Dividend Power

Monday, 19 January 2015

Greene King - slight seasonal blip

Greene King: This seasonal trading update could be seen as a bit mixed, with something for both bulls and bears. Retail LFLs were up 2.0% over the festive period, meaning that year to date the measure is +0.6%. However, since then LFLs are only flat in somewhat soft trading, although they do point out that they were up against some tough comparatives from this time last year. They also note an impact in Scotland from new, tougher, drink driving laws. Whereas the breath test in the rest of the UK stays at 35mg, in Scotland it is now 22mg, in line with most European countries. So it probably just as well that they are custodians of Belhaven 80 Shilling, rather than Tennent’s Super. Greene King also mentioned a soft run up to the festive season, citing their survey that in November household leisure spending was down 8% year-on-year. However, that survey pre-dates the bulk of the stimulus as oil price falls fed through to forecourt petrol prices. The Spirit Pub deal has been approved by both sets of shareholders, so it is now eyes down for any horse-trading required by the competition authorities, with completion hoped for in the first half of 2015.

For the year to end-April 2015 eps of 61p would be a flat year before growth of c10% in each of the next two years (plus Spirit on top). That 61p supports a twice-covered dividend of 30p, to give a PE of 12.9x and a yield of 3.8% at 789p. Despite having edged up from 755p, when I wrote on the stock in early December, these metrics still offer good value and the stock appears a good tuck away. At current prices I reckon there is a couple of pence also to squeezed out by buying via Spirit instead, if you are happy that the deal will go ahead and not be blocked. (Neil Cumming^,19^th January 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

Friday, 16 January 2015

Home Retail - a Woolworths for our time?

Home Retail: They seem to be a good example of what is silly about the latest US import: Black Friday. All it does is to suck in sales around that day, at the expense of margin and the risk of poor fulfilment. In the case of Argos (about three quarters of group turnover), Black Friday sales were up 45%, with a threefold increase in digital hits to 13.5m. After the distortion of Black Friday, they then decided to protect margins, at the expense of sales, through the Christmas season. This meant that LFLs over the 18 weeks to 3^rd January were +0.1% against expectations nearer 2%. However, margins fared better, being flat YTD (44 weeks) but up 25bps over the 18 weeks. At Homebase (the other quarter of sales) the managed decline continues, with more stores having closed and more to be closed. The resultant clearout of stock explains a 100bps margin drop over 18 weeks, with LFL sales up 0.6%. On the face of it this is worse than the 44 week data showing LFLs up 2.9%, with a lower 75bps margin drop. Overall the group states that pre-tax profits are still in line with consensus expectations.

For the year to 28^th February 2015, these expectations are for 11.7p of eps, making a PE of 17.1x after the markets’ reaction took the shares down to 200p. On a 3.54p dividend that is a yield of 1.8%. A year out some growth to eps of 12.7p and a dividend of 3.93p is forecast for a PE of 15.8x and a yield of 2.0%. These are not startlingly cheap for a group still trying to find its new role in a bricks and clicks world. I noticed before Christmas that Argos is using pop up click and collect sites, but that seems rather like a pea-shooter against the raw power of Amazon. As for Homebase, it might be summed up well by the Tunbridge Wells store, which sits forlornly, all peace and quiet, providing extra parking spaces for the Sainsbury with which it co-habits. Home Retail’s struggle to find a place in a new retail world seems all too reminiscent of Woolworths in the 1990’s. Overall this stock still doesn’t do it for me. (Neil Cumming^,16^th January 2015)

Thursday, 15 January 2015

Saga - when is a retailer not a retailer?

Saga: After coming to market with the class of 2014, Saga is one of those yet to sign up a fan club. Perhaps this is in part because, despite looking like a financial services group, they managed to get themselves classified into the General Retail sector. From a rating point of view that looked clever, except that now no one quite knows quite how to look at them. As the CEO, Lance Batchelor says, “I am very clear that our model is predominantly that of a broker, accessing the best products for our customers and delivering them with our own high standards of customer service”. This chimes with their maiden interims last year when, of £130.4m of EBITDA, Financial services were £114.5m. Travel was £15.2m, Healthcare £1.9m less central costs of £1.2m. In the summary of today’s Capital Markets’ Day the importance of Financial Services is being dialled up further through a wealth management jv with Tilney Bestinvest, whilst Healthcare is dialled down by looking to ditch the NHS and Local Authority care homes business.

Overall the opportunity for Saga is huge. There are over 20m over 50s in the UK and that is growing fast. At the interims they said that, at 10.6m names, they have just over half on their database, but only 2.7m are active customers. So they have plenty of scope to deepen and widen their pool of business. Current trading for the year just finishing, to 31^st January 2015, is described as in line. This would be consensus eps of 10.5p, meaning a PE of 15.5x at 163p. They state that the dividend should be at the top end of the 40-50% payout range. So 50% would be 5.25p, but there is only a final this year so I will guess at a 1/3: 2/3 split for a dividend of 3.5p and a yield of 2.1%. Looking out a year, the eps consensus is 13.7p, a PE of 11.9x and a 50% payout would be 6.85p, for a decent yield of 4.2%. This all seems quite attractive, but perhaps the next move is to get themselves put in the right sector, so that the right sector specialists can get to grips with them. (Neil Cumming^,15^th January 2015)

Wednesday, 14 January 2015

Fenner - the canary is still singing

Fenner: At least the canary is still singing, despite the group’s exposure to the bloodied coal and oil markets. They have two divisions, the first being Engineered Conveyor Solutions (ECS), which has a large exposure to coal markets and is around two thirds of turnover. The other third of turnover is in Advanced Engineering Products (AEP) which has a 30% exposure to oil markets. Both divisions are feeling the chill wind from end markets as customer activity slows and new ventures are put on ice, although time lags mean that in AEP it is more an anticipation of pain for now. In ECS, replacement business will provide some resilience, but that is too is vulnerable to mines being moth-balled if current market conditions persist. In ECS the board points out that they are well invested and that, therefore, cash conversion will be strong. The Fenner board has reacted swiftly, with cost cutting measures being enacted and capital expenditure cut back with a £9m cash benefit cited. With the oil market in particular showing no signs of reaching a level of stability yet, there will be a while to wait until anything cheerful is likely to be heard from Fenner.

The board says that earnings expectations for the year to August 2015 will be slightly below previous expectations, which looked like 22p. So at 206p, 21p of eps would be a PE of 9.8x. Given the comments on ECS cash conversion and capex cut-backs, a maintained dividend of 12p looks do-able, being a yield of 5.8%. (Noting that balance sheet debt at £110m-£120m is not overly burdensome). For the year to August 2016 it seems reasonable to expect (hope?) that end markets will not be getting worse and that light might be visible at the top of the mine shaft. So the modest PE plus good yield may be attractive, bottom of the cycle, metrics. So, a very interesting share, unless you feel that coal and oil markets are going to be very slow to turn the corner into 2016. (Neil Cumming^,14^th January 2015)

Tuesday, 13 January 2015

Wm. Morrison - the axeman cometh

Wm. Morrison: So, after five years, time has run out for CEO Dalton Philips. The move of Andrew Higginson (ex-Tesco FD, but untainted so far) in the Chairman’s role, has been brought forward. Almost before he gets his feet comfy under the desk, Higginson has announced that Dalton Philips has exited stage left. No successor has been announced with the search just getting underway. Maybe Philips was a trifle unlucky in that he joined Morrisons at the time that Lidl and Aldi were really starting to get noticed. He found a company with second tier computer systems, no home delivery service, no loyalty card scheme and no convenience stores. He has addressed all these, but maybe not well enough or quickly enough. I remember one rival being shocked and amused that Morrison’s were making simple errors such as putting convenience stores on the wrong side of the street for local footfall patterns. The tie up with Ocado on home delivery seemed loaded on favour of Ocado. He also dabbled in diversification (e.g. Kiddicare) to no avail. Perhaps history will say that he didn’t act fast enough and maybe the presence of a critical Ken Morrison as Honorary President inhibited him. For now though, the verdict has to be that he leaves with a tarnished reputation.

All the above over-shadowed this otherwise low key trading update, in which the LFL (ex-fuel) sales for the six weeks to 4^th January were revealed as -3.1%. At the same time (previously reduced) guidance was maintained with pre-tax profits for the year to 31^st January 2015, to be in the range £335m-£365m, with net debt of £2.3bn-£2.4bn. If this translates to around 11p of eps, then that is a PE of c17x, with the shares having bounced to around 185p. That doesn’t look enough to guarantee the 13p of dividend paid out last year, even though, in a fit of chutzpah, the interim was put up almost 5%. With changes in the board room, the standard pattern would now be for expectations for the year to 31^st January 2016 and beyond to be taken down to a level from which progress can be made. So this is another situation where income investors are faced by great uncertainty in an industry in disequilibrium. There really seems little rush to invest. (Neil Cumming^,13^th January 2015)

Friday, 9 January 2015

A little bit of UK consumer economics

A little bit of UK consumer economics: Politicians and central bankers are scared stiff of deflation, with Japan being seen as the modern example of the resultant economic porridge. So with deflation in our supermarkets and energy costs coming down, the overall inflation rate is set to stay well below the MPC’s 2% central target. Indeed Mark Carney may be sending regular postcards this year to George Osborne explaining sub 1% inflation rates. So the prospect of UK interest rate rises seems to be being pushed away again, which will suit the government just fine in the run up to May’s election.

In rough and ready terms the average UK household disposable income is £150-£160 per week. Mike Coupe at Sainsbury, this week quantified the benefit of recent fuel and food price drops at £10 per week per household. This is a c6.5% increase at a time when wage rates are just beginning to pick up. So the good news is that consumers have more money to spend (not all of it will go to savings and debt reduction). The bad news for consumer companies is that their customers have better price information than at any time in history. Yes, “Black Friday” was a success in terms of publicity and sales but probably only brought forward future sales and completed them at miserable margins. We are all used now to checking “brick” prices against “click” prices before we purchase and the seller is on the back foot.

So the successful consumer companies have to offer something in particular. It may be ambience, service and choice (John Lewis) or convenience and price (Lidl or Aldi). None of these are UK quoted companies though. In the quoted space, Next has been a good operator at combining on-line, store appeal and price (as the share price shows), whilst M&S shows what happens when a dull clothes offering meets bland stores. When you look for stocks exposed to the slightly flusher UK consumer and not competing purely on price, the pubs and restaurants leap out. In general people like going out and there is plenty to choose from, with some companies such as Greene King offering something at almost all price points. Others such as Marston’s, Mitchell & Butler and JD Wetherspoon also fit the bill. As a broad suggestion it is this ‘eating out with a drink’ consumer theme which investors should look at, with many of the sector’s shares not looking that expensive. (Neil Cumming^,9^th January 2015)

Thursday, 8 January 2015

Supermarkets - shoppers are the main winners

Supermarkets: So, we have now had trading statements from Sainsbury’s and Tesco, covering the Christmas period. Amidst the depressing stats about how many mince pies obese Britain ate, has anything much changed? Well, clutching at straws, it seems to be getting worse slower as negative LFL’s ease. However, more and more I am seeing comment that LFLs may be a red herring (probably also soon to be reduced in price) as their use is devalued by the noise created by on-line sales and click and collect services. The bad news is that there is still deflation in the system and the simple old sales line is still heading in the wrong direction. This seems to be particularly so in core food sales in store, with the blow being softened by non-food sales. The problems of over-spacing will take years to unwind, with Tesco being especially bloated.

At the same time, whilst the sales line flounders, the margin issue is getting worse. I read today that Sainsbury after its headline price cuts is now cheaper than Tesco on a ‘typical basket’ of shopping. Well I can’t see Tesco putting up with that, with the natural order likely to be restored after its latest salvo of price cuts announced today. Not that any of this will make Lidl and Aldi quake in their boots, implying that more needs to be done before equilibrium with the discounters is established. Tesco’s move is backed by cost saving measures (including moving from Cheshunt to Welwyn Garden City but leaving many ‘colleagues’ behind with a remaindered UB40 download). Tesco can at least also hack bits off with Blinkbox going to TalkTalk and Dunnhumby on the block, but these are not a solution to the core issue. They are one-offs that will not in themselves restore profit margins. Another Tesco cost saving is waving goodbye to the final dividend this year, with the bigger temptation of an equity issue still there.

Obviously there are broker forecasts aplenty out there, but these are fluid and could well have further to fall. With returns on capital looking sparse, balance sheets puce, sales down and margins falling, the outlook for dividends (let alone growth thereof) is glum. So, for income investors, it is still too early to wade back into the melee. For years we worried about what damage a full scale price war would do to the industry and now we are finding out. (Neil Cumming^,8^th January 2015)