Serco - Not their finest hour......

Serco: A proper big kitchen sink has been delivered by new-ish CEO Rupert Soames, with the shares down at 215p against a high above 600p in 2013. We had all been forewarned of trouble ahead but this is still a very sobering announcement. Their future now is in B2G, which is not a rail company but Soames’ plan to concentrate on Business to Government contracts in areas such as justice, immigration, transport and healthcare. Looking backwards he is flagging £1.5bn of Onerous Contract Provisions, half of which relates to goodwill and intangible assets. They are in talks with their banks about their covenants and the dividend is burnt toast. Following a placing of new shares in May 2014, Serco now plan a £550m rights issue in the first quarter of 2015. They have also flagged that 2014 operating profits should be £130m-£140m, some £20m lower than previously guided. But this may not be the end of it, as the full Strategy Review will not be unveiled until the results update in March 2015. As they say of the Onerous Contract Provisions “the range of possible outcomes is still wide”, with the risk on the upside. Even in this statement they are flagging another £150m-£200m of provisions, relating to UK government work, that they are considering making. Trying to be polite, the professional reputation of former CEO Chris Hyman, on the back of all this, is also toast.

Their main bank covenant is that leverage should be less than 3.5x EBITDA, with the figure being 2.41x at 30^th June 2014 post the equity raise. They now flag that this kitchen sink exercise will sent leverage beyond 3.5x at the December year end. To help get this figure down to a more standard 1-2x, they are flagging the £550m rights issue, but will only launch it once the 2014 accounts are signed off by the auditors. They also warn that trading in 2015 is set to be more difficult than previously expected.

At this stage there are still so many uncertainties that any analyst forecasts are subject to abnormal margins of error. PEs will look huge and the yield is 0%. With no dividend to enjoy, this is clearly not a stock for income growth investors. The reason for flagging it up at all is that Rupert Soames comes with a shiny reputation from Aggreko. A bit of Winston Churchill’s blood in his veins will come in handy too in the long months ahead. Having brought the whole plc down to a solid base by March 2015, Soames will be backed by many a ‘knife-catching’ investor to deliver a meaningful corporate recovery. The underlying opportunities in B2G are attractive and Serco can haul itself off the canvass. (Neil Cumming^, 11^th 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  

National Grid - powered up

National Grid: Let’s start with some homespun analysis. We have all read that the UK’s electricity supply capacity needs bolstering as obsolete kit is retired and too few new stations are coming onstream. We also know that much of the distribution and transmission infrastructure is at or near the end of its working life. The politicians need the lights to stay on, so an electricity company like National Grid should just have the edge in any periodic negotiations with the regulator. In their latest proposal they presented a range of capex programmes from £16bn-£20bn over eight years, which would result in steady regulated asset value growth of 5%-6% p.a. This is not something the government can afford to play ‘silly bees’ with.

In these half year results to 30^th September 2014 pre tax profits and eps, helped by lower financing costs, were both up 16% and the group is on course to meet their expectations for the full year. For many years the group’s US businesses were a bone of contention with investors, but at the moment things seem to be going better for National Grid, with asset growth of 5% p.a. seen “for the foreseeable future” coupled with cost efficiencies. The group has also announced a j.v. with the up market house builder Berkeley Group to exploit NG’s surplus UK property.

The group re-iterated its dividend policy of increases “at least in line with RPI inflation, for the foreseeable future”. They offer a scrip dividend scheme, but to offset any dilution from the new shares, NG operate a share buyback programme. The interim dividend was up 1.5% at 14.71p, being about one third of the expected annual. However, the shares have been good performers this year, which takes the edge of any whooping. Consensus eps of 55p at a share price of 915p, gives a full-ish PE of 16.6x whilst the likely dividend of 42.7p is a yield of 4.7%. So, despite the PE in the teens, with that dividend commitment and what I see as an encouraging industry backdrop, the shares are a quasi index-linked equity. As such they should continue to attract income growth investors. (Neil Cumming^, 10^th 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  

A Friday Miscellany - Banks, T-shirts, savings, flying and a lump of cheese.

Friday strays: Going back to last Friday, Royal Bank of Scotland issued its third quarter statement. The bank listed just under 30% of Citizens Financial Group in the US during the quarter. Generally RBS is showing improving results, with the core tier 1 up to 10.8%, as against the start of the year’s 8.6%. Guidance for the year was unchanged from the recent trading statement. The Tangible Net Asset Value is 388p up from 376p at the start of the year and broadly in line with the current share price. With no dividend until FY 2015 expected by markets income investors have time on their side.

Next up is HSBC’s third quarter update, which was ahead of most expectations on an underlying basis, but featured several hits from fines and provisions (FX, PPI etc.). The core tier 1 edged up to 11.4%. The third quarter dividend was maintained at 10c, with analysts looking for around 53c for the year, against 49c last time. The shares continue to languish around 635p, but this is a 5.3% yield, with upside and the stock still looks like decent baseload for income investors.

Remember that Associated British Foods is the main Weston family business with a quoted minority. It is a food manufacturer whose best bit is actually a retailer, Primark. The PE is in the mid 20’s despite including commodity earnings. The yield, on a 6.3% dividend increase, is still under 1.5%. It looks too expensive to interest me, but that has not stopped it being a good investment.

Legal & General has been a good friend to income investors in recent years as Nigel Wilson has turned on the cash generators. The third quarter IMS showed annuity sales up 16% as bulk sales compensated for the Government’s shredding of the personal annuity market. Asset Under Management at LGIM were up 14% at £676bn. Operating cash was up 8% and net cash 12%. At 239p the shares are no longer bargain basement, but on around 16.5p of eps the PE is 14.5x (and PE is relevant given the big changes in the P&L over recent years). The shares do trade at around a 40% premium to embedded value, but that doesn’t pick up any value for LGIM, which could be worth 25p-30p. A putative 10% dividend increase to 11.1p this year means a nice yield of 4.6%, probably rising to over 5% in 2015. Still a share to run with.

I wrote somewhat lukewarmly about John Menzies in late August, when it was clear that the aviation division was having a transitional year. Now, with a new CEO, Jeremy Stafford, in place there has been a profits warning with the aviation side seeing ongoing tough trading. The head of the aviation division has left, with a one way ticket and no duty free. I see one broker is now pencilling in flat eps of 50p for this year and next. This would still leave the pre-warning forecast dividend of 27.5p almost twice covered and a handsome yield of 8.2% at 335p. However with such negative momentum and the new CEO to conduct a strategic review, angels may fear to tread here for a while.

Dairy Crest have sold their dairy business to Muller for £80m (subject to competition clearance) in a well received deal, leaving them to concentrate on cheeses and spreads. The proceeds will be used to reduce debt initially. At the same time interim results saw the dividend increased by 2%, putting the shares (which are up sharply) on a now more secure yield of 4.5% at 477p. So still a low growth company and not that exciting, but this is re-assuring to those who hold them.(Neil Cumming, 7^th 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  

Marks and Spencer - corporate arthritis vanquished?

Marks & Spencer: For many years the company has felt like Granny trying to keep up with the youngsters like Next and Primark, but suddenly, with these interims, it has thrown a few decent shapes to confuse us. Following the mild autumn, first half general merchandise Like For Like sales were down 2.9% and clothing down 2.2%, with 1.3 percentage points being pinned on the weather. However, better sourcing helped push general merchandise gross margins up by a better than expected 150bps, with the guidance being that there is more to come. There should be an extra tailwind as the debacle of the web-site re-launch fades. Food LFLs were +1.0% and gross margin up 25bps, as M&S’s premium offering spared it the worst of the bloodbath in the squeezed middle aisle of Tesco et al. The Simply Food expansion has been upped from 150 to 200 stores over the next three years. Across the group there was good cost and capex discipline helping pre-tax profits to edge up 2.3% to £268m.

Cash generation also picked up and the board wheeled out a surprise 3.2% increase in the interim dividend to 6.4p. A repeat at the final would mean a 17.5p total dividend for a decent yield of 3.7% at the newly elevated 470p share price. (All the board has said is that they will ‘provide an update on shareholder returns....in May 2015’). Earnings upgrades have been sparse though after some downgrades in the run-up, so on consensus eps of around 33.0p to March 2015 the PE is 14.2x. I still find these metrics underwhelming for such a retail supertanker. The new found dividend growth is low, but the stock will be one to watch in case these results are the first evidence that it really has beaten corporate arthritis and got its mojo back. (Neil Cumming, 6^thNovember 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  

Imperial Tobacco - not up in smoke on Bonfire Night

Imperial Tobacco: Tobacco stocks are called many nasty things, with politicians queueing up to tax and chastise them, but they do throw off oodles of cash. Volumes were down 7% and revenues were down 6% in the year to 30^th September, but the never ending cost cutting helped push operating profits up 5%. The current plan is to squeeze out £300m per annum of total savings by fiscal year 2018, which is about 10% of current operating profits. So far they are up to £60m p.a. As an aside, their volumes were still 294bn sticks last year, or just over 40 per man, woman, child and baby on this planet. And that is just from the world’s fourth largest producer, although a $7.1bn deal is in train to buy several brands from Reynolds America and Lorillard, with completion due in Spring 2015. At that stage they will own Blu, giving them a better position in the e-cigarette market.

Anyway, earnings per share were down 3% at 203.4p, in line with consensus, but at constant exchange rates were up 2%. With healthy cash conversion at 91% and net debt down 11% to £8.1bn, the dividend was increased to 128.1p. The company will take on more debt with the US acquisitions next year, but all the same they have announced a plan to move to quarterly dividend payments, with a commitment to increase the 2014/15 dividend by at least 10%. After a good reaction to these results the shares are around 2820p, so the historic PE is 13.9x and the prospective yield is 5.0%. It sticks in the throat, but for income growth investors Imperial Tobacco is a solid portfolio candidate. The day will come when repeating the revenue down and dividend up routine will fail, but Chief Executive, Alison Cooper, is clearly determined that it won’t be on her watch.  (Neil Cumming^, 5^th 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  

National Express - Iron Maiden

National Express: Owning shares in National Express has been a patchy experience over the years, with an exposure to Spain and stretched finances hitting home in the late noughties. It was then that Jez Maiden became FD and he has played a large part in setting the group on a steadier course. So it is a shame that he is on his way to Croda International soon. He leaves behind a group including UK bus, coach and rail (C2C), Spanish bus and coach, North American student transport and from the end of next year German rail. The latest update was for their third quarter to 30^th September 2014, but all seems to be well.

After a 9% drop in first half profits, the third quarter saw a 15% rise. Revenue and profits across the group moved ahead. Contract wins were also booked in the new Middle East segment, as well as Spain and US transit. The C2C franchise (Southend to London) was renewed until 2029, a long enough contract to make the profit stream worth more than the low PE attached to some historic, shorter term, contracts in the industry. The fact that the Spanish economy seems to have turned the corner gives the group a tailwind there for the first time in yonks.

The guidance from National Express is that they are on target for full year profit and cash expectations (£150m). On the back of modest upgrades, 22p of eps for calendar year 2014 is a PE of just 11.2x at 247p. Dividend cover has been running at a tickle over 2x, so a dividend of 10.5p say gives a nice yield of 4.3%. The balance sheet gives no reason to think this isn’t do-able. Overall then not the best known stock or the most blue chip, but subject to a decent replacement FD it looks good value. (Neil Cumming, 4^th 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  

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