Dividend Power: February 2015

Thursday, 26 February 2015

Ladbrokes - don't bet on the dividend

Ladbrokes: So, the book is still open on who will succeed Richard Glynn as CEO. This leaves these full year results to 31^st December 2014 as a holding exercise. Revenue was ahead 3.8% at £1.16bn, driven by a 22.9% lift to £215.1m in ‘Digital’ as they re-boot with the help of Playtech. Pre-tax profits were down 13.5% at £98.0m, with ‘Digital’ progress more than offset by ‘UK retail’, where patchy sports results and re-structuring disruption took their toll. Who knows if you feel sorry for them that, group-wide, they dropped £8.1m on Boxing Day footie results, which, by and large, went according to the form guide. On the high street, 89 shops were closed in 2014, with a further 60 closures slated for 2015, the result of regulatory changes and shifting customer preferences. Eps were down by a similar 13.7% at 10.1p, whilst, on the dividend front, the board seem to have carried on whistling by keeping the annual total at 8.9p. Whether or not an incoming CEO will be pleased with the declared intention to pay the same again in 2015, remains to be seen. The company makes much of having spent the first half re-plumbing the group and starting to reap the rewards over the World Cup and into in the second half. They also point out that c14% of net revenue now comes from overseas (mainly Australia, Belgium and Spain). Results in Ireland were bad enough to trigger a “fundamental review”, so their card is marked.

The big quandary is what happens to the dividend now. The board aims to set the dividend based on earnings cover and a 1.5x-2x net debt to EBITDA range. At present net debt at £419.2m is about 3x depressed EBITDA, so the, barely covered, dividend should be at risk. However, they have stated the current intention to go again in 2015, although that does leave a line of retreat open. That get-out is key, as I would suggest that any incoming CEO would want to rebase the dividend, sort the balance sheet and invest enough to secure the turnaround in the group’s profitability. Even ahead of any kitchen-sinking, tough markets and regulatory burdens are causing analysts to be thinking of a ball-park 8p of eps in 2015, which would leave the dividend uncovered. Having rallied to 120p, from lows near 100p, the shares would be on 15x those eps with a vulnerable looking 7.4% yield. If you want to invest in the stock as a recovery under a new CEO, then that is grand, but don’t assume that the juicy dividend will be part of the deal. (Neil Cumming^,26^th February 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

Wednesday, 25 February 2015

St. James's Place - embracing change

St. James’s Place: This company seems to be humming along like a well-oiled machine at the moment. Last year was very significant as they saw long time historical shareholder Lloyds Banking Group reverse out of their controlling stake, to leave St. James’s as a true independent. The group has benefitted in recent years from numerous regulatory changes that have pushed many mom and pop IFA’s into an early retirement. At the same time the upper end of the mass affluent market has had to face repeated changes to personal tax and pension rules that has made proper advice ever more necessary. They are continually looking to improve their offering and in an interesting move they are now going to offer banking services to customers, piggy-backed off the challenger Metro Bank.

In these better than expected annual results to 31^st December 2014 they have reached funds under management of £52bn (up from £44.3bn last year) and there are now 10.5% more advisers at 2835. The EEV operating profits are up 29% to £596.4m, whilst the EEV net asset value is up 14% to 657.9p per share. As the books of business mature the cash stream is building and the final dividend has been hiked a whopping 50% to 14.37p, to total 23.3p, up 46% year-on-year. They state that this is 70% of underlying cash and that in future years they will move this to 75%. This implies another useful rise in the dividend next year and beyond.

For investors, the concern that Lloyds had a controlling stake in the group has now gone away. Saturation is another concern, given that as they passed through the 1000 adviser barrier some years ago people wondered how many ‘St. Jimmies’ the market could absorb. The concentration of the IFA market seems to have pushed this concern away for now though. Excellent share price performance means that at 935p (up again today) they trade at 1.42x EEV NAV, which seems a stretch, even though others also trade at hefty premia too. Even though the dividend is moving ahead at a clip the share price means that the yield is a modest 2.5% historic and say even 20% growth next year would only take the dividend to 28p for a yield of 3.0%. It feels as if a lot of good news is in the price now, but with plenty of opportunity in the years ahead, some will still feel like clambering on board now. The more patient will wait for quieter days or duller markets before jumping in. (Neil Cumming^,25^th February 2015)

Tuesday, 24 February 2015

BHP Billiton - toughing it out

BHP Billiton: With a wide spread of commodities including iron ore, coal and oil, BHP has been right at the heart of the recent upheavals in the commodities markets. This is reflected in these interims to 31st December 2014, with underlying operating profits down 25.5% at $9.2bn, despite production being up 9%. Eps were also down sharply at 80.2c (-47.4%), but the dividend was raised 5% to a, still covered, 62c. As with many other mining companies there is a big programme of cost cutting, capex reviews and project reappraisals underway. The tangible results are that BHP generated $4.1bn of free cash flow, helped by productivity gains and 23% of capex reductions, with spending down to $6.4bn in the half year. Capex is now 40% below peak levels and is forecast to reduce further to $10.8bn in FY2016. The productivity gains are ahead of schedule, with over half the $4bn targeted by 30th June 2017 already achieved. All this effort has left net debt down at $24.9bn, a gearing ratio of 22.4% and still rated at A+.

The demerger of South32 (a mixture of some aluminium, coal, manganese, nickel and silver assets) is on track to complete in the first half of this year and BHP have re-iterated that they will maintain a progressive dividend policy. Again they repeat that "any dividends from South32 will represent additional cash returns to shareholders". In their outlook, BHP are frank in seeing 2015 as a tricky year, but this is when being big and strong helps, as smaller fry drop out of the picture.

Say that they scrape 65c of eps in the second half, to make 145.2c for the year. At £:$1.54, that is 94.3p for a PE of 17x at today's pleased looking 1610p. That looks high, but could well be on near trough earnings. Teeing off from the interim dividend, if we assume a modest rise in the final to 65c, that makes 127c (82.47p) for the year, a nice yield of 5.1%. For FY2016 you should get a bit more than that, but on the reduced equity post the South32 group demerger, plus maybe something from South32. To me that all looks like you are being paid well to wait for the commodity upturn, whenever that is, and patience should prove to be a virtue. (Neil Cumming^,24^th February 2015)

Monday, 23 February 2015

HSBC - Gulliver's Travails

HSBC: If my old compliance officer found out that I had non-dom status and had $5m stashed in a Swiss numbered account using a Panamanian front, I would be doing a lot of explaining. So it will, or at least should, be for Stuart Gulliver, CEO of HSBC. Recent revelations about their Swiss private bank subsidiary paint a picture of a company without a grip on its subsidiaries thanks to a devolved management style. This tarnished image was already in mind after the reign of Stephen (Lord) Green, following the loose lending policies in North America before the banking crisis (but they were not alone in that), becoming embroiled in drug-related money laundering accusations in Mexico and getting caught in the forex rigging scandal. What a way to start celebrating your 150^th anniversary.

So today’s ever complicated annual results for 2014 are somewhat overshadowed by the rotten PR. Anyway eps were 69c (44.8p at £:$1.54), down from 84c, whilst the dividend is 50c (32.47p), up 2.0% on 2013. The earnings decline reflected, in part, “fines, settlements, UK customer redress and associated provisions”. This is hardly the stuff of Blue Chip quality. Whilst adjusted revenue was flattish ($62bn v $61.9bn), operating expenses were up 6.1% showing just how hard the bank is paddling to stay still at present. The highlighted CRD IV Tier 1 ratio crept up from 10.8% to 10.9%, but the return on equity was a skinny 7.3% against 9.2% in 2013. Their revised medium term (so multi-year) targets are for these numbers to reach a return on equity of 10% on a Tier 1 CRD IV capital ratio of 12%-13%.

Previously I have leant towards the line that the future is brighter, HSBC is tilting back towards the (longer term) faster growing Asian regions and is a well-capitalised, global leader. Meanwhile, a 32.47p dividend on a sagging 575p share price is a 5.6% yield to keep you warm while you wait. That is still very true, but who knows if Gulliver can restore any sense of moral authority and will this hobble his ability to perform the role of Chief Executive? Management upheaval, the regulatory doghouse and a patchy world economy could all conspire to delay financial progress for shareholders. The yield is tempting, but this is now one for the patient investor, ready for the long haul. (Neil Cumming^,23^rd February 2015)

Thursday, 19 February 2015

Centrica - the first cut is the hardest

Centrica: A new Chief Executive, Iain Conn, arrived earlier this year. So, in the time honoured tradition of kitchen sinking, the previously high profile dividend growth policy has gone for a ‘Burton’. In November, I wrote that I wasn’t that taken by Centrica at 294p, but at that stage the company was at least maintaining its target of real dividend growth. At the interim stage the dividend was ahead 3.7%, so whilst not wildly exciting for dividend growth hunters, it seemed OK. Now the finals to 31^st December have been announced and the total dividend is 13.5p, down just over 20% from the 17.0p paid last year. Having paid 5.1p at the interim, this final of 8.4p is just over 30% down on last year. For next year the full 30% cut will be implemented meaning a dividend around 11.9p.

So the white flag has been waved. The group is talking about ‘challenging conditions’ including adverse weather conditions (too mild in Blighty and a polar vortex in the US), and falling oil and gas prices. This has resulted in adjusted operating being down 35%, and eps down 28% at 19.2p. This just covers the new dividend, but net debt at £5.2bn is about 3x EBITDA. There has also been a £1.4bn impairment charge on various assets. These all seem to be signs of a company struggling to make progress for shareholders.

Looking forward energy companies in the UK are becoming a prime public enemy as politicians see them as election cannon fodder and the company takes stick for, supposedly, fleecing customers whenever possible. This is not a helpful backdrop for shareholders. In their statement Centrica say that eps for 2015 will be down on 2014 levels and that a strategic review of the business is in hand. This should be complete in time for the July 2015 interim results presentation. One of the points to be addressed is ‘Group financial framework’. This could mean anything from ‘it’s OK’ (less likely) to a further dividend adjustment and a capital raise (call me cynical). As a clue, even after the 30% dividend cut, future payouts ‘will be determined by the health and growth of the Group’s operating cash flow after tax’. To me that is far from a commitment that the re-based dividend has any sanctity. The shares have tanked today down nearly 9% at 256p. Even at these low levels they feel it appropriate to introduce a scrip dividend scheme to raise a bit of equity and conserve cash.

At 256p and guessing at 18p of eps, we have a PE of 14.2x and if 11.9p of dividend is paid, a yield of 4.6%. That might seem worthy of a nibble, but I just can’t help feeling that the strategic review might make investors more queasy, rather than calmer. (Neil Cumming^,19^th February 2015)

Wednesday, 18 February 2015

Rank Group - Hong Leong are selling: should you?

Rank Group: In my thumbnail on Rank Group, at the start of the month, my biggest stumbling block was that you were, or would be, an outsider at a company where one party (the Hong Leong Group) controlled 69% of the shares. Due to the Prudential/M&G owning a near 7% stake, which was deemed to be not part of the free float, the group was in breech of the criteria for a London premium listing. It was only through a special dispensation that the quote was being retained.

The results themselves were pretty good with more encouragement for investors than for several years. As a result the shares have been pretty good performers, climbing away from a plateau around 160p that they had been stuck on for almost a year. When I wrote last the shares were 176p and I was caught between liking the shares and worrying about the shareholding structure. Today, with the shares at 187p, a level last seen in early 2007, a subsidiary of Hong Leong is selling a 12.8% stake, in a book-build, at no lower than 185p, to take the controlling stake down to 56.1%. This will sort out the free float concerns and greatly improve liquidity. This is good news, but at the same time takes away any takeover hopes for the foreseeable future, with Hong Leong not a buyer, but retaining a controlling blocking stake.

For the year to 30^th June 2015, a possible 14p of eps is a PE of 13.3x and a 4.8p dividend would be a 2.6% yield. For me that looks enough for now and I’m not sure that fresh purchases are merited. What remains to be seen though is whether index funds and index huggers generate enough demand to squeeze up the price. If so, then profit taking would be tempting. (Neil Cumming^,18^th February 2015)