Electrocomponents - soggy chips.

Electrocomponents (ECM.L): My concerns for the safety of the dividend remain. Last week’s trading update, ahead of the FY16 interims, showed group sales up 4%, but, with Q1 at +5% and Q2 at +3%, the short term trend is deceleration. Whilst Europe kept up a smart clip at 13% in both quarters, North America sales swung from +3% to -3%, whilst the UK limped along at a steady -1% in both quarters. After a slow July and August, September picked up a bit, but the cited “weakening US manufacturing output” is a tough backdrop. Asia Pacific sales stood their ground at 0%, but the economic mood in that region ain’t great. The gross margin decline for the half is -170bps, continuing the first quarter experience and reflecting currencies (two-thirds) and price/mix (the balance). Amidst all this, operating costs grew by 3% in the first half, despite efforts to cut back. They are holding out the prospect of a better second half as easier comps and cost saving benefits feed through, with more details to be supplied at the interims in November by new-ish CEO Lindsley Roth.

Back in July consensus eps for FY2016 were 13.3p against 13.2p in FY2015, with the dividend to be held at 11.75p. I suggested that 12p might be a better guess and that the classic new CEO manoeuvre would be to get expectations down, cut the dividend (to 6p?) and re-build from a nice low base. Consensus eps are now 12.6p, so my 12p still looks plausible. The big change on the dividend front is that Premier Farnell (amidst CEO change) has slashed its dividend, so Electrocomponents’s dividend policy no longer has to contend with ‘keeping up with the Farnells’. I just see little reason for Electrocomponents to go on paying a barely covered large dividend, at a time when there are so many grey clouds gathered. A strong balance sheet means that they could stick their chin out and pay the full 11.75p, but then the debate would just roll forward to FY2017 on which we have little visibility right now. Does Roth want to risk having to cut in FY2017 and being blamed, whereas now, barely an eyebrow would be raised? At 181p, they are trading just off their recent 12-month lows and at 12p of eps the PE is a middling 15.1x and a 6p dividend would be a, still reasonable, 3.3% yield. Overall, I still see little reason to invest ahead of the interims in November. (Neil Cumming^, 5^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