Dividend Power

Thursday, 20 August 2015

Phoenix Group - a flaming good yield

Phoenix Group (PHNX.L): Thought: ‘tis better a shareholder be, than a policyholder be. There is money to be made out of closed life books and Phoenix is good at squeezing the cash juice out. Whether the policyholders rail against being trapped in low return products is another issue, with the FCA thematic review on the issue due before year-end. At least from the consumers’ point of view the new pension freedoms give them some increased clout (with Phoenix working with Just Retirement to provide customer choice). In this period Phoenix only wrote £208m of annuities against ££284m in the same period last year, but expects resilience in the remaining vesting business due to the popularity of their guaranteed annuity products.

In these interims, to 30^th June 2015, Phoenix generated an in-line £110m of cash, albeit this was down on the same period last year, when it was £332m. However, they are on track to meet their target of £200m-£250m for the year and a cumulative £2.8bn over the period 2014-19. This year is seen as a transition year as they prepare for Solvency II, implying that cash generation can recover in future years. Of the £2.8bn cash target, they have raised £1.1bn to date. So a further £100m say this year leaves £1.6bn for 2016-19, an average of £533.33m per annum. To put all those cash numbers into context, the annual dividend cost is very manageable at around £121m. The group MCEV held steady at £2.6bn, with the IGD surplus climbing from £1.2bn at year-end to £1.6bn. The dividend has been held at 26.7p, as they “demonstrate [their] commitment to a stable and sustainable dividend”. The group says that it is on course for meeting the new Solvency II rules and that the two remaining UK operating companies have achieved Insurers investment grade credit ratings at Fitch. This will take a useful 50bps off their current 312.5bps bank debt interest margin. Their ambition remains to build further on their position as the UK’s largest zombie book consolidator.

Normally the lack of dividend growth would dull my interest, but in this case the payment does seem sustainable, at the very least, and the group has a growth path to follow. The main risks would appear to be if the FCA fires a sidewinder or their Solvency II plans are rebuffed and more capital than planned is locked within the group. Assuming a maintained full year dividend of 53.4p, there is a 6.1% yield of at today’s 878p. The shares have been good performers since 2012, but they still look to be a hold and on any set back, that yield could become compelling. (Neil Cumming^,20^th August 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

Wednesday, 19 August 2015

Glencore - anyone want a white furry cat?

Glencore (GLEN.L): Ivan Glasenberg’s plan A seemed to be set along the lines of global domination: ‘get a quote, buy Xstrata, along with white furry cat and black leather chair’. He is now beavering away on a less glamorous Plan B: ‘cut capex, trim sails, maintain credit rating, weather commodity price storm’. In the past, Glencore would have weathered cyclical downturns behind closed doors but now the drama is to be played out in the full glare of the quoted stage. These interims, to 30^th June 2015, show the scale of the challenge. Adjusted EBITDA was down 29% to $4.6bn, with eps down 53% at 7c. The dividend has been held at 6c, but with no clues about the second half. The trimming of the sails has resulted in current capital employed falling from $21.3bn to $17.2bn, capex cut from $4.0bn to $3.2bn and net debt trimmed a tad from $30.5bn to $29.6bn, (as working capital has been released). Ivan has been quoted as saying that $27bn of debt is now the next aim. Whilst debt has been controlled, the fall in profits has seen net debt to EBITDA climb from 2.4x to 2.7x, but the group takes comfort from $10.5bn of committed available liquidity at the period end. The EBITDA is split out between Marketing at $1.2bn and Industrial at $3.4bn. They are shooting for full year Marketing EBITDA of $2.5bn-$2.6bn, which leaves a lot to do in the second half in such terrible markets. The path for Industrial EBITDA in the second half is left unguided. Industrial capex is forecast to slow further with a figure of $6bn for 2015 forecast against previous guidance of $6.5bn-$6.8bn, whilst in 2016 a further step down to $5bn is forecast.

Adjusted eps last year were 33c, so 15c may well be the ballpark for this year. At £:$1.56, that is 9.6p. The share price has been smashed, having more than halved over a year and at today’s grim 161p is a PE of 16.8x. If the full year dividend is held at (what would be an uncovered) 18c, then that is 11.54p for a yield of 7.2%. This is where dividend investors roll the dice. If the storm starts to pass, then they may well get that dividend yield and feel chuffed as the share price bounces back. However, right now commodity markets seem completely shot and emerging market currencies and economies are stressed. If the economic outlook at the time of the finals is no better, then paying a large dividend whilst, presumably, cutting back further on capex could seem foolhardy. No doubt there would also be pressure from lenders and credit agencies for the equity holders to share some dividend pain, in return for holding onto the BBB credit rating. Unless you think commodity markets will get much worse, I would not bail out at such a low share price. However, staying put is with the full knowledge that the dividend risk is now high, in my view. (Neil Cumming^,19^th August 2015)

Tuesday, 18 August 2015

John Menzies - still a work in progress

John Menzies (MNZS.L): Back in March, I thought that the shares looked cheap at 387p on the reduced earnings and rebased (downwards) dividend. However, I was concerned that underlying trading was still lacking forward visibility leading to my taking a ‘wait and see’ approach. The market had no such qualms, with the share price breaching the 500p mark in July, before settling back to 475p today. So what progress can be seen in today’s interims, to 30^th June 2015? On a constant currency basis, turnover is up 2.1% year on year, whilst underlying pre-tax profits have fallen 17.9% to £17.0m. As the geographic profile of profits changes, so the tax charge has gone up from 27% to 32%. This has played its part in suppressing underlying eps of 18.8p, against 24.7p in the first half of 2014. As flagged in the March rebasing, the dividend is 5.0p against 8.1p. Whilst aviation turnover is up 8%, operating profits fell 29% to £9.4m, reflecting restructuring costs and contract churn. The recent loss of contracts in Spain will lead to further (non-cash) write-downs. Distribution performed well, with operating profits nudged up from £12.0m to £12.2m. This was despite the secular decline of print and losing the boost of 2014 being a World Cup ‘sticker album’ year. The recent acquisition of AJG Parcels is a next step towards growing their position in the e-commerce parcels market. The balance sheet continues to be in decent nick, with net debt of £120.8m, only up £7.4m despite the recent upheavals, in part reflecting good cash conversion of profits.

Clearly the re-booting of the group is not yet finished and both their aviation and distribution markets continue to be very competitive. The strategy is set on winning more large-scale hub and base aviation contracts, whilst also broadening the activities of distribution further into fulfillment and parcels. Overall, they forecast 2015 is to be second half weighted, although they do flag that recent weakening in currencies such as the Euro, Australian dollar and Czech koruna are a headwind. Consensus eps forecasts are for 46.5p, giving a PE of 10.2x, taking their guidance that the interim dividend of 5p is about 30% of the annual, a yield of 3.5%. These valuations do not look expensive, but the quality of the earnings is holding the share price back. There are signs here that the new management is making progress, but I would still only suggest clambering on board if you have a higher risk appetite. (Neil Cumming^,18^th August 2015)

Monday, 17 August 2015

Bovis Homes Group - happy days for house building

Bovis Homes Group (BVS.L): These are great times for house builders. There is a structural shortage of housing and the population is growing. Mortgage rates are very low (albeit on the turn). Prices are rising, but affordability is holding good. The Government loves you and wants you to succeed. NIMBYs and the green belt are being sidelined/threatened. The need to include social housing in many new developments has been watered down to a minimal level. There may be build and land cost pressures, but these are nothing against all these positives. You can see all this in the Bovis interims to 30^th June 2015, with record completions (1,525 v 1,487) and an average sale price up 10% to £264,200 (partly due to mix). Analysts are worried that this year is more second half biased than usual, but after the hiatus of the May election that shouldn’t be too surprising. It is already difficult to recall just how fevered the fears of a Miliband/Sturgeon regime were. Anyway, in these numbers, revenue grew 9%, pre-tax profits at £53.8m were also up 9%, eps were up 11% at 32.1p and the dividend was up 14% at 13.7p. The consented land bank added around a net one thousand plots in a year and is now 19,081 (so over five current year’s production), with a further 23,287 strategic plots. All this has been achieved with net debt rising from £45.3m to a still very modest £58.8m. Their aim is to grow to production steadily to reach a range of 5,000 to 6,000 per annum and then hold those levels. The group is spreading out from the south-east, but is still heavily weighted towards that area, which as we all know, is the hot-house of the imbalanced UK economy.

In a very early blog, in August last year, I was positive on Bovis at 840p, but worried about how much further they could travel (with the General Election hurdle still to be negotiated). The shares might be down today, but at 1150p have clearly been a good investment. Consensus forecasts for FY2015 are for eps of 100p, which is a modest PE of 11.5x. The company has forecast the dividend at 40p (so well covered at 2.5x), for a yield of 3.5%, whilst FY2016 should see double-digit growth in eps and dividend. Further out, the board is targeting a 33% payout ratio, with any surplus capital being used to fund “additional dividend payments”. We all know that the UK housing market is cyclical, but we seem to be in a very long and strong cycle at the moment. Rising mortgage rates may be the biggest cloud on the horizon just now, but on these share valuations I find it difficult to conclude anything other than Bovis being a strong hold, despite the 35% plus share price rise over the last year. (Neil Cumming^,17^th August 2015)

Thursday, 13 August 2015

G4S - accountants still at work

G4S (GFS.L): No one would say that the recovery at G4S is the finished article yet, but there are signs that Ashley Almanza is making solid progress. Mind you, their rag tag army of employees (£9 per hour, no expenses) at this year’s Wimbledon, still needed to go to charm school and get uniforms that fitted. In this week’s interims, to 30^th June 2015, continuing revenue (at constant currency) was up 2.8% at £3,285m, with good growth in their increasingly important emerging markets and North America, alongside modest growth in Europe, offsetting a modest fall in the UK. Not a great result but revenue is still going in the right direction. The profit before interest, tax and amortisation, rose 4.9% to £193m, although £5m of the £9m improvement came from cutting corporate costs. Eps were 6.1p, up from 5.6p on the back of which the interim dividend has been raised by an encouraging 5% to 3.59p, after five years on hold. Net debt was flat at £1,677m (2014: £1,680m), with net debt to EBITDA edging down from 3.1x to a still hefty 3.0x. A caveat to all this, is that these numbers are after stripping out currency effects, discontinued businesses, businesses identified for disposal and restructuring costs. These included £8m on an asset and liability review, £9m on legacy contracts, and £16m on re-structuring. There was also a £9m charge comprising £21m of goodwill impairment offset by £12m of disposal gains. The effect of all this accountancy can be seen in the unadjusted eps of 2.3p, down 54%. There is more work to be done on execution though, with 16 businesses having been sold since 2013, but 30 more are for the chop. Looking back and clearing up the past is one thing, but the group has also won new contracts worth £1.4bn (£680m annualized) alongside a pipeline increment of £2.2bn and a 90% retention rate on existing business. Overall the group comments that momentum has been building through the first half.

Consensus eps for this year are at 15p, rising to 17p next year. At a soggy share price of 261p that is a PE of 17.4x dropping to 15.4x. Meanwhile the 5% interim dividend increase points to an annual of 9.7p for a yield of 3.7%. A similar 5% rise in 2016 would take the yield to 3.9%. Back in March, with the shares at 285p, I felt that there was no rush to invest. The shares are a bit cheaper now and progress has been made, so they are better value, but I don’t see why income investors need rush into the stock until more momentum has been built up and the clean up is nearer completion. (Neil Cumming^,13^th August 2015)