Friday nibbles - SSE/Sainsbury/Liontrust/Quindell

Friday nibbles: SSE’s interim results saw the dividend raised by 2.3% to 26.6p, consistent with their target of “at least” RPI growth. But the company flagged that eps will be towards the bottom end of their guidance and that dividend cover could “temporarily fall below its target range of around 1.5 times and be closer to around 1.2x in 2016/17”. Net debt rose by £185.6m to £7.9bn, which is heavily asset backed but still some 3.5x EBITDA. Periodically analysts fret that SSE cannot meet its dividend ambitions and they won’t be calmed by this update.

J Sainsbury have launched a £190m convertible bond, maturing in 2019. The coupon is 1%-1.75%, with a conversion premium of 30%-35%. If you have any doubts about Sainsbury’s ability to thrive/survive then you won’t want to lend them money at a miserable interest rate for 5 years. If you think they will thrive/survive, then the current beaten up shares (down c35% in a year) still offer a (not cast iron) yield of 4.5% for this year. If things get really bad then the dividend might go amidst an equity issue, but the bonds won’t look pretty either. If you want to back a recovery then the shares look the better option, (displaying my equity bias here!).

I wrote favourably about Liontrust recently, since when the shares have moved up smartly, but still look attractive. Recently released first half numbers confirm good trading momentum and a surprise doubling of the dividend to 2p. For the year to March 2015, consensus eps of 20.5p is a PE of 12.2x at 250p. If the dividend is doubled for the full year to 6p, that is a yield of 2.4% with a healthy cover of 3.4x. 

Back in August, as confusion reigned over the fate of their flagship RAC venture, I observed that Quindell had too many uncertainties for comfort. An uncontested UK libel victory over Gotham Research, (with any penalty probably unenforceable under the US SPEECH Act), brought some respite for the shares. However, the recent collapse in the share price, on the back of some esoteric Directors’ share dealings involving ‘pawning’ shares to buy more, has confirmed that this is only for the most adventurous investor. (Neil Cumming^, 14^th November 2014)

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  

J. Sainsbury - Justin time Mr. King!

J. Sainsbury: With every update you increasingly have to wonder whether Justin King’s best decision at Sainsbury’s really was to leave before his reputation came under pressure from industry upheaval. His successor, Mike Coupe, has been promoted to the hot seat at a time of major competitive challenges. These interim results, to 27^th September 2014, also encompassed a strategic review. The top line, underlying, LFL sales were down 2.1%, with quarter 2 being worse at -2.8%. Underlying pre-tax profits were down 6.3% at £375m, with eps down 12.7% at 14.5p. This interim dividend was, against some expectations, held at 5p, but we will come back to that later. In the strategic review they foresee negative LFL sales for “the next few years”. They will invest £150m into lower prices, whilst increasing non-clothing and launching clothing on-line. In the period to 2018 they will open 850,000 sq. ft. of new space, with over half being convenience stores. This is a big step down from the 750,000 sq. ft. expected in 2014/5 alone. To protect the balance sheet, which has £2.3bn of net debt, they will target cutting a cumulative £500m from operating costs over the next three years and reduce capex to £500m - £550m p.a. To put this in context capex was £562m in this first half alone, with previous guidance having been for £925m for the full year.

Despite the capex cuts, the dividend is taking its share of pain too. They are explicit in expecting “profitability to be lower in the second half than the first half”. They also state that the dividend will be determined by using two times cover on underlying eps this year and in each of the next three, with “our dividend for the full year....likely to be lower than last year”. Analysts forecasts have a wide margin of error just now, but if JS make say 25p of earnings this year (which would be the 14.5p in the first half and a hair-shirted 10.5p in the second half), then that implies a full year dividend of 12.5p against 17.3p in the last financial year. Given market conditions (we still await Tesco’s next price response), the year to March 2016 may see again see lower eps and hence the dividend would fall again. I was nervous of this stock when I wrote about it in early October and nothing here makes me any more optimistic. (Neil Cumming^, 13^th November 2014)

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  

Vodafone - Aspiring Quad player

Vodafone: The post Verizon Wireless shape of Vodafone is becoming clearer. These first half numbers to 30^th September showed group revenue down 3.0% and EBITDA down 10%, both on an underlying basis. For the record and amid many adjustments, the pre-tax profits were down 44.9% and adjusted continuing eps down 46.5% at 2.63p. The fog clears as we get to the dividend line with the interim dividend of 3.6p, up 2% although this is shy of expectations for a 5%-7% rise. The company re-iterated its policy to “increase the full year dividend per share annually”.

These bare numbers hide a huge amount of activity and data points galore. The two year long £19bn organic investment programme across its geographies, dubbed Project Spring, continues apace with 4G roll out now covering 10.5m customers group wide. The Project is at its half way point, so more benefits for customers are to be expected. Group data traffic was up 77% yoy and is still accelerating. They mention that they are in transmission from being a mobile telephony company to a “unified communications provider”. This is a big transition and they will meet the likes of BT coming in the opposite direction from a fixed line heritage, as everyone tries for the quad play of fixed, mobile, broadband and content. Across Europe the receding spectre of austerity has helped Vodafone stabilise returns after many years of misery. Their emerging markets m-Pesa money transfer service now has 18.5m customers and continues to grow.

It is well worth remembering that Vodafone has a substantial deferred tax asset and in this period they recognised an additional £5.5bn, taking the total to £25.4bn. If ever it could be unlocked, say on a corporate event, this becomes very significant in the context of a market capitalisation of £58.6bn and underlying debt of £18.6bn (i.e. an Enterprise Value of £77.2bn). The company’s slightly increased guidance is that the first half was in line with their expectations and that “EBITDA for the financial year 2015 to be in the range of £11.6bn to £11.9bn, and free cash flow to be positive, after all capex”. They also comment that the current investment programme will, in time, feed through to “revenue, profitability and cash flow”. Taking the low end of the EBITDA range at £11.6bn the EV/EBITDA ratio is a modest 6.6x. A dividend of 11.3p would be a yield of 5.1% at 220p, with modest growth seen the year after. None of this is that racy, but that yield is going to attract income growth investors, especially with an improving trading picture offering the potential for some profit upgrades in the future. (Neil Cumming^, 12^th November 2014)

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  

Serco - Not their finest hour......

Serco: A proper big kitchen sink has been delivered by new-ish CEO Rupert Soames, with the shares down at 215p against a high above 600p in 2013. We had all been forewarned of trouble ahead but this is still a very sobering announcement. Their future now is in B2G, which is not a rail company but Soames’ plan to concentrate on Business to Government contracts in areas such as justice, immigration, transport and healthcare. Looking backwards he is flagging £1.5bn of Onerous Contract Provisions, half of which relates to goodwill and intangible assets. They are in talks with their banks about their covenants and the dividend is burnt toast. Following a placing of new shares in May 2014, Serco now plan a £550m rights issue in the first quarter of 2015. They have also flagged that 2014 operating profits should be £130m-£140m, some £20m lower than previously guided. But this may not be the end of it, as the full Strategy Review will not be unveiled until the results update in March 2015. As they say of the Onerous Contract Provisions “the range of possible outcomes is still wide”, with the risk on the upside. Even in this statement they are flagging another £150m-£200m of provisions, relating to UK government work, that they are considering making. Trying to be polite, the professional reputation of former CEO Chris Hyman, on the back of all this, is also toast.

Their main bank covenant is that leverage should be less than 3.5x EBITDA, with the figure being 2.41x at 30^th June 2014 post the equity raise. They now flag that this kitchen sink exercise will sent leverage beyond 3.5x at the December year end. To help get this figure down to a more standard 1-2x, they are flagging the £550m rights issue, but will only launch it once the 2014 accounts are signed off by the auditors. They also warn that trading in 2015 is set to be more difficult than previously expected.

At this stage there are still so many uncertainties that any analyst forecasts are subject to abnormal margins of error. PEs will look huge and the yield is 0%. With no dividend to enjoy, this is clearly not a stock for income growth investors. The reason for flagging it up at all is that Rupert Soames comes with a shiny reputation from Aggreko. A bit of Winston Churchill’s blood in his veins will come in handy too in the long months ahead. Having brought the whole plc down to a solid base by March 2015, Soames will be backed by many a ‘knife-catching’ investor to deliver a meaningful corporate recovery. The underlying opportunities in B2G are attractive and Serco can haul itself off the canvass. (Neil Cumming^, 11^th November 2014)

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  

National Grid - powered up

National Grid: Let’s start with some homespun analysis. We have all read that the UK’s electricity supply capacity needs bolstering as obsolete kit is retired and too few new stations are coming onstream. We also know that much of the distribution and transmission infrastructure is at or near the end of its working life. The politicians need the lights to stay on, so an electricity company like National Grid should just have the edge in any periodic negotiations with the regulator. In their latest proposal they presented a range of capex programmes from £16bn-£20bn over eight years, which would result in steady regulated asset value growth of 5%-6% p.a. This is not something the government can afford to play ‘silly bees’ with.

In these half year results to 30^th September 2014 pre tax profits and eps, helped by lower financing costs, were both up 16% and the group is on course to meet their expectations for the full year. For many years the group’s US businesses were a bone of contention with investors, but at the moment things seem to be going better for National Grid, with asset growth of 5% p.a. seen “for the foreseeable future” coupled with cost efficiencies. The group has also announced a j.v. with the up market house builder Berkeley Group to exploit NG’s surplus UK property.

The group re-iterated its dividend policy of increases “at least in line with RPI inflation, for the foreseeable future”. They offer a scrip dividend scheme, but to offset any dilution from the new shares, NG operate a share buyback programme. The interim dividend was up 1.5% at 14.71p, being about one third of the expected annual. However, the shares have been good performers this year, which takes the edge of any whooping. Consensus eps of 55p at a share price of 915p, gives a full-ish PE of 16.6x whilst the likely dividend of 42.7p is a yield of 4.7%. So, despite the PE in the teens, with that dividend commitment and what I see as an encouraging industry backdrop, the shares are a quasi index-linked equity. As such they should continue to attract income growth investors. (Neil Cumming^, 10^th November 2014)

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  

A Friday Miscellany - Banks, T-shirts, savings, flying and a lump of cheese.

Friday strays: Going back to last Friday, Royal Bank of Scotland issued its third quarter statement. The bank listed just under 30% of Citizens Financial Group in the US during the quarter. Generally RBS is showing improving results, with the core tier 1 up to 10.8%, as against the start of the year’s 8.6%. Guidance for the year was unchanged from the recent trading statement. The Tangible Net Asset Value is 388p up from 376p at the start of the year and broadly in line with the current share price. With no dividend until FY 2015 expected by markets income investors have time on their side.

Next up is HSBC’s third quarter update, which was ahead of most expectations on an underlying basis, but featured several hits from fines and provisions (FX, PPI etc.). The core tier 1 edged up to 11.4%. The third quarter dividend was maintained at 10c, with analysts looking for around 53c for the year, against 49c last time. The shares continue to languish around 635p, but this is a 5.3% yield, with upside and the stock still looks like decent baseload for income investors.

Remember that Associated British Foods is the main Weston family business with a quoted minority. It is a food manufacturer whose best bit is actually a retailer, Primark. The PE is in the mid 20’s despite including commodity earnings. The yield, on a 6.3% dividend increase, is still under 1.5%. It looks too expensive to interest me, but that has not stopped it being a good investment.

Legal & General has been a good friend to income investors in recent years as Nigel Wilson has turned on the cash generators. The third quarter IMS showed annuity sales up 16% as bulk sales compensated for the Government’s shredding of the personal annuity market. Asset Under Management at LGIM were up 14% at £676bn. Operating cash was up 8% and net cash 12%. At 239p the shares are no longer bargain basement, but on around 16.5p of eps the PE is 14.5x (and PE is relevant given the big changes in the P&L over recent years). The shares do trade at around a 40% premium to embedded value, but that doesn’t pick up any value for LGIM, which could be worth 25p-30p. A putative 10% dividend increase to 11.1p this year means a nice yield of 4.6%, probably rising to over 5% in 2015. Still a share to run with.

I wrote somewhat lukewarmly about John Menzies in late August, when it was clear that the aviation division was having a transitional year. Now, with a new CEO, Jeremy Stafford, in place there has been a profits warning with the aviation side seeing ongoing tough trading. The head of the aviation division has left, with a one way ticket and no duty free. I see one broker is now pencilling in flat eps of 50p for this year and next. This would still leave the pre-warning forecast dividend of 27.5p almost twice covered and a handsome yield of 8.2% at 335p. However with such negative momentum and the new CEO to conduct a strategic review, angels may fear to tread here for a while.

Dairy Crest have sold their dairy business to Muller for £80m (subject to competition clearance) in a well received deal, leaving them to concentrate on cheeses and spreads. The proceeds will be used to reduce debt initially. At the same time interim results saw the dividend increased by 2%, putting the shares (which are up sharply) on a now more secure yield of 4.5% at 477p. So still a low growth company and not that exciting, but this is re-assuring to those who hold them.(Neil Cumming, 7^th November 2014)

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