Dividend Power

Thursday, 9 July 2015

Challenger Banks - More Challenged now

Challenger Banks: I wrote recently on these, coming to the conclusion that they were worth keeping an eye on, albeit income investors may want to wait until dividend flows ramp up further down the road. I especially focussed on Aldermore (ALD.L) and Shawbrook (SHAW.L) as being two ‘clean’ start-ups without baggage from any existing physical estate or venerable IT architecture. Part of my interest was that the Government has been keen to promote these challenger banks as a source of competition to the discredited established players. However, the Budget seems to have chucked a load of sand into their engines. Changes (i.e. reductions) to mortgage tax relief for Buy-To-Let landlords may affect demand for such mortgages, which are important products for many of the challenger banks. Secondly, the Government is unwinding the bank levy tax on large banks global balance sheets but is keeping a domestic element and introducing an 8% tax surcharge on profits, which will directly impact the challengers. Yesterday we saw sharp falls in their share prices, although the precise effects on earnings are rather cloudy. For now, I would stick to my view that these could be very interesting investments, but that income hunters can afford to wait for better earnings visibility to emerge. (Neil Cumming^,9^th July 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, 7 July 2015

Capital & Regional - a new yield kid on the block

Capital & Regional (CAL.L): The group has been through some major upheavals over the last decade, but now seems to be on a steadier course. It is focused on “The Mall” brand of community shopping centres. There are six in the portfolio at present, at Wood Green, Walthamstow, (both London), Luton, Blackburn, Maidstone and Camberley. The Mall fund was originally set up in 2001 as a joint venture with Morley Fund Management (Aviva to you and me), but C&R gained full control and ownership last year. The other Morley fund set up in 2001 was the Junction Fund, but this was sold to Hammerson in 2012. C&R also own the Kingfisher centre in Redditch and have a 50% jv stake in the Buttermarket in Ipswich. The final portfolio component is the rather incongruous Snozone dry ski slopes at Milton Keynes and Castleford. The German portfolio was sold at the end of last year, raising £42.1m of cash.

Gaining full control of The Mall fund has enabled C&R to save £1.5m in costs, which is significant in the context of CY2014 operating profits of £19.3m. It has also allowed the group to convert to REIT status. They now have a roadmap development plan to add value to these assets over the next three years, with the aim of becoming recognised as the UK’s leading community shopping centre player. They have just announced the interim valuation for The Mall at 30^th June 2015, showing a healthy 6.2% asset value rise to £791.0m over six months, largely due to yields having compressed from 6.27% to 5.95%.

The key for income investors is that adopting REIT status means that their new dividend policy can be to distribute 90% of The Mall’s operating profits, split equally between interim and final. For CY2015, they anticipate paying at least 2.9p of dividend. On a share price of 58p, that is a handsome 5%, with growth to come in the next few years at say mid to high single digits percentage rates. Last year’s EPRA NAV was 59p, so the shares are trading pretty much in line with historic NAV, with a 10% plus uplift on the cards for this year. Whilst the rise of on-line shopping has been well documented, a well-managed shopping centre can still flourish as a retail/leisure destination. Even though the shares have climbed steadily from lows of 23p in November 2012, on these valuations Capital & Regional still seems to be a very attractive stock for income hunters. (Neil Cumming^,7^th July 2015)

Monday, 6 July 2015

BP - Less uncertainty and a 5.9% yield

BP (BP..L): I have been very worried in the past about BP’s dividend security as they wrestled with their open-ended Deepwater Horizon bills, Russian exposure and soggy crude oil price. Last Friday, shareholders had some good news in the shape of a wide-ranging settlement of the Deepwater debacle. The agreement with the US Federal government and the five affected states totals a whopping $18.7bn, but this is less than most people’s worst fears and is spread over up to 18 years. This all means that the pre-tax charge relating to the spill will climb from $33.8bn to $43.8bn. This is some £28bn at current exchange rates and (ignoring any discounting back to make it look smaller) is still a huge financial (and reputational) blow against the scale of a company whose current market capitalization is around £79bn. A small consolation for BP is that some of the cost will be tax deductible, whilst they were braced for this, with the first quarter balance sheet showing cash of $32.4bn, with net debt of $25.1bn, resulting in a modest gearing ratio of 18.4%. Immediately, the board has made it quite clear that their commitment to the dividend is unaffected by this settlement and that their support of it remains absolute. The sting in the tail of the settlement news is that the myriad of smaller individual claims and class actions will continue and a bugbear for BP has been the generous nature of the settlements awarded by the US courts. Whilst some of the legal profession may now have to climb off the gravy train, many others will still be happily on board.

So, the Deepwater saga is more of less into the final furlong, but BP remains in a difficult place. The low oil price and anaemic global recovery (with Chinese GDP growth fading rapidly), is making the day-to-day business of the oil majors tougher. BP also has that exposure to Russia through Rosneft. The good news here is that a weird sort of equilibrium has been reached. Yes, sanctions against Russia interests are in place, but I do not perceive that much is being done to tighten the screw as companies find work arounds. Unless Putin raises the heat again, we seem to be in for a long drawn out staring match, with the West wary of baiting the Russian bear too much.

BP is still not a stock to get excited about, but having been wary at 450p in February, I have to be more upbeat at 432p with much uncertainty removed. Dividend growth may still be low (or absent) but the current annual 40c (25.64p) seems safe. That equates to a yield of 5.9%. Furthermore, takeover chatter is re-emerging. It is seen that, with oil prices so low, corporate activity can lead to financially engineered growth. BP at low valuations and with Deepwater settled, it seems to have a target plastered to its rump. That doesn’t mean that anyone will take a pot-shot, but it must be an uneasy feeling all the same. (Neil Cumming^,6^th July 2015)

Thursday, 2 July 2015

Hargreaves Services - who would be a UK coal miner?

Hargreaves Services (HSP.L): Today’s trading update, for the year to 31^st May 2015, made for pretty sombre reading. Current trading has been ‘broadly in line with management’s expectations’, which usually means ‘we have come up a bit short’. Ongoing trading sounds difficult with low coal prices and coal power station closures hurting profits. The board is still holding out for an eventual recovery in coal prices, but relying on Government support to bolster the coal industry sounds unlikely. I fear from Hargreaves’s perspective that few people care enough about the industry and coal is firmly labelled as a dirty fuel to be shunned. They look to me to be on their own. Meanwhile, more than the targeted £3.0m has been chopped off the cost base, but further re-trenchment of the group will see a new £4.5m charge (redundancies, ineffective fuel hedges and mine reserve costs). They have also now given up chasing all the money they expected from the Liverpool Biomass Conversion project, which will result in a £2.4m charge, but release £10m of trapped cash. The board’s cash generation exercise has gone well though, with year end net debt just £1.0m, after £6.3m of share buy-backs, but helped by £8.0m of timing differences.

The shares have been terrible this year, having nearly halved and are languishing at 320p. For the year running to 31^st May 2015, consensus eps is 98p, for a PE of 3.3x, with a 30p dividend (we hope) giving a whopping yield of 9.4%. Looking ahead to FY2016, consensus eps of 49p point to a PE of 6.5x. The share price is telling you that these numbers are too optimistic. Back at the interims the board stated that they were targeting a 40% dividend payout, so 30p on 98p of eps would be possible for FY2015. They also stated that, if cash cover was sufficient, they would hold the dividend through a profit dip. Even with a strong balance sheet, to pay out 30p of dividend in FY2016 on (toppy) forecast eps of 49p is beginning to look a luxury. Many an investor has come away with a bloody nose from trying to make money our of UK coal and the risks at Hargreaves look too high for all bar the most adventurous investor. (Neil Cumming^,2^nd July 2015)

Wednesday, 1 July 2015

Greene King - nothing that a hot summer can't fix

Greene King (GNK.L): Having been positive on Greene King as it moved up from 755p in December, now might be a good time to step aside for a while, with the shares at 850p. After a busy year, including the, recently approved, acquisition of the Spirit Pub Company, there suddenly seems to be a lot on management’s plate. In these annual results, to 3^rd May 2015, underlying revenue growth was 3.0%, but pre-tax profits edged lower by 0.8% to £168.5m. The results were held back though by the ongoing sales of ‘tail end’ pubs that were diluting overall returns. Excluding these, underlying pre-tax profits grew 6.9% to £167.0m. Underlying eps, at 61.0p, were up 1.3% (but up 9.2% based on the retained estate), whilst the total dividend was raised by 4.8% to 29.75p, in line with the targeted cover ratio of ‘around two times’.

Within these numbers, the dominant Retail division broke through the £1bn revenue mark (+5.9% underlying), but margins, whilst recovering from the first half, still slipped 40bps to 19.1%, to leave underlying operating profits up 3.6%. LFL sales grew at a tepid 0.4%, with the World Cup, Scottish drink drive laws and tougher comparatives all blamed in part. Pub Partners revenue was down 18.5% and operating profit down 17.3% as the estate shrank, with the LFL net income metric up 3.5%. For the continuing business of 881 pubs, operating margins edged up 70bps to 44.3%, with an average EBITDA of £69,900. Greene King notes that the Spirit deal will add 416 pubs to the estate with an average EBITDA of £77,000. The reduced number of pubs had a knock on effect to Brewing, with underlying EBITDA down 1.5% to £34.9m, despite some market share gains. Over the course of the year net debt fell by £66.9m to £1368.7m, which on EBITDA of £319m is a ratio of 4.3x. The new year has started ‘steadily’ with Retail LFL sales up 0.6% and Pub Partners LFL income up 1.2%, but Brewing volumes are down 3.7% due to tougher comparatives and export timing differences.

For FY16, consensus eps are 65p, a PE of 13.1x at 850p, indicating a dividend of 32p and a yield of 3.8%. These are not that demanding, but with the Spirit integration to execute and a lack of sales and revenue momentum at present, it feels like the shares may mark time for a while. There is nothing though that a hot summer can’t fix and as Britain swelters today in 30C plus heat, trading momentum this week should pick up nicely at least. (Neil Cumming^,1^st July 2015)