BT - 'Hanging on the Telephone'

BT: So much to moan about, such as their 100% owned Openreach being slow at fixing our phone and having to watch BT Sport over Broadband out in the sticks. But, stifling an ever so small yawn, what about the shares? Well these interims showed pre-tax profits up 16% to £1.1bn, despite a 2% slide in revenue to £8.74bn as cost cutting continued. Within the revenue line BT Consumer was up 7% whilst BT Global Services, Openreach, BT Business and BT Wholesale all slipped. The debt pile shrank from £8.07bn a year ago to £7.07bn. Pleasingly, the dividend rose 15% to 3.9p, on eps up 13%. 

Some of the main worries that investors tend to have is firstly that no-one, including the regulator, likes BT. Well that is not new and BT are adept at managing that relationship. Secondly they have a huge IAS19 pension deficit (£5.9bn at 30^th September 2014), but they chip away at it. The discount rate used in this quarter was down to an eye-watering record low of 0.82%, but during the quarter they did hedge away 25% of their longevity risk at no extra cash cost. The triennial valuation to 30^th June 2014 is in the post. Thirdly, BT Sport is a costly exercise in content acquisition. Maybe so, but they have made BSkyB sit up and take note. The BT Sports content costs will go up further, but the aim of securing the client base, as fibre broadband is rolled out, appears to be working.

Guidance from the company has been held. So  a possible 29.5p of eps for the year to 31^st March 2015 is a modest PE of 12.4x at a slightly soggy 365p (down 2.4% on Thursday’s results). If the full year dividend is up 15% (their target range is 10%-15% for 2014/15 and 2015/16) you get just over 12.5p for a yield of 3.4%. Maybe not enough to get the pulse racing, but on a reasonable PE rating with a healthy growing yield it looks like decent portfolio baseload for income growth investors. Also worth noting, is that so far this year BT has spent £197m on its share buyback programme and is on course for £300m for the financial year with a further £300m slated for the year after. (Neil Cumming, 3^rd November 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

Round 'em up - a few strays

Round ‘em up: It is one of those weeks when the results come faster than you can cope with, so here are brief thoughts on a few FTSE100 stocks, with dividend news, that have slipped past the bat.

I will write on BT early next week, but it looks like good baseload for income growth investors. The interim dividend was up 15% with a re-iteration of the ambition to raise the total dividend by 10%-15% in each of the 2014/15 and 2015/6 years. The 2014 starting yield of 3.4% is not startling but overall this looks good value.

Royal Dutch Shell is another company that fails to excite but has income attractions. The third quarter dividend was put up by 4.4% to 47c, so there is currency noise here for sterling investors. But in an age when resource company boards are more conscious of husbanding cash they are on course to generate enough cash to meet their target to return $30bn to shareholders over the current and next financial years by way of dividends and buy backs. If the Final is another 47c then the annual sterling dividend will be around 117p. At a 2320p share price this is a 5% yield. So it may be a corporate supertanker and the low oil price is not what they want, but with a very long record of dividend delivery and an increasing 5% yield this is another decent looking stodgy stock.

Barclays is another matter. The great project 'Transform' is designed to transform the bank from a low capital return capital markets play, with questionable historic staff ethics, into a more efficient retail and customer focused bank. It may be coincidence but the now unloved Investment Bank operations are having a poor year. At the same time the skeletons that have fallen out of the cupboard are still rattling with a new £500m FX investigation provision and a further £161m PPI provision top-up. This flow of historic bad news is clouding the progress that is being made by new-ish CEO Antony Jenkins. I am writing this before the PRA stress test results this afternoon but with a core Tier 1 of 10.2% I would expect them to clear the bar but not by much. A narrow pass would have adverse implications for future dividend growth. The interim dividend is again 1p to make 3p so far this year and on course for a maintained 6.5p for the year. Perhaps there will be an increase at the final, but I am being ungenerous. So that is a 2.9% yield at 226p, which is OK if you believe in the medium term Barclays turn-around. At this share price there is a big discount to the 287p Tangible Net Asset Value, but that probably reflects concern that there are more balance sheets hits to be taken. They might be going in the right direction but there feels little rush to invest yet. 

(Neil Cumming, 31st 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

Sub-Standard Chartered

Standard Chartered: The Peter Sands of time are running out. He has been in charge at Standard Chartered for eight years but the momentum is now firmly and worryingly negative. These third quarter results were greeted with alarm by markets. The loan book has slipped, shrinking from $305bn at the half year to $296bn now. On nearly flat operating income, quarterly impairments were $539m, having been $289m for this quarter last year amidst ‘subdued’ trading conditions and a 4% rise in costs. This dropped through to quarterly pre-tax profits of $1530m against $1830m in third quarter 2013. In response, the group is now targeting a further $400m of cost savings in 2015.

The group says that the group is ‘well capitalised, with ratios well above the regulatory requirements’. Yet Core Tier 1 was 10.9% at the year end, 10.5% at the half year and won’t have improved. This is still comfy for now, but is at a time when regulators want to see Core Tier 1 going up and not down. Suddenly from expansion across Asian markets and in different verticals the group is now fighting fires on various fronts and having to re-trench. Their guidance is now ‘that underlying profits in the second half will be lower than the same period last year’. This is a blow, as at the interims they were talking about profits being higher in the second half than the first. Also, the bank is still in the US regulatory doghouse for money laundering failings. This is disappointing since it is a ‘second strike’ and some feel that the group’s management was too blasé and failed to clean out the stables after the first $667m fine.

For the current calendar year eps might perhaps be 160c against 164.4c last time. At 1000p (and falling for now) that is roughly a PE of 10x. The interim dividend was held at 28.8c and a maintained final would make 86c for a big 5.4% yield. The shares are trading probably in line with Net Tangible Asset Value (which was 1597.6c at 31^st December 2013). So the temptation is the yield, but that looks unlikely to grow and the balance sheet is flagging. Whilst it looks like there is some way to go before the dividend is under threat, the management needs to arrest the slide now. This takes us back to the murmers that perhaps Peter Sands isn’t the best man for the hot seat just now. Despite that yield it feels like there is no rush here. (Neil Cumming, 30th 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

BG Group - Holding Out For A Hero

BG Group: This is one of the great stock market disappointments of recent years, with a poorly played hand of cards, despite including prime positions in deep water Brazil and Australian LNG. Results’ announcement after results’ announcement has included delays and production disappointments. So now they have the new manager signed from abroad to improve their performance. Helge Lund has been persuaded to leave Statoil to join BG, with the challenge of a job at a smaller organisation hopefully as motivating as the some ten-fold increase in remuneration.

These Third Quarter results were again a mixed bag: Brazil better, Kazakhstan worse, North Sea slower and Egypt coughing up $350m of back payments. Mind you, that still leaves $1.2bn outstanding of Egyptian receivables. Brazilian production is now past 100/- bpd and the first Australian LNG is due before the end of this year. (The somewhat unexpected re-election of centre-left Dilma Rousseff as Brazilian President is a small negative for sentiment.) Overall current 2014 production guidance has been held. For now though, investors are looking beyond these results to see how Lund shuffles his pack on arrival in March 2015, although there is no reason yet to think that utterances or action will ensue quickly.

Currently, eps forecasts for the next couple of years are in the 70p ball park, for a broad brush PE of 14.3x at 1000p and a 19p dividend for this year. That is a yield of 1.9%, with decent cover allowing scope for more increases, barring some major strategic upheaval. Which, of course, may just happen. For income investors none of this looks that compelling yet, but a decent business meeting a high quality Chief Executive is well worth following closely.  (Neil Cumming, 29th 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  

Lloyds Banking Group - Is Black Beauty on the comeback?

Lloyds Banking Group: So the banks are slowly hauling themselves out of the mire post the banking crisis. Lloyds did its bit to help at the time, by trying to over pay by unimaginable factors for HBoS, only to then end up merely over-paying massively for it. Their thanks for buying a wrecked bank, which brought Lloyds to its knees, was to be told by the EU that they had received ‘state aid’ and to see Her Majesty’s Government end up as a major shareholder. The eventual verdict from Brussels was that they would have to sell off a sizeable chunk of their branch network. Hence, the carve out of TSB and sale this summer of the first equity chunks, through an IPO and placing, with the sales due to be completed by 31^st December 2015. For income investors the abandonment of the dividend was a blow as the banks sector used to be a core income generator for them. So for several years Lloyds could be ignored by income investors, but we are coming to the end of that phase.

Monday saw the results of the EBA stress test under which Lloyds would have a 6.2% core tier 1, not far above the 5.5% hurdle and tighter than Barclays (7.1%), HSBC (9.3%) or RBS (6.7%). This came soon after last week’s trailed news of a 10% workforce shrinkage over the next three years. Today’s results confirm those 9000 job losses and a 150 branch closure programme, which will hog the media headlines. This is part of a three year programme targeting an ambitious 45% cost income ratio (at 49.7% now) and £1bn of cost savings. These results overall beat most expectations with a margin improvement of 4bps to 2.51% and bad debts and impairments continuing to tail off. That is not to say though that it is business as usual, because the lending market is still very turgid and distorted by QE. The Tangible Net Asset Value is 51.8p, up from 49.4p last quarter.

On the dividend front they just say that talks with the PRA continue. The assumption is that a token 1p dividend can be expected at the 2014 Finals in February, but the narrow EBA stress test pass and leverage uncertainty put an element of doubt on this. However, an optimist can look to maybe 8p of eps in 2015, with say a 4p payout. At 74p this would be a tempting PE of 9.3x and a yield of 5.4%, but a full looking price to current TNAV of 1.4x. Overall it feels like this is a stock to start squirreling away (HMG will be sellers again), whilst leaving scope to average down or run for the exit if it strays off the recovery path.  (Neil Cumming, 28th 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  

Spirit Pub Company - or cider or IPA?

Spirit Pub Company: I wrote favourably on this stock on 5^th September 2014, when the price was around 78p. Now, corporate action is always a bit of a wild card in stock selection, with many a youthful month wasted waiting for the eventual bid for Rowntree Mackintosh. All the same, if a bid comes rolling along it always brightens the day as has happened at Spirit Pub Company. When, as now, you get ‘one and a smidge’ bids and the whiff of a contest, it becomes interesting.

Firstly, Greene King turned up in September with an approach worth 100p that was rebuffed. They then increased the indicated offer to secure Spirit’s approval and recommendation. The new agreed proposal is 0.1322 new Greene King shares and 8p cash. The cash is partly a sop for not getting Spirit’s 1.5p final declared dividend, scheduled for going xd in January 2015. Now the Irish cider maker C&C (Magner’s to you and me) has indicated that it is considering an approach with 110p being mentioned. This would probably be a mix of cash and paper, but more cash than Greene King are offering. Many are observing that the fit with C&C is not that obvious, with apparently limited scope for cost cutting, so Spirit’s blessing seems unlikely. C&C’s ‘put up or shut up’ date is 5pm 20^th November.

Something to keep in mind is that Greene King’s shares have not been great of late, although an element of weakness is the potential overhang of the new shares that could be issued. At the current 790p, the offer values Spirit at 112.4p. But Greene King’s high for the year is 933p and getting half way back there (i.e. 861p) would give a bid value of 121.8p. On maybe 63p of eps to April 2015, that is a not unreasonable 13.7x for Greene King, before any benefit from a Spirit deal. There is always the risk that bid talks and offers evaporate or break down. Likewise a competition spanner may come in (unlikely with C&C; not quite so sure with Greene King?). But if Spirit make say 7.3p of eps to August 2015 and if that is worth a modest 12.5x then the shares should hold above 90p.

So I would hold on for now and see what happens; a sweetener from Greene King could seal the deal and leave everyone happily supping on a pint of IPA.  (Neil Cumming, 27th 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  

Tesco - unexpected loss in bagging area

Tesco: When I wrote on Tesco’s in late August, it was already clear that the wheels had come off the trolley, but the flow of bad news continued. There is now a messy debate emerging about whether the former Chief Executive, Philip Clarke placed undue pressure on his executives to pull all the levers possible to pull forward profits in a desperate rear guard action. So now the shiny kitchen sink is out on display and it is pretty full. Deloittes have put a figure of £263m on the profit ‘hole’, similar to the original £250m estimate, but extending back to cover three years. Investors are left with the assumption that the problem doesn’t go any further back in time (which would put Terry Leahy on display). The Chairman Sir Richard Broadbent is stepping down, so the boardroom will soon be refreshed in all key positions.

In these results sales were down 4.4%, with UK like for likes down 4.6%. On squeezed margins the profit figure of £783m was 46.6% down, before all the one offs. Group net cash generation was down to £1bn (from £1.7bn). The balance sheet has been protected to some extent by the swingeing dividend cut (at 1.16p, down 75%), but capex plans have been treated more kindly, coming in at a reduced but still hefty £2.1bn, which will raise eyebrows. The international operations continue to be mixed and further surgery here seems likely. The bright spot was Tesco Bank, with profits up 20% to £102m.

So with the P&L still under internal and external pressure with a balance sheet that is showing signs of stress, so the nadir may be near, but not yet passed. The stress is in net debt that is now £7.5bn and a £3.4bn pension deficit. A rights issue at some point is still quite possible. Given all the uncertainty the board is giving no full year guidance. Being generous and assuming that first half clean eps of 7.7p can be repeated, then 15.4p works out at a PE of 11.0x at 169p. The dividend for the year is likely to be down 75% to 3.69p for a yield of 2.2%, and has an uncertain future. For income growth investors (and many others) this is a share for another day (or year). (Neil Cumming, 24th 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