We have seen a few companies down grading expectations recently with Pearson and Home Retail being a couple of notable examples earlier this week. Today, following on from my Monday detour down memory lane which featured UK vice stocks, we have had a Q3 trading update from the bookies William Hill (WMH).
This was a bit down beat as they suffered from strong comparatives in the previous year which included the football (soccer) world cup and a poorer gross win reflecting adverse sporting results for bookies this quarter. They also had the effects of the increased rates of UK gambling duty to contend with too. On the back of this they are suggesting that their full year operating profits will now be towards the bottom of a £291 to £312m range which suggests downgrades on average of around 3.5% to me. So the fall in the share price of nearly 6% this morning to 325p would seem to more than factor that in.
Looking at a two year chart this has taken the shares to the bottom of their range and I note a more recent gap on the chart around the 400p which often gets closed eventually and therefore could provide a medium term target if and the shares should recover at some point in the future. In the meantime the rating seems OK and they should start to be supported somewhat by the near 4% yield, but as ever you pay your money and take your choice or place your bets in this case?
Finally, if you were hoping to see Back to the future Part 3 here today - apologies it has been delayed in post production, but I hope to maybe get it out over the weekend or early next week so don't forget to check back here.
After yesterday's part 1 I bring you an immediate sequel, unlike films which obviously take a long time to make compared to bashing out a blog post. although that takes some time too. But it seems appropriate that I should do part 2 today as I mentioned yesterday, this is the day that they travelled to in the 2nd film including their take on what today might be like.
Any way for my part 2, I am also going to rely on a crazy sounding and looking professor, although the one I am using gives an amusing, entertaining, engaging and informative lecture. I am going to be using him to help you think about the past and how countries have developed and what the future might hold based on demographics. These are big trends which can have dramatic effects over time, but these effects are largely set given the people are in place and you just have to give it time to work through, although migration can offset these effects to a certain extent at the margin.
So without further ado I'll leave you in the capable hands of world-famous statistician Professor Hans Rosling who presented a spectacular portrait of our rapidly changing world. With seven billion people already on our planet, we often look to the future with dread, but Rosling's message is surprisingly upbeat. So I would highly recommend watching on the BBC I-player - This World - Don't Panic The Truth About Population. Despite sounding dull, this was, as I say, an amusing, entertaining, engaging and informative lecture using state-of-the-art 3D graphics and the timing of a stand-up comedian. It's was available for 27 days from the date of this post on the I-Player. So if you are reading this in the future or not able to access the I-player then please see this link for a free version from gapminder.org or simply click the graphic below. Meanwhile I'll be back (whoops that's another time traveller) with my Back to the future part three based on this at a future date, or maybe tomorrow, I do believe that's a song.
With another quiet day in the markets and after my trip down Memory Lane, today I thought I'd start a Back to the Future series. This of course was also a Film series which started back in and was originally set in 1985 and involved the star Michael J Fox travelling back in time to 1955. In addition in the sequel he travelled forward in time to 21st October 2015 which just happens to be tomorrows date. There is an amusing Wiki page dedicated to the series and this link explores the technology that the film makers guessed we might have by now. So we didn't get the Hover board or the auto drying jacket but we did get the video phone and I'm pretty sure that supermarket frozen Pizzas are a good attempt at dehydrated Pizzas!
So what's this got to do with investment I can tell you are thinking? Well I thought I would go back in time and reference some old data and then return to the current day to see what it might be able to tell us about the future. So with that in mind I would suggest you might want to revisit the resources page on the site and look up the Global Year Book 2015 which appears in the useful websites section or click the highlighted link to download a copy.
Following on from the UK Vice post this also has a section starting on page 17 titled Responsible Investing: Does it pay to be bad? This comes to a similar conclusion to me, but it might be interesting for you to read in more detail as activist investing can work too. Amongst other things the document then also goes onto look at returns from global assets classes over 115 years back to 1900. This is then repeated for the various countries around the world reaching the UK on page 57.
This shows that in the long run, the 115 years covered here, although that is clearly too long for most folk except perhaps for babies born to day or in the future with the advances in healthcare etc. Any way this shows that the long term real (after inflation) return on UK equities has been 5.3%. Meanwhile over a more realistic investor lifetime taking the 50 year period from 1965 to 2015 the real returns were 6.2% although I think this figure may be distorted slightly upwards by the lengthy bull markets in that period and a consequent boost from a re-rating of equities over the period. So I think the more normal range of real returns to expect would be more like 4 to 5% in normal circumstances unless you are starting from a particularly depressed valuation level.
The importance of the starting valuation and its effects on future returns is highlighted by the returns which have been earned since the year 2000 when valuations were at extremely high levels. This has led to real returns from UK equities being only 1% over the 14 years to the end of 2014 in what could be described as an on going secular bear market as the FTSE has still failed to convincingly break above the levels it traded at in 2000.
So with all the recent concerns about global growth and consequent market volatility, what might the future hold for returns from here? Well for this I'm going to reference a document which was mentioned in the press yesterday and featured in my twitter stream - the Capita Asset Services Dividend Monitor Q3 2015 which you can download here. This shows 5.9% growth in underlying dividends from UK companies this year and they expect these to reach £84.8 billion by the end of the year which would be up by 6.8%. This is a decent level of growth and is probably above the long term average of real growth in dividends with inflation running at perhaps 1% or less this year.
They do however flag that they expect to see this growth slow to just 3% nominal in 2016 as the effects of recent cuts from the likes Glencore and Standard Chartered feed through. This would put real growth into the 1 to 2% range which I think is more like the sort of rate that one would expect in the long run. Now in case you think I'm making that up take a look at the following graph from the Capita report:
Looking at the underlying dividends we can see that since the end of 2007 these have grown from around £61bn to the expected £85bn or so to the end of this year. Thus over the 8 years this represents growth of 39.3% which represents an annual growth rate of 4.23%, despite the fall in dividends in 2009/10 and as such represents a trend including both good and bad periods. UK CPI over the same period including this years expected 0.3% 2015 rate (Source: H M Treasury consensus forecasts October 2015) gives an average CPI of 2.6% per annum or 3.4% for RPI. Thus the real dividend growth using CPI has been 1.63% per annum since 2007 or 0.83% using RPI. Thus on the CPI measure of inflation this puts real growth in recent years in my suggested 1 to 2% range or slightly below using RPI. Taking an average of the two inflation rates would give a 3% rate of inflation and suggest that real dividends had grown by 1.23% per annum.
Summary & Conclusion on Future Return Expectations
So lets look to the future to see what we can see. In the Capita report they suggest that the forecast dividends for next year represent 3% growth in nominal terms and the average forecast for CPI for 2106 is 1.7% to give real growth of 1.3%.
They also suggest that the dividend next year will give a yield of 4.1% which as they say means equities have the best
yields of major asset classes.
Thinking long term this suggest to me that from these valuation levels we can look forward to real (after inflation) returns from UK Equities in line with or around the long term averages of 5 to 6%. This comes from the yield suggested by Capita of 4.1% for next year. So lets say for the sake of simplicity and to be slightly conservative 4% yield to which you can add assumed real dividend growth of 1 to 2% per annum which should give you total real returns in the region of 5% to 6%.
So there you go I think valuations seem fine on that basis at the moment and investing on these terms should be fine for the long term. However, obviously there are some concerns about dividends from some of the larger sectors like miners and oils and we have seen cuts in recent years from Banks and food retailers, but nevertheless dividends have continued to grow overall over the piece. Thus I wouldn't get unduly worried about more cuts although I accept that cover levels have come down a bit in recent years overall, which could crimp growth or make levels of dividend vulnerable in another downturn, but for now the economy seems to be doing fine and is forecast to grow at a similar rate next year.
As ever I guess time will tell in the short term and the long tern is but a series of short terms, but in the meantime relax, let your dividend roll in and enjoy this video about the things we were supposed to have by now according to the makers of Back to the future!
Not much news around today, but a good US blogger called Eddy Elfenbein, who I follow on twitter and at his website crossingwallstreet.com, reminded me this morning that it was 28 years ago today that we had the Black Monday of the 1987 crash. Now hopefully we won't have another Monday like that today, although we do have the dreaded US import of the Black Friday shopping event to get through soon I believe.
Talking of the 1987 crash and US imports its funny how your brain works when you start thinking and reminiscing down Memory Lane. That got me thinking for some reason about another US import from that time - a TV show called Miami Vice which you can check out in more detail here if you are not familiar with it and enjoy the opening credits below to liven up a dull Monday.
My mind then went off at another tangent and got onto vice and and thinking about vice stocks after most of the favourites won in the Rugby World Cup over the weekend, which is probably good for the bookies. As an aside I had thought that Ireland might beat the Pumas and that Scotland would get thrashed but it turned out to be the opposite with Scotland so unlucky to lose out in the end. So probably good for the bookies and checking them out it looks to me like William Hill (WMH) might be interesting down here on a technical basis looking at the chart below.
It trades on 13 to 14x with a yield of around 3.7% including a 4.1p interim worth 1.2% which goes xd this week. It scores OK with a CIS of 65 and a Stockopedia rank of 78 so not too bad as the bookies tend to win in the long run. So...
...talking of vice stocks I personally don't mind investing in those, although some prefer not to and there are ethical funds available which screen out those type of stocks - armaments, drink, gambling & tobacco. With that in mind how have a collection of UK Vice stocks done in recent years? Well to find out I pulled together a quick chart to see how William Hill, Greene King (GNK), BA Ssytems (BA.) and BAT Industries (BATS) have done against the FTSE All Share over the last five years. As you can see on the chart, which shows percentage change over that period, they have all out performed the index and would also have had higher yields to boost returns further, with William Hill winning by several lengths.
So there you go if you don't mind investing unethically or in vice as it were then it seem it could be profitable for you. While in another strange mind tangent having coined the phrase UK Vice above I did a quick search and found that apparently there is a site / Company along those lines called Vice which describes itself as specializing in exploring uncomfortable truths and going to places we don't belong. Herein you will find people talking frankly about their hatred and love for various things, general heresy, the only culture, travel and news documentaries you'll want to watch, tons of exclusive new stuff, and probably not a lot of cats. So not sure I would recommend it but check it out if you dare and it has an accompanying twitter feed @VICEUK - so you really do learn something everyday by taking a mind detour down memory lane and here's an appropriate old song for the topic today.
...as we have had a couple more updates from holdings in the portfolio. First up today we have had an Interim management statement for the 15 weeks to 11 October 2015 from Rank Group (RNK) which looks very good on the face of it. They have reported an 8% increase in like-for-like revenues for the period with total revenues increasing by 7%.
This seems to have been driven by 12% growth in total and LFL in the Grosvenor Casinos division. Mecca Bingo was ahead too but only by 1% total and 3% LFL. They say the growth in the Casinos division was driven by on line and London Casinos which augurs well for the roll out of their enhanced digital offering in Q1 2016. The growth in Mecca Bingo was apparently more balanced between venues and digital.
Steady as she goes here then as the full year revenue growth is forecast to be 8% and they seem broadly in line with that so far. Indeed on the outlook the Company said that the the Group's businesses continue to make progress in line with management's expectations and it remains confident in the Group's prospects for the year. Seems like a strong hold on a fullish looking 17x with a 2.4% yield and a CIS of 97 & a Stockopedia Rank of 96 - Bingo.
So it seems we are becoming a nation of gamblers as well as a nation of shop keepers, although personally I've never been in a Casino, apart from the Stock Market! Any way talking of shop keepers that brings me onto the other stock which reported today - the retailer W.H Smiths (SMWH). They reported full year results for the year to 31st August 2015. These are a bit of a conundrum because if you were starting out in business today you probably would not create it and it has been one of the most heavily shorted stocks in the UK market, although this is now at about 7% of the shares outstanding. Despite this as you can see from the chart at the end the shares continue to progress steadily.
As for the results these seem to be in line with forecasts with another 12 to 13% growth in the eps and dividends. This has again been driven by the travel business which saw 9% total revenue growth and 4% LFL. This helped to offset the on going decline in the high street stores which saw revenues decline by 4% in total and 3% LFL. They do however remain highly cash generative with £109m of free cash flow which has helped to fund the 13% increase in the dividend and another £50m share buy back programme. The high street stores also edge profits up on the back of more cost cutting.
So overall it seems like more of the same with shrinking high street stores delivering profits and cash flow on the back of on going cost cutting which helps to fund expansion in the travel business which benefits more from its captive audiences.
One has to wonder how much longer the cost cutting can go on and with recent publicity about retailers keeping VAT at airports and over charging at hospitals whether there could be regulatory intervention at some point on the travel side? Aside from that they shares also look fullish value on around 16.6x with a 2.8% yield for the year to August 2016. Despite this they still score well with a CIS of 98 and a Stockopedia Rank of 91, so on that basis they are likely to remain in the portfolio.
Finally in the portfolio I note that Maintel (MAI) has achieved the 800p level that I hoped they might achieve (where they now look over bought) when I reviewed their results.