Dividend Power

Wednesday, 22 July 2015

Liontrust - plenty of growth left, but taking a breather

Liontrust (LIO.L): On the face of it, this trading update, for the first quarter to 30^th June 2015, is a bit underwhelming. Assets under management fell slightly by £36m from £4,494m to £4,458m, with net outflows calculated as £7m. The net outflow broke down into -£29m from Institutional, but +£22m elsewhere, implying a slight margin mix benefit. The balance of the AuM drop was market moves and investment performance with Institutional down £16m and -£13m elsewhere. The group points out that retail fund performance continues to be very good over the long term, with six out of eight funds in the first quartile since their current manager was appointed. However, over one year three funds are fourth quartile and only one is in the top quartile (Macro UK Growth Fund). The new Global Strategic Equity Fund has just launched, but there is no news on its progress.

Looking ahead, Liontrust seems well placed to exploit the growing UK market in savings products, as government policy and demographics both push savers towards more involvement in long term financial planning. Including performance fees (of maybe 2p per share?), eps consensus for FY2016 is at 24.5p, which at today’s slightly grumpy 330p, is a PE of 13.5x. The dividend expectation of 9.4p equates to a prospective yield of 2.8%. Double digit plus eps growth can be achieved over the next few years and with a growing cash pile and healthy dividend cover, of well over 2x, further dividend growth should be impressive. Last November I was keen on the shares, when they were a snip at 215p. After such a good run, it feels to me that they might pause for breath, but I would stay invested. (Neil Cumming^,22^nd 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, 21 July 2015

PZ Cussons - St. Tropez meets Lagos

PZ Cussons (PZC.L): When I last wrote on PZ Cussons, in December 2014, there was great uncertainty over the impending Presidential elections in Nigeria. In the event, not only did the elections pass relatively smoothly, but they also resulted in the first democratic transfer of power in Nigeria’s history. There are still many challenges to overcome, (e.g. insurgency, corruption, inflation, weak currency, low oil price), but these are pretty much routine for PZ by now. In these annual results, to 31^st May 2015, PZ reported revenues down 4.9%, but up 0.7% in constant currency with strong sterling, weak Nigerian Naira and weakening Australian dollar all involved. Pre-tax profits showed a similar pattern with a modest 1.9% drop at constant currency, but a 5.4% headline drop. Eps were 17.94p, barely changed from last year’s 17.96p. On the back on this the dividend was raised 3.1%, to a 2.2x covered 8p. This was a remarkable 42^nd consecutive year of dividend increase. Net debt jumped from £29.4m to £157.4m reflecting acquisitions (five:am, Nutricima jv buyout and PZ Nigeria stake increase from 70.55% to 72.8%) and higher working capital requirements in Nigeria. The latter increase being mainly a hedge against further currency devaluation after last year’s 25% drop. Despite the cash outflow, net debt was still only 1.2x EBITDA though.

Nigeria is a tough place to operate, but the long-term prospects are good providing the civil institutions can strengthen and flourish. The other African operations in Ghana and Kenya are smaller, but the opportunity is there is build out a more meaningful African spread of businesses over time. In this year African revenues grew 7.5% and operating profits by 5.3% (both constant currency). Both Australia and Indonesia showed good growth in constant currencies with the Asia division showing revenue growth of 14.0% although operating profit fell 6.7% due to competition in Australian homecare. In Europe revenues fell 14.2% in constant currencies (partly reflecting portfolio rationalization in Poland), but operating profits grew by 2.2%.

Looking ahead, currency weakness will be a feature in FY2016, with Nigeria also facing imported inflation. Consensus forecasts are for a return to modest growth with eps of 18.6p, being a PE of 19.1x at 355p. Clearly the long record of dividend increases is a source of pride to PZ and dividend growth of 4% to 8.32p looks affordable in FY2016, resulting in a prospective yield of 2.3%. This doesn’t look overly cheap to me and the shares will react to sentiment (good and bad) on Nigeria and emerging markets in general. I wouldn’t buy today, but if you want regular dividend growth then it is hard to argue with 42 years and counting of increases. (Neil Cumming^,21^st July 2015)

Thursday, 16 July 2015

Dairy Crest - still not convinced

Dairy Crest Group (DCG.L): This is a stock that I have got consistently wrong, being bearish as the price has climbed steadily to today’s 567p, since the lows below 400p of last summer. The big positive news has been the proposed disposal of the troubled dairies division to Muller. This was referred to European regulators, but to the relief of Muller and Dairy Crest was sent back to the UK’s CMA in March 2015. The haggling with the CMA is now well underway, with an announcement due on 21^st August as to whether remedies have been agreed. This would then enable completion of the deal this year. Otherwise the CMA will only report in December meaning that the affair will rumble on into 2016.

In today’s trading update to 30^th June 2015, the year’s outlook is confirmed as unchanged. Cathedral City cheese continues to perform well, although sales progress was offset by slippage at Clover and Country Life, reflecting the runny state of the butter and spreads market. Cash generation is described as good, with weak milk prices releasing cash from working capital. Net debt should peak around the half-year mark (30^th September) as stock builds and capex continues. So that leaves FY2016 consensus eps of 38.8p looking solid, being a PE of 14.6x. A tickly little dividend advance from 21.7p to say 22p gives a yield of 3.9%. Further out FY2017 should see profits from the new infant formula milk ingredients project kick in, provided product testing and commissioning goes smoothly. I still fret that these valuations are getting ahead of themselves for a stock operating in such competitive markets. Any pushback from the CMA or on formula milk would be a stumble as would any increased price skirmishes in their cheese and spreads division. So I would still fight shy of getting involved with the stock, despite having been wrong so far. (Neil Cumming^,16^th July 2015)

DX Group - dividend delivery is on route

DX Group (DX..L): Well, the very brief trading update for the year ended 30^th June 2015 would easily fit on a postcard. It is seemingly a case of no (or little) news being good news, although the appointment of Numis as broker is a new positive. Since I wrote favourably on it at the interims in February, when the share price was 95p, the stock has been a bit of a puzzle to me. The group’s management, led by Petar Cvetkovic, has grasped that it needs to specialize and add value in order to thrive. At the margin it will have been helpful to see City Link go under at Christmas (after which DX cherry picked some assets) and see Whistl hit turbulent waters in the wake of withdrawing from door to door letter delivery. The overall delivery market remains very competitive and at the bottom end there are few barriers to entry. In addition the big competitor is Royal Mail, who are getting their act together post privatisation. How aggressive Royal Mail is, will depend on how earnest the regulator is in policing it.

But for now, DX has confirmed that second half trading has been ‘satisfactory’, with cash generation ‘remaining strong’, which would appear to underpin their dividend prospects. Back at the Interims consensus eps forecasts for the year now ended were 11.3p, but that seems to have slipped to become the FY2016 forecast. With the new FY2015 consensus at 10.6p, the share price of 86p gives a PE of 8.1x dropping to 7.6x. The interim dividend of 2p was stated to be a third of the anticipated annual total, giving a yield for FY2015 of nigh on 7.0%, with scope for a modest increase in FY2016. There are many risks in their market, but the current valuation just seems plain mean. (Neil Cumming^,16^th July 2015)

Monday, 13 July 2015

Ashmore - a victim of fashion

Ashmore (ASHM.L): These are difficult days to be an emerging markets asset manager, especially if you are a specialist in debt fund products. So, a trading update from Ashmore is a nervy moment just now, but the fourth quarter update to 30^th June, released last week wasn’t too bad. Assets under management, at $58.9bn, were down but only by 3.6%. Of this $2.2bn drop, outflows of $3.0bn were partly offset by positive investment performance of $0.8bn. Management added colour to this, commenting that about half the outflows were in lower margin product areas, including Blended Debt. It is still reasonable to expect further group margin erosion over time though, as Ashmore grows and matures and competitive pressures squeeze their pricing power. Of the three biggest themes, Blended Debt fell by 9.8% to $15.7bn in this quarter, but Local Currency edged up 0.7% to $15.2bn whilst External Debt eased back 1.6% to $12.0bn. In general investment performance was good, with Blended Debt and Corporate Debt leading the way, whilst Local Currency lagged.

On the wider stage, investors’ attention is still trained on the wait for the US Fed to start raising interest rates. In the mean time carry trades and emerging market investing are being pushed down shopping lists. The problem is that every time we seem to be getting near to the big day, the Fed prevaricates. It might be concerns over the durability of the US recovery, or concerns over upheavals in financial markets if the Eurozone implodes in a Grecian crisis. Now you can add the weird goings on in China’s equity markets to the list of perils. So, Ashmore may be in structurally attractive asset classes, but will have to exhibit patience waiting for the finger of fashion to point their way once more.

Unsurprisingly the shares have been weak of late and at 286p are well down on the 350p sort of price that prevailed a year ago. Consensus forecasts are coming down, but at an already depressed 20p for FY2106, the PE is 14.3x. Helped by a strong balance sheet, a modest dividend rise to 16.8p is possible, producing a juicy yield of 5.9% to keep you warm. I would only add the caveat here, that the CEO Mark Coombs owns some 40% of the equity and last week’s Budget changes to dividend-related personal taxation may just change his preferred route of extracting remuneration from Ashmore. So, who knows when Ashmore’s markets will come back into favour, but at current valuations and with a good yield they are well worth a look. The shares tempted me at 317p back in April and that temptation is that bit stronger today. (Neil Cumming^,13^th July 2015)