As I'm sure you have heard and read already apart from the terrible atrocity in Tunisia, the other major news at the moment is the on going threat of Greek default and a potential exit from the Euro. This seems to have come a step closer as the talks broke down and now Greek banks have been closed and currency controls imposed.
There is still an outside chance that the EU might get its way via regime change if the Greek people vote for the deal which might then leave the current Greek government in a difficult position. So certainly a week will feel like a long time in Greek politics this week. In terms of what does this all mean - I saw a good article in Money Week recently which looked at an Anatomy of a Grexit: What would happen if Greece left the euro? Interestingly in the table about half way down the article which looked at the timetable for a Greek exit from the Euro the first stage was closure of the banks, although I note they are still allowing partial withdrawals.
So time will tell if this is the beginning of the end for Greece in the Euro or if there will still be some last minute fudge. Regardless of that it has still caused a wobble in the markets as the reality of a potential exit finally dawns. At the time of writing the FTSE for example is off around 1.5% to 6650 and the Eurostoxx 50 is off over 3%. In terms of FTSE and the chart below, it looks like it is just about hanging onto support in the low 6600's which it bounced from earlier this month.
However if that gives way it looks like it the 6200 to 6400 area might be the next most obvious area of support may be.
In the short term this will obviously continue to unsettle markets until it is resolved one way or another. It remains to be seen if it might be a sea change event which has knock on effects and contagion around the rest of the EU periphery and whether this brings the 6 year old bull market in equities to an end. Failing that, longer term it might actually be good to have finally got it out of the way and it might then actually help Greece and the Eurozone to move onto a stronger footing. Time will tell if we have seen the top or if the current shake out represents a healthy correction and a good buying opportunity but not a time for being a hero right now I suspect.
..and the end of another dull week in the markets which have been dominated by the on going will they won't they Grexit debate which will now stretch on over the weekend. So apart from Tesco's update today (which will no doubt be extensively reported elsewhere) and Stanley Gibbons (SGI) unexpectedly cutting their final and full year dividend in their results today, there is not a lot to write about.
However, as I always try and being you value and hopefully things of interest I thought I would share a few things I have been reading and watching this week. So on the investment front I read a couple of what I thought were interesting things about identifying yield stocks, although that may just be confirmation bias as they seem to reinforce what I do with my Scores.
The first one was by Jack Vogel who works with Wesley Grey the co author of Quantitative Value and was posted on their useful Alpha Architect site. This looked at taking the top 20% yield stocks from a large cap universe ($1.8bn+) in the US from 1964. They then split this into two portfolio based on the value metric EBIT/EV to form a high value and low value equally weighted portfolio. This appeals to me as these are the two metrics I use in the value score for the Compound Income Scores.
These two portfolio were then equally weighted and compared to an equally weighted portfolio of the yield stocks and the whole universe they were selecting from. The results can be seen in the table below which is from the original article and their conclusions were:
In this article Jack also referenced another article which their post was a response to. This was another article from -
- Research Associates called The Market for “Lemons”:A Lesson for Dividend Investors. In this they looked at identifying Quality high yield stocks and improving returns by screening for profitability (ROA) and distress for which they use debt coverage ratio. Again this appeals to me as these are also things that I include in the Compound Income Scores.
They also looked at accounting red flags for which they use increase in Net operating assets (NOA) and accruals and they found that both higher levels of accruals and NOA suggest lower future equity returns regardless of causation. This is something I would perhaps like to include in the CIS but I have not found an easy way to do it - so spotting that type of thing remains part of the due diligence process & gut feel when researching stocks flagged by the Scores.
They then took the top 200 yield stocks from their universe and tested these added screens and found that they all added value over the 1000 Large cap universe and the higher quality 100 yield stocks outperformed the 100 lower quality yield stocks. They also found that by combining all these measures together into a Composite gave higher average total return, lower volatility and higher subsequent 5 year dividend growth. If you want to read the Research Affiliates document which is authored by Chris Brightman, CFA, Vitali Kalesnik, Ph.D., and Engin Kose, Ph.D. then see the link above.
So quite a compelling case for backing quality and secure stocks based on profitability and balance sheet measures which is part of what I do in the Compound Income Scores. Of course I also look at dividend cover, growth and estimate revisions for a more complete picture, but of course sometimes simpler may be better, but I find it works for me and hopefully some of my subscribers.
Any way that's all on the investment front for now. Otherwise TFI it's Friday as they say or it's FF Friday as I said in the title because it is Glastonbury this weekend which was supposed to feature the Foo Fighters (FF) - that's a band and not a stock in case you are not into music!
If like me you were disappointed that they will not now be headlining because Dave Grohl broke his leg then don't despair - I have a treat for you. See the video below for a great set they did in Germany recently before he broke his leg, but be warned it does include some swearing from Mr Grohl and also quite a few tweets, many of which are in German and therefore may also be rude for all I know as mein Deutch ist nicht das gut! Auf wiedersehen, have a great weekend - I've got to rock on - see you next week.
..as we have news of yet another round of talks scheduled in the Greek debt crisis as the latest proposals could not be signed off. I guess this one may run down to the wire again before an agreement, perhaps. However, even if they do reach an agreement more repayments and similar problems will no doubt be along again before too long unless we finally have a Grexit this time around.
Meanwhile in a busier day for announcements in the UK stock markets we have had in line final results from Photo-Me (PHTM) which I wrote up recently. They increased the dividend by 30% as promised and this was despite currency headwinds from the strength of Sterling against the Euro and the Yen. The underlying strength of the cash generation from the business helped to fund the dividend and capital expenditure together which totalled £40 million.
Despite these outflows they still ended the year with net cash only down slightly at £60.7m versus £63.1m last year. On the back of this they outlined a new dividend policy for the next three years where they say they intend to increase the dividend by 10% per annum and any net cash on the balance sheet at 30 April 2016 (and the following two years) in excess of £50m will be available to shareholders as a special dividend in line with the new policy.
This is driven by the continued investment in rolling out Photo booths in new territories and continued investment in their Revolution Laundry product. On these, in addition to their plans for having 2000 of these by the end of this year they say they hope to have 6,000 units in operation in Europe by 2020 and that they are also looking for opportunities in Asia and the USA. They also say they are still trialling a car wash concept, which would have some overlap in terms of location as the stand-alone Revolution laundry units and use the same network of engineers. Results from those first units are encouraging and they will report further on its plans for this concept in 2016, based on progressively scaled-up trials. If these are successful I assume this would impact on their cash requirements as they are higher cost than the laundry units, which would then reduce the likelihood of special dividends but could boost medium term growth.
On the outlook they say "...the Group's Treasury function keeps FX under continual review, although the continued strengthening of sterling against the euro and the yen, which may have an adverse effect in the coming year, remains a challenge. Importantly, however, the operational performance of the business remains very good. Subject to the risks and uncertainties detailed in the Strategic Report, the Board anticipates another year of strong underlying progress."
Summary & Conclusion
In line numbers and a suggested dividend increase of 10% may disappoint the market as forecasts seemed to suggest a further near 30% increase in the dividend for the coming year to 6.3p. Using the 10% forecast this would suggest around 5.4p which would put it on around a 4% yield which may though provide some support. However, of course it is possible that if the cash remains around current level and they decide not to roll out the Car washes, then there could be a circa £10m special dividend next year, which would equate to about 2.6p per share which would then exceed the current forecast. So a bit of a curates egg as you might get a lower pay out if they have found another profitable avenue for investment, or a higher pay out if they don't.
Otherwise the PE looks quite full at around 17.8x, but if you adjust for the cash then it looks fairer at around 16x. So overall another set of good numbers from this one and a further roll out of photo booths and the new laundry product and potentially car washes to drive future growth, but I'm not sure there is enough in all of this to push the shares dramatically higher in the short term, but they could be interesting in the medium term if they can deliver on their plan, so definitely one to watch given the financial metrics on this one.
First a quick update on Kingston Communications (KCOM) which I highlighted back in January this year as offering value and at that time I suggested that they could perhaps return to around 100p from the 80p level they were trading at around the time. I updated on this after the final results earlier this month when they reported a further 10% dividend increase and I concluded that there didn't seem to be enough in these numbers to me to justify it breaking our from its range at this time.
I note that in the last week it has hit my 100p target, although it has just nosed above that briefly in the past. I note also that forecasts for the dividend to March 2017 are now out and these show the slow down I expected to around 2% or so. The yield of around 6% should still support them up here, but I'm not sure they will re-rate much more for now. Thus with the shares due to go XD the final dividend of 3.58p this Thursday, I suspect this may help to maintain the resistance at the 100p level for now.
So if you are not bothered about income, now might be a good point to lock in a decent 25% or so capital gain in the space of 6 months against a market that has been flat. Otherwise it seems like a solid hold for the 6% yield, but I wouldn't expect much more from it in capital terms for now though.
The second 6% or so yield stock today is one I mentioned briefly back in early November 2014 as a way of playing a recovery in the Japanese market by investing in a fund manager that was big in Japan. While the idea was a reasonable one as the Japanese market has gone up by around 20% since then, sadly Polar Capital (POLR) the suggested stock has lagged this. In my defence though at least the Sterling Hedged I-Shares MSCI Japan GBP Hedged UCITS ETF I also suggested as a purer way of playing it has outperformed.
Polars under performance was due to the fact that their Japanese fund suffered a poor performance run and saw large outflows and consequently in today's results they suffered their first outflow of funds since the financial crisis. Despite this they did maintain the level of the full year dividend payment as they are confident about their business going forward having added a few new teams and product areas to diversify the business. They look OK value on around 16x with a near 6% forecast yield for the current year, but their larger more established competitors like Jupiter and Aberdeen look more attractive on the Compound Income Scores right now.
Thus again it is probably one that is supported by the yield, but will need the underlying business to improve to move it on in price terms. They seem optimistic on this front and the Chairman's outlook statement in today's results is worth reading as it includes sensible comments such as:
"Markets are by no means cheap and are susceptible to a meaningful correction if central banks cannot manage to deflate at a measured rate the various bond market bubbles they have created in Western economies. Overall debt levels remain uncomfortably high in too many countries although there has been notable progress in some such as the US."
In conclusion, probably not one to chase after the recent share price move and on the back of these slightly disappointing results. However, if you are sanguine on markets medium term and Polars ability to continue outperforming and attracting assets then this could be one to consider on weakness as they seem to be finding good support between 360p and 400p.
Finally, if Greece manage to pull off another great escape (for now) from default then I guess markets could have a relief rally too in the short term.
Last week I was bemoaning the lack of news and quite frankly this week wasn't much better. However, there has been the never ending story of the inevitable (?) Greek default which is no doubt is a woeful situation for all the Greek citizens to endure. They do seem to be a bit confused though as they seem to be protesting about the austerity and cuts demanded by the Europeans but at the same time they want to stay in the Euro.
Any way it seems that the rest of the world is not too worried and as the FT says: "Despite the acrimony between Athens and its international creditors, many investors still believe a deal will be struck — because both sides have too much to lose. In 2012, many lost money underestimating historical and geopolitical forces binding the eurozone. Such optimism is particularly strong among US investors, according to one European banker. “They see Greece and they don’t see Greece — they expect something mysterious will sort it out."
This sentiment was apparent in the US this week as stocks, including those on Nasdaq hit record highs this week as the Fed was seen as reassuring about the likely pace of rate rises when and if they start and Fitbit the latest tech stock which offers wearable technology went to a 50% premium on its debut. I guess you could read this two ways wither it shows the US market is still bullish and leading the way or it is getting overheated as tech IPOs go to crazy premiums much like 1999.
So endeth the week with no resolution to the Greek tragedy and another meeting with EU leaders scheduled for Monday. I guess they are hoping to bang some heads together over the weekend and come up with another fudge to keep the Euro on the rails and pretend that Greece can keep making its payments on its debts even though it clearly cannot afford to do so.
As for next week I note we have results on Thursday 25th from Photo-Me (PHTM) which features in the Compound Income Scores Portfolio and which I wrote up recently here. I note that the shares have continued to languish around the 140p level and the results could prompt a move either way depending on how they are received, but if they are well received then I maybe they could test the 150p resistance level perhaps?