A couple of results announcements today from decent income stocks today in the shape of Intermediate Capital Group (ICP) The mezzanine finance and fund provider and Pennon Group (PNN) the water utility and waste group. Click the highlighted names if you want to read the full announcements. Longer term readers may recall that ICP is one I recommended and bought almost exactly a year ago when it was around 400p with a target of 500p. I reviewed it again in January this year when it hit my target and debated whether I should stay or go and take the money and run.
In the end I top sliced my holding and continued with it and based on today's figures I'm glad that I did. They seem to be firing on all cylinders at the moment reporting record assets and new funds being raised at record rates, credit standards being maintained and impairments down on last year and below their target 2.5%. Added to which Europe seems to be recovering (although they are more global and diversified these days) and investors are still hungry for yield products and markets remain buoyant for exits. So I guess you could say it doesn't get much better than this?
On the back of this they are planning to return £300m (about 13 to 14% of the market cap) via a special dividend which is on top of the £100m share buy back which they did in the last year. In addition to this they are raising the final dividend and as a result, the full year dividend, by just under 5%. This is all designed to re-gear their balance sheet to 0.8-1.2x from 0.5 currently and raise their return on equity to over 13% from the current 11%, although I hope they are not gearing up at the wrong time.
The shares have responded with a further 5%+ rise to around 590p at pixel time and this leaves them on a yield of about 3.9% based on 2016's forecast dividend of 23.2p (+5%) which would still leave it towards the bottom end of its yield range in recent years, suggesting it may be up with events up here. In addition banking / financials are often valued on a price to book based on their ROE with 10% often roughly suggesting a 1x price to book. In this case if we take their suggested 13% ROE and factor in perhaps a prospective 10% rise in today's book value of 402p to give say 442p this would also leave them on a fairish looking 1.33x book value. So a strong hold for me up here on that basis, but worth watching markets, bond yields, credit spreads and defaults for signs of continued good times or trouble which might hit this one quite hard.
Meanwhile in the more mundane world of water and waste Pennon Group have also reported a near 5% increase in their dividend and they are committed to growing this by RPI +4% until 2020. So by way of comparison with ICP based on their 2016 forecast dividend of 34p (+5.76%) this also leaves them on a prospective yield of around 3.9% at the flat pixel time price of 877p.
So there you go a couple of stocks yielding 3.9% on the basis of forecast dividend growth of around 5% albeit that they have differing levels of operational and financial risk. So as ever you can pay your money and take your choice or not as the case may be, but they both seem reasonable to me and certainly more likely to protect against the ravages of inflation (which I discussed yesterday) than a cash deposit. If you are bullish of markets I guess you might prefer ICP or if you are more cautious you would probably go for Pennon but if you wanted to hedge your bets and get a bit of diversification you could buy both, just a suggestion not a recommendation.
..to a new high on FTSE 100, although personally I wouldn't get too excited about that. I guess we might see it consolidate it's recent gains to try and confirm a break out, but in the meantime I'll be continuing to focus on individual stocks.
Talking of which, while I was away last week I see we had amongst other things like the budget, final results from EMIS the healthcare software provider, Phoenix Group (PHNX) the closed life consolidator and a Q3 trading update from IG Group (IGG). I also note that there were the usual strong results from Next (NXT) although marred somewhat by a more downbeat / realistic assessment of the growth prospects for the current year from their highly regarded CEO Simon Wolfson. This probably makes sense with the forthcoming election and the associated uncertainty given the range of possible outcomes.
Of the others IG Group seemed fine ex the hit from the Swiss Franc move, while Phoenix Group results seem to have been well received with the shares moving up further, although I note they only maintained and talked about a sustainable dividend on the back of cash flows from their closed books of life policies. They also paid down some debt and are targeting an investment grade credit rating, although I note their debt pay down is expected to slow this year. Thus it seems OK so maybe my concerns on this one are misplaced, but as I'm not desperate for yield I'd rather focus on stocks with lower yields and better growth prospects.
EMIS results seemed fine and the outlook statement struck a positive tone, but the shares were largely unmoved on the back of this. This probably reflects the re-rating the shares have enjoyed in the last year as they have risen from around 600 pence when I first wrote them up. With the shares now closer to 900 pence and not far off their all time high, they now look less attractive as the rating has moved up close to 20x this years forecast earnings and the expected yield is only just over 2% at 2.24% which leaves it close to being a sell on my 2% & 20x sell discipline. That being said it seems set fair and the quality is reasonable and they seem to have been able to grow the dividend by around 10% over the last 5 years including the latest 18.4p dividend. So the returns should be acceptable, it is just the price you have to pay now is getting quite high, so probably not one to chase up here.
Today in brief I note that Matchtech (MTEC) which I wrote up in February has announced some contract extensions and a new contract with Southern Water which as Keith Lewis, Chief Operating Officer of Matchtech Group plc, said: "These contract wins clearly demonstrate how the breadth and knowledge of our specialist recruitment teams is enabling the Group to meet the demands of new and existing clients alike in sourcing high quality candidates across both the engineering and professional sectors." These shares have not moved much and still look good value on around 13x with a 4%+ yield and the benefits of the acquisition of Networkers International still to come. Apart from that finally I note that Pennon Group (PNN) have confirmed a continuation of their RPI+4% dividend policy to 2020 after the recent regulatory review completed.
So on a yield of close to 4% that doesn't seem too bad if not outstanding, cheers.
A note for you today on three stocks that provide income underpinned by different assets / operations. Yesterday we had Anglo Pacific (APF) which from its announcement about a placing describes itself as:
"A global mining royalty company. The Company's vision is to create a leading international diversified royalty company with a focus on base metals and bulk materials. The Company's strategy is to build a diversified portfolio of royalties, focusing on accelerating income growth through acquiring royalties in cash or near-term cash producing assets. It is an objective of the Company to pay a substantial portion of these royalties to shareholders as dividends. Further details can be found on the Company's website at www.anglopacificgroup.com."
In the announcements yesterday they raised gross proceeds of £10 million by placing shares representing about 5% of their issued share capital at 180 pence. The recently appointed executives and directors also subscribed and now own around 9% of the equity between them. This was done to help finance the acquisition of a royalty in something called the Maracás Vanadium Project for up to $25 million, for which they get a 2% net smelter return royalty interest on all mineral products sold from the area of the Maracás Project to which the royalty interest relates. This is in line with the new managements strategy of expanding their portfolio with high quality base metals and bulk commodity mining projects that have existing or near-term production. You can download a presentation about this acquisition here and about investing in royalties and the new management team's strategy here.
I like this one as it is a way of playing commodities but with reduced cost risks as their royalties tend to be related to production volumes, although obviously production outages or delays are a risk. It trades at a small discount to its year end book value of 196 pence and offers a decent 5.7% yield, although it is not very well covered or forecast to grow that much in the short term, but it has grown by 5.5% per annum over the last five years.
Meanwhile moving on to today we had a final results announcement from LondonMetric (LMP) a UK property REIT which has invested in commercial and residential property in the past. In the last year or so they have now shifted the emphasis of the portfolio to out of town retail and distribution assets. The highly experience Chairman Patrick Vaughan commented on the property market outlook by saying:
"I believe we are somewhere in the middle of the cycle for UK commercial property in which an improving economy, the availability of reasonably priced credit and strong competition for supply makes the investment market very competitive, but I am confident that we will maintain a high level of investment and build on the activity this year for future outperformance and further excellent returns for our shareholders."
The NAV on this one (a key metric for property related shares) came in at 121 pence up by 11 to 12% so the shares, like many other property companies these days trade at a premium to this, trading at around 145 pence reflecting some of the expected growth to come. The other attraction is the yield which based on the declared unchanged dividend of 7 pence gives a yield of 4.8% which they say is fully covered by contracted rental income. Other key things to watch on these type of funds is the debt or the loan to value ratio which here came in at a reduced level of 32% versus 43% last year and had a weighted average cost of 3.9%. So they should be making a decent return over and above that. The other swing factor is occupancy levels or voids, rental increase potential and lease lengths. They have 99.6% occupancy, 32.6% of rent roll benefiting from fixed uplifts and unexpired leases averaging 12.7 years. So all fairly solid if a little dull, but a reasonable way of getting exposure to commercial property if you want to) with an experienced management team that gives you a decent yield, although it has not grown in the last couple of years but is forecast to edge up by around 2% this coming year.
Finally, today we had Preliminary results from Pennon (PNN) the water utility and waste recycling group. Which as it is fairly self explanatory I won't go into too much detail. The headlines were that the regulated side was good and has got it plans for the next regulatory period - K6 approved already. While the waste side Viridor saw profits down around 19% due to difficult market conditions in recycling and investing for future growth especially in energy from waste facilities. They increased the dividend by a useful 6.5% in line with their RPI +4% guidance that has been in place in the current five year regulatory period (K5). We will not know about the future dividend policy until next year as they said: "The Board will review the dividend policy for the K6 period following the Final Determination for South West Water and will make an announcement at the 2014/15 Preliminary Results." So some uncertainty there until things are finalised but at least we know their plans have already been accepted so hopefully their shouldn't be any nasty surprises. Indeed, the last time I wrote on this one I referenced their document about the latest regulatory round which given that their proposals have been accepted, seemed to suggest that they would expect to deliver around 5% dividend growth, which at the current level of starting yield should give a total return of 9% assuming an unchanged rating. So overall another reasonable yield of around 4% from this one but with a little uncertainty as to the level of growth going forward. In fact I was a bit surprised to see it was as low as 4% so I guess it could drift off from here unless there is another bout of demand for defensive stocks.
Any way sorry it was such a boring note today and well done if you got this far - but hey who ever said income investing was exciting? So as a reward if you did get this far see the following which carries on my recent dog theme and sums up what I have been saying here - enjoy, hopefully it will brighten up an otherwise dull day. Note: if you are reading this on the e-mail you may have to visit the site to view it.