Further to my post on Monday, the TalkTalk (TALK) interims are out and look OK as they say they are on track to meet forecasts before the costs of the cyber attack. Therefore it seems they have decided to tough it out despite the estimated cost of £30 to £35 million for cyber attack which represents a hit of about 25% to their expected net profit for this year . So they have decided to increase the interim by the promised 15% and say the expect to grow the final by 15% too. So it seems my fears of a dividend cut were unfounded for now and unsurprisingly the shares have had a bounce as a result.
After last weeks shock announcement of a 50% cut in AMEC's dividend on the back of the downturn in oil services. I thought today I would talk about a likely dividend cut which may well be delivered this week. The stock concerned is TalkTalk (TALK) who are due to report an update on Wednesday and who have been in the news for all the wrong reasons given their data breach recently, although this was not the first time this has happened to them.
When I last wrote on this one back in July this year I finished up by saying "...they have continued increasing the dividend rapidly and the cover has therefore eroded to around 1x. Thus the strongly growing 4% yield seems attractive on the face of it, but it may be vulnerable to the forecast growth slowing or stopping if they don't end up delivering the growth in profits and cash flow that they are expecting. Otherwise the shares don't seem that attractive on other valuation metrics like the PE of 25x so a hold at best for yield I would say."
At the time they were suggesting the growth would be second half weighted and given the hack, the likely increased costs on the back of it and increased price competition I fear that the growth will not now be forthcoming and that dividend will now have to be cut given the debt and the limited cover. This is indicated by the score of 28 & 12 for financial security and cover on the Compound Income Scores (CIS). In addition they have already seen steady downgrades prior to this so the estimate revision score is also already very poor at just 8. Thus despite the decent yield and strong forecast growth the shares only Score 20 on the CIS overall (100 is best).
Even though the shares have already tanked on the back of the hack (see chart below) I think there could be further downside from here because profits estimates may be downgraded again and the dividend now likely to be cut or passed completely at the interim stage according to a Citigroup analyst when he said:
‘We think that TalkTalk were already slipping in customer numbers before their website was hacked. In their results next week we’re expecting TalkTalk to suspend its guidance, skip its interim dividend and provide an update on customer orders and cancellations in the wake of the security breach.’ (see this report at Thisismoney.co.uk for more details).
So it now looks like a sell to me, even down here, as a halving of the dividend to 6.9p and say a 4% yield again would suggest <180p. In terms of cash flow (for shareholders) I suppose it could be worse as if they do pass the interim and then say halve the final and following interim they'll only be looking at 4.6p or a 2% yield for this year based on Friday's price of 226p which reinforces the sell case for me, I note the shares are already off by 5% this morning in response to the press articles.
Of course I could be wrong, despite what the figures suggest and they may choose to tough it out and maintain the dividend, which would lead to a bounce and we'll only have to wait until Wednesday to find out.
The beer comes from Marston's (MARS) who had a reasonable looking trading update for the 41 weeks to 18 July 2015.
This saw their destination & premium locations as well as their taverns reporting positive like for like (LFL) sales growth of 1.7% and 1.6% respectively. Encouragingly they had seen stronger trading in the last 10 weeks with +2% LFL, operating margins up slightly year on year and they are on track to open 25 new pubs. Meanwhile they continue to dispose of lower return wet led pubs and move more towards franchising some of these. Their brewing side also grew by 4% and was this boosted to 10% by the acquisition of Thwaites during the year.
They made some interesting comments on the effects of the proposed living wage which has been seen as a negative for the general retail and hospitality trades. On this they said:
"The recently announced Government plans to introduce a mandatory Living Wage by 2020 are consistent with our expectation that the gap between the National Minimum Wage and the Living Wage would be closed over time. The additional cost of meeting the higher target of £9 per hour by 2020 will mean that wage costs will be modestly greater than we had expected, but the impact compared to our plans is mitigated by the fact that we had anticipated increases above the rate of inflation, and the lower rate of corporation tax from 2017."
The shares are a bit of a curates egg as they have drifted back recently below 160p where they trade on around 11 to 12x earnings with a yield of 4.5% which is expected to grow by around 5%. The yield and the shareholders 20% discount remain the main attractions on this one, however the balance sheet is quite highly geared albeit they do benefit from some reasonable property backing.
Meanwhile if you've got bills you've gotta pay then you may have come across or used one of Pay Point's (PAY) terminals in one of the 27,000+ shops that they operate in. They have had an in line Q1 IMS statement today showing modest growth so probably nothing to get too excited about there in the short term, although the shares have responded positively first thing being up by about 1% in a weak market. So it seems like steady as she goes but I should have more to say on that tomorrow.
The chat part today comes in the form of Q1 trading update from the Quad play telecoms provider Talk Talk (TALK). In this despite only delivering 3.5% revenue growth they say they are confident in delivering 5% for the full year together with strong EBITDA and free cash flow growth. They did however warn that H1 would look weak and that much of the growth would be h2 weighted due to the timing of the delivery of their on going (MTTS) cost saving plans. The market doesn't seem to like this that much as the shares have been marked down by 6% first thing as it seems to be a familiar pattern of jam tomorrow with this one as they continue to invest in growing the business. Despite this they have continued increasing the dividend rapidly and the cover has therefore eroded to around 1x. Thus the strongly growing 4% yield seems attractive on the face of it, but it may be vulnerable to the forecast growth slowing or stopping if they don't end up delivering the growth in profits and cash flow that they are expecting. Otherwise the shares don't seem that attractive on other valuation metrics like the PE of 25x so a hold at best for yield I would say.
Finally before I go we had a quarterly update from Easyjet (EZJ) which saw better revenue per seat than the guidance they issued in May. The better than expected revenue per seat was driven by trading in the UK and beach routes across Europe in May and June & the successful implementation of revenue management initiatives, offsetting in part the impact of the movement in Easter and the French Air Traffic Control strikes in April which together decreased revenue per seat at constant currency by three percentage points. They also grew capacity, passenger numbers and the load factor.
So it seems quite positive overall and the market agrees as it has marked the shares up by 4% this morning to 1736p where it is climbing nicely toward the 1800p price target I set when I suggested it as a trading buy earlier in the year when it was below 1600p in my Prepare for boarding post, I hope some of you got on board and are enjoying the flight too.
Any way must fly got some plumbing to try and turn my hand to - toodle loo.
Aside from that they increased their dividend by their previously promised 15% to 13.8p which strangely was ahead of consensus forecast of 13.5p despite their stated intention to raise the dividend at this rate. They have promised to raise it by a further 15% again this year which will make 15.9p, in line with the consensus for next year and will leave them on a yield of around 4.4%.
Summary & Conclusion
The yield and and the promised growth remain the main attraction with this one, although you have to wonder how long they can keep raising it if the profits don't come through soon. This is especially so as the balance sheet is quite geared with debt equivalent to 2.4x EBITDA which is quite high but they do claim it will come down to less than 2x. This level of debt is probably more acceptable for a utility type business such as this. In addition as a customer of theirs I note that they are able to raise their prices quite readily without much hindrance from the regulator.
For example I just renewed my annual line rental with them for what they highlighted was a £20 saving. However last year I paid £141 as a result, whereas this year it came to £180.36 for a whopping 27.9% increase, although they are not alone in this, so much for competition and regulation! In addition my package price is due to go up by around 8% shortly and I'm sure call prices have been increasing too so they certainly seem to have pricing power.
On that basis I'm happy to run with it for the yield and dividend growth despite the apparently high rating and stretched balance sheet given the oligopolistic type features. In addition, If they do achieve their 25% EBITDA margin target in 2017 I think it could rise to around 450p by then and be on a fairer looking 14x or so which should give a fairly decent total return. However, time will tell if they actually deliver on their margin promise by then or if they find more things to spend their cash on (like Blinkbox recently). in the meantime if you don't like the shares then enjoy some music from TalkTalk the band above.