Dividend Power

Friday, 6 November 2015

Dividend Power is taking a break

Dear Reader,

Thank you for all support and interest over the last 15 months. I hope that you have found the Dividend Power blog interesting. I have now been recruited by a professional City firm to produce a more formal version of Dividend Power, which is a very exciting development for me.

So, for now, my blog will have to go on hold, but you never know what the future holds,

Good luck with your investing,

Neil

Thursday, 29 October 2015

Royal Dutch Shell - BG and $60 oil are on their bucket list

Royal Dutch Shell (RDSB.L): The third quarter numbers, to 30^th September, were presented on a Current Cost of Supplies basis. This showed negative earnings of $6.1bn (after identified items of $7.9bn) against a $5.3bn profit a year ago and also suffered from a $1bn currency translation headwind. Whilst downstream performed well on the back of cost cutting and good refining margins, upstream was hit by low oil and gas prices. Underlying eps were 28c against 92c a year ago. Cash flow in the quarter was $11.2bn against $12.8bn a year ago. The dividends paid in the quarter cost $3.0bn (of which $0.7bn were settled under the scrip dividend programme). So the cash dividend cost is easily covered by cash flow, although I doubt whether a scrip programme using shares yielding nearly 7% would pass muster at business school, with gearing steady-ish at just 12.7%. Looking at the nine-month numbers, earnings fell 87% to $2.0bn, with underlying eps down 54% at 140c. Cash flow was down 31%, but is still a still hefty $24.4bn. The large $7.9bn of identified items was dominated by $8.2bn of exceptionals (it is almost Halloween after all). These reflected low oil and as prices ($3.7bn) as well as exploration retrenchment such as withdrawing (for now) from Alaska ($2.6bn) and halting work on the Carmon Creek thermal project in Canada ($2.0bn).

Looking out into the fourth quarter, little new joy is offered, as upstream production will be affected by various disposals (and the oil price is still low), whilst refinery availability will reduce due to maintenance schedules. The BG deal is still slated to complete in early 2016. The write-offs have dented the shares today and at 1705p the consensus eps for 2015 of 128.8p is a PE of 13.2x, with 134.3p in 2016 pointing at a PE of 12.7x. Meanwhile the 188c (121.3p) of dividend generates a yield of 7.1%. There is a degree of bravado in maintaining this dividend, but they are banking on an eventual recovery in oil prices, with both BP and Royal Dutch citing $60 per barrel for their assumptions. In current, unpredictable, energy market conditions this is mostly hope, or at least hope that the forward oil price market is right. In the meantime they are cutting costs and cutting capex, whilst the pending BG deal offers the chance to re-shape the portfolio for medium term growth. The strong balance sheet means that this overall strategy can be afforded, without obviously damaging future growth prospects. This all seems more re-assuring than BP, where Macondo and Rosneft along with an upward tweak to their gearing target all raise slight queries in my mind. So I would stick with Royal Dutch Shell in preference to BP. (Neil Cumming^,29^th October 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

GlaxoSmithKline - A cracking yield and Neil Woodford at the gates.

GlaxoSmithKline (GSK.L): Thanks mainly to the Novartis deal there are lots of “adjusted”, “core”, “pro-forma” and “reported” lines in these third quarter, to 30^th September (all constant currency), numbers. So, reported 3Q sales were up 11% at $6.1bn, or +5% on a pro-forma basis. Nine-month sales were £17.6bn, up 6% reported and 2% pro-forma. In the quarter Global Pharma sales fell 7% (pro-forma), with Seretide/Advair a key element (price and volume), but this was off-set by a strong performance from HIV-related products. There was steady progress in Vaccines and the beefed up Consumer Healthcare. This broad pattern was also true of the nine-month totals. Core pre-tax profits of £1,568m were down 5% (nine-month £3,893m, -6%), whilst eps of 23.0p were down 13% with a nine-month running total of 57.7p (-10%), whilst total Q3 eps of 11.1p made a nine-month running total of 181.7p. The dividend was maintained at 19p. After all the corporate transactions, net debt is a manageable £10,551m against £14,788m a year ago.

The core eps guidance for 2015 is maintained, being “to decline at a percentage rate in the high teens”, mainly due to the effects of the Novartis deal and Seretide/Advair declines. Looking out to 2016, core eps are expected to bounce by a double-digit percentage, partly helped by getting sales and synergy benefits out of the Novartis deal. The group confirms that it expects to pay an annual dividend of 80p in 2015, 2016 and 2017. Further out the new product pipeline (with 40 new drugs/vaccines in it) is expected to produce £6bn of annual sales and will be highlighted at an upcoming R&D day. The shares have been quite perky of late and the market liked these results, with the price now at 1402p against summer lows of 1227p. So consensus eps for this year is 76p, which is a PE of 18.4x, dropping to 16.5x on 84.8p of eps in 2016 and the 80p dividend is a whopping 5.7% yield. The maintenance of the dividend is predicated on a strong balance sheet and renewed profit momentum as new products kick in post the current patent cliff. If you are happy with that premise then the shares are a happy hold. If you feel that there is many a slip etc. then that dividend becomes more questionable as does the whole investment case. However, Neil Woodford is already holding management to the fire, reportedly calling for a full scale break up, which may act as a back-stop to any renewed share price weakness. For now I will remain a believer, whilst acknowledging that faith could be mis-placed. (Neil Cumming^,29^th October 2015)

Wednesday, 28 October 2015

Lloyds Banking Group - Life in the old nag yet.

Lloyds Banking Group (LLOY.L): This was a mixed bag of an IMS, covering the nine months to 30^th September 2015. Total income was flat at £13.2bn, with net interest income up 4% at £8.6bn but other income down 7% at £4.6bn, with the fourth quarter not expected to make up the lost ground. Operating costs were down 1% nudging the cost income ratio down to 48.0%, but the big win was a 64% drop in impairment charges to £336m. Underlying profits for the nine months were up 6% at £6.4bn, but down in the third quarter from £2,155m last year to £1,972m this time. Whilst statutory nine-month pre-tax profits were up 33% at £2.151m, this was after a further £500m PPI provision making £1.9bn YTD (9M 2014: £1.5bn). Underlying eps were 1.8p for the nine months against 1.7p a year ago. The Common Equity Tier 1 ratio was 13.7%, up on the 12.8% at the previous year-end and the half year’s 13.3%. The Tangible Net Asset Value is 55.0p, up on December 2014’s 54.9p and the interim stage 53.5p. Looking forward the net interest margin guidance has been edged up to the 2.63% achieved in the first nine months (9m 2014: 2.39%) although the asset quality gains of the first nine months look to be temporary.

The news of a further PPI provision and a miss to consensus forecasts has sent the shares down to 74p today, which is a price to book of 1.34x. Consensus eps of 8.6p is a PE of 8.6x, with a dividend forecast of 2.5p indicating a yield of 3.4%. Forecasts for 2016 seem to be all over the place but centre on 8p for a PE of 9.25x. A further hike in the dividend is expected in 2016, with the 3.9p mid-range pointing to possible (and eye-catching) yield of 5.2%. This is consistent with previous company comments about distributing surplus capital above a CET1 ratio of 13% (v 13.7% now) and aiming for a 50% payout ratio. The frosty attitude of Government and Regulators towards banks has thawed in recent months, yet the backdrop for an incumbent retail bank is still tricky. They are lumbered with old IT systems, over-spaced on the High Street and burdened with the sins of the past (e.g. PPI). The Government wants more Challenger banks, even if taxation policy seems to run against this policy. Yet, Lloyds looks cheap, maybe due in part to the overhang of the state’s stake and the drip feed sales of recent times. Along with that there will be plenty of vocal support from vested parties ahead of next year’s public sale. So I think there is upside in this share at the moment. If you are an individual the share sale won’t make you rich, but if you invest the £1000 maximum limit for obtaining a priority allocation, then the 5% initial discount and first anniversary 1 for 10 bonus make for a handsome potential return. (Neil Cumming^,28^th October 2015)

Tuesday, 27 October 2015

BP - how costly is that big dividend?

BP (BP..L): Today’s third quarter results are heavy on financial strategy. They are set out using a medium term $60 per barrel oil price, which would have seemed very conservative a few years ago. With Brent below $50 right now, a degree of optimism is required, but many believe that with new exploration choked off the oil price will have to bounce off these levels next year. The big picture is to balance cash flows by 2017, before turning cash positive. This will enable them to maintain the dividend, before resuming long-term growth. A replacement cost net quarterly profit of $1.8bn was down on last year’s third quarter of $3.0bn, but up on this year’s second quarter of $1.3bn, helped by cost cutting, a good QoQ upstream recovery and downstream resilience. Of the nine-month cumulative total of $5.7bn, $1.1bn came from their interest in Rosneft. One big hit is to capex, which a year ago was expected to be $24bn-$26bn in 2015, but is now likely to be around $19bn, with a range of $17bn-$19bn p.a. out to 2017 now provided as guidance. This is impressive, but it is difficult to tell whether they are cutting fat, gristle or meat from their programmes. The risk is that if they over-do the cuts, it will hurt future performance. Other general costs are expected to be down by $6bn between 2014 and 2017. They are on course to reach their divestment target of $10bn with more to come. Some is being ear-marked for the costs of Macondo (total so far $55bn), which are contained but still increasing despite the proposed settlements with the US authorities. Gearing is 20% having been 15% a year ago, with the net debt figure up from $22.4bn to $25.6bn. So, the gearing target having been held to a 10%-20% band since 2010, is now being loosened to “around…20%”. The quarterly dividend has been held at 10c.

So the end is coming in to focus for the Macondo bill, but as that uncertainty fades I still fret about Rosneft. It just strikes me that this investment is vulnerable to Putin moving the goal posts. Unlikely, but I just can’t be sure. Naturally, the oil price is outside BP’s control, but at these levels the resultant belt-tightening may or may not represent a future opportunity cost. Net debt crept up by $3.2bn last year, whilst the dividend cost is of the order of $7bn (£4.55bn). I just wonder whether some investors would rather protect the balance sheet strength and the ability to maximize the profit from any oil price recovery, rather than scoop a chunky yield of over 6½%. Eps forecasts for this year are 22p rising to 23.5p next year, so at 387p the PE is 17.6x dropping to 16.5x. The likely 40c dividend for this year is about 25.8p for that yield of 6.7%. The group has been adamant that the dividend will be maintained, so all my fretting may only result in hair loss and not financial loss. It may just be a case of whether protecting the dividend is at the cost of future expected total returns. Rather than choosing BP it may well be that, if you do want to hug a huge oil dividend, then the near 7% from Royal Dutch, with BG synergies hopefully in the pipeline, may be the safer option. We get more news on that stock later this week. (Neil Cumming^,27^th October 2015)

Thursday, 22 October 2015

Debenhams - The Spectre of Woolworths

Debenhams (DEB.L): The question is still the same. What is the point of Debenhams? The same can of course be asked of House of Fraser and BHS. The challenge for these High Street veterans is to knuckle down like W H Smith, or to aspire to the relevancy of Next and John Lewis. The alternative is the spectre of Woolworths’ slide into the history books, without 007 to help. In today’s Finals, to 29^th August 2015, Transactions were up 1.3%, whilst Group LFL sales were up 2.1%, (but only +0.6% after currency moves and on a slowing quarterly trend). One of their battles has been to reduce promotional activities (the creeping plague of Blue Cross days for example). Some progress has been made, with 17 fewer promotional days (and 42 down on FY2014) leading to a 90bps markdown improvement, thus helping to hold overall gross margins flat, albeit slightly short of guidance. This left pre-tax profits up by an in-line 7.3% at £113.5m and basic eps up 7.0% at 7.6p, whilst the full year dividend is maintained at 3.4p. On the balance sheet, good cash generation (helped by better stock control) saw net debt come down by £41.7m to £319.8m, leaving net debt to EBITDA at 1.3x against 1.6x a year ago. This already seems fairly healthy, but the group is toughening the medium term target from 1.0x to 0.5x. Whilst they talk of a new progressive dividend policy, clearly more cash will be retained in order to pay down debt and (with some EBITDA growth we hope) meet this target. The medium term dividend cover target is now set at 2.5x.

The way ahead for the group is to further develop their multi-channel offering, expand the international operations (to 30% of Group transactions) and to utilise spare UK space by introducing more concessions. Whether an initial eight Sports Direct concessions is sufficiently aspirational, is for you to decide. Mind you, with Mike Ashley punting the shares the Board may feel obliged to co-operate. In these results they say that on-line sales were up 11.4%, representing 13.6% of group sales, against a long-term target of 30%, whilst “Nine by Savannah Miller” was their best ever brand launch. They now operate from 248 stores in 27 countries, with 161 being in the UK. A new CEO will take all these plans forward, as Michael Sharp is sticking to his plan to walk away next year after five years at the helm. They reckon that they can absorb the impact of the National Living Wage, so there might be enough here to at least hold consensus forecasts at 7.8p. At today’s perky 85p, that is a modest PE of 10.9x. Dividend cover this year was 2.24x, so a slight tweak to 2.3x on the route to 2.5x, leaves my dividend forecast at 3.39p for a yield of 4.0%. That all looks cheap, but in the age of clicks ‘n’ bricks I still worry that large department store chains are structurally too disadvantaged. The prize is that if John Lewis can flourish, there must be space for others to do likewise. The shares have been a good trading stock during Michael Sharp’s tenure, without holding on to any advances, with the high ground above 100p being lost to those mysterious snowy profit warnings a couple of years back. I would now wait for the new CEO to be announced next year, with a good appointment potentially being the catalyst that investors have been looking for. (Neil Cumming^,22^nd October 2015)