Dividend Power

Tuesday, 17 February 2015

Wood Group (John) - Riders on the Storm

Wood Group (John): Oil service companies are not the in thing at the moment, with the oil price at such depressed levels. E&P companies are reining back capital expenditure and shelving projects left, right and centre. Wood Group’s experience is no different, but it does have a reputation as one of the premium players in its markets. In these, in-line, annual results to 31^st December 2014, revenue was up 7.8% to $7.6bn, underlying pre-tax profits up 10.9% at $414.5m and eps at 99.6c were little changed from 98.6c the year before. Good news for income growth investors was the confirmation of a 25% dividend hike to 27.5c (so nearly four times covered) and a declared intention to post double-digit percentage increases going forward. This ambition is supported by a balance sheet that, having bedded in several acquisitions, shows net debt of $295.7m, “around the lower end of our stated preferred range of 0.5x-1.5x net debt to EBITDA”.

Obviously the oil services industry is expecting 2015 to be bloody, but Wood Group claim “relative resilience”. At the moment they have 12 months visibility on the PSN Production Services order book, but the engineering businesses order book is at the lower end of a 6-9 month window. This could mean that the current industry slowdown will not fully impact Wood Group in the short term. However, this time lag does give them plenty of room to make any further required adjustments to their cost base. The rub is that forecasts for 2015 and 2016 are fluid. Let’s guess that they make 75c this year, at £:$1.54 that is 48.7p. At the current 683p (sharply up on the day) that is only 14x what may be trough earnings. Let’s make the heroic assumption that they get back to near 100c in 2016. That is 64.9p for a PE of only 10.5x. Even if it takes them until 2017, that recovery path has attractions. Meanwhile an intended minimum 10% annual dividend increase, takes you to at least 33.3c (21.6p) in 2016 for a useful, but not huge, yield of 3.2%. Cautious investors may well want to wait for further clarity on any further oil price recovery, but the share price move tells you that others are braver. (Neil Cumming^,17^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

Monday, 16 February 2015

DX - not frightened of Royal Mail, UPS, DHL, etc.

DX: One of quite a few small companies nibbling away at Royal Mail’s heels. The CEO Petar Cvetkovic cut was MD at City Link before it went mouldy, joining DX almost five years ago. Spotting that bog standard parcel delivery is a cut-throat business, DX specialises in time critical, high value and mission critical deliveries, mainly for the B2B market. Through DX Freight (acquired in 2012) it provides similar added value services in the freight market. Clearly, this is all a highly competitive space but so far DX has dodged most of the banana skins. Having floated in the big class of early 2014, the shares have struggled to gain traction. This is not too surprising in a parcels market where Amazon and Royal Mail are taking lumps out of each other despite being ‘friends’ and City Link finally took its last breath at Christmas.

In these interims to 31^st December 2014, the comparatives are all pro-forma from their private days. So, revenue is down a tickle at -1.7% as unprofitable business was shed, but this helped move EBITDA up 5.2% to £14.2m, with PTP down 1.8% at £10.7m and eps up 2.4% at 4.3p. A maiden interim dividend of 2p has been declared, which is guided to be one third of the annual total. The balance sheet is strong with net debt of only £12.1m, down from a post float £12.2m at the last year-end. The company points out that it is traditionally second half weighted.

Consensus eps looks like 11.3p, so at today’s 95p the PE is only 8.4x. A nearly twice-covered dividend of 6p is expected, using the company’s guidance, for a yield of 6.3%. At a market capitalisation of £190m, DX is a tiddler and it is swimming with some big fish. However, these numbers are very tempting for the more risk taking income growth investor, who would be in good company as the shareholder register is dominated by well known institutions. (Neil Cumming^,16^th February 2015)

Thursday, 12 February 2015

Rio Tinto - Rio Grande

Rio Tinto: It ain’t easy being a mining company at the moment. On the broad sweep they are wrestling with the hangover from grandiose expansion plans, often hatched in the last decade, that seem ill-suited to the current state of commodity prices. A big attraction of Rio is its major position in the copper market through its 30% share of the BHP Billiton operated Escondida mine in Chile. For copper the long-term prognosis is good, with rising consumption and an industry that will struggle to keep up with demand. Iron ore is also important and this market has been in a major slump of late with excess supply and falling prices. To their credit, Rio has today announced full year results to 31^st December 2014, which seem to be a general beat on City expectations. Whilst commodity prices have been weak, Rio has reduced costs, slashed capex, reduced debt and cranked the handle to return cash to shareholders. So net debt has come rattling down from $18.1bn to $12.5bn, against underlying earnings only down 9% at $9.3bn. Meanwhile capex has come down by about one third, to $8.2bn from $13.0bn.

The full year dividend has been raised 12% to 215c, as the board delivers on its ambition of a progressive dividend policy. At £:$1.53, this 140.5p is a 4.6% yield at 3070p. At the same time a $2bn share buyback has been announced, meaning that almost $6bn of cash is heading back to shareholders, which is a juicy 9.2% of the current total market cap of around £65bn. The guidance for 2015 is for more capex cuts (to $7bn) and a further $750m of cash cost savings. Earnings last year were down 9% at 503.4c (329p), being a PE of 9.3x and easily covering the dividend. There may be further eps slippage in 2015, but this seems a low PE for what may be near the bottom of the cycle. So there are fundamental attractions in this stock. In addition, last August, Glencore ran the slide rule over Rio with a view to a merger. This was rebuffed by Rio and has become less likely for now due to the falling value of Glencore paper. Still, there is nothing like a lurking predatory presence to keep the Rio board’s mind focussed on the job in hand and offer a further encouragement to investors. (Neil Cumming^,12^th February 2015)

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)

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)