Electrocomponents - still fretting about the dividend

Electrocomponents (ECM.L): I am still fretting about this stock’s dividend. Today we had the first quarter update to 30^th June 2015. The good news was that underlying sales growth has picked up slightly, to 5%, led by International (over 70% of group sales) growing at 7%. Within this Europe was up 13%, whilst slowing US economic growth saw North America growing at 3% whilst Asia was flat. The UK sales line was down 1%, but that implies a modest pick up since the last update. The migration to on-line business continues with eCommerce sales up 10% and now above 60% of the group total. However, gross margin was down 1.7% over the quarter, reflecting pricing and currency headwinds. The group says that as it hits easier comparatives in the second half and management actions take effect, they foresee some relief to full year gross margins.

The new Chief Executive, Lindsley Ruth, comments that there is “much to do to” in boosting sales growth in UK and Asia and stabilizing gross margins. He may be being cautious but aiming to stabilise gross margins is different to restoring them to previous levels. The half-year results in November will be the time that he unveils his plans on how to take Electrocomponents forward. Consensus forecasts for FY2016 are for barely any eps growth with 13.3p expected against last year’s 13.2p. That is a PE of 15.6x at today’s 208p. The support for the shares is the thinly covered 11.75p dividend, producing a yield of 5.6%. The board could maintain this, but my gut tells me that Ruth may well take the chance to lower the base in his autumn review, so that he can then start posting increases from then. Just as an illustration, a modest kitchen sink to 12p of eps for FY2016 and a move to a two-times dividend cover would be a payout of 6p and a yield of 2.9%. I felt in May that the shares were a potential value trap at 239p and despite the lower share price now, I would still hold off buying. (Neil Cumming^, 23^rd July 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