N Brown Group - In the brown stuff

N Brown Group 
A nasty set of interims that caught the market with its big pants down. The group is well known for catalogue based selling to the old and the large and the old who are large, with an element of credit through instalment payments. Under the guidance of new CEO, Angela Spindler, the group has been moving towards more on-line selling, de-emphasising catalogues, opening High Street sites and raising their fashion content. You may even have seen Lorraine Kelly looking happy to be amongst JD Williams clothed customers, or previously Freddie Flintoff wearing Jacomo. Unfortunately for N Brown they seem to have launched their autumn winter slightly later than previously, with a delayed mailing and managed to coincide this with the unfavourably mild weather of late.

The shares have fallen heavily, not helped by soggy markets, to 290p. For the year to February 2015, eps could be 25p, with a well covered dividend of 14.4p. These equate to a modest PE of 11.6x and a yield of almost 5.0%. If this is the bottom of their fortunes then these may seem attractive metrics, however the concern is that trading may stay tough and that the CEO has changed too much too quickly. It looks as if there is no great rush to commit money to these shares unless their fortunes and or those of the market start to improve. (Neil Cumming, 13th October 2014)

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         info@dividendpower.co.uk 

Cape(d) Crusader

Cape: This oil and gas centric support services group was only a few steps from being a financial basket case when Joe Oatley arrived as Chief Executive in 2012. He had performed very well in his previous CEO job at Hamworthy plc, but at first it looked rather like Cape was a step too far. However, Oatley tackled the ‘kitchen sink’ list which included a disastrous contract in Algeria and an ill-disciplined Australian market. Gradually the group has pulled round and stabilised although profits are still well shy of the 2011 levels, before all the problems emerged. They are exposed to key markets in the Middle East and North America and have expanded into new territories, whilst adding more specialist services to their offering. Whilst some fret about capital expenditure squeezes across the energy space, Cape are better placed as a significant maintenance provider. Pre-tax profits for the year to 31^st December 2014 are in the range £37m-£41m giving an eps of the ball park of 27p, with 10%+ growth seen in 2015. With good cash generation now in place, these eps can support a dividend this year of almost 14p. The recent good Capital Markets’ Day has seen the share price move up to 280p, but that is still only a PE of 10.4x, with a yield of 5% and growing. Given the recent history of the company I acknowledge that there are still risks of further problems, but at these valuations income growth investors must be tempted.  (Neil Cumming, 10th October)

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  

Marston's - Income Pedigree

Marston’s: Another pub company that is enjoying the fruits of the UK consumer recovery. Whilst the lop-sided UK recovery (with services perkier than manufacturing) poses the same old long term macro-economic challenges, for food led pubs life is good. Yes, it rained in August and the Bank Holiday weekend didn’t happen, but there was a good summer and September was a good weather month. So Marston’s like-for-likes in the year to September 2014 were +3.1%, despite the late summer slowing. Marston’s is pushing ahead on several fronts, including more accommodation and new-build openings. They have a good range of formats including the budget conscious ‘Two for One’ through to the up market ‘Revere’ and the town centre ‘Pitcher & Piano’. Whilst competition for new sites is hotting up Marston’s has been playing this game for a while and has visibility on openings for the next three years at least. The board is experienced with well-regarded CEO Ralph Findlay having been at the group since 1996, becoming CEO in 2001. Net debt to EBITDA is of the order of 6x, not unusual in this asset backed sector. At 138p, with eps for September 2015 of 13p in sight, the multiple is a modest 10.6x. On a dividend payout of just over a half, a dividend of 7p equates to a tempting (and growing) yield of 5.1%. Unless you think that the UK consumer recovery is about to be curtailed abruptly after the 2015 general election, Marston’s looks like a stock that holds great attractions for income growth investors. (9th October 2014)

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  

Retail Bonds - Caveat Emptor

Retail Bonds: In a world of pathetically low interest rates for savers, the hunt for yield has led private investors to seek out new opportunities. Retail bonds have been a success story on the back of that, with numerous offerings from well known (and not so well known) corporate issuers. The LSE is now running an electronic trading book, allowing investors to buy and sell these retail bonds more readily. There are certainly some attractive yields on offer, but I have concerns that some investors might not realise that their capital is at risk in the event of an adverse corporate development. For example, Tesco issued a 5.2% 2018 bond in 2011, which had by May 2014 reached a price of £108, for a running yield of 4.8%. However, the recent travails at Tesco have seen the price drop to £102, leaving recent buyers nursing a capital loss. Of course initial investors at par will still be showing a profit, but that assumes that the credit risk at Tesco does not deteriorate any further. Another example would be Paragon Group, the mortgage company. Its fortunes have fluctuated with the UK housing market over the years, so life is good right now. But it hasn’t always been that way, with the most recent tough patch being through the sub-prime banking crisis. The 6.125% bond matures in 2022 and at £102 is a running yield of 6%. But it strikes me that backing the UK housing market through to 2022 is not a ‘gimme’ and there is an element of capital risk. So if you are prepared to monitor and trade these bonds, then that is fine, but a buy and hold strategy could leave you exposed to surprises. They are not deposit accounts. (8th October 2014)

 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  

Admiral Group - in a half Nelson?

Admiral Group: It is so tricky to judge whether this is a mis-understood money machine or a company facing burdensome structural challenges. As well as their core Admiral brand they operate several others including the comparison site ‘confused.com’. It has always been known that the group makes lots of money from ancilliary services and has, broadly, benefitted from the trend towards a claims and compensation culture. At the same time there are aspersions about just how likely you are on confused.com to end up being steered towards an Admiral Group product. Added to this, recent years has seen politicians starting to investigate whether the motor insurance industry is acting in consumers’ best interests and motor insurance rates have been under pressure. So Admiral’s eps seem to be plateauing just above 100p according to analyst forecasts (which probably have a decent margin of error). The dividend policy is to pay out 45% of post tax profits plus specials, having regard to reserve strength. At the moment this process is resulting in a near 100% payout ratio. The regular element is likely to prove cyclical given the nature of the industry with political and regulatory headwinds a further pressure. The special element is largely predicated on reserve releases, but they will in all probability come to an end at some point (maybe not that far away either). Then the dividend would look very exposed in respect of both elements. For now the shares at around 1285p with a 99.5p total dividend yield 7.7%. If you chose to put a line through the special dividend stream then the yield is a less alluring (and not necessarily rock solid) 3.5%-4%. So I do not see that Admiral fits the dividend growth mandate and would be wary of owning the stock. (7th October 2014)

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  

De La Rue - The Double Centenary hangover

De La Rue: Market conditions have been tough for the company for some time, which probably played a part in Tim Cobbold’s thinking over his decision to move to UBM earlier this year. Printing money has been fiercely competitive in recent years, featuring over-capacity and irrational pricing. At the same time newer profit streams such as e-passports have not grown as fast as expected. Ironically in the age of contactless payment cards the cash processing business has been a rare spot of calm....for now. All this has culminated in a profit warning and dividend cut. For the year to March 2015 eps are likely to be around 43p on revised numbers, meaning a modest PE of 11.6x at the sharply lower share price of 480p. The interim dividend was cut by just over 40% from 14.1p to 8.3p. Although the only commitment is to review the final dividend at the finals next year, a similar cut for the full year would mean a total dividend of 25p for a yield of 5.2%. If net debt ends up around £115m then net debt to EBITDA could be around 1.2x, which looks comfortable. As long as trading does not deteriorate further then the 5.2% yield looks sustainable, even if the climb back towards last year’s 42.3p is likely to be a long-ish trek. For dividend growth lovers, none of this looks exciting but there is one extra element that may sway thinking. In 2011 French rival Oberthur failed in a bid for De La Rue in the £9 - £10 a share range. The current travails may well have suitors dusting off their files. Not a strong enough reason to buy perhaps, but maybe just enough to make battered shareholders hang around a little bit longer. (6^th October 2014)

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  

J.Sainsbury - Not such sweet Nectar

J. Sainsbury: Perhaps Mike Coupe is unlucky in taking over from the successful Justin King at a time when the food retail industry is in turmoil. Or perhaps he is lucky, in that he take over at a time when the industry behemoth Tesco is face down in the dirt. Either way, he faces a rapidly changing market and the spectre of food deflation. In its own right, Sainsbury’s is well placed within the industry having fewer over-spaced stores, better non-food expansion potential (especially clothing), a good loyalty programme (using Nectar), established home delivery and a growing high street convenience presence. A nagging concern is whether they fall between two stools, lacking the M&S/Waitrose cache whilst clearly not being a discounter. Perhaps the jv to re-introduce discount fascia Netto to the UK acknowledges this portfolio vulnerability? For the half year like-for-like sales (ex-fuel) were down 2.1%, with a similar figure being guided for the second half. Alongside this, margins will be under pressure leading to profits being down year on year. Capex is of the order of £750m, roughly the size of forecast EBIT. Meanwhile, last year’s dividend of 17.3p cost around £330m and at 240p delivered a yield of 7.2%. That dividend was covered almost twice by historic earnings, but cover this year and next is likely to be nearer 1.3x. However, in the absence of a sharp recovery in industry profitability, the total cost of dividend and capex may prove tough for the Board to justify. An NAV near 300p and the 25.99% Qatar Investment Authority stake provide under-pinning, but as a comfort blanket that may prove a bit thin in chilly winds. The brave may feel that the lowly share price fully reflects the industry upheaval, but for those seeking income growth driven returns there doesn’t seem to be any rush. (3^rd October 2014)

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