GlaxoSmithKline - into the dividend fog.

GlaxoSmithKline: Chief Executive Sir Andrew Witty is administering some big medicines to his sluggish charge, where their key respiratory franchise is being held back by poor sales of the ageing Advair, as newer products wend their way to approval. Earlier this year the group announced a complicated deal with Novartis that will see various assets swapped and a major consumer healthcare business emerge as a joint venture. Following that deal the group plans to return £4bn to shareholders, (the current market capitalisation is £66.5bn). Now the group has announced that its majority owned ViiV Healthcare, which was formed to develop treatments for AIDs, is ready for an IPO of a minority stake to crystallise a valuation. The group has also announced plans to target around £1bn of cost savings with half achievable by 2016 and the balance within three years.

The full year dividend for 2014 is targeted to be 80p, up 3% on last year’s 78p. Even after the spike in the shares on these results to around 1380p, that is a handsome yield of 5.8%. The ‘but’ is that in 2015 they expect the dividend to be maintained but not increased. That is where the fog descends for income growth investors. By 2016 your GlaxoSmithKline share will have exposure to the Novartis jv, with its own dividend policy and the ViiV Healthcare subsidiary with another dividend policy (which may not be generous). The £4bn return of capital may feel like income but you then have to replace the recurring 5.8% dividend stream on that money. So if you invest £1000 now and receive income of £58, I do not know what all the moving parts will deliver in 2016. In many such upheavals the answer is less dividend not more. All the corporate moves may well release value for shareholders and for that reason holding onto GlaxoSmithKline shares seems sensible enough. However, by the important yardstick of dividend income growth, they are quite likely to come up short.  (Neil Cumming, 23rd October)

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  

Home Retail Group - I can hear a chainsaw

Home Retail Group: When you have a lot of bricks and your business is threatened by the clicks of the internet retail revolution, life is tough. If you are Argos then a large secondary High Street estate, based on paper catalogues became a horrible place to start. Then you add in Homebase, which used to aim for ‘aspirational’ but has long lost any pzazz and life is tough. In fairness to Home Retail they have made a good fist of managing change, under the leadership of the now departed Terry Duddy. The estate is slimmer, the paper is being replaced by tablets and their version of ‘click ‘n’ collect’ has been added. Over recent years, Homebase seemed to have reached the status of a relatively pain free managed decline, but today we were treated to the noise of the corporate chainsaw revving up again.  

In the interims to August 2014, pre-tax profits were up 13%, but were shy of forecasts with an expected £20m increase in operating costs being more front end loaded than expected, with £15m incurred so far. Argos saw a +2.9% like for like sales lift with gross margins being maintained. Electricals and the like performed better than soft furnishings where more range work is needed. Overall, internet sales are now 43% of the total so they have come a long way in recent years. At Homebase like for like sales were up 4.1%, but there was another hit to gross margins, this time being -75bps. The company has announced that 25% of the remaining stores will be shut by 2018, albeit most are in a long tail that the group seems to have stopped loving some time ago. Frankly, few will miss them. At 178p, a slightly optimistic consensus of 11.5p eps for February 2015 is a middling PE of 15.5x. The interim dividend is held at 1p in line with policy to put through any changes at the finals. If the 11.5p is made, then the total dividend could be 3x covered at 3.8p to give a modest yield of 2.1%.  Meanwhile, against a market capitalisation of £1.44bn, the balance sheet sports a healthy £333m of cash, up £2m over the period, but down from £412m a year ago and the NAV is stated at 348p.

The bottom line is that if Argos and Homebase disappeared, they wouldn’t be missed for long. There are almost echoes of Woolworths’ long goodbye in all this, although the cash and NAV do provide comfort that such a brutal disappearance is unlikely for now. If you like the shops then this may all seem like a store of value, but with little positive momentum in the business, I would rather shop elsewhere.   (Neil Cumming, 22nd 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 or e-mail at info@dividendpower.co.uk  

Whitbread - Today here, tomorrow the world?

Whitbread: The momentum at Whitbread has kept going since Andy Harrison (ex Lex Services and easyJet) became CEO in 2010. The main eatery brands are Brewers Fayre and the venerable Beefeater, but most of the excitement is elsewhere. Costa Coffee has been a huge success and is all around us on High Streets, trains, stations, pubs and motorways. In this six months to August 2014 Costa like for like sales grew another 6.1% with top line growth of 16.9% and expansion abroad looks set to be the next leg of growth. Also doing very well has been Premier Inns, both through its own efforts and the self-inflicted financial straits at rival Travelodge. Premier like for like sales were up 9.6% within overall growth of 14.7% and record 84% occupancy. In the financial year to February 2015, £500m will be spent on growth (including £415m on Hotels and Restaurants), but cash generation overall is good with half year cash flow generation at £356.3m, leaving net debt up by £37.1m at a manageable £467.2m. Whilst the lodging business is capital hungry, the coffee side has far better cash characteristics and the debate over demerger (or similar) is never far away, although recurring good results have tended to dampen the flames of unrest. The debate though is how much all this is worth?

The interim results showed underlying profit before tax up 18.5%, with eps up 21.5% to 111.69p. The dividend was increased by 15.6% to 25.2p. So on consensus forecasts of about 205p, the PE is 20.5x at a 4200p share price. Dividend cover has been creeping up and if I look to a 2.6x cover the dividend would be 78.9p yielding 1.9%. Forecasts look to be leaving some scope for upgrades but at least 10% growth in FY2016 is expected. Whitbread are executing very well, but on these metrics it all seems a tad expensive, as has been the case for some time. From here, it seems difficult to see how extra value could be created by demerger, but the issue will never entirely go away. I would hold off from fresh purchases but would congratulate those who bought early and are still holding on happily.  (Neil Cumming, 21st October)

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  

Provident Financial - Knock, Knock

Provident Financial: Going back a few years, some were predicting the decline of door-step lenders such as Provident Financial. You have to take your hat off to them though. They have launched new products to suit new technology and new customer requirements and now they are set to benefit from the broom that is sweeping out the debris of the disgraced payday lending market. They have even started to expand abroad again having previously successfully floated off International Personal Finance in 2007. Vanquis was set up in 2002, concentrating on credit cards with low spending limits for those with impaired credit records and this now also takes retail deposits. This is now being rolled out in Poland. More recently they set up Satsuma, a short term on-line lender with APR’s in the hundreds not thousands of percent. Meanwhile they still operate the old style door step lending where competition is less since the emasculation of Cattle Holdings. The other main strand is vehicle finance (Moneybarn) for those with impaired credit histories.

The shares have done well in recent years and are now around 2050p. Digital Look cites consensus eps showing growth of 14% to 128p for this year to 31^st December, rising 15% to 148p next year, so a PE of 16x dropping to 13.8x. Good cash generation means a high dividend payout, with cover around 1.3x. Consensus dividend for this year is a rise of 12% to 98p and then 15% to 113p, giving a yield of 4.8% rising to 5.5%. As the likes of Wonga face their re-birth, the way ahead looks rosy for Provident Financial and on these numbers, despite the good multi-year performance, it may not be too late to buy. It is a strong hold at the very least.  (Neil Cumming, 20th October)

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  

Diageo - mine's a Serengeti please

Diageo: This huge international drinks group has an amazing array of brands under its umbrella. These stretch from Smirnoff, Bell’s, Johnnie Walker and Gordon’s Gin through to Guinness. You even almost have to forgive them for inflicting Blossom Hill and Piat d’Or on the populace through your local Spar.....or maybe not. So their aim in developed markets is to add brands, develop brands and move customers up the price points. In emerging markets they want to bring customers into the branded space using both their major brands and acquired local brands. For example, on my recent Tanzanian safari one debate was whether Serengeti or Tusker beer tasted better. Serengeti won, but Diageo own them both. So this recipe should all secure long term growth of global GDP plus a bit. There are plenty of missed beats over time, say when emerging market economies wobble, the Chinese turn against graft or somewhere like Russia becomes a pariah. So, I find it really difficult to get that excited about Diageo unless the share price is in a market driven heap. Otherwise, it feels almost quasi bond like in its stately progress over the years.

At the moment the share price is around 1700p, with historic eps around 95p and dividend of 51.7p, giving a PE of 17.9x and a yield of 3.0%, nearly twice covered and backed by a reasonable balance sheet. And you could expect very long term growth of maybe mid single digit percentages. This all looks very unthrilling, but maybe you should compare it to a gilt and then you might surmise that for a modest equity risk you are actually adding considerable long term cumulative upside. In that sense, perhaps, it is base load for long term equity portfolios. Mind you 1700p may just also get you two bottles of Johnnie Walker Red Label or Bell’s at a desperate supermarket sometime in the run up to Christmas.  (Neil Cumming, 17th October)

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  

Liontrust - a growing cub.....

Liontrust: This group has enjoyed great momentum in recent years. The latest FUM was £3.8bn, with the market capitalisation at £97m. They have announced that they have won a £320m institutional UK equity income mandate which was lost by Miton Group recently, being run on behalf of SWIP (now owned by Aberdeen Asset Management). The UK equity income team is led by Stephen Bailey, whilst the UK equity team is led by Anthony Cross and on the multi-manager side they employ John Husselbee and Paul Kim.  So, with a good fund factory in place and some good performance the future looks rosy for the group. For the year to March 2015 forecast eps could brush 20p, meaning that at 215p, the PE is 10.8x. Meanwhile the dividend is on course for around 4p, giving a yield of 1.9%, but this is growing at a clip (having been 1p in the year to March 2013). With eps set to grow well and a dividend cover of 5x, dividend growth is set to be very good. I know that with equity markets in upheaval it is a brave man who buys an asset manager, but fortune supposedly favours the brave. The other risk is an unexpected upheaval in the fund manager ranks, but all seems to be a stable ship at present. For income growth investors this looks to be a smaller market capitalisation stock worthy of a second look. One other small cloud to be aware of is that the Chief Executive John Ions has been off-loading stock recently, although he still has £2m and options so still has plenty of skin in the game.  (Neil Cumming, 16th October)

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  

Ashmore Group - fashion victim?

Ashmore Group

Ashmore is a very successful manager of emerging market funds, with a bias towards debt and bond offerings. Due partly to their specialist brief they enjoy high margins with EBITDA margin of around 65%. However all is not well at the moment. The impending end of QE in the USA as tapering comes to its conclusion is making investors fret about the immediate future for emerging markets. The lure of being out of the dollar and enjoying a ride on the ‘carry trade’ of an emerging currency is fading. In their first quarter update Ashmore have revealed AUM of $71.3bn, somewhat weaker than the $72-76bn range that analysts had been forecasting. The worry is that AUM could face further pressure as investors cash out and that the handsome margins may end up being squeezed, despite having held good for many years so far.

Having fallen some 25% over the last year the shares are around 294p. On reduced expectations of say 21p earnings for June 2015, this is a PE of 14 and the likely 17p dividend is a yield of 5.8%. The balance sheet is strong with spare cash on board, so despite low dividend cover of 1.2x there is no reason to fear for this year’s dividend. So this all looks attractive enough, but I am fretting about the apparent loss of momentum at the group. Investment fads are very fickle and emerging markets look well set for the medium and long term, but just now there seems little rush to buy Ashmore. (Neil Cumming, 14^th 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                                  info@dividendpower.co.uk