Legal & General (LGEN) announced their final results today (click image above for full details at their investor relations) which seemed to be broadly in line with forecasts. I say broadly in line as the earnings looked slightly light, but that is not so important with this one as it is mostly about the dividend. On that front the 19% increase to 13.4p was in line with forecasts and marks the last year of bumper dividend growth as they finish running the dividend cover down to a lowish 1.4x for a 5.8% yield.
Going forward they talk about pursuing a progressive policy which presumably means more in line with earnings growth assuming they manage to deliver growth. Their future growth rest on five spokes to their umbrella as it were which they highlight as being ageing populations (pensions, annuities and equity release), globalisation of asset markets (L&G is 15th largest in world with 1% market share), creating real assets (infrastructure and housing), welfare reform (DC Pensions) and digital (servicing and cost reduction).
Current forecasts seem to indicate an expectations for 6 to 7% growth in both the earnings and dividends. Based on this mornings share prices which seems underwhelmed by these results and is therefore down by 5% to 232p leaves them on a yield of 6.1% for the coming year, assuming those forecasts are not downgraded. It doesn't look like that will be the case to me as they said for 2016 that they expect to deliver a further increase in operational cash generation of 6-7% across the areas that they provide guidance for: LGR, LGA, LGC, Savings and Insurance excluding General Insurance. I also read a report that UBS are suggesting that they now see 6% dividend growth between 2016 and 2019.
Summary & Conclusion
An in line set of results from L&G with the last in a line of bumper dividend increases as they finish running down their dividend cover. Given the outlook for continued 6 to 7% growth, the fall in the share price this morning leaves them looking attractive on a 6%+ yield which should in the absence of a de-rating provide potential for a double digit total return in the next twelve months which seems like a reasonable return for the risk here.
The contrary view and the scope for a de-rating would rest on a rout in bond and equity markets which they and their businesses are exposed to (as evidenced by the collapse in the share price this year shown in the chart below). The fall in share price this morning seems to tie into this as apparently according to some reports I have seen suggests that some analysts are flagging that their capital position is somewhat weaker than other UK competitors, although they describe their model as capital light.
As ever you pay your money and take your choice, but I am happy to choose this one as part of a broadly diversified income portfolio. If you agree with the sentiment it might be worth putting on your watch list in case we do get another bout of market weakness before they go XD the final (9.95p / 4.3%) on 28th April 2016.
A quick update for you today as there has been a bit more news around in the last couple of days since my note on Clarkson. Yesterday we had updates from Imperial Tobacco (IMT) who put out a 9 Month Interim Management Statement confirming they were trading in line with expectations and continued to be on track to deliver their 10% dividend growth target for the year. This will put it on a yield of around 4.75% for this year and it continues to look like an attractive income stock as it scores 90 on the Compound Income Scores (CIS).
Meanwhile in Insurance we also had interim results yesterday from Admiral (ADM) which edged up its chunky dividend by 3% as UK car insurance profits increased and overseas start up losses reduced. Their comparison business did however see a decline into loss put down to lower profits from confused.com in the UK and increased investment in overseas sites. This ones offers an excellent 6% yield thanks to their shareholder friendly approach of paying speical dividends to return surplus capital not required by regulations or to fund the growth of the business. Consequently it does not look so good on traditional dividend cover and balance sheet metrics and therefore only scores 52 on the CIS but nevertheless I think it is a good operator in this area.
Today we have had a couple of updates from stocks which feature in the Compound Income Scores Portfolio. Firstly WH Smiths (SMWH) had a pre close trading update in which they said that they expect their full year results to be slightly ahead of the consensus of analysts' expectations, which is nice. This one continues to confound expectations as they manage the decline of the high street business and the travel side continues to go from strength to strength and continues to expand.
Finally Rank Group (RNK) had some final results today which look very strong as UK punters appetite for gambling seems to be showing no signs of diminishing. Thus they beat forecasts across the board with turnover +4% to £738.3m v £731.7m, earnings +18% to 14.6p v 14.3p and the all important dividend +24% to 5.6p v 5.25p for a 6.66% beat although it was achieved via a reduction in cover from 2.8x to 2.6x which is still fine.
They saw growth in both the casino and bingo venues as well as on line despite the the introduction of Remote Gaming Duty from 1 December 2014, so a good result all round. They also flagged strong cash flow which allowed them to pay down debt too. On the outlook the suggest these strong trends have continued into this year and that they expect to launch a new online platform early next year.
The shares, before any upgrades post these numbers currently stand on a fullish looking 17x with a 2.5% yield for the current year to June 2016 and they still score well on the CIS with a score of 91. So I wouldn't put you off as the business seems to be trading well and the shares have momentum (see chart below), but I'm kicking myself for not buying them personally when I looked at them under 200p. So I'm reluctant to chase them up here (anchoring in action ?) but given the score the CIS portfolio will continue to run them, place your bets.
..no not the political based comedy featuring Dr Who but the results season that is as there seems to be a flood of results today. So I don't have much time for a big write up but the highlight for me was the Full year results from Legal General (LGEN).
This is one I have written on several times in the last year and in particular about a year ago when it had fallen on the back of the Chancellors surprise shake up of Pensions. At that time with the shares having fallen to around 200 pence I suggested they looked like a good stock to buy for yield as an alternative to an annuity.
As you can see from the chart this has worked quite well since then with the shares up by around 30% and the full year dividend just announced coming in at 11.25 pence versus the 10.7 pence which was being forecasted a year ago and up by 21% on the year. So what has driven this good outcome? The highlights from the results were:
· ANNUITY ASSETS UP 28% TO £44.2BN (2013: £34.4BN)
· LGIM TOTAL ASSETS UP 16% TO £708.5BN (2013: £611.6BN)
· UK PROTECTION PREMIUM UP 6% TO £1,407M (2013: £1,326M)
· SAVINGS ASSETS UP 10% TO £124.2BN (2013: £113.4BN)
· DIRECT INVESTMENTS UP TO £5.7BN (2013: £2.9BN)
They talk about five macro trends driving their strategy - ageing populations, globalisation of asset markets, welfare reform, digital connectivity and bank retrenchment which create long term growth opportunities for them. So essentially they are tapping into providing pension and asset management solutions for companies and individuals plus providing alternative finance where banks have been reluctant or unwilling to lend. They also say they will pursue these trends organically ans with add on acquisitions if appropriate.
Summary & Conclusion.
This is all helping to drive growth in the business and the dividend although in the short term the dividend is being boosted by them reducing the net cash coverage of dividend towards 1.5 times in 2015. This leads to forecasts of around a further 15% dividend growth for the current year. This leaves the shares on a yield of around 4.7% for the coming year at this mornings price of 273 pence. Which seems pretty attractive given the growth, although clearly once their desired cover level is achieved presumably the growth will slow thereafter so I wouldn't get carried away with projecting the current growth rates into the future.
Nevertheless as they say "Legal & General delivers economically and socially useful products. Our market leading growth businesses coupled with continuous cost reductions have given us scale and efficiency in our chosen markets. The five global macro trends driving our strategy - ageing populations, globalisation of asset markets, welfare reform, digital connectivity and bank retrenchment - create long term growth opportunities, which we position our businesses to capture. The rapid growth of LGIM's international business to over £100bn, the £5bn of investment in physical assets in the UK, and our entrance into the lifetime mortgage market are all examples of the successful execution of our strategy."
Thus I would say it seems well placed to continue to deliver in the future and as such they look like a strong hold for income and some growth, although I wouldn't expect the growth to continue at the rate it has in recent years. In addition the shares were looking over bought prior to today's news and with more pension announcements due soon so it may be worth being patient as there may be better days to buy them if you wanted to.
First up we have had results today from Primary Health Properties (PHP) which I wrote up briefly back in March. Not much has changed here since then as they continue to churn out slightly higher dividends which have grown by around 3.5% on average over the last few years and 2.6% in these figures. They achieve this off the back of a portfolio of health related properties in the UK leased principally to GPs, NHS organisations and other associated healthcare users.
The current 12 months of dividends including today's 9.75 pence interim comes in at 19.5 pence and offers a yield of 5.7% based on last nights closing price of 345 pence. Other points to note are that EPRA net asset value per share increased by 2.7% to 308 pence (31 December 2013: 300 pence) so the shares stand at a premium. It is also worth noting that the dividend is only covered 76% by earnings in these numbers but this was up from 52% last year, but they are aiming to get this to be fully covered. Also worth noting that net debt is quite high at £624.5 million which equates to a loan to value of (LTV) of 63.6%, although around 25% of this is now unsecured after debt refinancing recently.
So overall a decent growing yield from a property portfolio serving health related / government back tenants, albneit not especially cheap against its assets and with quite high levels of debt.
Next up is another stock I mentioned recently - The Renewable Infrastructure Group (TRIG) which has a portfolio of operational wind and solar assets diversified across weather systems, regulatory regimes and power markets. They recently had a C share issue to raise and invest in more assets and the shares have therefore drifted back to 103 pence as a result. With this years suggested full year dividend of 6.08 pence (Source: Company RNS today) they are yielding 5.9% and this would be expected to grow roughly in line with inflation going forward - which is nice. The NAV was 102.3 pence at the June 2014 reporting date so not too much of a premium right now. Not much else to say on this one but you can check out the results if you want to read more about it.
Finally going up the risk and complexity scale we had interim results from Phoenix Group (PHNX) which describes itself as the UK's largest specialist closed life fund consolidator. It is quite a complicated one to get to grips with but overall it is quite a simple business as they are mostly just running off and generating cash from closed life assurance books of business. It has been quite highly geared but this has now reduced to 35% pro-forma with about £1.5 billion of shareholder debt on the balance sheet and about £1.8 billion in total. They say they on track to generate £500 to £550 million of cash this year and £2.8 billion between 2014 and 2019 although I believe the latter figures include the £390 million they got for the dispsoal of their IGNIS asset management arm to Standard Life recently.
The dividend was unchanged at 26.7 pence and this was covered 2.7x by reported diluted earnings from continuing operations. This together with last years final of the same amount give a yield of 7.5% at a price of 712 pence this morning.
As they have now got their debt levels down and are talking of getting and maintaining an investment grade credit rating this suggests to me that the dividend should be well underpinned by the cash flow they are expecting over the next few years. It should also allow them to acquire more closed books (at a discount presumably) and or pay out surplus cash to shareholders. On this the Company said:
"The underlying strength of the business model and the stable and predictable long-term cash generation has enabled us to declare a 2014 interim dividend of 26.7p per share, in line with the 2013 interim dividend. Given the run-off nature of the group's business, the Board believes it is prudent to maintain a stable, sustainable dividend whilst the Group builds its financial flexibility to execute its growth strategy and will keep the dividend under review.
The first half of 2014 has delivered many successes for the Group. The balance sheet has been transformed, our structure has been simplified and our reliance upon bank financing has been reduced. We have created a sound platform for Phoenix to consider potential acquisition opportunities, enabling us to grow the business and strengthen our existing position as the UK's largest specialist consolidator of closed life funds."
So overall a rather complex situation based on what should be a relatively simple and hopefully predictable business of running of closed life books which have been bought at a discount to their future value. Thus if managed properly and if the assumption underlying the life books turn out to be prudent then the cash / profits should flow over the years. Obviously market movements and regulatory changes can upset this outlook. On regulatory changes they detailed some of the financial effect in their statement which you should probably read if you are interested in this one. They summarised the effects by saying the following:
"The first half of 2014 saw a number of key regulatory changes to the UK life assurance sector. The financial impacts of several of these changes are still uncertain but the Group continues to take actions to prepare for the possible range of outcomes, including possible changes to policyholder decision-making."
Apart from another dull set of figures from an insurer, this time Amlin (AML), the highlight of which was the 3.9% increase in the dividend. See the link above for full details and the insurance category to the right for more background on it. The only other thing that aroused my interest today was another set of strong numbers from a house builder. This time it was Bovis Homes Group (BVS) who reported profits and earnings up over 100% and a 200% increase in the dividend. Now of course it was the increase in the dividend which piqued my interest.
This is another well managed national house builder and they set out in the results they way they look to manage their activities over the cycle and they summarised market conditions in the first half as follows:
"The UK economy is recovering positively. In the first half of 2014 the UK housing market has continued to perform robustly with increased housing transaction activity. Home buyers have good access to mortgages and are confident about buying a home. This has been supported by the greater certainty provided by the extension of the Government's Help to Buy shared equity scheme."
On the back of this and their confidence in achieving their targets for this year and next they have announced an increased interim dividend of 12 pence and an intention to pay 35 pence for the full year in 2014 and at least 35 pence in 2015. This compares to forecasts of 22.3 pence and 28.4 pence (source:Stockopedia) prior to these numbers. Thereafter, in this phase of the cycle the Board plans to operate a regular payout ratio of one third of earnings with supplementary dividend payments to shareholders of cash surplus to requirements as they move towards optimal scale. This should still mean around 35 pence though as the eps forecast for 2015 was around 100 pence any way before any changes on the back of these figures.
Other points to note are net assets of 624 pence and a pension surplus of £1m. Their optimal scale is 5000 to 6000 units a year and by managing the housing cycle they seek to maximise returns, while effectively stewarding shareholders' capital, targeting ROCE of at least 20% by 2016. The Group held 17,702 consented plots in its land bank at 30 June 2014. The average consented land plot cost at the start of 2014 was £48,900. This has decreased to £45,900 at 30 June 2014 and compares to their average expected selling prices for 2014 of £210,000 to £215,000 forecast in these figures.
Summary and Conclusion:
Another set of strong numbers from a house builder, no surprise there, but the dividend increase was. Given the market was previously happy to put this one on a 3.5% yield based on the previous 2015 forecast dividend, you could argue for a 1000 pence price target if you applied the same yield to the new 35 pence dividend. This would also put it on around 10x the current expected earnings for that year.
Looking at the chart (see below or visit the website if you can't see it on the e-mail). it looks as though the shares have been in a trading range between 720 pence and 820 pence and they have this morning moved to the top end of that range on the back of these numbers in a stronger market which has also recovered from its recent lows. As they now look over bought you might therefore want to hold off and wait and see if it sags back into the range or finds support from its 200 day moving average at around 807 pence to confirm a bullish trend.
However, with the Bank of England back tracking on raising rates again last week and the consensus now shifting to no rate rise until next year you could argue for a continuation of the recent recovery in the price and a possible break out from the recent range. If this were to happen then technical analysts would argue for up to 100 pence of upside (the width of the range) which would also take it up towards its recent highs around 920 pence (resistance?) for a potential 13.5% return if you include 1.5% from the interim dividend.
On the downside if you are more worried about a housing market bubble rolling over or popping then I guess chartist could see the chart as what they call a head and shoulders which if the neck line at 720 pence were to break would theoretically target 100 pence more downside or 200 pence from current levels and take the shares back to around their book value at 620 pence where I would suggest it would look very cheap and be fundamentally suppo
So as I always say you pay your money and take your choice but for my money I would be looking for this one to break out on the upside for a move towards 900 to 1000 pence in the medium term.