Dividend Power

Monday, 19 October 2015

Man Group - Manny Made Man

Man Group (EMG.L): Last week’s Third Quarter update, to 30^th September, included the volatile month of August. It showed FUM of $76.8bn, down from $78.8bn three months earlier and $79.0bn at 31^st December 2014 (adjusted for subsequent acquisitions). Net inflows in the quarter were $1.4bn, more than offset by market movements and FX. Of total FUM, $44.8bn (58%) are Alternative, with $30.5bn (40%) being Long Only and $1.5bn (2%) being Guaranteed. The Alternative strategies drew in $1.1bn as net inflows out-stripped market moves and FX. However Long Only fell by $2.9bn as redemptions (mainly from GLG) hit hard. Within Alternatives, AHL claimed a good quarter, ending with 63% of open-ended funds at high watermark (HWM) and another 18% within 5% of HWM. In Alternatives, Discretionary ended the quarter with 14% of FUM at HWM and 48% was within 5% of HWM. In Long Only, the Global and Emerging Market core strategies hit rough water, experiencing net outflows, although they did out-perform benchmarks. The Discretionary strand was hit by poor absolute investment returns of $1.5bn due to Japan Core Alpha falling 14.8%, against the benchmark fall of 13.5%.

Clearly the group is better balanced now than in the AHL dominated days of yore (but for some risk junkies, a falling margin trend makes it less attractive). Valuing the shares is still a cold towel exercise though as you will see. In the first half, eps of 13.9c was made up of management fees (5.4c) and performance fees (8.5c). In the first half they bought back $175m of shares and declared surplus capital of $425m. The dividend was set at 5.4c (3.47p) against 4c. This is all in line with their policy of paying out 100% of adjusted management fee eps, with any build up of surplus capital being distributed periodically. Consensus eps for 2015 are 21.5c (13.9p), which, working back from a dividend forecast of 10.4c (6.7p) might be split between that amount of management eps and 11.1c (7.2p) of performance eps. A conservative view is that performance fees come and go and perhaps should have a PE of 0. So at 159p, the 6.7p of management eps give a chunky PE of 23.7x, although using the full eps of 13.9p is a PE of 11.4x. Spinning it around, if the management eps are worth 15x then that gets you to 100.5p. So, the performance fees need to be worth 8.1x to explain the share price of 159p. That is too much in my view. The management eps drive the dividend, so at 6.7p, the prospective yield is 4.2%, which is not startling. With an EV (using surplus capital only) around £2,975m ($4,611m) and FUM of $76.8bn, that ratio is 6.0%, which doesn’t add much support to the valuation. Overall, the nature of the beast breeds opacity in forecasts and that means that I struggle to see value for income investors at these levels. (Neil Cumming^,19^th October 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, 14 October 2015

N Brown Group - the fashion makeover continues

N. Brown Group (BWNG.L): This stock is still on the journey from its roots as “mail order clothes for pensioners” to “ multi-channel, specialist fit fashion retailer”, with brands such as JD Williams, Simply Be and Jacamo being their three “Power brands”. It has not all been plain sailing, but today’s interims, to 29^th August 2015, have pleased the market. Group revenue is up 4.2% at £415.8m, with the three power brands up 8.4%. However (in-line) underlying trading profits are down 15.9% at £35.0m, due to bringing forward Autumn/Winter range marketing spend and the extra costs of seven more Simply Be and Jacamo stores (now totalling 15 in all). Exceptional items were £14.8m, but are guided to be less in H2 at £2m-£3m. Adjusted eps are 5.74p, down from 11.56p and the interim dividend is held at 5.67p. Net debt has edged up to £239.8m, from £205.2m. Financial services revenue was down 0.4% at £116.6m, but on an improving trend saw Q2 revenue up 1.0% after Q1’s -1.9%.

Looking forward they comment that the year will be “significantly H2 weighted…..H2 has started well, with a pleasing performance in September.” Guidance remains for a 100bp gross margin drop, mainly in Financial Services (-200bps to -300bps) with Product somewhere in a range -25bps to +50bps. They are in the “early days” of attracting cash customers, who don’t need a credit account. At the moment half of new customers open a credit account. There is clearly much here to suggest that the group is progressing well. They are aiming, eventually, to have 25 stores covering 85% of the population, although it is still early days for judging the success of the “bricks” initiative. The improving economic backdrop will help, with households gradually loosening belts. The move towards a National Living Wage may raise their costs, but will be far more significant in terms of boosting customers’ spending power. After a yo-yo year for the shares they are up at 337p today. FY2016 consensus eps of 24.6p (which assumes that H2 does make up for H1) is a PE of 13.7x. A maintained dividend of 14.23p would be a yield of 4.2%. There are still many moving parts to this story. More cash and fewer credit customers appeals, as does broadening the appeal of the offerings. Yet, the old core demographic of older customers was reliable and growing, whilst more fashion and stores means more risk and volatility, as does the toehold in the US (where losses were halved). So, for now, I will stay on the fence, but I can see why many will be more enthusiastic than me. (Neil Cumming^,14th October 2015)

Tuesday, 13 October 2015

Bellway - Ringing up the profits

Bellway (BWY.L): Another stonking set of results from a house builder. In the year to 31^st July 2015, revenues were up 18.9%, with gross margins up 290bps at 24.2%. This helped drive a 44.0% rise in pre-tax profits, to £354.2m. Eps were up 47.5% at 231.5p and the dividend was hiked 48.1% to 77.0p. The return on capital employed is up 430bps to 23.9%, whilst net debt is just £38.5m. This is a reverse from cash held of £3.6m a year ago, but is after £620m of land investment (2014: £460m). The land bank has increased to 36,211 plots from 35,434, with a record 7,752 homes (2014: 6851 homes) being sold in the year. (The previous record of 7,638 was set in 2007 and we all know what happened next….) Within the geographical split, private sales growth in the South out-stripped the North, whilst social housing in the North more than doubled. Private average selling price inflation was stronger in the North, but the absolute level in the South (£290,900) was still far ahead of the North at £212,000. Price increases are necessary because there is some inflation pressure from labour and material costs. On land prices they only say that new acquisitions are meeting internal gross margin and return on capital employed targets, but there must be upward pressure on prices in such a robust market.

Looking forward the group is gunning for “up to 10%” volume growth in FY2016, although the first nine weeks saw a 16% increase. On the dividend they comment that cover is still 3.0x as this year’s hike was only in line with eps growth. They “expect to maintain a similar dividend cover, but will retain the ability to remain flexible and respond to market cycles”. The shares have been very good performers, having risen from 1460p a year ago to 2451p now. Consensus eps for FY2016 are 252.5p, but I reckon upgrades may be needed now. Using 260p is a PE of 9.4x and a three times covered dividend would be 87p for a yield of 3.5%. Despite the high share price, this still looks attractive. Interest rates will not rise rapidly (if at all just now) and there is clearly a political will to get more houses built, so the industry’s main challenge is to maintain financial discipline in order to extend the cycle for as long as possible. The yields and dividend growth available make this a very attractive sector for income investors just now. If I were to own one stock it would be Berkeley Group. Despite its focus on London (and hence overseas demand) it is arguably the most adept at managing its balance sheet through the cycle. When the music stops, as it will one day, I would expect Berkeley shareholders to suffer less than many others. (Neil Cumming^,13^th October 2015)

Monday, 12 October 2015

Jupiter Fund Management - an attractive yield

Jupiter Fund Management (JUP.L): Today’s respectable third quarter update, to 30^th September 2015, shows AUM down 2.4% QoQ at £33,525m. The drop is a negative market movement of £884m, offset by inflows of £77m. Within that £77m, Segregated Mandates lost £142m, whilst (higher margin) Mutual Funds brought in £196m and Investment Trusts brought in £23m. Since the end of last year AUM have climbed £1,630m, from £31,895m to that £33,525m, with net inflows totaling £1,447m and market movements £183m. They comment that in the third quarter the European equity strategies and the Dynamic Bond fund proved popular, with the drop in Segregated Funds being in part top-slicing by clients after good performance. Back at the Interims, Jupiter posted EBITDA up 13.8% at £86.8m, with underlying eps up 15.5% at 14.9p. The dividend was up 8.1% at 4.0p, with net cash at £209.7m. The cash was down from £251m at 31^st December 2014, reflecting seasonal dividend payments and annual staff bonuses. They laid out their dividend policy as follows: “our intention is for the ordinary dividend payout ratio to be around 50% across the cycle. The board then expects to retain up to 10% of pre-variable compensation earnings for investment and growth…The remaining balance….will be returned to shareholders.” For now, capital returns will be as special dividends in line with shareholders overall preferences.

It is often commented that Jupiter is not the sexiest fund management house, but they have a good roster of managers, solid fund performance, a good brand name and a strong balance sheet. This year’s numbers will have to absorb some double running costs of around £4m as they re-locate their London HQ, with an ongoing extra £5m added to the cost base. The group is on course to meet expectations and consensus eps for FY2015 are 28.5p, for a PE of 15.0x at 428p. That implies an ordinary dividend of 14.25p. Last year’s special dividend of 11.5p included 4.9p from the sale of the private client business. Consensus dividend forecasts of 24.25p this year imply therefore a special of 10p this year, down from 11.5p, but still handy. That 24.25p would be a handsome yield of 5.7%, whilst a maintained special would make 25.75p, reaching a 6.0% yield. Consensus forecasts for 2016 (partly reflecting the increased operating costs) are for low to mid single digit growth in eps and total dividends. None of this may make you leap off the sofa, especially given the direct exposure to nervy stock markets, but I still reckon that the stock is a good tuck away when there is dividend growth pressure in big sectors such as resource stocks, banks and pharmas. (Neil Cumming^,12^th October 2015)

Thursday, 8 October 2015

Tate & Lyle - no nasty surprises for once

Tate & Lyle (TATE.L): What a relief, with an in-line trading update and maintained guidance for once. For the six months to 30^th September, Splenda Sucralose is up, as is, “strongly”, Food Systems, helped by the Gemacom acquisition. Speciality Food Ingredients (SFI) are up year on year, with volume growth being seen in the second quarter. Good sweetener demand is helping Bulk Ingredients (BI), but the one sour note is Commodities, which have been hit by low US ethanol margins. As a result the overall BI result was below last year. For analysts this is a tricky year, with the dilutive Eaststarch j.v. deal impacting forecasts. In FY2017 this dilution was forecast at 3p. The deal has now received regulatory approval and so is being classified as “Discontinued”, leading to an adoption of equity accounting for joint ventures. As part of the deal, Tate should now receive Euro240m cash on completion and SFI will become around 55% (v50%) of operating profit and account for the vast majority of Europe profits.

At the Finals guidance was for flat pro-forma pre-tax profits in FY2016, with a dividend maintained at 28p. Consensus forecasts now, for FY2016, are 34.9p, with 37.7p in FY2017. The shares have recovered form a summer dip below 500p, to trade at 566p for a PE of 16.2x, dropping to 15.0x. The dividend ambition of 28p is a yield of 4.9%, but re-building cover may come before dividend increases. At the Finals, net debt had risen from £353m to £504m, but net debt to EBITDA to net debt was still only 1.3x, against an internal ceiling of 2.0x. Now, I haven’t seen any company comment on what they will do with the Euro240m due soon, but there must be a chance that a chunk can be directed the way of shareholders? At the very least it helps copper bottom the 28p dividend guidance. Back in April, when the shares were 645p I was lukewarm on them. They still have exposure to cyclicality in BI and fail the dividend growth test, but after this update I am now tempted by that yield and robust looking balance sheet. (Neil Cumming^,8^th October 2015)

Wednesday, 7 October 2015

Tesco - inching forward

Tesco (TSCO.L): Aldi and Lidl continue to make progress in their UK expansion. However, the big boys seem to be whistling louder as they attempt to keep their spirits up. After Sainsbury’s relatively upbeat recent release, we now have Tesco’s interims, to 29^th August 2015. In the key UK market, LFL sales were down 1.1%, but with an improving trend in Q2 at -1.0% against Q1’s -1.5% (and Q4’s -2.0%). Overseas LFL sales were up 1.0%, with Europe and Asia both positive in Q2. Stripping out the stuff that is being sold/shut, sales (constant currency) were down 0.3%, although currency shaved a further 1.6% off. Group operating profit before bad stuff was £354m, down more than half on last year’s interim of £779m, with UK, International and Bank all in reverse gear. Pre-tax profit (pre exceptionals and pension costs) were £158m against £614m, for eps of 1.13p (v 6.11p) and no dividend, as we already knew. A sign that the ship is more stable is that exceptionals were Nil against £563m in the same period last year. Slashed capex came in at £0.4bn v £0.9bn, whilst net debt (including discontinued operations) went up from £7.5bn to £8.6bn, year-on-year, but was barely up from £8.5bn six months ago. Total indebtedness (including operating leases and pension deficit) edged up from £21.7bn to £21.9bn.

Despite all this gloom the new management team cites that customers are responding to their grass roots turnaround with UK transactions and volumes up. The balance sheet is being bandaged with Homeplus (Korea) due to bring in £4.2bn of benefit, no dividend cost, a cheaper DC pension scheme and less capex. They are on-track to meet this year’s expectations, but “we are prepared to invest further [if we] need to enhance the long-term competitive position of the business”. So it sounds like market share etc. will be defended through further P&L pain if the competition send out more gun-boats.

At 191p, the shares are off the September dip into the 160’s. On current consensus eps for FY16 of 7.6p that is a PE of 25.1x, with FY17’s 10.5p being a PE of 18.2x. Clearly the sheer scale of Tesco is an opportunity and a recovery in sales/margins and a return to a meaningful dividend could all drive the shares higher. However, the discounters are still in a sweet spot and my interpretation is that Tesco would respond to fresh price cuts by rivals. A rights issue, whilst not heavily rumoured, cannot be ruled out at some point in the recovery story. As a reminder, they said at the finals: “future dividends will be considered within the context of the performance of the Group, free cash flow generation and the level of indebtedness.” So for income investors, sitting this one out for now is the safest option. (Neil Cumming^,7^th October 2015)

Monday, 5 October 2015

Electrocomponents - soggy chips.

Electrocomponents (ECM.L): My concerns for the safety of the dividend remain. Last week’s trading update, ahead of the FY16 interims, showed group sales up 4%, but, with Q1 at +5% and Q2 at +3%, the short term trend is deceleration. Whilst Europe kept up a smart clip at 13% in both quarters, North America sales swung from +3% to -3%, whilst the UK limped along at a steady -1% in both quarters. After a slow July and August, September picked up a bit, but the cited “weakening US manufacturing output” is a tough backdrop. Asia Pacific sales stood their ground at 0%, but the economic mood in that region ain’t great. The gross margin decline for the half is -170bps, continuing the first quarter experience and reflecting currencies (two-thirds) and price/mix (the balance). Amidst all this, operating costs grew by 3% in the first half, despite efforts to cut back. They are holding out the prospect of a better second half as easier comps and cost saving benefits feed through, with more details to be supplied at the interims in November by new-ish CEO Lindsley Roth.

Back in July consensus eps for FY2016 were 13.3p against 13.2p in FY2015, with the dividend to be held at 11.75p. I suggested that 12p might be a better guess and that the classic new CEO manoeuvre would be to get expectations down, cut the dividend (to 6p?) and re-build from a nice low base. Consensus eps are now 12.6p, so my 12p still looks plausible. The big change on the dividend front is that Premier Farnell (amidst CEO change) has slashed its dividend, so Electrocomponents’s dividend policy no longer has to contend with ‘keeping up with the Farnells’. I just see little reason for Electrocomponents to go on paying a barely covered large dividend, at a time when there are so many grey clouds gathered. A strong balance sheet means that they could stick their chin out and pay the full 11.75p, but then the debate would just roll forward to FY2017 on which we have little visibility right now. Does Roth want to risk having to cut in FY2017 and being blamed, whereas now, barely an eyebrow would be raised? At 181p, they are trading just off their recent 12-month lows and at 12p of eps the PE is a middling 15.1x and a 6p dividend would be a, still reasonable, 3.3% yield. Overall, I still see little reason to invest ahead of the interims in November. (Neil Cumming^,5^th October 2015)