares just now, especially with the share price up around a third since the merger completion. (Neil Cumming^,18^th December 2014)

Tuesday, 16 December 2014

Domino Printing - if only they delivered pizzas

Domino Printing: Somewhat of a fallen angel this one, after an earlier disastrous foray into the US through TEN Media and significant profit downgrades earlier this year, due mainly to Far Eastern pricing pressures. But with these finals to October 2014, some stability appears to be returning. Revenue was up 4%, (9% on constant exchange rates), whilst underlying pre-profits rose 9% to £57.6m. The underlying eps of 40.01p were up 13% and supported a 5% annual dividend increase to a, nearly twice covered, 22.74p. Net operating cashflow was a healthy £65.8m, helping net cash balances up to £40.1m.

However, their guidance is that customers are still being cautious. Coupled with significant ongoing R&D costs, the company is predicting that profits in FY2015 will be broadly flat on FY2014. (On R&D they spent £18.2m against £19.5m in FY2013, but they indicate that FY2015 will see this reduction ‘reverse’, being the further headwind for the P&L.) Longer term though, the market for high quality digital printing should still enjoy further structural growth. The statement notes that as well as new equipment sales Domino are placing more emphasis on nailing down the steadier after-sales revenue streams, which is sensible. However, the more uncertain outlook for global economic growth, as winners and losers emerge from the current oil price rout, does not help forecasting accuracy right now. So the guidance for flattish profits might mean allowing for a slight dip in eps to say 39.5p in FY2014. With the shares at 642p that is a PE of 16.3x. With cash on the balance sheet a further small dip in cover could allow the dividend to go up, say, 3% to 23.42p for a yield of 3.6%. These are not bargain basement levels, when the resumption of eps growth is still unclear. The question remains whether Domino can regain its form and reclaim a seat at the top table. For now there is no obvious rush to invest. (Neil Cumming^,16^th December 2014)

Monday, 15 December 2014

Carpetright - a good start for the world of Wilf

Carpetright: Dear old Phil Harris has had a long and successful business career. He now goes by the moniker of Baron Harris of Peckham and an even greater honour is to be a Director of Arsenal Football Club. More problematic is his legacy at Carpetright, which has suffered over recent years from changes in consumer taste, especially the rise of wood and ‘wood’ floor coverings. Phil has tried to let go of the reins but it never seems to have quite happened......until now? He retired as Chairman (finally) in October and the latest Chief Executive, appointed in May 2014, is Wilf Walsh, an unknown in the world of carpets. These interims to 25^th October 2014 are relatively cheery, with sales up 2.6% reflecting macro-economic trends with UK recovery diluted by European weakness (and the effects of Euro weakness). Operating profit moved from £4.1m to £7.4m as European losses were eliminated and UK operational gearing has kicked in despite sharpening the price offer, leading to basic earnings per share of 7.6p against 2.6p. There is again no dividend, the last one having been in 2011, but net cash was £3.2m against net debt of £14.3m a year ago.

Analysts are now being guided towards the top end of expectations, with Wilf Walsh setting out his vision of brand renewal and ‘value heritage’. The UK estate has been trimmed and almost two thirds of shops have been renovated, whilst in Europe better business practices, cost cutting and cash management have led to early wins. These are early days and there have been other false dawns. It may be that the trough for carpets in interior design has passed and people will still want to see carpets in shops, so internet competition is less of a threat. The top end of expectations is about £11m giving about 12.5p of earnings. The shares have jumped over 10% today, to 350p to produce a PE of 28x....true recovery land. The dividend will be re-visited at the finals, but say a 2p notional would be a 0.6% yield. These look very full valuations, but it might be worth keeping a beady eye on how Wilf fares in case a sustainable recovery momentum builds up. (Neil Cumming^,15^th December 2014)

Thursday, 11 December 2014

P Z Cussons - Kate Moss plus Goodluck Jonathan

P Z Cussons: Forget the old bar of Imperial Leather soap that Granny used to cherish, Kate Moss is their more recent inspiration. What is not to like about a health and beauty consumer goods company that now derives over 40% of revenue from Africa? It’s main trading territory there has a population of c175m and a high birth rate. Thanks to natural resources it is a rich nation, with a growing middle class, albeit there is still much inequality. Elsewhere in developed markets, major brand names include Carex, Charles Worthington, St Tropez and Venus. The answer to my earlier question, in a word, is Nigeria. Whilst blessed with an exciting future, Nigeria is currently facing renewed internal strife ahead of Presidential elections early next year, with religious tensions and unrest rising. The collapse in the oil price has badly affected their currency and the budget. Whilst now officially Ebola free, regional cross-border trade has been adversely affected.

This has been reflected in a trading statement for the half year to 30^th November 2014, with Europe and Asia on track for increased profits, but Africa (mainly Nigeria) down. Overall operating profits are down 4% as a result. Last year (to 31^st May 2014) eps were 17.9p, so a 5% set back, (which seems plausible) would leave them at 17p for the year to 31^st May 2015. The shares have been weak of late and at 309p (against a 12 month high of 403p) the forward PE is 18.2x. Given the good long-term prospects the dividend is likely to go up, with say a 5% rise taking the total to 8.15p for a yield of 2.6%. Given the massive opportunity that is Africa, PZ Cussons is a stock that has exciting long-term prospects. Just now though, despite the weak shares, the valuation seems full enough given all the uncertainties in Nigeria. (Neil Cumming^,11^th December 2014)