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.
Thursday, 9 October 2014
Marston's - Income Pedigree
Marston’s: Another pub company that
is enjoying the fruits of the UK consumer recovery. Whilst the lop-sided UK
recovery (with services perkier than manufacturing) poses the same old long
term macro-economic challenges, for food led pubs life is good. Yes, it rained
in August and the Bank Holiday weekend didn’t happen, but there was a good summer
and September was a good weather month. So Marston’s like-for-likes in the year
to September 2014 were +3.1%, despite the late summer slowing. Marston’s is
pushing ahead on several fronts, including more accommodation and new-build
openings. They have a good range of formats including the budget conscious ‘Two
for One’ through to the up market ‘Revere’ and the town centre ‘Pitcher &
Piano’. Whilst competition for new sites is hotting up Marston’s has been
playing this game for a while and has visibility on openings for the next three
years at least. The board is experienced with well-regarded CEO Ralph Findlay
having been at the group since 1996, becoming CEO in 2001. Net debt to EBITDA
is of the order of 6x, not unusual in this asset backed sector. At 138p, with
eps for September 2015 of 13p in sight, the multiple is a modest 10.6x. On a
dividend payout of just over a half, a dividend of 7p equates to a tempting
(and growing) yield of 5.1%. Unless you think that the UK consumer recovery is
about to be curtailed abruptly after the 2015 general election, Marston’s looks
like a stock that holds great attractions for income growth investors. (9th October 2014)
Wednesday, 8 October 2014
Retail Bonds - Caveat Emptor
Retail Bonds: In a world of pathetically
low interest rates for savers, the hunt for yield has led private investors to
seek out new opportunities. Retail bonds have been a success story on the back
of that, with numerous offerings from well known (and not so well known)
corporate issuers. The LSE is now running an electronic trading book, allowing
investors to buy and sell these retail bonds more readily. There are certainly
some attractive yields on offer, but I have concerns that some investors might
not realise that their capital is at risk in the event of an adverse corporate
development. For example, Tesco issued a 5.2% 2018 bond in 2011, which had by
May 2014 reached a price of £108, for a running yield of 4.8%. However, the
recent travails at Tesco have seen the price drop to £102, leaving recent
buyers nursing a capital loss. Of course initial investors at par will still be
showing a profit, but that assumes that the credit risk at Tesco does not
deteriorate any further. Another example would be Paragon Group, the mortgage
company. Its fortunes have fluctuated with the UK housing market over the
years, so life is good right now. But it hasn’t always been that way, with the
most recent tough patch being through the sub-prime banking crisis. The 6.125%
bond matures in 2022 and at £102 is a running yield of 6%. But it strikes me
that backing the UK housing market through to 2022 is not a ‘gimme’ and there
is an element of capital risk. So if you are prepared to monitor and trade
these bonds, then that is fine, but a buy and hold strategy could leave you
exposed to surprises. They are not deposit accounts. (8th October 2014)
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.
Tuesday, 7 October 2014
Admiral Group - in a half Nelson?
Admiral Group:
It is so
tricky to judge whether this is a mis-understood money machine or a company
facing burdensome structural challenges. As well as their core Admiral brand
they operate several others including the comparison site ‘confused.com’. It
has always been known that the group makes lots of money from ancilliary
services and has, broadly, benefitted from the trend towards a claims and
compensation culture. At the same time there are aspersions about just how
likely you are on confused.com to end up being steered towards an Admiral Group
product. Added to this, recent years has seen politicians starting to
investigate whether the motor insurance industry is acting in consumers’ best
interests and motor insurance rates have been under pressure. So Admiral’s eps
seem to be plateauing just above 100p according to analyst forecasts (which
probably have a decent margin of error). The dividend policy is to pay out 45%
of post tax profits plus specials, having regard to reserve strength. At the
moment this process is resulting in a near 100% payout ratio. The regular
element is likely to prove cyclical given the nature of the industry with
political and regulatory headwinds a further pressure. The special element is
largely predicated on reserve releases, but they will in all probability come
to an end at some point (maybe not that far away either). Then the dividend would
look very exposed in respect of both elements. For now the shares at around
1285p with a 99.5p total dividend yield 7.7%. If you chose to put a line
through the special dividend stream then the yield is a less alluring (and not
necessarily rock solid) 3.5%-4%. So I do not see that Admiral fits the dividend
growth mandate and would be wary of owning the stock. (7th October 2014)
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.
Monday, 6 October 2014
De La Rue - The Double Centenary hangover
De La Rue: Market conditions have
been tough for the company for some time, which probably played a part in Tim
Cobbold’s thinking over his decision to move to UBM earlier this year. Printing
money has been fiercely competitive in recent years, featuring over-capacity
and irrational pricing. At the same time newer profit streams such as
e-passports have not grown as fast as expected. Ironically in the age of
contactless payment cards the cash processing business has been a rare spot of
calm....for now. All this has culminated in a profit warning and dividend cut.
For the year to March 2015 eps are likely to be around 43p on revised numbers,
meaning a modest PE of 11.6x at the sharply lower share price of 480p. The
interim dividend was cut by just over 40% from 14.1p to 8.3p. Although the only
commitment is to review the final dividend at the finals next year, a similar
cut for the full year would mean a total dividend of 25p for a yield of 5.2%.
If net debt ends up around £115m then net debt to EBITDA could be around 1.2x,
which looks comfortable. As long as trading does not deteriorate further then
the 5.2% yield looks sustainable, even if the climb back towards last year’s
42.3p is likely to be a long-ish trek. For dividend growth lovers, none of this
looks exciting but there is one extra element that may sway thinking. In 2011
French rival Oberthur failed in a bid for De La Rue in the £9 - £10 a share
range. The current travails may well have suitors dusting off their files. Not
a strong enough reason to buy perhaps, but maybe just enough to make battered
shareholders hang around a little bit longer. (6th October 2014)
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.
Friday, 3 October 2014
J.Sainsbury - Not such sweet Nectar
J. Sainsbury: Perhaps Mike Coupe is
unlucky in taking over from the successful Justin King at a time when the food
retail industry is in turmoil. Or perhaps he is lucky, in that he take over at
a time when the industry behemoth Tesco is face down in the dirt. Either way,
he faces a rapidly changing market and the spectre of food deflation. In its
own right, Sainsbury’s is well placed within the industry having fewer
over-spaced stores, better non-food expansion potential (especially clothing), a
good loyalty programme (using Nectar), established home delivery and a growing high
street convenience presence. A nagging concern is whether they fall between two
stools, lacking the M&S/Waitrose cache whilst clearly not being a
discounter. Perhaps the jv to re-introduce discount fascia Netto to the UK
acknowledges this portfolio vulnerability? For the half year like-for-like
sales (ex-fuel) were down 2.1%, with a similar figure being guided for the
second half. Alongside this, margins will be under pressure leading to profits
being down year on year. Capex is of the order of £750m, roughly the size of
forecast EBIT. Meanwhile, last year’s dividend of 17.3p cost around £330m and
at 240p delivered a yield of 7.2%. That dividend was covered almost twice by
historic earnings, but cover this year and next is likely to be nearer 1.3x. However,
in the absence of a sharp recovery in industry profitability, the total cost of
dividend and capex may prove tough for
the Board to justify. An NAV near 300p and the 25.99% Qatar Investment
Authority stake provide under-pinning, but as a comfort blanket that may prove
a bit thin in chilly winds. The brave may feel that the lowly share price fully
reflects the industry upheaval, but for those seeking income growth driven
returns there doesn’t seem to be any rush. (3rd October 2014)
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.
Thursday, 2 October 2014
Dairy Crest - no spilt milk yet
Dairy Crest: Operating in the UK
dairy products and liquid milk industry is a tough gig. Competition is fierce,
with fellow large beasts like Unilever, Arla and Muller prowling the pastures
and fortunes are fickle. Dairy Crest do have good brand names including Clover,
Country Life, Utterly Butterly, Davidstow, Cathedral City and Friij, but it is
a constant battle to stay with the game. Dairy Crest have had a tailwind from
property sales in recent periods, but these are nearing an end. Cost cutting and supplier squeezes are a
regular feature of life, although every time farmers face a price cut the bad
publicity for the liquid milk buyers soon follows. The closure of a liquid milk
bottling unit just emphasises the near terminal decline of doorstep deliveries.
Men, closer to the pulse than, me point to liquid milk contract uncertainties,
with big M&S and Morrison’s deals up for renewal soon, so there is always
the next battle to fight. For the year to end March 2015, net debt should be
under £200m and with EBITDA of around £110m, the balance sheet is solid enough
at present. But in a cyclical and somewhat commoditised industry, regular
profit progression is hard to nail down. Last year (to March 2014) the dividend
was 21.3p, having been nudged up by 2.9% and was almost twice covered by
earnings, for a yield of 5.6% at 377p. This all looks safe enough barring some
nasty P&L shocks (such as a major contract loss, say......). So, the PE is
low (just under 10x) and the yield looks attractive but I am not convinced
about the prospects for dividend growth. This has the hallmarks of a potential
value trap that you can trade successfully, but it is not one to buy and hold. (2nd October
2014)
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.
Wednesday, 1 October 2014
Morrison (Wm.) Supermarkets - As cheery as Morrissey...
Morrison (Wm.)
Supermarkets: UK
supermarkets are bashing their trolleys against a brick wall. The recession has
left consumers more conscious of waste and shopping more tactically. The rise
of home delivery and the increased use of top up convenience shopping has left
the majors over-spaced (especially the beleaguered Tesco). At the same time the
discounters, Lidl and Aldi, are competing hard on price and improving quality
to woo the middle ground (and middle class) shopper. Into this melee,
Morrison’s has added failed diversification, late adoption of convenience
stores and home delivery, lack of a sophisticated loyalty programme and an IT
backlog. No wonder Ken Morrison has crossed his successor, Dalton Philips, off
his Christmas present list, even if some of the issues germinated on his own shift.
The industry now faces having to sacrifice margin to maintain position and
Morrisons is no different. Yet with the interim results the dividend was
declared at 4.03p, a rise of 5% and the board stated ‘our commitment to pay a
total dividend for 2014/15 of not less than 13.65p’. At the share price of
169p, this is a seductive (but uncovered) yield of 8.1%. Net debt was £2.6bn,
with the board indicating a figure of £2.4bn - £2.5bn by year end, leaving net
debt to EBITDA manageable at around 3x. If profits rebound sharply then
maintaining the dividend through the dip will seem sensible, but even though
Morrison has some opportunity for self-help, they are facing the same industry
turmoil as everyone else and a sharp profit rebound seems a pipe dream for now.
A dividend cover of 1.5x on the 13.65p would require eps of 20.05p, a figure
which will only be reached beyond analysts’ current forecast horizons. If you
are seeking secure and growing dividends then check your trolley, as this
industry and this stock have some very wilful and wonky wheels right now. (1st October
2014)
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
Subscribe to:
Posts (Atom)