Dividend Power

Wednesday, 11 February 2015

Electrocomponents - the prettier ugly sister

Electrocomponents: In their own beauty competition against Premier Farnell, Electrocomponents seem to be winning by being less ugly. In the four months to 31^st January 2015, sales growth was 5%, with International sales up 8%, whilst UK sales were down by 2%. They point out that eCommerce sales were up 6%, resulting in a 59% share of total sales. Compared to the six months to September 2014, Group sales growth has picked up from 3% to 5%, with the UK unchanged at -2%, but International accelerating to 8% from 5% as North America and Europe pick up more than Asia tails off. The rub is that product mix and currency headwinds have seen a 1.3 percentage point drop in gross margin, which they claim to have started to reverse in January through management action. There is a generally steadier background than at Premier Farnell, so these are more ‘business as usual’ numbers.

However, this all points to pre-tax profits of c£80m for eps of 13p, with the last five years having seen a high tide of 19.5p (2011/12) and a low of 11.8p (2009/10). Since 2011/12 the dividend has plateaued at 11.75p, which a strong enough balance sheet and jam tomorrow statements have justified. The shares have flinched and are down 5% at 201p today, so we have a PE of 15.5x and a yield of 5.8%.

None of this should get income growth investors excited. If you believe that it will all click into place one day, then you may disagree with me. The other straw to be clutched is the idea that the two ugly sisters could one day merge and unleash cost cutting on a grand scale. We shall see. (Neil Cumming^,11^th February 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

Tuesday, 10 February 2015

Tate & Lyle - very bitter sweet

Tate & Lyle: When Javed Ahmed arrived as the new CEO in 2009, there were high hopes for Tate & Lyle. He arrived fresh from a 17-year stint at the highly successful Reckitt Benckiser, where he had held a succession of divisional head roles. He took over from Iain Ferguson who, amid mis-steps and mounting frustration, had struggled to turn the artificial sweetener Splenda into a blockbuster success. So how has Ahmed done? Well after an initial surge, progress at the group and in the share price seems to have stalled.

In the recently released third quarter update, we saw a mix of good bits with the odd weevil. The bottom line though is that profits are now expected to be at the lower end of the £230m to £245m guidance issued in September 2014, in what has been a year of multiple profit warnings. The more commoditised Bulk Ingredients division is suffering from lower sweetener volumes and lower ethanol profits, with overall results being below expectations. This loss of momentum will set the tone for the division at the start of the 2015/16 financial year. Matters were a bit better in the Speciality Food Ingredients side which had one of its better quarters with ‘strong volume growth’, but Splenda experienced volumes down year on year, amidst a very competitive global market. The product is now subject to, in effect, a strategic review as to its future, with completion due by the end of the financial year on 31^st March. A ray of light is that a recent capital expenditure catch up programme across the demand, supply and planning processes has delivered. So no further incremental capex will be needed in 2016, beyond what has already been announced. However, lost sales caused by the ensuing disruption are not now envisaged as being recoverable until 2016/17 and beyond. In amongst various moving parts net debt has increased from £383m at the end of September to £466m by 31^st December 2014, with further increases to come.

So going with PBT of £230m, gives eps of 38p, against 55.7p last time. The interim dividend was up 5% and for the full year that points to a 29p dividend total. On a recently shredded share price of 576p this is a yield of 5%. Whilst debt is climbing, net debt to EBITDA is currently around 1.5x, so no real pressure there yet and that dividend is affordable if the board choose to support it. But eps recovery from here looks set to be a multi-year journey, which must impact on dividend growth. There seems to be no rush to invest ahead of the finals being announced in the second quarter. (Neil Cumming^,10^th February 2015)

Monday, 9 February 2015

Dairy Crest - In a Muller Corner?

Dairy Crest: The shares had a near 20% surge, last year, on the news of the proposed dairy disposal to Muller. Approval, or not, of this deal is not due until the second half of this year. It is not even certain whether the yea or nay will be determined here or in Brussels, with the companies pressing for a British review. They presumably feel that approval here is more likely, with fewer strings and a speedier response. In what is now a very consolidated milk market, we shall see. In the mean time it is business as usual with the third quarter update stating that spreads and cheeses were performing well in the usual dairy products warzone, whilst the dairy side continues to lose money. Whilst prices to farmers are trending down, the supermarkets are in the biggest general price battle for many a year and it is suppliers profits that get squeezed. As an aside does your baby like the chemically sounding ‘galacto-oligosaccharide’? Well it is nothing to do with Ronaldo or Real Madrid, but is a pre-biotic, is ‘good’ for them and goes into infant formula milk products.

If the dairies deal goes through, without too much horse-trading, then Dairy Crest will have a stronger balance sheet and a decent stable of brands. I just worry though that they will not have the same marketing and financial muscle as some of their competitors. Nominal GDP plus a bit earnings growth may be possible and a reasonably covered dividend of 21.3p historic, is a yield of 4.3% at 500p. That seems OK as long as competitive behaviours remain rational. However, they might not. I would be tempted to leave this stock for others, bearing in mind though that Dairy Crest may become a bid target itself post the disposal. A share to re-visit later this year perhaps. (Neil Cumming^,9^th February 2015)

Thursday, 5 February 2015

Premier Farnell - more like Sky Bet League 2

Premier Farnell: Some stocks just seem to set out to frustrate investors and Premier Farnell is one of those. It seems that more often than not, there is a rancid smorgasbord of reasons why they will not quite come up to scratch. Today’s trading update for the just completed year to 1^st February 2015 is another selection containing some bitter morsels. Group sales in the fourth quarter were up 4.0%, an acceleration on the third quarter’s 2.7%, with Europe being singled out as the star. However, Europe’s economies are insipid right now (q.v. Draghi’s QE policy) and the improvement was due to the rollout of a new web platform, but this will probably be largely a one off lift. On margins they say that strategic moves and clearing out stocks of Raspberry Pi, ahead of Raspberry Pi 2’s launch, hit margins in the second half to the tune of 1 percentage point. Hence operating profits will be in the range £86m to £88m (a small miss) against £91.5m last time, with another £2m blow due if exchange rates stay where they are. They also announce that, whilst targeted annualised cost savings are being raised £10m to £12m, they will be achieved over two years, not one, and be backend loaded.

So it looks like the eps will stay marooned on a plateau between 14p and 15p for this year and the 2015/16 year, to make a four year stretch. The shares have tanked today on the news and are down 10% at 152p, near the twelve month low of 147p. At that price the PE is in the 10x ballpark. The dividend is stuck at 10.4p and doesn’t look threatened, producing a yield of 6.8%. Whilst this yield is large, the best total returns come from those companies growing eps, with which to grow their business and reward shareholders through progressive dividends. On that yardstick Premier Farnell comes up well short and must do better.(Neil Cumming^,5^th February 2015)

Wednesday, 4 February 2015

Anglo Pacific - can that yield be real?

Anglo Pacific: This little followed resource royalty stock is a real conundrum of a small company. A new chapter started when Julian Treger, most well-known for his stint at Active Value Investors Ltd., became CEO in October 2013. He set out a plan to re-configure the group’s portfolio of royalties and make the group more dynamic. However, he arrived at a time when income from their Australian Kestrel coal royalty (where Rio Tinto is a key operator) was in a slump partly due to mining activity being concentrated outside their royalty acreage. Naturally, the bear market in many commodity prices has not helped.

Looking forward, the group says that Kestrel will see their acreage become more active, with a subsequent benefit to Anglo. As for commodity prices, it is a lottery as to what happens next, but my gut feel is that most of the pain has now been taken. Today the group has announced a new £42.8m royalty acquisition, Narrabi, tied to Whitehaven’s NSW coal project. The mine life is given as 22 years, with the potential to extend this. Of the acquisition cost, £39.5m is in cash and £3.3m in shares, alongside a placing of new shares expected to raise between £29.6m and £42.8m.

At the same time they have issued a new dividend policy, with a stated intention to pay a final dividend of 4p for 2014. This makes a total for the year of 8.45p, down from 10.2p in 2013. The share price spent much of the early part of 2014 at 175p, but at the current 82p this is still a yield of 10.3%. Going forward they are targeting a minimum dividend of 8p, although they have left plenty of wriggle room. Still, 8p is a 9.8% yield. They then indicate a minimum payout of 65% of adjusted earnings. I have seen an eps forecast of 14p for 2016, although who really knows. At the 65% payout level that would be 9.1p though, for a yield of 11.1%. I won’t even do the maths on the 52p of eps in 2010. If you see hope for commodity prices, such as coal, then this share could be a way to get good exposure. But it comes with heavy caveats about recent track record, small market cap., and deliverability. (Neil Cumming^,4^th February 2015)

Tuesday, 3 February 2015

BP - the dividend is as safe as Bob Dudley's job

BP: Back in September I wrote on BP, questioning whether they could or should fund their then current capex and dividend plans. This was against a background of continued legal strife regarding the Gulf of Mexico spillage. Since then the legal trench warfare has carried on, with BP making little yardage to speak of. At the same time the oil price has collapsed and having a major investment in a Russian company, Rosneft, is looking like a recipe for sleepless nights.

Now we have some answers in the shape of the annual results for 2014. The main interest for dividend lovers was that a final dividend of 10c has been declared, making 39.5c for the year. This is an increase of 6.8% on last year’s 37c. The official sterling equivalent has yet to be announced, with 16^th March being the due date. However, in a year of big currency swings, the press statement uses 23.85p as the annual total, up 1.9% on the previous year, a handsome yield of 5.5% at 450p. In the press release, the Chief Executive, Bob Dudley says that “Throughout the work to reset BP, the dividend remains the first priority within our financial framework”. This is as explicit as you can get that the dividend is safe. Or at least as safe as his job, the two fates now being firmly linked. Net debt is now $22.6bn, down from $25.2bn a year ago after a string of disposals, to leave their net debt ratio little changed at 16.7% and well within their 10%-20% comfort range.

Further moderate disposals are slated, but as with many oil companies lately it is the capex programme that has been targeted. For the year, total capex came to $23.8bn, with $22.9bn being ‘organic’. The latter measure is slated to be “around $20bn” in 2015, having once been $24bn-$26bn. So, the maths is that BP can pay the dividend, which costs c£4.2bn p.a. What concerns me is whether in a world of low oil prices, Russian uncertainty and ongoing US legal cases, it makes sense for BP to be doing this. Certainly it feels like Bob Dudley has set a brave course and has little room to change tack if the wind picks up. (Neil Cumming^,3^rd February 2015)

Monday, 2 February 2015

Rank Group - place your bets

Rank Group: Owners of Mecca Bingo and Grosvenor Casinos, the company is a conundrum for investors. To look at the operations is one judgement, but you also have to contend with the Malaysian Hong Leong group. It owns a near 69% stake, whilst the M&G/Prudential’s near 7% means that Rank breaches the UKLA free float rules for a premium listing. That quote only continues thanks to an UKLA dispensation. So that premium listing could be lost at some point and in the absolute extreme the quote full stop could be lost, leaving minority shareholders unprotected. The dilemma for outsiders though is that Rank seems to be doing quite well and is worthy of a look.

The interims to 31^st December 2014 were helped by the cut in bingo duty from 20% to 10% and show revenue up 3%, adjusted pre-tax profit up 29% and adjusted eps up 34%. As well as the £8.1m rise in pre-tax profits, £5.6m was saved on the tax line. They comment that the new Remote Gaming Duty cost £0.8m in December, simplistically pointing to an annualised £9.6m total. Cash generation has been good, with a £72.8m operating inflow and net debt has come down to £94.9m from £135.1m a year ago. The interim dividend has been raised by 19% to 1.6p. At the same time the group has begun ramping up capex in both casinos and bingo, as they invest for the future and meet pledges made as part of the bingo tax lobbying. Peppered through the statement are references to new digital platform investments and initiatives, in partnership with the up and coming Newcastle-based Bede Gaming. The £25.2m VAT reclaim case rumbles on with HMRC ahead on away goals and the next appeal due to be heard on 21^st April.

The stock is no longer that well covered by analysts, but on limited consensus for the year to 30^th June 2015, 14p of eps looks do-able, being a PE of 12.6x at 176p, (the shares having spiked up 10p or so). After the interim dividend hike, an optimist could punt at a (still well covered) full year dividend of 4.8p, producing a yield of 2.7%. The shares were right up against the 170p-ish top end of the recent trading range but have now broken out. It is difficult to see where more momentum comes from, although a VAT win could generate some excitement. If you are willing to risk being caught in a Malaysian check-mate then the stock is worth a look. (Neil Cumming^,2^nd February 2015)