...as I guess financial reporting is more efficient these days and lots of companies are getting their figures out before the holiday month of August. So many to go though and other things to do meant I didn't have time to write up any yesterday.
In passing I note that a few companies which feature in the Mechanical Compound Income Scores Portfolio have had updates recently. If that is of interest to you the names concerned have included Jupiter Fund Management (JUP), Renishaw (RSW), and ITV which all seemed fine. While Schroders (SDR) have reported today increased in flows of £8.8bn a 21% increase in their dividend.
Otherwise in recent days we have had some big yielding blue chips like Glaxo SmithKline (GSK) and Royal Dutch Shell (RDSA & RDSB) have had results updates and confirmed their plans to maintain their dividends and hence their current 6%+ yields. While expensive consumer stocks like Reckitt Benkiser (RB) and Diageo (DGE) have had mixed updates with Reckitt's raising guidance but cutting the dividend post their demerger of the pharmaceutical arm. While Diageo had a small miss on their earnings but raised their dividend by a better than forecast 9% reflecting their confidence in the outlook for 2016.
Finally in brief amongst many others too numerous to mention today we have had interim results from RPS Group (RPS) which I wrote up in the past and got into when it was sub 200p when the news flow on their oil & gas (O & G) operations was better than expected. However I traded this one out for a decent total return earlier this year when the O & G news unsurprisingly started to deteriorate.
In today's numbers the O & G division and effects of currency translation to a lesser extent have led to around a 7% fall in their earnings in H1, although they did increase the dividend by their "normal" 15%. Despite this they flag that the division, after some judicious cost cutting, has remained profitable with double digit margins. They also highlight the success of their diversification efforts via their "normal" add on acquisitions and suggest they have plans for more after completing a refinancing and extension to their debt facilities. Their net debt was actually slightly down by £0.5m over the period to £72.7m (gearing of around 20%) despite the spend on acquisitions in the period and reflects their strong cash flow, albeit bolstered by a big positive swing in working capital (debtors & creditors).
Looking at last years H1 / H2 split it looks to me, given the fall in the earnings today, that there could be a risk of perhaps 5% downgrades today, unless the acquisitions are expected to offset this in H2 perhaps? This could take earnings down to say 20p which together with the "normal" +15% dividend of about 9.75p would leave it at this mornings 215p (-2.3%) on a reasonable looking 10.75x with a 4.5% yield 2x covered. Thus it looks like it is worth holding / revisiting if you think they can continue to manage the decline in their O & G division and offset this with diversifying acquisitions as they have done recently.
On the chart if you were to do a school boy trend line from the February low that would come in around these levels. But if that fails to hold then the 180p to 200p range might be a good area of support for a purchase / repurchase where it would then be on around 10x with a 5% yield.
GlaxoSmithKline (GSK) - put out Q1 numbers yesterday lunchtime and set out prospects for newly shaped Group and expectations for improvements in performance for 2016-2020. I say a curates egg because the numbers themselves were a little lack lustre but they had some good and some bad news on the dividend front.
As regular, longer term readers may or may not recall, I have expressed some concerns about the sustainability of their dividend last year when it was still expected to be growing by 4 or 5%. These expectations got downgraded as we went through the year and eventually they ended up just maintaining the full year dividend at 80p after years of growth.
To recap I was concerned that the disposal of the cancer business and the proposed float of the HIV business plus the impending arrival of the new chairman might then prompt them to cut the dividend going forward given the limited cover and their not so strong balance sheet. This was evidenced by their comment in the statement on their decision to retain for now the HIV business as follows:
"Since the completion of the transaction and receipt of the first monthly results from the former Novartis businesses during April, the Group has reviewed in detail its integration plans and has developed a five year outlook for the Group, which includes an updated view of ViiV Healthcare. In doing so, GSK has also reviewed its capital allocation strategy. The Group's commitment to its current credit ratings has been a key consideration in this review."
They have however today in this update committed to maintaining the pay out at 80p for the next three years (2015-17).
Against this though they have cut their proposed return of capital from the disposal of the cancer business by 75% from £8bn to £2bn or about 20p rather than about 80p. Not a big deal I guess as this was just paying shareholders back with their own capital, but it seems they now want to hang onto more of it to facilitate the maintenance of the dividend by paying it out more slowly and less explicitly and also maintain their credit rating as highlighted above.
On this they said the following: "The Group wishes to ensure that it maintains the flexibility to deploy capital in response to certain events, which may or may not occur in the next five years, including the potential exercise of 'put' options by partners in ViiV Healthcare and Consumer Healthcare; and the possible introduction of a generic version of Advair in the US. The Group has also factored into its view the impact of a continued low interest rate environment on pensions, other employee related liabilities and potential company contributions."
So it seems they are also highlighting several other risks to their growth and finaces, so I would still be concerned about the sustainability of the dividend in the medium term, but hopefully they can come through this period and return to growth in the dividend at some point in the future.
Summary & Conclusion
On balance something of a relief for income investors that the dividend is being maintained, but hopes of a bumper special this year have been dashed and slashed by 75% as even that is not now coming until next year. The shares do not look especially cheap on around 17x with a flat yield of just over 5%. It is undoubtedly a high quality business, but given the outlook maybe the rating is a bit rich? So I'm not that surprised to see it off today, albeit in a weak market with a whiff of panic setting in maybe?
On the Compound Income Scores it is in the bottom quartile with its score of 25 being dragged down by poor dividend cover and finances plus a poor estimate revision trend. Thus it would not feature as part of a focussed income portfolio as there will be more attractive and growing dividends to be had. However, I can see the attraction as part of a more broadly based income portfolio given the reassurance on the dividend for now and the quality of the business.
We have had final results from the Lloyds of London Corporate capital vehicle Amlin (AML) today. This is a well managed group that says about itself that:
"The strength of our franchise, underwriting expertise and ability to adapt are powerful advantages as the market evolves. Amlin is well positioned to take advantage of the opportunities created by the pace of change in our markets, and has an excellent track record of cross-cycle underwriting discipline. We continue to believe that we can deliver attractive returns on equity."
Talking of ROE they delivered around 14% this year down from nearer 20% last year, reflecting the more competitive nature of the insurance market this year which they flag up in the statement. They expect this to continue in the year ahead and as a result they are cutting back in some areas where there is excess capital chasing premiums and reducing returns.
Consequently they have announced today a special dividend of 15 pence, as they do periodically in times like this, to keep their balance sheet efficient and to support their returns. This gives a yield of 2.9% based on the 513p share price this morning and is in addition to the full year dividend of 27p which was up by 3% for the year and which itself gives a yield of 5.3%.
Summary & Conclusion
They shares look fairly valued on around 1.6 to 1.7x tangible book value given their ROE and similar metrics that apply to Catlin (CGL) which is about to be taken over. The main attraction is the 5%+ yield from dividend which had grown by nearly 9% per annum over the last 5 years. However, this years dividend of 27p was some way short of the estimates that were in the market, although perhaps they included some expectation of a special? Taking this into account the compound growth rate over the last 6 years comes down to 8%, which is still quite good given the current yield. I guess given the outlook the rate may be a little slower in the current year but it should still be sufficient for the shares to offer a double digit potential return, which seems fair enough. So they would seem like a strong hold for income as part of a diversified income portfolio.
Meanwhile in brief GlaxoSmithKline (GSK) have confirmed that its three-part transaction with Novartis has completed today. As a result, following today's completion, GSK plans to use the transaction proceeds to fund the full amount of the previously announced capital return of £4 billion to shareholders. Subject to shareholder approval, the capital return is expected to be implemented through a B share scheme, which will provide capital treatment for all UK tax-resident shareholders. Further details on the capital return will be sent to shareholders in due course.
In light of the timing of closing the transaction, the Company intends to report its first quarter results for 2015 and hold an Investor Meeting on 6 May 2015, at which it will provide 2015 earnings guidance and profile the medium and long-term shape and opportunities for the enlarged Group.
So if you are a holder it will probably be worth putting that date in your diary. While the £4bn is around 5% of the market cap and could effectively double this years expected unchanged dividend from GSK it is just a return of capital so the value of your remaining holding will go down by the same amount.
Longer term readers will also know that I have concerns that this business restructuring and the New Chairman Sir Philip Hampton (who has been involved with dividend cuts and omissions throughout most of his career) increases the risk that GSK will use this as an opportunity to "re-base" the dividend (as nobody cuts these days) going forward after this year.
Within the Q3 announcement the Company confirmed and unchanged Q3 payment of 19 pence and that they expect the full year dividend for 2014 to be 80 pence which would be up by 3% year on year. This however compares to current consensus forecasts of 80.8 pence so a small downgrade to expectations there. More serious though was the fact that they also said that next years dividend for 2015 would be unchanged at the same level of 80 pence. This compares to consensus forecast of 82.8 pence so a more significant 3.4% reduction in expectations there then.
The one positive offset to this disappointing news is that they confirmed the likely special dividend of £4 billion next year once the proposed disposal is complete. I estimate this will be roughly equivalent to the full year dividend of 80 pence.
Thereafter, as I have written before, with the new Chairman arriving and the possibility of splitting the business I suspect there may be a risk that they could then use that as an opportunity to "re-base" the overall pay out.
...as a Non Executive Director from 1 January 2015. He will succeed Sir Christopher Gent as Non-Executive Chairman with effect from 1 September 2015, or at an earlier date if released from other commitments. So what you may be thinking, well just in case you missed it, I wrote about this back in the summer and what it might ultimately mean for GSK's dividend in the medium term.