Electrocomponents - increasing dividend risk

Electrocomponents: I am now getting very worried about the dividend here. There is a new CEO in place, Lindsley Ruth, who joined in April. Now comes the, not too surprising, news that the long standing FD, Simon Boddie is going in September. In November, Ruth is planning to present plans to improve performance after a “disappointing” FY2015, whilst meanwhile, “actions to address underperformance are being intensified”. This all sounds like a man looking at kitchen sinks in B&Q. In these annual results, to 31^st March 2015, headline revenues were down £6.9m to £1,266.2m after currency moves and fewer trading days provided a £50m headwind. Pre-tax profits were £96.1m (-5%), with eps down 19% at 13.2p. The dividend was, as expected, held at 11.75p.

There are many gloomy references, but here are some examples. Improving revenue growth is proving elusive, with UK sales down 2%, offset by 6% International growth. Broadly, this sales pattern has continued into the early part of FY2016. UK profit contribution was down £9m “due to revenue and gross margin declines”. Overall group gross margin slipped 130bps to 44.6% as currencies hurt and sales growth in lower margin territories failed to offset sales lost in higher margin areas (i.e. UK). Further pressure on margins came from a drive to grow corporate accounts, involving increased discounting. Better news was that the balance sheet remains in good nick, with net debt/EBITDA at 1.3x whilst free cash flow was £52.3m (FY2014: £58.3m).

I am finding it difficult see any encouragement for analysts to pencil in eps growth. So after 13.2p in FY2015, perhaps we should look use 13p for now as a FY2016 number. That 13p may still be too optimistic if more margin is used to attempt a kick-start of the sales growth. The shares have rallied this year and are at 239p, for a PE of 18.4x. Now, I don’t see why Ruth will want to saddle himself with that dividend, when he can (is) casting aspersions at the previous team. Why not cut and then look clever by growing from a lower base? So a two times cover would be 6.5p of dividend for a yield of 2.7%. I was lukewarm on the shares at 201p in February and at 239p I would suggest claiming discretion as the better part of valour. In November, investors can assess the new plan at the interims and decide if they want to jump back on board. (Neil Cumming^, 21^st May 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