Today we have another set of results from a house builder, Persimmon (PSN), which as you would expect are very strong. No surprises here on the dividend as they made their second payment of £214m (70p per share), paid 4 July 2014, of surplus capital under the Capital Return Plan. This is a Berkeley Group (BKG) style plan to return surplus capital that they generate to shareholders over the next ten years. By way of reminder they describe this plan as follows:
"Our long term strategy is to deliver superior shareholder value through the housing cycle. This value will be delivered by growing the Group to optimal scale as markets develop and requires disciplined, well-judged capital deployment through the cycle. Management has given a long term commitment to shareholders that they will receive capital that is considered as surplus to the needs of the reinvestment requirements of the business through the cycle. This commitment is to return £6.20 per share, or £1.9 billion of capital, to shareholders over a ten year period to June 2021."
The first two payments of surplus capital totalling £1.45 per share, or £442 million, were made on 28 June 2013 and on 4 July this year. The third scheduled payment is 95 pence per share, or c. £290 million, in July 2015. This will be finalised and announced with the 2014 Full Year results of the Group scheduled for Tuesday 24 February 2015.
I'll not dwell on the results as they show lots of strong numbers which you can read in full at the link above if that is of interest to you. However I would highlight that the revenues were up by 33% to £1.2bn which compares to full year revenue growth forecasts of 18.4% (Source: Stockopedia). They also reported earnings per share of around 54 pence versus 34 pence at the same stage last year which in the event were around 42% of the full year earnings. If roughly the same h1 / h2 split is achieved this year then they could perhaps achieve closer to 128 pence of earnings against current forecasts of 111.8 pence which suggests some scope for upgrades on the back of these numbers. This is especially so as they say that current forward sales are up by 22% and that reservation in the traditionally quieter summer months since 1 July are running 9% ahead of last year.
Summary & Conclusion
Another strong set of numbers from Persimmon with further progress on their plans to return surplus capital to shareholders over the next few years. With next years payment of 95 pence this gives a yield of 7.1% at last nights closing price of 1335 pence. Meanwhile current trading looks strong and this leaves them well place to probably beat current forecasts which put it on 12x for this year, but this may turn out to be closer to 10x if they do see some upgrades and they are on just under 10x next years current forecast earnings. This one, like Bovis yesterday, also looks to have gone through a period of consolidation which it may also be breaking out from, but resistance from peaks earlier in the year is not far away at between 1400 and 1500 pence, so a strong hold for me for now. If you are not in it and are prepared to buy into the house builders then this seems like a good way to play it, but given the lumpy nature and timing of the dividend there may be better opportunities to get in along the way before the next payment is due.
Finally today I have for you an in line 6 month trading update from Imperial Tobacco (IMT) which they headlined as continued strategic progress and unchanged full year outlook. So steady as she goes with limited growth from their mature markets, but they claim their growth brands outperformed the market while specialist brands also did well. Their growth markets saw better growth of 8%. The main story going forward will be the integration of the US acquisition announced last month, the cost of which means they have suspended their share buy back programme.
This leaves them on around 12x with a 5% yield based off of the 10% dividend growth for this year which they have reiterated in these numbers. So OK in a dull way although the balance sheet is more geared than I would like, but I can just about live with it given the strong and predictable cash flows they generate - still beats cash in the bank if you are prepared to take the risk.
In another quiet news day Imperial Tobacco, which I wrote about recently, has announced its intention to float a minority stake in its Spanish tobacco distribution and logistics arm on the Spanish stock exchanges. This should bring in some much need cash as their balance sheet was looking quite highly geared last time I covered it and this was one source of funds that I hoped they might utilize to reduce it. Other than that we'll have to wait to see what they get for their stake to assess what the other financial effects of this might be.
In addition to this, if you are invested in tobacco stocks and in case you missed it, you may be interested in a two part series on the industry, plain packaging and e-cigarettes etc. featuring access to British American Tobacco which was shown on the BBC recently. It included some interesting statistics in the first part including the fact that the UK treasury earns twice as much in tobacco duties compared to the cost of treating smoking related diseases in the NHS.
While I do not approved of smoking I have never actively discouraged smokers as I always figured they were keeping my taxes down! I've not caught up with the second part yet but it looked as though they would be covering e-cigarettes which is a developing threat / opportunity to the industry. If that appeals you can click on the picture below to visit the associated website and watch the programmes on the BBC i-player where they are available for the next 3 and 7 days respectively.
It just so happens that we have had announcements by stocks in these two sectors today. When you think about it they are quite good partners in a portfolio as one is exposed to longevity risk in its business while the other sells products that help to reduce life expectancy, despite what the picture above might suggest. Indeed back in the days of conglomerates BATS even owned a life company (Allied Dunbar / Eagle Star) and Imperial was part of the infamous Hanson Trust before it was broken up and Imperial was de-merged.
Imperial Tobacco (IMT) announced their interim results to 31st March 2014 in which they saw revenues down by 5%, operating profits by 4%, earnings by 1% but the dividend was increased again by 10% which is around the rate of growth forecast for the full year. Aside from the headlines numbers being down they point to Specialist & growth brands / markets being up. While they also suggested significant stock reductions were achieved, which impacted volume, revenue and profit - begs the question if they had stuffed channels in the previous years to hit numbers? They also said they are on track to deliver £60 million of cost savings from their cost optimisation programme this year and a total of £300 million by 2018.
Looking ahead they said they will move to paying quarterly dividends from 2015 and expect modest adjusted earnings per share growth at constant currency and further dividend growth of at least 10%. They talk about their actions providing a stronger platform for generating quality sustainable growth. They say that trading conditions are unlikely to materially improve in the coming months but that they are experienced in growing their business in a demanding environment and remain on track to achieve their targets and create further value for shareholders.
They also emphasise that their cost and stock optimisation programmes supports their growth ambitions. On this it looks to me like cost cutting and share buy backs are probably supplying up to half of the likely 5%(?) or so underlying growth, which I guess is not surprising for a mature business such as this. It does beg the question how they can sustain dividend growth at 10% per annum in the medium term, especially as the dividend is only covered 1.6x or so by earnings and cash flow. The other concern with this one for me is the balance sheet as I have noticed it coming out badly on Z-Score screening (risk of bankruptcy). This reflects the £9 billion or so of debt versus the £24 billion or so market capitalization and I note that the interest cover is forecast at less than 3 times (2.85), a level which I use a threshold for identifying financial risk.
So in summary - a bit of a curates egg this one - OK value around 12x earnings with a good yield and growth of 5% & 10%, but lowish cover and a geared balance sheet. However it is a pretty stable / declining business with strong cash flows and I guess it does have some assets like Logista in Spain that it is looking to IPO which would reduce the debt burden. I guess it will depend how much they can get for it versus the £73 million operating profit as to whether it goes and helps the finances or not. Thus on balance I'm inclined to run with it but it looks to have got over bought recently and is towards the top of it range over the last three years so I wouldn't be adding to it or chasing it up here. It should probably outperform if the market sags back from here but will likely lag a renewed rise in the market, but Ok as part of a diversified income portfolio.
I'll also be watching developments in the e-cigarette market and how they cope with this. It seems they have started to respond to this with acquisitions and their own products, but this could easily be a threat rather than an opportunity - lets hope they don't go the way of EMI and HMV after they failed to adapt to new technology.
Meanwhile in the Life sector we have had a Q1 IMS from Legal & General (LGEN) today which I wrote up recently after it got hit by the announcement on annuities in the budget. So I'll not dwell too much on the operations here but note that they highlighted lots of strong growth across board and posted record results. They also highlighted that "they benefit from favourable demographic trends; we have economically and socially useful products for customers; and with our LGIM economists forecasting 3% plus economic growth in the UK and US, we are excited about the prospects for our business."
So in contrast to Imperial they offer socially useful products! The shares are up now by around 5.7% since I last wrote about them at the end of March and they have now gone ex the final dividend which is worth 3.3%. This is another 5% or so yield stock with double digits growth forecast and around 1.5x cover in a fairly mature industry. However, it looks to me that the growth prospects and cash flow here should be more robust although uncertainty about the longer term impact of the annuity changes remains. On that basis I'm happy to hold this one as a well managed play on demographics and funding a decent retirement for people and me!