# Roland Head > I run a model dividend portfolio that's based on my quality dividend screening system. I also review the best UK dividend shares for my newsletter. Public Ghost content for AI and LLM tooling. This file includes a bounded export of public pages first, then recent public posts. Append `.md` to any post or page URL to get the content in Markdown (for example, `/example-post.md`). ## Pages ### About me URL: https://www.rolandhead.com/about/ Last updated: 2024-01-23T17:44:25.000Z My name is Roland Head. I've worked full time as an freelance investment writer and analyst since 2012\. Prior to investment writing, my professional background was as an engineer working in IT and telecoms. I'm a keen private investor, investing exclusively in the UK stock market. My main focus is equity income. My investing approach is built around a [stock screening system](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) I have developed to filter and score UK dividend shares. I use this as the starting point for my investment choices, before applying additional research and analysis. **On this website, I run a** [**newsletter service**](https://www.rolandhead.com/dividend-newsletters/) **tracking the progress of my** [**quality dividend model portfolio**](https://www.rolandhead.com/dividend-portfolio/)**. This strategy is intended to offer a blend of above-average yield and long-term growth.** The model portfolio largely mirrors my own personal portfolio and accounts for the majority of my personal investments. I hope that my commentary and investing progress will be of interest to other investors, but I should emphasise that I do not provide financial advice or recommendations. *Disclaimer: all content is provided for information and educational purposes only and is intended for self-advised investors.* [My work](https://www.rolandhead.com/my-work/) can also be found on websites including [**Stockopedia**](https://www.stockopedia.com/?ref=rolandhead.com),where I've run a successful rules-based model portfolio since 2016\. I also manage a large-cap high yield model portfolio on the [**Investor's Champion**](https://www.investorschampion.com/channel/portfolio/income-boosters?ref=rolandhead.com)website. I hold the **CFA UK Investment Management Certificate (IMC)** and have passed the **CFA Level 1** exam. If you have any feedback or questions, please do not hesitate to get in touch with me through the [contact page](https://www.rolandhead.com/contact/) or via [Twitter](https://twitter.com/rolandhead?ref=rolandhead.com) or [LinkedIn](https://uk.linkedin.com/in/rolandhead?ref=rolandhead.com). **Roland Head** ### Privacy Policy URL: https://www.rolandhead.com/privacy-policy/ Last updated: 2024-05-25T15:58:36.000Z #### 1\. Introduction 1.1 We are committed to safeguarding the privacy of our website visitors and subscribers. 1.2 This policy applies where we are acting as a data controller with respect to the personal data of such persons; in other words, where we determine the purposes and means of the processing of that personal data. 1.3 We use cookies on our website. Insofar as those cookies are not strictly necessary for the provision of our website payment and membership services, we will ask you to consent to our use of cookies when you first visit our website. 1.5 In this policy, "we", "us" and "our" refer to Roland Head Ltd. For more information about us, see Section 14. #### 2\. Credit 2.1 This document was created using a template from Docular ([https://seqlegal.com/free-legal-documents/privacy-policy](https://seqlegal.com/free-legal-documents/privacy-policy?ref=rolandhead.com)). #### 3\. The personal data that we collect 3.1 In this Section 3 we have set out the general categories of personal data that we process. 3.2 We may process data enabling us to get in touch with you ("**contact data**"). The contact data may include your name and email address. The source of the contact data is you. 3.3 We may process your website user account data ("**account data**"). The account data may include your account identifier, name, email address, account creation and modification dates, website settings and marketing preferences. The primary source of the account data is you, although some elements of the account data may be generated by our website. 3.4 We may process information relating to transactions, including purchases of services that you enter into with us and/or through our website ("**transaction data**"). The transaction data may include your name, your email address, your payment card details (or other payment details) and the transaction details. The source of the transaction data is you and our payment services provider. 3.5 We may process information contained in or relating to any communication that you send to us or that we send to you ("**communication data**"). The communication data may include the communication content and metadata associated with the communication. Our website will generate the metadata associated with communications made using the website contact forms. 3.6 We may process data about your use of our website and services ("**usage data**"). The usage data may include your IP address, geographical location, browser type and version, operating system, referral source, length of visit, page views and website navigation paths, as well as information about the timing, frequency and pattern of your service use. The sources of the usage data are Google Analytics and the website analytics provided by our website platform, Ghost. #### 4\. Purposes of processing and legal bases 4.1 In this Section 4, we have set out the purposes for which we may process personal data and the legal bases of the processing. 4.2 **Operations** \- We may process your personal data for the purposes of operating our website, the processing and fulfilment of orders, providing our services, generating invoices, bills and other payment-related documentation, and credit control. The legal basis for this processing is our legitimate interests, namely the proper administration of our website, services and business. 4.3 **Publications** \- We may process account data for the purposes of publishing such data on our website and elsewhere through our services in accordance with your express instructions. The legal basis for this processing is the publication of content in the ordinary course of our operations. 4.4 **Relationships and communications** \- We may process contact data, account data, transaction data and communication data for the purposes of managing our relationships, communicating with you (excluding communicating for the purposes of direct marketing) by email, SMS, post or telephone, providing support services and complaint handling. The legal basis for this processing is our legitimate interests, namely communications with our website visitors, service users and individual customers, the maintenance of relationships, and the proper administration of our website, services and business. 4.5 **Direct marketing** \- We may process contact data, account data and/or transaction data for the purposes of creating, targeting and sending direct marketing communications by email for marketing-related purposes. The legal basis for this processing is our legitimate interests, namely promoting our business and communicating marketing messages and offers to our website visitors and service users. 4.6 **Research and analysis** \- We may process usage data and transaction data for the purposes of researching and analysing the use of our website and services, as well as researching and analysing other interactions with our business. The legal basis for this processing is our legitimate interests, namely monitoring, supporting, improving and securing our website, services and business generally. 4.7 **Record keeping** \- We may process your personal data for the purposes of creating and maintaining our databases, back-up copies of our databases and our business records generally. The legal basis for this processing is our legitimate interests, namely ensuring that we have access to all the information we need to properly and efficiently run our business in accordance with this policy. 4.8 **Security** \- We may process your personal data for the purposes of security and the prevention of fraud and other criminal activity. The legal basis of this processing is our legitimate interests, namely the protection of our website, services and business, and the protection of others. 4.9 **Insurance and risk management** \- We may process your personal data where necessary for the purposes of obtaining or maintaining insurance coverage, managing risks and/or obtaining professional advice. The legal basis for this processing is our legitimate interests, namely the proper protection of our business against risks. 4.10 **Legal claims** \- We may process your personal data where necessary for the establishment, exercise or defence of legal claims, whether in court proceedings or in an administrative or out-of-court procedure. The legal basis for this processing is our legitimate interests, namely the protection and assertion of our legal rights, your legal rights and the legal rights of others. 4.11 **Legal compliance and vital interests** \- We may also process your personal data where such processing is necessary for compliance with a legal obligation to which we are subject or in order to protect your vital interests or the vital interests of another natural person. #### 5\. Providing your personal data to others 5.1 We may disclose your personal data to our insurers and/or professional advisers insofar as reasonably necessary for the purposes of obtaining or maintaining insurance coverage, managing risks, obtaining professional advice. 5.2 Your personal data held in our website database will be stored on the servers of our hosting services providers identified at https://ghost.org/. 5.3 Financial transactions relating to our website and services are handled by our payment services provider Stripe. We will share transaction data with our payment services providers only to the extent necessary for the purposes of processing your payments, refunding such payments and dealing with complaints and queries relating to such payments and refunds. You can find information about the payment services providers' privacy policies and practices at https://stripe.com. 5.4 In addition to the specific disclosures of personal data set out in this Section 5, we may disclose your personal data where such disclosure is necessary for compliance with a legal obligation to which we are subject, or in order to protect your vital interests or the vital interests of another natural person. We may also disclose your personal data where such disclosure is necessary for the establishment, exercise, or defence of legal claims, whether in court proceedings or in an administrative or out-of-court procedure. #### 6\. International transfers of your personal data 6.1 In this Section 6, we provide information about the circumstances in which your personal data may be transferred to a third country under UK and EU data protection law. 6.2 We may transfer your personal data from the European Economic Area (EEA) to the UK and process that personal data in the UK for the purposes set out in this policy and may permit our suppliers and subcontractors to do so, during any period with respect to which the UK is not treated as a third country under EU data protection law or benefits from an adequacy decision under EU data protection law; and we may transfer our personal data from the UK to the EEA and process that personal data in the EEA for the purposes set out in this policy, and may permit our suppliers and subcontractors to do so, during any period with respect to which EEA states are not treated as third countries under UK data protection law or benefit from adequacy regulations under UK data protection law. 6.3 The hosting facilities for our website are situated in Amsterdam, Netherlands. The competent data protection authorities have made an adequacy determination with respect to the data protection laws of this country. Transfers to this country will be protected by appropriate safeguards, namely the use of standard data protection clauses adopted or approved by the competent data protection authorities, a copy of which you can obtain from *https://ghost.org/dpa/*. 6.4 Our payment services provider and related services are are situated in a number of other countries. The competent data protection authorities have made an adequacy determination with respect to the data protection laws of each of these countries. Transfers to each of these countries will be protected by appropriate safeguards, namely the use of standard data protection clauses adopted or approved by the competent data protection authorities, a copy of which can be obtained from https://stripe.com/gb/legal/service-providers*..* 6.5 You acknowledge that personal data that you submit for publication through our website or services may be available, via the internet, around the world. We cannot prevent the use (or misuse) of such personal data by others. #### 7\. Retaining and deleting personal data 7.1 This Section 7 sets out our data retention policies and procedures, which are designed to help ensure that we comply with our legal obligations in relation to the retention and deletion of personal data. 7.2 Personal data that we process for any purpose or purposes shall not be kept for longer than is necessary for that purpose or those purposes. 7.3 We will retain your personal data as follows: (a) contact data will be retained for a minimum period of one year following the date of the most recent contact between you and us, and for a maximum period of five years following that date; (b) account data will be retained for a minimum period of seven years following the date of closure of the relevant account, or for the duration necessary for us to comply with the law and pursue our legitimate interests. (c) transaction data will be retained for a minimum period of seven years following the date of the transaction, or for the duration necessary for us to comply with the law and pursue our legitimate interests. (d) communication data will be retained for a minimum period of one year following the date of the communication in question, and for a maximum period of five yearsfollowing that date; (e) usage data will be retained for 10 yearsfollowing the date of collection. 7.4 Notwithstanding the other provisions of this Section 7, we may retain your personal data where such retention is necessary for compliance with a legal obligation to which we are subject, or in order to protect your vital interests or the vital interests of another natural person. #### 8\. Your rights 8.1 In this Section 8, we have listed the rights that you have under data protection law. 8.2 Your principal rights under data protection law are: (a) **the right to access** \- you can ask for copies of your personal data; (b) **the right to rectification** \- you can ask us to rectify inaccurate personal data and to complete incomplete personal data; (c) **the right to erasure** \- you can ask us to erase your personal data; (d) **the right to restrict processing** \- you can ask us to restrict the processing of your personal data; (e) **the right to object to processing** \- you can object to the processing of your personal data; (f) **the right to data portability** \- you can ask that we transfer your personal data to another organisation or to you; (g) **the right to complain to a supervisory authority** \- you can complain about our processing of your personal data; and (h) **the right to withdraw consent** \- to the extent that the legal basis of our processing of your personal data is consent, you can withdraw that consent. 8.3 These rights are subject to certain limitations and exceptions. You can learn more about the rights of data subjects by visiting [https://edpb.europa.eu/our-work-tools/general-guidance/gdpr-guidelines-recommendations-best-practices\_en](https://edpb.europa.eu/our-work-tools/general-guidance/gdpr-guidelines-recommendations-best-practices%5Fen?ref=rolandhead.com) and [https://ico.org.uk/for-organisations/guide-to-data-protection/guide-to-the-general-data-protection-regulation-gdpr/individual-rights/](https://ico.org.uk/for-organisations/guide-to-data-protection/guide-to-the-general-data-protection-regulation-gdpr/individual-rights/?ref=rolandhead.com). 8.4 You may exercise any of your rights in relation to your personal data by written notice to us, using the contact details set out below. #### 9\. About cookies 9.1 A cookie is a file containing an identifier (a string of letters and numbers) that is sent by a web server to a web browser and is stored by the browser. The identifier is then sent back to the server each time the browser requests a page from the server. 9.2 Cookies may be either "persistent" cookies or "session" cookies: a persistent cookie will be stored by a web browser and will remain valid until its set expiry date, unless deleted by the user before the expiry date; a session cookie, on the other hand, will expire at the end of the user session, when the web browser is closed. 9.3 Cookies may not contain any information that personally identifies a user, but personal data that we store about you may be linked to the information stored in and obtained from cookies. #### 10\. Cookies that we use 10.1 We use cookies for the following purposes: (a) **Authentication and status** \- we use cookies to help us determine if you are logged into our website. #### 11\. Cookies used by our service providers 11.1 Our service providers use cookies and those cookies may be stored on your computer when you visit our website. 11.2 We use Google Analytics, which gathers information about the use of our website and uses cookies for this purpose. We use the information gathered by Google Analytics to create reports about the use of our website. You can find out more about Google's use of information by visiting [https://policies.google.com/technologies/partner-sites](https://policies.google.com/technologies/partner-sites?ref=rolandhead.com) and you can review Google's privacy policy at [https://policies.google.com/privacy](https://policies.google.com/privacy?ref=rolandhead.com). The cookies used by Google Analytics are named \_ga and \_ga+container-id. 11.3 We use Stripe to take payments on this website. Stripe may set cookies for the purposes of fraud prevention. The cookies used by Stripe are \_\_stripe\_mid and \_\_stripe\_sid 11.4 We use a product called Osano to store and manage user preferences for cookies. The cookies used by Osano are osano\_consentmanager and osano\_consentmanager\_uuid #### 12\. Managing cookies 12.1 Most browsers allow you to refuse to accept cookies and to delete cookies. The methods for doing so vary from browser to browser and from version to version. You can obtain up-to-date information about managing cookies via these links: (a) [https://support.google.com/chrome/answer/95647](https://support.google.com/chrome/answer/95647?ref=rolandhead.com) (Chrome); (b) [https://support.mozilla.org/en-US/products/firefox/privacy-and-security](https://support.mozilla.org/en-US/products/firefox/privacy-and-security?ref=rolandhead.com) (Firefox); (c) [https://help.opera.com/en/latest/security-and-privacy/](https://help.opera.com/en/latest/security-and-privacy/?ref=rolandhead.com) (Opera); (d) [https://support.apple.com/en-gb/guide/safari/welcome/mac](https://support.apple.com/en-gb/guide/safari/welcome/mac?ref=rolandhead.com) (Safari); and (e) [https://support.microsoft.com/en-gb/windows/microsoft-edge-browsing-data-and-privacy-bb8174ba-9d73-dcf2-9b4a-c582b4e640dd](https://support.microsoft.com/en-gb/windows/microsoft-edge-browsing-data-and-privacy-bb8174ba-9d73-dcf2-9b4a-c582b4e640dd?ref=rolandhead.com) (Edge). 12.2 Blocking all cookies will have a negative impact upon the usability of many websites. 12.3 If you block cookies, you will not be able to use all the features on our website. In particular, you may be unable to access membership-only content or your account settings. #### 13\. Amendments 13.1 We may update this policy from time to time by publishing a new version on our website. 13.2 You should check this page occasionally to ensure you are happy with any changes to this policy. 13.3 We may notify you of significant changes to this policy by email. #### 14\. Our details 14.1 This website is owned and operated by Roland Head Ltd. 14.2 We are registered in England and Wales under registration number 13480949, and our registered office is at Micklewood, YO22 5NA. 14.3 Our principal place of business is at Micklewood, YO22 5NA. 14.4 You can contact us: (a) by post, to the postal address given above; (b) by email, using the email address published on our website. #### 15\. Representatives 15.1 Our representative within the EU with respect to our obligations under data protection law is Roland Head and you can contact our representative using the email address published on the website [contact page](https://www.rolandhead.com/contact/). 15.2 Our representative within the UK with respect to our obligations under data protection law is Roland Head and you can contact our representative using the email address published on the website [contact page](https://www.rolandhead.com/contact/). ### Contact URL: https://www.rolandhead.com/contact/ Last updated: 2023-04-25T16:15:08.000Z You can contact me using one of the methods below. **Email**: mail at rolandhead.com **Twitter**: [@rolandhead](https://twitter.com/rolandhead?ref=rolandhead.com) **LinkedIn:** [uk.linkedin.com/in/rolandhead](https://uk.linkedin.com/in/rolandhead?ref=rolandhead.com) ### Client work URL: https://www.rolandhead.com/my-work/ Last updated: 2025-08-31T12:04:39.000Z I am a freelance investment writer and analyst, with a particular interest in UK equity income. I can provide both editorial/opinion articles and white label news coverage, depending on client requirements. I also have experience of running model portfolios for a number of clients. I have passed the CFA Level I exam and hold the CFA UK Investment Management Certificate ([IMC](https://secure.cfauk.org/qualifications/imc-exam.html?ref=rolandhead.com)). I am a keen private investor and I regularly take part in [**investing podcasts**](https://www.rolandhead.com/tag/podcasts/). If you are interested in a particular type of writing, please [contact me](https://www.rolandhead.com/contact/) for more information. ### Investment publishing credits ### [Stockopedia](https://www.stockopedia.com/?ref=rolandhead.com) I contribute regularly to Stockopedia's flagship [Daily Stock Market Report](https://app.stockopedia.com/columns/stock-market-report-1?ref=rolandhead.com), providing timely analysis of UK company news. I also provide regular editorial covering topics including investor education, systematic investing, stock screening and company analysis. In addition, I have run the Stock in Focus (SIF) model portfolio at Stockopedia since 2016\. Between April 2016 and December 2024, SIF generated an average annualised return of 10%. You can find an [*archive of all my past columns here*](https://app.stockopedia.com/authors/roland-head?ref=rolandhead.com). I am a regular participant in the weekly Stockopedia Companies & Markets podcast. ### [Investor's Champion](https://www.investorschampion.com/?ref=rolandhead.com) I run the [Income Boosters high yield portfolio](https://www.investorschampion.com/channel/portfolio/income-boosters?ref=rolandhead.com) and contribute regular news and analysis of UK dividend stocks. ### Motley Fool UK I have contributed stock analysis and commentary to the Motley Fool UK’s premium subscription services. I also write regularly for The Motley Fool’s main UK site, providing news and analysis on a broad range of big cap firms and popular small cap stocks. *You can find a full list of my recent articles on* [*my Motley Fool profile page (click here)*](https://www.fool.co.uk/author/sopavest/?ref=rolandhead.com)*.* ### Other work **Thought leadership and other investment commentary:** I can provide investment commentary for commercial clients on request. Please [get in touch](https://www.rolandhead.com/contact/) for more details. ### Home URL: https://www.rolandhead.com/home/ Last updated: 2021-11-24T20:12:11.000Z # The Firing Room – Professional Writing Services I’m a published, professional freelance writer – I stake my reputation and my income on my writing – every day. # Joined-Up Writing Although writing is a specialized skill, it doesn’t exist in isolation – whether it’s search engine optimization, improving conversions or filling an awkward-sized space in a magazine, every type of freelance writing has a context, a purpose – a business – behind it. That’s where *joined-up writing* comes in. Of course I’ll provide you with high quality and well-researched writing – that’s a starting point. What I can also offer is the experience needed to understand your underlying needs: - What your business model is - Why you need my writing - How you’ll use my writing - What you need from me. After all, what kind of writer do you want? Someone who needs to be spoon-fed and can’t be trusted to deliver on time, or someone who will deliver high quality work, on time and to budget, without needing excessive direction? Someone who takes your business seriously and wants it to succeed. I can give you these benefits, and combine them with original, well-researched and compelling writing – whatever its purpose. My experience is as varied as it is useful, giving me a rich set of resources to draw on and enabling me to adapt quickly and efficiently to new challenges. Here’s a breakdown of the background knowledge and experience I bring to my writing: - Commercial pre-press and publishing experience (business directories) - Online marketing experience (my own online businesses) - Large-scale IT and engineering experience in a corporate environment (global telecommunications company) - Sales experience (antiques dealer) - Customer service experience (show me a job where this is not important!) As well as all that, I have a Masters degree, and have lived, worked and travelled in much of Europe and Asia. All this experience – combined with great writing skills – is the reason I can offer you *joined-up writing* – professional writing that truly adds value to your business. If you think I might be able to [help you](https://www.rolandhead.com/services/), then [get in touch](https://www.rolandhead.com/contact/) now to explore the possibilities – whether you have a detailed specification or just a vague idea, a large project or a small one, I’d love to try and [help you](https://www.rolandhead.com/contact/) move forwards. ### Services URL: https://www.rolandhead.com/services/ Last updated: 2021-11-24T20:12:00.000Z I offer a range of services catering to the needs of both web and print publishers and to corporate and editorial clients. You can see some examples of my work on [my Portfolio page](https://www.rolandhead.com/portfolio/) – do not hesitate to [contact me](https://www.rolandhead.com/contact/) if you have any specific requirements you would like me to help with. - Corporate, financial and investment news - Editorial and opinion pieces on investment and related topics - Business writing: letters, reports and other documents requiring a professional writer To find out more, [get in touch with me today](https://www.rolandhead.com/contact/) for a no-obligation discussion of your needs and how I can help you. ### Quality UK dividend portfolio URL: https://www.rolandhead.com/dividend-portfolio/ Last updated: 2026-09-06T10:51:13.000Z This page provides an overview of the shareholdings in my model dividend portfolio and its historic performance. The portfolio's remit is to: - Provide a **dividend yield greater than the FTSE 100**; - Provide **inflation-beating income growth**. The theory behind this strategy is that steady income growth *should* lead to corresponding share price growth **over longer periods**, as stocks re-rate to maintain stable yields. In theory at least, this should mean enjoying useful capital gains over time, while also receiving a rising income. You can find all of my quarterly portfolio performance updates on my [newsletter page](https://www.rolandhead.com/dividend-newsletters/). **Portfolio key stats on 1 July 2026:** - No. of companies: 20 - Median market cap: £505m - 5yr average annual dividend growth: 5.2% - Average number years dividend paid: 26 - **Portfolio weighted average forecast dividend yield: 5.4%** - *Portfolio average* [*dividend screen score*](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)*: 61/100* ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/1h26-rh-pf-div-income-2.png) Dividend yield based on the portfolio's initial capital of £100k (Dec 2021) ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/1h26-rh-portfolio-perf-1.png) Total return performance from 1 Dec 2021 to 30 June 2026 For the avoidance of doubt, **the portfolio documented on this site is a model (virtual) portfolio**. **I own all of these shares in my personal portfolio,** but real-world considerations mean that my personal portfolio is not exactly the same as the model portfolio. For example, I've owned many of these stocks since before I created this model portfolio, so my purchase prices and position sizing are different. The stocks in this portfolio are selected from the results of my dividend screen, which scores each stock on a number of attributes. You can read about my screen [here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). You can read more about my policy for selling shares and buying new ones for the model portfolio [in this piece](https://www.rolandhead.com/portfolio/portfolio-selling-shares/). *The portfolio is only available to subscribers.* _This page is for paying subscribers only._ ### Disclaimer URL: https://www.rolandhead.com/disclaimer/ Last updated: 2024-05-28T18:21:32.000Z Please read this disclaimer and our [Terms & Conditions](https://www.rolandhead.com/terms-conditions/) carefully before using this website. rolandhead.com is owned and operated by Roland Head Ltd, a company registered in England and Wales with company number 13480949\. References to *we,* *us, our* and the *website* refer to Roland Head Ltd. ## Information, not advice All content provided on this website is intended for educational and entertainment purposes only. This **website does not provide investment advice or recommendations**. Information published on this website is intended for self-advised investors and should not be used as the basis for any investment decisions. We are not aware of your personal circumstances or investment goals. Investments discussed on this website may not be appropriate for you. You should research all investment decisions yourself and not rely upon information provided on this website. If you are unable to do this or have any doubt about the most appropriate choice for your circumstances, you should **seek professional advice from a registered financial adviser.** This website is not regulated by the Financial Conduct Authority. Individual authors providing content for the website are not regulated financial advisers. ## Accuracy & Disclosures Reasonable efforts are made to ensure that all information is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated unless explicitly indicated. Authors are required to **disclose** if they have a long or short interest in any investment under discussion *at the time of publication*. However, **disclosures are not updated** and do not provide a guide to an author's current investments. ## Risk of losses The value of stock market investments may rise and fall. You may get back less than you originally invested. Some stock market investments can be difficult to sell and may result in a total loss for shareholders. You should not investment money in the stock market that you cannot afford to lose. You should not rely on dividends to support your living costs. Dividends and other shareholder payouts can be cut without notice and are never guaranteed. It's inevitable that some investments discussed on this website will perform poorly. We do not accept any liability for any damages or losses you may incur as a direct or indirect consequence of information published on this website, or as a result of the availability or non-availability of the website. ### Dividend portfolio newsletter archive URL: https://www.rolandhead.com/dividend-newsletters/ Last updated: 2026-09-06T10:49:45.000Z This page contains a list of all the previous newsletters I have published regarding [my model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). These newsletters fall into one of two categories: - Monthly newsletters reviewing financial results from portfolio companies (subscribers only) - Quarterly and annual newsletters reviewing the model portfolio's performance (free to read) --- ### Dividend newsletter archive Here is a list of all my past portfolio newsletters, in reverse chronological order. **2026:** - [August '26 dividend portfolio update: mixed views + the next stock I'm selling](https://www.rolandhead.com/portfolio/august-26-dividend-portfolio-update-mixed-views-the-next-stock-im-selling/) - [July '26 dividend portfolio update: quality at a reasonable price + takeover action](https://www.rolandhead.com/portfolio/july-26-dividend-portfolio-update-quality-at-a-reasonable-price-takeover-action/) - [**H1 2026 dividend portfolio review: better than I expected**](https://www.rolandhead.com/portfolio/2026-half-year-dividend-portfolio-review-b/) - [June '26 dividend portfolio update: takeovers, turnarounds & transitions](https://www.rolandhead.com/portfolio/june-26-dividend-portfolio-update-takeovers-turnarounds-transitions/) - [May '26 dividend portfolio update: what I'll be buying and selling in June](https://www.rolandhead.com/portfolio/may-26-portfolio-update-what-ill-be-buying-and-selling-in-june/) - [Apr '26 dividend portfolio update: 2 possible takeovers plus reassuring trading updates](https://www.rolandhead.com/portfolio/april-26-dividend-portfolio-update-2-possible-takeovers-plus-reassuring-trading-updates/) - [**Q1 2026 dividend portfolio review: a poor start**](https://www.rolandhead.com/portfolio/q1-2026-dividend-portfolio-review-a-poor-start/) - [Mar '26 dividend portfolio update: 3 top ups, 5 results & 34% of my portfolio](https://www.rolandhead.com/portfolio/mar-26-dividend-portfolio-update-3-top-ups-5-results-34-of-my-portfolio/) - [Feb '26 dividend portfolio update: dependable quality + turnaround progress](https://www.rolandhead.com/portfolio/feb-26-dividend-portfolio-update-dependable-quality-turnaround-progress/) - [Jan '26 dividend portfolio update: a promising start to 2026](https://www.rolandhead.com/portfolio/jan-26-dividend-portfolio-update-a-promising-start-to-2026/) **2025:** - [**2025 dividend portfolio review: rising income wasn't enough**](https://www.rolandhead.com/portfolio/2025-dividend-portfolio-review-rising-income-wasnt-enough/) - [Dec '25 dividend portfolio update: why I'm buying more of this 8% yielder](https://www.rolandhead.com/portfolio/dec-25-dividend-portfolio-update-why-im-buying-more-of-this-8-yielder/) - [My portfolio top ups for December + new momentum rules](https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/) - [Nov '25 dividend portfolio update: reassuring trends vs turnaround](https://www.rolandhead.com/portfolio/nov-25-dividend-portfolio-update-reassuring-trends-vs-turnarounds/) - [October '25 dividend portfolio update: will this UK manufacturer be an AI winner?](https://www.rolandhead.com/portfolio/october-25-dividend-portfolio-update-will-this-uk-manufacturer-be-an-ai-winner/) - [**Q3 2025 dividend portfolio review: income growth + expensive lessons**](https://www.rolandhead.com/portfolio/q3-2025-dividend-portfolio-review-income-growth-expensive-lessons/) - [September '25 dividend portfolio update: improving performance + resilient quality, but I'm selling one stock](https://www.rolandhead.com/portfolio/september-25-dividend-portfolio-update-improving-performance-resilient-quality-but-im-selling-one-stock/) - [August '25 dividend portfolio update: is the dry spell about to end?](https://www.rolandhead.com/portfolio/august-25-dividend-portfolio-update-is-the-dry-spell-about-to-end/) - [July '25 dividend portfolio update: 50% profit margins + 2 profit warnings!](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/) - [**H1 2025 dividend portfolio review: positive returns suggest my income strategy remains on track**](https://www.rolandhead.com/portfolio/h1-2025-dividend-portfolio-review-positive-returns-suggest-my-income-strategy-remains-on-track/) - [June '25 dividend portfolio update: top-slicing my biggest winner + mixed results from these small caps](https://www.rolandhead.com/portfolio/june-25-dividend-portfolio-update-top-slicing-my-biggest-winner-mixed-results-from-these-small-caps/) - [May '25 dividend portfolio update: FTSE 100 triple header](https://www.rolandhead.com/portfolio/may-25-dividend-portfolio-update-ftse-100-triple-header/) - [Apr '25 dividend portfolio update: patient quality + a double profit warning](https://www.rolandhead.com/portfolio/apr-25-dividend-portfolio-update-patient-quality-a-double-profit-warning/) - [**Q1 2025 dividend portfolio review: taking a look at the big picture**](https://www.rolandhead.com/portfolio/q1-25-dividend-portfolio-review-taking-a-look-at-the-big-picture/) - [Mar '25 dividend portfolio update: strong balance sheets in tough times + 3 top ups](https://www.rolandhead.com/portfolio/mar-25-dividend-portfolio-update-strong-balance-sheets-in-tough-times-3-top-ups/) - [Feb '25 dividend portfolio update: mixed news, top-up candidates](https://www.rolandhead.com/portfolio/feb-25-dividend-portfolio-update-mixed-news-top-up-candidates/) - [Jan '25 dividend portfolio update: a turnaround situation?](https://www.rolandhead.com/portfolio/jan-25-dividend-portfolio-update-a-turnaround-situation/) **2024:** - [**2024 dividend portfolio review: rising income despite dividend cuts**](https://www.rolandhead.com/portfolio/2024-dividend-portfolio-review-rising-income-despite-dividend-cuts/) - [Dec '24 dividend portfolio update: 1 new stock to replace Burberry, a top up & 2 sets of small-cap results](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/) - [Nov '24 dividend portfolio update: top performers and a problem stock](https://www.rolandhead.com/portfolio/nov-24-dividend-portfolio-update-top-performers-and-a-problem-stock/) - [Oct '24 dividend portfolio update: strong results from two very different AIM shares](https://www.rolandhead.com/portfolio/oct-24-dividend-portfolio-update-strong-financials-from-two-very-different-aim-shares/) - [**Q3 24 dividend portfolio review: cash yield up 25% YTD + I'm beating the (wrong) benchmark!**](https://www.rolandhead.com/portfolio/q3-24-dividend-portfolio-review-cash-yield-up-25-ytd-im-beating-the-wrong-benchmark/) - [Sep '24 dividend portfolio update: a mixed bag of results + 2 new stocks](https://www.rolandhead.com/portfolio/sept-24-dividend-portfolio-update-a-mixed-bag-of-results-2-new-stocks/) - [Aug '24 dividend portfolio update: quality, value & the possible benefits of age](https://www.rolandhead.com/portfolio/aug-24-dividend-portfolio-update-quality-value-the-possible-benefits-of-age/) - [Jul '24 dividend portfolio update: will new brooms sweep clean?](https://www.rolandhead.com/portfolio/jul-24-dividend-portfolio-update-will-new-brooms-sweep-clean/) - [**H1 2024 quality dividend portfolio review: cash income up 22%**](https://www.rolandhead.com/portfolio/h1-2024-quality-dividend-portfolio-review-cash-income-up-22/) - [Jun '24 dividend portfolio update: two very different stories](https://www.rolandhead.com/portfolio/jun-24-dividend-portfolio-update-two-very-different-stories/) - [May '24 dividend portfolio update: consumer demand remains uncertain](https://www.rolandhead.com/portfolio/h1-2024-quality-dividend-portfolio-review-cash-income-up-22/) - [Apr '24 dividend portfolio update: mixed results](https://www.rolandhead.com/portfolio/apr-24-dividend-portfolio-update-mixed-results/) - [**Q1 2024 dividend portfolio review: income growth**](https://www.rolandhead.com/portfolio/q1-2024-quality-dividend-portfolio-review-rising-growth/) - [Mar '24 dividend portfolio update: 10 results + one new stock](https://www.rolandhead.com/portfolio/mar-24-portfolio-update-10-results-one-new-stock/) - [Feb '24 portfolio update: steady progress | special dividend | problems](https://www.rolandhead.com/portfolio/feb-24-portfolio-update-steady-progress-special-dividend-problems/) - [Jan '24 dividend portfolio update: (mostly) good news](https://www.rolandhead.com/portfolio/jan-24-dividend-portfolio-update-mostly-good-news/) **2023:** - [**Quality dividend portfolio: 2023 annual review**](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2023-review/) - [Dec '23 dividend portfolio update: changing landscape + top ups](https://www.rolandhead.com/portfolio/dec-23-dividend-portfolio-update-changing-landscape-top-ups/) - [Nov '23 dividend portfolio update: risks and opportunities](https://www.rolandhead.com/portfolio/nov-23-update-risks-and-opportunities/) - [Oct '23 dividend portfolio update: value on offer?](https://www.rolandhead.com/portfolio/october-23-dividend-portfolio-update-value-on-offer/) - [**Q3 2023: buying shares and looking ahead**](https://www.rolandhead.com/portfolio/q3-2023-review-buying-shares-and-looking-ahead/) - [Sept '23 dividend portfolio update: keep going](https://www.rolandhead.com/portfolio/sept-23-dividend-portfolio-update-keep-going/) - [Aug '23 dividend portfolio update: macro headwinds](https://www.rolandhead.com/portfolio/august-23-dividend-portfolio-update-macro-headwinds/) - [Jul '23 dividend portfolio update: no drama](https://www.rolandhead.com/portfolio/july-23-dividend-portfolio-update-no-drama/) - [**H1 2023: positioning the portfolio for long-term growth**](https://www.rolandhead.com/portfolio/h1-2023-positioning-the-portfolio-for-long-term-growth/) - [June '23 dividend portfolio update: foggy outlook](https://www.rolandhead.com/portfolio/june-23-dividend-portfolio-update-what-could-go-wrong/) - [May 23 dividend portfolio update: mostly good news](https://www.rolandhead.com/portfolio/may-23-dividend-portfolio-update-mostly-good-news/) - [Apr' 23 dividend portfolio update: expanding coverage](https://www.rolandhead.com/portfolio/apr-23-dividend-portfolio-update-expanding-coverage/) - [**Q1 2023: a big loss leaves me lagging the market**](https://www.rolandhead.com/portfolio/q1-2023-a-big-loss-leaves-me-lagging-the-market/) - [Mar 2023 dividend portfolio update: better than expected](https://www.rolandhead.com/portfolio/march-23-dividend-update-better-than-expected/) - [Feb '23 dividend portfolio update: defensive quality](https://www.rolandhead.com/portfolio/feb-23-dividend-portfolio-update-defensive-quality/) - [Jan '23 dividend portfolio update: mixed news](https://www.rolandhead.com/portfolio/jan-23-dividend-update-mixed-news/) **2022:** - [**Quality dividend portfolio: 2022 review**](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/) - [December 2022 portfolio update](https://www.rolandhead.com/portfolio/direct-line-dividend-cut-dec22-results/) - [November 2022 portfolio update: 6% yield + tech growth](https://www.rolandhead.com/portfolio/6-yield-tech-growth-november-2022-portfolio-update/) - [October 2022 dividend portfolio update](https://www.rolandhead.com/portfolio/october-2022-dividend-share-update/) - [**Q3 2022: quality dividend portfolio review**](https://www.rolandhead.com/portfolio/q3-2022-quality-dividend-portfolio-review/) - [September 2022 divdend portfolio news](https://www.rolandhead.com/portfolio/september-2022-dividend-share-news/) - [August 2022 dividend portfolio news](https://www.rolandhead.com/portfolio/august-2022-dividend-share-news/) - [July 2022 dividend portfolio news](https://www.rolandhead.com/portfolio/july-2022-dividend-share-news/) - [**H1 2022: quality dividend model portfolio review**](https://www.rolandhead.com/portfolio/h1-2022-quality-dividend-portfolio-review/) - [June 2022 dividend portfolio news (+ another bid)](https://www.rolandhead.com/portfolio/june-2022-dividend-share-news/) - [May 2022 dividend portfolio results review](https://www.rolandhead.com/portfolio/may-2022-dividend-share-news/) - [April 2022 dividend portfolio results review](https://www.rolandhead.com/portfolio/april-2022-dividend-share-news/) - [**Q1 2022: quality dividend model portfolio review**](https://www.rolandhead.com/portfolio/q1-22-quality-dividend-portfolio-review/) - [March 2022 dividend portfolio results review](https://www.rolandhead.com/portfolio/march-22-dividend-portfolio-news/) - [Quality dividend model portfolio: February review](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-february-review/) - [Quality dividend model portfolio: January review](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-january-review/) **2021** - [**2021 Quality Dividend portfolio review**](https://www.rolandhead.com/portfolio/2021-portfolio-review/) --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Thank you for subscribing! URL: https://www.rolandhead.com/thank-you-for-subscribing/ Last updated: 2023-08-19T09:13:08.000Z _This page is for paying subscribers only._ ### Thank you for signing up! URL: https://www.rolandhead.com/thank-you-for-signing-up/ Last updated: 2023-05-20T11:21:20.000Z _This page is for subscribers only._ ### Terms & Conditions URL: https://www.rolandhead.com/terms-conditions/ Last updated: 2024-05-28T18:24:18.000Z *These terms and conditions were last updated on 28 May 2024.* Please read these terms and conditions carefully before using this website. By using this website you agree to abide by these terms and conditions. rolandhead.com is owned and operated by Roland Head Ltd, a company registered in England and Wales with company number 13480949\. References to *we,* *us, our* and the *website* refer to Roland Head Ltd. Your use of this website and any dispute arising out of such use of the website is subject to the laws of England, Northern Ireland, Scotland and Wales. ## Introduction These terms and conditions shall govern your use of our website. 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You can contact us: (a) by post, to the postal address given above; (b) by email, using the email address published on our website. ## Posts ### August '26 dividend portfolio update: mixed views + the next stock I'm selling URL: https://www.rolandhead.com/portfolio/august-26-dividend-portfolio-update-mixed-views-the-next-stock-im-selling/ Last updated: 2026-09-06T06:52:26.000Z Welcome to my monthly [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) review for August. After [July's takeover action](https://www.rolandhead.com/portfolio/july-26-dividend-portfolio-update-quality-at-a-reasonable-price-takeover-action/), August was a little quieter, with just two of my portfolio stocks issuing results during the summer lull. Both companies are market leaders in their main areas of activity, but they're very different beasts. In this review I give my view on the latest numbers from each company. I also discuss a **longstanding holding that I've decided to sell**: - **Company #1:** this FTSE 250 firm recently reported record H1 profits, thanks partly to geopolitical tailwinds. Market sentiment remains strong, despite the stock now trading on a relatively demanding valuation. I explain why I'm staying invested despite the risk if a cyclical slowdown at some point. - **Company #2:** shares in this FTSE 100 financial are trading close to their all-time highs, but the stock has received an unusual barrage of **sell ratings** from City analysts. They appear to be increasingly sceptical about the quality and sustainability of the company's earnings – and its shareholder returns. - **Company #3 - what I'm selling:** I've decided to sell one of my largest and oldest holdings after a strong run. I've held the shares personally since 2018 and in the model dividend portfolio since its inception in December 2021\. The business in question is still trading well and is arguably not too expensive, but I think the story has changed. While there's a risk I'll miss out on explosive new growth, I think risk has increased and I am no longer comfortable with the direction of travel. *Quick reminder: my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and prices paid will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** --- ## In this month's report Please scroll down for the full report, or click on the links to go directly to a specific section: _This post is for paying subscribers only._ ### July '26 dividend portfolio update: quality at a reasonable price + takeover action URL: https://www.rolandhead.com/portfolio/july-26-dividend-portfolio-update-quality-at-a-reasonable-price-takeover-action/ Last updated: 2026-09-04T06:59:02.000Z The likely erosion of my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) by deep-pocketed private equity buyers continued in July, with a recommended cash offer for energy group **DCC Energy (LON:DCC)** that values the business at up to 6,797.22p per share. This follows on from a less contentious offer for **Intertek (LON:ITRK)** [last month](https://www.rolandhead.com/portfolio/june-26-dividend-portfolio-update-takeovers-turnarounds-transitions/). Both Intertek and DCC are among my larger holdings, suggesting I could have significant cash to reinvest over the next 6-12 months. Major shareholders seem happy with Intertek's offer, but not all are happy at DCC. Founder Jim Flavin, who remains a 3%+ shareholder has [reportedly described](https://www.ft.com/content/e7966a18-6144-4873-940d-3f4d6bfccc4c?shareType=nongift&ref=rolandhead.com) the price as *"astounding"* and *"a charade"*, questioning the board's judgement in choosing to recommend it. Aviva Investors and Fidelity are also said to have suggested the offer undervalues the group's prospects. I am also a little disappointed at the prospect of losing DCC, but as a private investor I don't tend to waste too much energy on feeling frustrated by takeovers – there's no choice but to bank the win and move on. The offer itself is also worth dissecting as it comes in three parts: - Base consideration of 6,525p per share; - The final dividend for FY26 of 147.22p; - Up to 125p per share for the expected sale of the Technology business. Together these add up to the headline 6,797p figure, but I'd personally exclude the dividend from this (as it was paid on 23 July 2026), giving a figure of up to 6,650p. Shareholders are expected to vote on the offer in September. I assume the board is confident of securing support for the deal, hence its recommendation. Personally, I won't rush to sell as I'll be happy to continue holding if the offer fails. Takeovers aside, three companies from my portfolio issued results in July: - A FTSE 100 heavyweight that's upgraded full-year guidance. - A newish entrant to the FTSE 100 that's growing fast but is also becoming a quite different business. I'm not sure I like the change. - An AIM-listed consumer goods stock yield that's a recent addition to my holdings and offers a 5% dividend yield. Read on for my thoughts on all three sets of results. *Quick reminder: my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and prices paid will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* **Disclosure*: Roland owned shares in Intertek and DCC at the time of publication.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** --- ## In this month's report Please scroll down for the full report, or click on the links to go directly to a specific section: _This post is for paying subscribers only._ ### 2026 half-year dividend portfolio review: better than I expected URL: https://www.rolandhead.com/portfolio/2026-half-year-dividend-portfolio-review-b/ Last updated: 2026-07-19T07:02:30.000Z The first half of 2026 has reinforced my belief in the adage that *it's* *time in the market that counts, not timing the market*. Events this year might reasonably have derailed investment returns – either through a change in investor sentiment or an actual fall in corporate earnings. What's actually happened (so far) is largely the opposite. Earnings are largely holding up and investor sentiment has remained positive, perhaps underpinned by the continuing AI boom. Even my bête noire, the FTSE 250 (to which [I have a lot of exposure](https://www.rolandhead.com/portfolio/q1-2026-dividend-portfolio-review-a-poor-start/)), has behaved, playing catchup with the FTSE 100 after a poor start to the year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/ukx-mcx-spx-ytd-chart-170726.png) FTSE 100 (black), FTSE 250 (blue), S&P 500 (red) Another factor bolstering UK market returns has been the high level of takeover activity. My dividend portfolio has also benefited from corporate action, with two of my top five holdings becoming the subject of private equity interest: - **Intertek (LON:ITRK)**: recommended cash offer from Swedish PE giant EQT. - **DCC (LON:DCC)**: the board wants to sell to KKR, but a number of major shareholders are still unhappy with the offer that's on the table. I too feel there could be a little more gas in the tank. These factors (and some positive company performances) have left my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) ahead of the FTSE 100 so far this year, reversing [an uncomfortable Q1](https://www.rolandhead.com/portfolio/q1-2026-dividend-portfolio-review-a-poor-start/). Of course, there's no guarantee that any of the trends highlighted above will continue during the remainder of the year. Even if they do, some of the companies in my portfolio could run into fresh problems. For now though, I'm enjoying the bounce. In the remainder of this review, I'll take a closer look at the portfolio's performance in Q2 and H1, summarise recent trades and update my record of the portfolio's key financial metrics. - [Q2 2026 performance review](#q2-2026-performance-review) - [Portfolio changes in Q2 2026](#portfolio-changes-in-q2-2026) - [Position weightings](#position-weightings) - [Key financial metrics for the portfolio](#portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) *As a quick reminder, the dividend portfolio documented on this website is a *model portfolio* that largely mirrors my main personal investments. My main goals are to:* - *Generate a *dividend yield greater than the FTSE 100*;* - *Provide *inflation-beating income growth*.* --- ## Q2 2026 performance review As the ultimate aim of this portfolio is to provide a reliable and rising income, I'll start with a snapshot of the portfolio's dividend performance to date: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/1h26-rh-pf-div-income-1.png) Dividend yield based on the portfolio's initial capital of £100k (Dec 2021) While no new capital has been added to the model portfolio since its inception, all income is reinvested. Given this one would hope to see a rising trend of dividend payouts over time. Indeed, one of my reasons for presenting the information in this way is to (hopefully) illustrate the compounding power of reinvested dividends over longer periods – while maintaining the option of switching to income withdrawal as needed. Dividend growth so far this year has been a little lower than previously, but I'm reasonably confident portfolio income will hit a new high in 2026. Of course, dividend income is less useful if the capital value of the portfolio is being eroded. Fortunately, the portfolio enjoyed a decent bounce during the second quarter, reversing Q1 losses and leaving me comfortably ahead of the market for this (very short) period. **Q2 2026 performance:** - RH model portfolio total return: +15.2% - FTSE 100 Total Return index: 4% **H1 2026 performance:** - RH model portfolio total return: 9.0% - FTSE 100 Total Return index: 7.6% Six months is a short period, so here's a longer view on the portfolio's performance since inception in December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/1h26-rh-portfolio-perf.png) Total return performance from 1 Dec 2021 to 30 June 2026 **Share price changes:** a simple average can mask a wide range of underlying movements. That's normal in most portfolios, even over quite short periods. Here's a snapshot of share price movements with the model portfolio during the second quarter of 2026: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/1h26-rh-pf-share-price-chg.png) --- ## Portfolio changes in Q2 2026 During the first quarter I made a number of [top up purchases](https://www.rolandhead.com/portfolio/q1-2026-dividend-portfolio-review-a-poor-start/), without selling anything or adding any new shares to the portfolio. In Q2, I became more active, adding a new stock to fill the vacant 20th slot in the portfolio and opting to replace another longstanding share with a new holdings. I also made one further top up purchase. These were the first new stocks added to the portfolio since December 2024. This activity had a couple of themes behind it. First of all, I wanted to maintain the portfolio's existing exposure to defensive consumer stocks, while rotating a position. Secondly, I wanted to increase my exposure to the software sector, where I think some high quality SaaS businesses have been unfairly penalised by investors' focus on AI-related stocks. Here's a summary of the transactions I made in Q2: ### SALE: Imperial Brands (LON:IMB) This FTSE 100 tobacco stock was a very successful investment for the model portfolio. I bought Imperial at 1,564p when I launched the portfolio and sold in two tranches at 2,205p (July '25) and 2,535p (June '26). [I decided to sell](https://www.rolandhead.com/portfolio/may-26-portfolio-update-what-ill-be-buying-and-selling-in-june/) due to a mild loss of conviction, but more really because I just didn't want to own shares in this business anymore. Including dividends, the portfolio's investment in **Imperial Brands generated a total return of approximately 115%, or 19% annualised.** ### BUY: Consumer goods company I replaced Imperial with a consumer goods stock that boasts a family heritage, strong balance sheet, attractive quality metrics and a distinctive brand. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/image-10.png) Source: [Stockopedia](https://app.stockopedia.com/home?ref=rolandhead.com) This business has a long track record of regular dividends and currently offers a forecast yield of over 5%. Premium subscribers can read more [here](https://www.rolandhead.com/portfolio/may-26-portfolio-update-what-ill-be-buying-and-selling-in-june/). ### BUY: a high-quality SaaS stock with a valuable niche This high-quality, niche SaaS business first came to my attention in 2024\. It provides mission-critical services to enterprise customers, most of whom become extremely loyal. It also boasts excellent quality metrics and a history of special dividends. Revisiting this business earlier this year left me with the view that this could be a good time to get involved. For more details, see [my in-depth buy review](https://www.rolandhead.com/dividend-shares/new-stock-a-high-quality-saas-business-with-sticky-customers/). ### TOP UP: a British tech champion with a 6% FCF yield This FTSE 100 stock is a rare British tech success story: the software provided by this company is an essential system of record for many SMEs and is pretty sticky, with a well-known brand. I don't think it will be displaced by AI-coded alternatives. The shares have fallen by more than 30% over the last year, despite continued profit growth. That's left the stock with a trailing free cash flow yield of c.6%, a level I think offers long-term value. --- ## Position weightings Here's a snapshot of how the model portfolio looked following these top ups, on the 1 July 2026 *(premium subscribers can see this chart with company names on my* [*portfolio page*](https://www.rolandhead.com/dividend-portfolio/)*)*: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/1h26-rh-pf-positions-anon.png) I don't have a fixed policy on maximum weightings or rebalancing. If my largest holding rises above 10% of the portfolio I might think about trimming, but I've no plans to take any immediate action. At the other end of the scale, I don't really want any positions much below 2%, but thankfully that's not currently an issue. --- ## Portfolio: key financial metrics Using an approach borrowed from [Terry Smith](https://www.fundsmith.co.uk/?ref=rolandhead.com) (and others), I like to calculate average metrics for all of my stocks so that I can view the portfolio as it if was a single company. Doing this allows me to track any changes in the overall profile of the portfolio and gauge whether – in aggregate – the stocks I hold have the characteristics I'm targeting. Here's how the model portfolio looked on **30 June 2026**: | **Period end** | **31 Dec 21** | **31 Dec 22** | **31 Dec 23** | **31 Dec 24** | **31 Dec 25** | **30 Jun 26** | | -------------------------- | ------------- | ------------- | ------------- | ------------- | ------------- | ------------- | | Median mkt cap | £3,200m | £2,300m | £1,700m | £983m | £1,230m | £505m | | TTM ROCE | 20.6% | 22.2% | 21.0% | 22.5% | 20.2% | 24.1% | | TTM EBIT yield | 8.7% | 9.4% | 11.3% | 11.0% | 8.7% | 8.1% | | TTM FCF yield | 6.7% | 7.0% | 7.1% | 8.0% | 6.4% | 6.8% | | Net debt/5yravg net profit | \-0.2x | 0.3x | 0.2x | \-0.3x | 0.0x | \-0.1x | | TTM div yield\* | 4.1% | 4.5% | 5.3% | 5.4% | 5.1% | 5.1% | | 5yr avg div grth | 8.3% | 7.6% | 6.3% | 6.3% | 5.0% | 5.2% | | fc div yield\* | 4.4% | 5.0% | 5.2% | 5.4% | 5.3% | 5.4% | | No. yrs div paid | 24 | 21 | 24 | 24 | 26 | 26 | *Scroll L-R (Data source: SharePad/company accounts. Some adjustments were needed. \*Dividend yields were weighted to reflect position size from 2025 onwards. Prior to this they were simply averaged.)* The biggest metric change by far in Q2 was the drop in the portfolio's **median market cap**, which fell from £1.2bn to just £505m. This reflects the addition two new mid-cap stocks and the sale of a FTSE 100 firm – the middle point in the range shifted. For some context, the **mean** market cap only fell from c.£8.5bn to c.£7bn. Moving further down the table, a slight moderation in the portfolio's **EBIT yield** and **FCF yield** reflects the overall rise in valuations during the period. Both figures are still at levels I think are attractive. Leverage remained close to neutral at a portfolio level, aided by one of the more highly geared stocks I've owned (Imperial Brands) being replaced by a company with a net cash position. In fact, both of the new companies I added have a longstanding record of reporting year-end net cash. Dividend yields – forecast and trailing – have remained broadly stable and in line with my target range of 1%-2% above the FTSE 100 average. Reassuringly, the new companies I've chosen have not diluted the portfolio's dividend streak – the 20 companies I own have, on average, paid dividends in each of the last 26 years. --- ## Final thoughts After a [poor Q1](https://www.rolandhead.com/portfolio/q1-2026-dividend-portfolio-review-a-poor-start/) I've enjoyed a strong Q2\. While I remain confident in my strategy of trying to identify high quality, cash-generative businesses that can provide reliable dividends, I'm aware that headwinds remain. Another concern, as I discussed [in June](https://www.rolandhead.com/portfolio/june-26-dividend-portfolio-update-takeovers-turnarounds-transitions/), is that the portfolio has evolved so that the proportion of turnaround/transition situations is probably higher than I'd really like. I aim to try and whittle this down slightly over time, although I'm sticking with the companies I have at present. Assuming the takeovers of Intertek and perhaps DCC go through, I'll need to find at least one new stock to add to the portfolio over the next 6-12 months. I have a few potential ideas in mind that I plan to look at more closely in share reviews over the coming months. Until then, I hope you are enjoying the summer and seeing good fortune in the markets! Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### June '26 dividend portfolio update: takeovers, turnarounds & transitions URL: https://www.rolandhead.com/portfolio/june-26-dividend-portfolio-update-takeovers-turnarounds-transitions/ Last updated: 2026-07-05T07:04:11.000Z The second quarter of 2026 (a full H1 report will follow shortly) was a positive period for my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). This result was aided by a cash takeover offer of £61.077 per share for FTSE 100 group **Intertek (LON:ITRK)**, one of my top five holdings. The average buy price of the model portfolio's Intertek position is c.£49, so I should enjoy a reasonable profit when dividends are included. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/07/itrk-1y-chart-030726.png) Another one of my top five holdings also received strong **takeover interest** during the period – I'm waiting to see if this will translate into a firm offer. Takeover activity is gratifying in the sense that it provides immediate profits and supports my view that the companies in question were a) good and b) undervalued. However, it does leave me with the challenge of finding suitable replacement sources of income. More on that later in the year – for now, my second-quarter trades (see [here](https://www.rolandhead.com/portfolio/may-26-portfolio-update-what-ill-be-buying-and-selling-in-june/) and [here](https://www.rolandhead.com/dividend-shares/new-stock-a-high-quality-saas-business-with-sticky-customers/)) have been completed. I'm not planning any further transactions until the end of the third quarter, in line with my quarterly 'slow trading' strategy. Turning to June's results, five of my portfolio stocks issued results last month, **including one big profit warning.** All five of these are small caps and all five are in the middle of multi-year periods of turnaround or transition. Looking at the portfolio as a whole, I've realised this is probably true for around half my stocks. I don't want to build a portfolio of value/turnaround situations as, I don't think this is consistent with my desire for high quality income. So it looks like I'll need to be careful to manage this type of exposure going forward. *Quick reminder: my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and prices paid will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* *Disclosure: Roland owned shares in Intertek at the time of publication.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** --- ## In this month's report Three of the FTSE 100 companies in my dividend portfolio issued results in June. I've reviewed each of them and share my thoughts below. Please scroll down for the full report, or click on the links to go directly to a specific section: _This post is for paying subscribers only._ ### New stock: a high-quality SaaS business with sticky customers URL: https://www.rolandhead.com/dividend-shares/new-stock-a-high-quality-saas-business-with-sticky-customers/ Last updated: 2026-06-21T07:04:17.000Z When I add a new stock to my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/), it's rarely a business that's completely new to me. More often, it's a company that I've followed for some time and gradually learned about. Doing this allows me to gain conviction while waiting for a suitable buying opportunity. The subject of this new stock review is a case in point. I first wrote about this software business in a [Dividend Note](https://www.rolandhead.com/tag/dividend-notes/) in 2024\. At the time, I noted its excellent quality metrics, super cash conversion and preference for paying special dividends (no doubt influenced by founder ownership). **It's also a Rule of 40 stock:** a software business where revenue growth and the group's EBITDA margin sum to more than 40%. This isn't a concept I place too much weight on, but I do think it's a positive reflection on the profitability and growth potential of this business. Back in 2024, I concluded that the company might be an interesting investment, but I was unsure about the valuation. Fast forward two years and the **share price has fallen**, while **earnings have risen.** Indeed, shares in this company **now trade at half their 2017 IPO price**, despite a **substantial increase in sales and profits** over the last eight years. The outlook is also fairly positive: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/06/alfa-price-eps-fc-080626.png) While there have been some company-specific factors at play, my impression is that this year's sell-off has been triggered by the **SaaSpocalypse**. This sector-wide sell-off has left shares in this business trading on just 16x forward earnings. In my view, that could be a fairly undemanding valuation for a business with **50%+ returns on equity, extreme customer loyalty** and **long-term growth prospects**. I've spent some more time learning about this business in recent months. My conclusion is that it could be an interesting choice to consider for the vacant 20th slot in my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). In this review I'm going to take a look at the company in question and run it through my scoring system to see whether it could earn a place in my portfolio. **Disclosure:* at the time of publication I do not own shares in the company under discussion.* --- ### Summary _This post is for paying subscribers only._ ### May '26 dividend portfolio update: what I'll be buying and selling in June URL: https://www.rolandhead.com/portfolio/may-26-portfolio-update-what-ill-be-buying-and-selling-in-june/ Last updated: 2026-05-31T20:43:02.000Z May turned out to be a fairly positive month for my quality dividend portfolio, thanks partly to an improved takeover proposal for one of my larger holdings, FTSE 100 testing and certification specialist **Intertek (LON:ITRK)**. Would-be private equity bidder EQT has indicated it might be prepared to pay £60 per share in cash, but has not yet made a firm offer. The two companies are currently working through a due diligence progress, with a deadline for a bid of 11 June 2026. Given that EQT has worked its way up from £51.50 to £60, my guess is that this deal will go ahead. Intertek is not the only company that could be leaving my portfolio in the coming months. **I've also decided to sell another holding** in June, during my usual quarterly trading window. The departing stock is a FTSE 100 consumer goods business with an attractive yield but some constraints on long-term growth. In this month's portfolio review, I've explained the reasons for my sale decision and shared details of **one new buy** and **one top up** I'm planning for the month ahead. *Quick reminder: my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and average price paid will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* *Disclosure: I owned shares in Intertek at the time of publication.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** ## In this month's report Three of the FTSE 100 companies in my dividend portfolio issued results in May. I've reviewed each of them and share my thoughts below. I've also included full details of the portfolio trades I'm planning in June. Please scroll down for the full report, or click on the links to go directly to a specific section: _This post is for paying subscribers only._ ### Nichols: fizzy yield could provide durable income URL: https://www.rolandhead.com/dividend-shares/nichols-fizzy-yield-could-provide-durable-income/ Last updated: 2026-05-24T07:01:38.000Z I'm looking for a dividend stock from the consumer goods sector to replace one of the existing holdings in my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). In this share review I'm going to take a look at **Nichols (LON:NICL)** – the 118-year-old maker of *Vimto* and other soft drinks. This AIM-listed stock has **sales in over 60 countries** and uses the same capital-light model favoured by **Coca-Cola** to generate high returns on capital. Nichols has fallen out of favour with investors in recent years following a difficult period during the pandemic, when overexposure to out-of-home sales and some sub-par acquisitions contributed to a profit slump. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-eps-shareprice-210526.png) The company has now addressed many of the issues it faced and results are improving. I don't think the current valuation reflects the quality or value on offer from this **118-year old family business.** I'm also tempted by the recently enhanced dividend policy, which means the shares **now boast a forecast yield in excess of 5%.** 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). **Disclosure:* at the time of publication I do not own shares in Nichols.* --- ### Table of Contents - [**A family favourite with an international twist**](#a-family-favourite-with-an-international-twist) - [**Recent trading & outlook**](#recent-trading-outlook)\- expectations unchanged - [**Crunching the numbers**](#nichols-crunching-the-numbers) \- how does Nichols score in my ranking system? - [**Dividend culture**](#dividend-culture-a-strong-commitment) \- a proven track record of commitment - [**Dividend safety**](#dividend-safety-excellent) \- a well-supported payout - [**Dividend growth**](#dividend-growth-better-than-it-seems)\- I *think* fundamental support remains strong - [**Dividend yield**](#dividend-yield-improving) \- a more generous payout policy could see the yield top 5% - [**Valuation**](#valuation-relatively-cheap) \- the shares look cheaper than they have done since 2011 - [**Profitability**](#profitability-fully-recovered)\- after a difficult patch, quality metrics have bounced back - [**Fundamental health**](#fundamental-health-very-strong) \- a very strong balance sheet - [**Momentum**](#momentum-middling) \- analysts are optimistic, but the market is not yet convinced - [**Conclusion**](#conclusion-a-definite-contender) \- could Nichols be a suitable addition to my dividend portfolio? --- ### A family favourite with an international twist In 1908, Manchester herbalist John Nichols invented *Vimtonic* – a herbal tonic designed to give people 'Vim & Vigour'. Nichols delivered the product to shops, cafes and temperance bars in the local area and it quickly became popular. The recipe for Vimto – still used today – includes a mix of grape, blackcurrant and raspberry juice, plus a secret combination of herbs and spices. Vimto rapidly gained popularity and was soon sold in both cordial and carbonated ready-to-drink formats. Steady expansion saw Nichols leverage both the (then) British Empire and the temperance movement to reach a far larger market at home and abroad. Today, Vimto is a staple of UK supermarket drinks aisles and out-of-home offerings. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-fy26-uk-supermarkets.png) Source: Nichols FY26 presentation Export sales contributed a quarter of the group's revenue last year and take place across Africa and the Middle East, where Vimto is a staple part of the Iftar evening meal during Ramadan. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-fy26-iftar.png) Source: Nichols FY26 presentation Like its much larger rival **Coca-Cola**, Nichols operates a **capital-light model** that sees the company **sell concentrate syrup to bottlers and licensed partners** in each of its geographic markets. This model supports high returns on capital and a cash-rich balance sheet that's allowed the company to execute a turnaround without any unnecessary financial stress. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-fy26-africa.png) Source: Nichols FY26 presentation **A family business?** Following the retirement of John Nichols as chairman in 2023, Nichols is no longer led by a family member. Mr Nichols is the grandson of the company's founder and first joined the company in 1971\. He remains on [the board](https://www.nicholsplc.co.uk/investors/our-board/?ref=rolandhead.com) as a Family Representative Director, as does his son Matt Nichols, who is also the group's Commercial Director - International. The Nichols family also retains a sizeable shareholding, suggesting to me that this remains a family-controlled business, like a number of others in my portfolio. --- ### Recent trading & outlook > "Full year expectations remain unchanged with positive trading momentum set to continue as we complete Phase 2 of our concentrate model shift." **2025 full-year results** ([11/03/26](https://www.investegate.co.uk/announcement/rns/nichols--nicl/2025-preliminary-results-/9468121?ref=rolandhead.com)): last year's results showed a welcome improvement in margins, despite limited sales growth: - Revenue up 1.3% to £175.1m - Pre-tax profit up 21.5% to £29.2m - Adjusted earnings up 5.5% to 67.53p per share - Net cash up 3.8% to £55.7m - *Operating margin: 15.6% (2024: 12.4%)* - *Return on capital employed: 27.5% (2024: 24.9%)* **UK:** the company reported *"sustained growth in UK Packaged"* products, with the total retail sales value of products sold rising by 4.8% to £135m. Growth in the core Vimto brand was driven by product innovation and market share gains across newer formats such as ready-to-drink and energy. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-fy26-category-growth.png) Source: Nichols FY26 presentation Licensed brands such as Levi Roots and Slush PUPPiE are also said to have performed well. **International:** export performance was a little mixed due to a variety of factors: - **Middle East:** revenue fell by 15.5% to £12.0m, which management says related to the timing of shipments in 2024 and 2025 prior to peak Ramadan demand. Vimto was launched in Yemen and Iraq during the year. - **Africa:** like-for-like revenue rose by 9.4%, with total revenue up 5.7% to £20.8m. However, margins improved significantly as the company completed a shift from shipping finished goods to selling concentrate in African markets. > "Our strategy to move can production closer to the point of consumption provides volume, margin and carbon reduction ESG benefits." - **Other international markets:** Nichols is focused on building volume in Europe and North America, where market penetration is currently low. These regions contributed £9.2m of revenue last year. In Malaysia, where Vimto launched in 2024, the company focused on securing retail listings (>3,000 stores) and raising awareness through marketing campaigns. As a predominantly Muslim country, Malaysia may offer an opportunity to replicate the Ramadan popularity of Vimto in the Middle East. **Outlook:** *"Looking ahead, we anticipate delivering another strong performance in 2026 despite ongoing macroeconomic uncertainty. Trading in 2026 to-date has been positive and in line with our expectations."* House broker Singer Capital left its forecasts unchanged at the time of the 2025 results, reflecting uncertainty due to the Middle East conflict: - FY26E adj EPS: 71.6p (+6.1% vs FY25) - FY27E adj EPS: 76.6p (+7% vs FY26) At the time of writing these forecasts put the shares on a FY26 forecast P/E of 13 – not excessive, in my view. **AGM Trading Update** ([21/04/26](https://www.investegate.co.uk/announcement/rns/nichols--nicl/agm-trading-update/9529271?ref=rolandhead.com)): this update left **full-year expectations unchanged** but did perhaps sound a note of caution: - Middle East conflict *"may lead to some volatility in supply chains and key input costs"*; - International sales will be weighted to the second half of the year, due to the timing of concentrate shipments to Africa and the Middle East. Many companies have highlighted the potential impact on supply chains and cost inflation from the Middle East conflict. However, I think it's worth emphasising Nichols' exposure to this end market, which is unusually high for a UK-listed consumer business. --- ## Nichols: crunching the numbers **Description:* a UK soft drink producer that owns the Vimto brand, together with a number of other licensed and owned brands. Sales are concentrated in the UK, Middle East and Africa, although the business is expanding more broadly.* | **Nichols(LON:NICL)** | **Quality Dividend score: 63/100** | **Forecast yield: 5.5%** | | ------------------------ | ---------------------------------- | ------------------------ | | Recent share price: 948p | Market cap: £342m | *All data at 21 May 26* | ***Latest accounts:*** [*2025 full-year results*](https://www.investegate.co.uk/announcement/rns/nichols--nicl/2025-preliminary-results-/9468121?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think Nichols could be a suitable addition to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). As a reminder, this is a scoring system I've developed to rank shares for the qualities that are important to me, from a quality dividend perspective. My choice of scoring factors is of course **personal** and **highly subjective**. These scores are not intended to be used as a guide on when to buy or sell shares. They're simply one factor I use to assess a stock's potential attractions, in addition to broader, company-specific analysis. Unless specified otherwise, the financial data I use in this process is drawn from ShareScope. --- ### Dividend culture: a strong commitment Family-controlled firms are often a good place to look for reliable dividends. Multi-generational family ownership often see dividends as a core part of their income stream and prefer them to share buybacks – a view I share. Nichols chose to cut its dividend during the pandemic, when over-exposure to out-of-home (foodservice) sales caused profits to plummet during lockdown. While the group's net cash position was never threatened, the outlook at the time was uncertain. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-dividends-210526.png) This cut ended a 30-year run of unbroken dividend *growth*, but Nichols has maintained annual payouts for the last 34 years, according to ShareScope. The payout is now moving back towards its pre-pandemic levels and last year's return was boosted by an additional special dividend of 54.8p per share. I am confident that Nichols has a strong dividend culture. **Nichols scores 5/5 for dividend culture in my screening system.** --- ### Dividend safety: excellent My dividend safety scores looks at how well the dividend is covered by earnings and free cash flow. I also take into account a group's net debt (or cash) position. I have few concerns in this area with Nichols. As the chart below shows, the group has maintained dividend cover in the range of 2x for most of the last 30 years. Free cash flow cover has also been consistently comfortable, while net cash has accumulated. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-div-fcf-cover-netdebt-220526.png) The only caveat to this is that from 2026, Nichols has altered its dividend policy to target 1.5x cover. Given the group's £50m+ net cash position I think this should be safe enough – this year's forecast payout of 51.4p per share would cost £18.8m. But changes to longstanding policy are always worth monitoring, so I will be keen to see that free cash flow cover remains healthy. **Nichols scores 4.2/5 for dividend safety in my screening system.** --- ### Dividend growth: better than it seems? My dividend growth score is designed to test the sustainability of a company's payout growth by comparing it to free cash flow and net asset value per share. The logic is that if these two other metrics don't increase in similar proportion to dividend growth, support for the payout is likely to weaken over time. Nichols' track record prior to the pandemic was excellent. But the company's payout (red bars below) is still slightly below its pre-pandemic peak and both NAV per share and free cash flow have also weakened during the recent turnaround period. This has resulted in Nichols scoring zero in my dividend growth category: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-divps-fcfps-navps-fc-220526.png) I think this result is probably a little harsh, given the context. Free cash flow cover has remained positive following the reduction to the payout. As I mentioned above, the payout is also expected to rise significantly this year, taking it above its 2019 level. Broker forecasts suggest free cash flow will also stabilise, delivering cash cover for the dividend of around 1.5-1.6x. Companies rarely achieve a top score in all categories at once. I'm willing to overlook this shortfall. In my view, Nichols' strong balance sheet and proven dividend culture *should* underpin sustainable growth over the coming years. **Nichols scores 0/5 for dividend growth in my screening system.** --- ### Dividend yield: improving When scoring a stock for dividend yield I consider the five-year average, trailing yield and forecast yield. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-divyield-fc-220526.png) What's clear is that Nichols used to command higher yields in the past, prior to 2010\. My view on this is that this correlates to the start of the low interest rate era, where companies with reliable dividends were bid to higher valuations than in the past. This was a particularly noticeable trend with a number of high quality AIM dividend stocks that were popular with AIM IHT fund managers. Many of these have de-rated since, perhaps partly due to persistent fund outflows. I see this as a potential opportunity. **Nichols scores 2.8/5 for dividend yield in my screening system.** --- ### Valuation: relatively cheap To calculate my screening score, I look at a company's valuation based on its EBIT/EV yield and its free cash flow yield. I see these measures as a more useful guide than the P/E to the valuation of the whole business and the level of sustainable return potentially available to shareholders. The chart below shows some inconsistency in recent years. But it also highlights how the recovery in profit since 2022 has left the stock looking potentially cheap, with an EBIT yield that's nearing 10%. (As a rule of thumb, I tend to use 8% as a threshold for value.) ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-fcf-ebit-yield-190526.png) The caveat to this is that the company's cash generation also needs to recover. I think it will. Checking last year's cash flow statement shows some large unfavourable working capital movements which the company says resulted from the timing of some year-end sales. This is expected to unwind during the first half of 2026 and not recur this year. Broker forecasts suggest free cash flow could be c.£30m this year, giving a potential free cash flow yield of more than 8%. **Fair value estimate:** various valuation methodologies exist to try and calculate the intrinsic value of a company's shares. I tend to be careful about relying on them too heavily because they require predictions about the future. Even so, I find fair value estimates useful for providing a different perspective on valuation to the relative valuation ratios I use in my scoring system. The intrinsic valuation methods I tend to use are **earnings power value**,the **dividend discount model** and **discounted cash flow**. In Nichols' case, applying a 10% required rate of return and some conservative estimates on long-term growth gives me **a range of fair value estimates from c.750p to 1,150p**, depending on which method I use. Averaging these gives me c.910p, slightly below the last-seen share price of 948p. *This is perhaps a sign that Nichols isn't necessarily all that cheap unless the business can deliver the hoped-for return to sustainable growth.* **Nichols scores 3.5/5 for valuation in my screening system.** --- ### Profitability: fully recovered? For non-financial stocks I use return on capital employed (ROCE) as my main indicator of profitability, paired with net asset value per share growth. The reason for this is that a business generating consistent returns on a growing asset base should increase in value over time. I see ROCE as a more useful measure than profit margins for gauging whether a company has the potential to deliver *long-term* compound growth. ROCE is not necessarily as useful in the short term, but that's not my main concern for this portfolio. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-roce-navps-220526.png) My screen blends five-year average ROCE, trailing-12-month ROCE and NAVps growth to give an overall score. Despite last year's excellent ROCE result, two factors combine to suppress my overall profitability score for Nichols: - Five-year average ROCE remains depressed; - The group's net asset value is still below its 2019 peak, largely relating to the underperforming out-of-home business. **Nichols scores 3/5 for profitability in my screening system**. --- ### Fundamental health: very strong My scoring algorithm uses interest cover and net debt to gauge a company's fundamental health. However, Nichols has net cash and net interest income, so these factors aren't very relevant. To illustrate the company's balance sheet strength, I thought it might be more useful to look at how the company's quick ratio and net cash position have evolved over time. As a reminder, the quick ratio compares current assets (excluding inventories) with current liabilities: it's a measure of a company's ability to meet its near-term liabilities from liquid assets. We can see from the chart that Nichols maintains a high level of liquidity: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-quickratio-netborrowing-220526.png) Indeed, checking last year's balance sheet suggests the company could have settled all of its outstanding payables at the end of the year from net cash, without needing to convert its receivables into cash. That's a strong position to be in. **Nichols scores 5/5 for fundamental health in my screening system.** --- ### Momentum: middling The momentum element of my scoring algorithm is a relatively new addition. I discussed it in more depth [here](https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/). In short, I look for a pattern of improving earnings (recent and forecast) and some technical share price momentum. I also want to see forecast dividend growth. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-eps-divps-fc-220526.png) We can see from the chart that Nichols earnings and dividend have both returned to growth. Broker forecasts suggest they will continue rising over the next couple of years. Share price momentum is a little less certain, I think. I'm no chartist, but the measure I use here to gauge momentum is the ratio of the 50-day moving average (red line) to the 200-day moving average (blue line). This is a commonly used charting approach to gauge the medium-term trend of a stock. Ideally, the 50dMA would be comfortably above the 200dMA, indicating positive share price momentum. In this case, the two lines are both at the same level, perhaps indicating somewhat uncertain momentum: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/05/nicl-5y-chart-50-vs-200dma-220526.png) My hope with Nichols is that if earnings follow forecasts, buyers will gradually return to the stock when it becomes too cheap to ignore. Whether this transpires remains to be seen, of course – my momentum score is still new and has not yet had chance to prove its worth. **Nichols scores 2.5/5 for momentum in my screening system.** --- ### Conclusion: a definite contender **My dividend screening system awards Nichols an overall score of 62/100 at the time of writing (May 2026).** I covered Nichols briefly in a dividend note in [March 2024](https://www.rolandhead.com/dividend-notes/unloved-value-opportuities-spt-rwa-inch-nicl-08-03-24/#nichols-nicl) and have followed it in the background for several years. It's a defensive consumer goods business with the kind of characteristics that have historically supported reliable dividend growth over long periods. The past is no guarantee of the future, of course. Nichols lack of family management could see the company lose its focus, while its niche brand – albeit a large niche – could eventually reach growth limits as fashions and tastes change. Ultimately, this is a business that sells sugary drinks, after all. Despite these concerns, I think the valuation, balance sheet and trading outlook all point to a potential opportunity – if the company can avoid further missteps. Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### April '26 dividend portfolio update: 2 possible takeovers plus reassuring trading updates URL: https://www.rolandhead.com/portfolio/april-26-dividend-portfolio-update-2-possible-takeovers-plus-reassuring-trading-updates/ Last updated: 2026-05-03T06:51:30.000Z April was a busy period for trading updates from my portfolio. At the end of the month, I was left with the following scores on the doors: - **Four** of my companies issued trading updates **in line with expectations**; - One **FTSE 250** company now expects to report full-year profits *"*comfortably ahead*"* of previous expectations; - Another FTSE 250 company is now guiding for full-year profits *"*towards the lower end* of consensus expectations"*; - Two of my companies issued full-year or half-year results (see below); - **Two of my larger stocks received possible takeover offers** \- both are holdings I've topped up in the last few months ([here](https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/) and [here](https://www.rolandhead.com/portfolio/mar-26-dividend-portfolio-update-3-top-ups-5-results-34-of-my-portfolio/)). The offers were rejected but both companies remain in play under takeover rules, with neither potential bidder having yet ruled themselves out. The takeover candidates are both industrial groups that were already in the process of slimming down to focus on their most profitable, fastest-growing operations. I'm happy to continue holding them if no firm bids emerge; they are among my larger, higher conviction positions. *Quick reminder: my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** --- ## In this month's report My monthly reports only cover results, not (usually) trading updates. This means there are just two companies on the menu this month: both are AIM-listed UK businesses with family ownership and **6%+ dividend yields.** Here is a summary of each section – please scroll down for the full report, or click on the links to go directly to a specific section: _This post is for paying subscribers only._ ### Q1 2026 dividend portfolio review: a poor start URL: https://www.rolandhead.com/portfolio/q1-2026-dividend-portfolio-review-a-poor-start/ Last updated: 2026-04-12T07:00:41.000Z The first quarter of 2026 brought its share of surprises. The impact on UK share portfolios varied, mostly depending on the level of exposure to energy, defence and mining. In this review I'll look at the performance of my dividend portfolio in Q1\. *Spoiler alert: I don't own many energy, defence or mining stocks.* As a quick reminder, the dividend portfolio documented on this website is a **model portfolio** that largely mirrors my main personal investments. My main goals are to: - Generate a **dividend yield greater than the FTSE 100**; - Provide **inflation-beating income growth**. This strategy is based on the hypothesis that steady income growth *should* lead to corresponding long-term share price growth, as stocks re-rate to maintain stable yields. In theory at least, this should mean enjoying useful capital gains over time, while also receiving a rising income. So far, the portfolio has generated rising income in each year since its inception in 2021\. Although dividend income fell slightly during Q1 when compared to the same period last year, the first quarter typically provides less than a quarter of the portfolio's full-year income. I am not too concerned about this shortfall at this point. I'm also hopeful that some [recent top-up purchases](#portfolio-changes-in-q1-2026) will bolster income receipts during the remainder of the year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/04/rh-pf-div-income-1q26-2.png) Dividend yield based on the portfolio's initial capital of £100k (Dec 2021) In the remainder of this review, I'll take a closer look at the portfolio's performance in Q1, summarise recent top up trades and update my record of the portfolio's key financial metrics. - [Q1 2026 performance review](#q1-2026-performance-review) - [Portfolio changes in Q1](#portfolio-changes-in-q1-2026) - [Position weightings](#position-weightings) - [Key financial metrics for the portfolio](#portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) --- ## Q1 2026 performance review There's no way to put a positive spin on this. By the time markets closed on 31 March 2026, my model portfolio had underperformed the FTSE 100 total return index by 8.8%. **Q1 2026 performance:** - RH model portfolio total return: -5.4% - FTSE 100 Total Return index: +3.4% Although only 38 of the companies in the FTSE 100 rose in Q1, the largest gains were concentrated in some of the largest companies, driving the market higher. Unfortunately, only one of the stocks listed below is a member of my portfolio (although it is one of my two largest positions): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/04/ukx-top25-1q26.png) Source: ShareScope The chart below shows the model portfolio's performance against the FTSE 100 TR since the portfolio's inception in December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/04/1q26-rh-portfolio-perf-2.png) Total return performance from 01-Dec-21 to 31-Mar-26 The extent to which the FTSE 100 has outperformed the remainder of the UK market over the last five years is made clear by comparing my portfolio with a different benchmark. Over the same period as shown in the chart above, my performance is almost level with the FTSE 250 total return index: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/04/rh-pf-vs-mcxtr-inception-310326-1.png) Source: ShareScope Historically, the FTSE 100 and 250 have been more equally matched. My hope remains that the UK's small and mid-caps will reassert themselves over time: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/04/mcxtr-vs-ukxtr-090426.png) L-R: Dec '21 to Mar '26 / Dec '09 to Mar '26 (Source: ShareScope) Unfortunately, the portfolio's small and mid-cap exposure meant it was more heavily exposed to the market sell-off that followed the start of the Middle East conflict. Just four of my stocks (out of 19) logged positive share price performances in Q1: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/04/rh-pf-1q26-share-price-chg.png) While only three stocks saw material cuts to consensus earnings forecasts in Q1, sentiment was poor and many shares de-rated and became cheaper. As a result, I decided to adds to some holdings at the end of the quarter. Instinctively, I find my temperament is better-suited to averaging down than cutting losers quickly. Whether this will eventually prove to be a winning approach is a different question. --- ## Portfolio changes in Q1 2026 No new stocks were added to the portfolio during the first quarter and no shares were sold. I did continue to use accumulated dividend income to top up existing holdings. Following on from a record [seven top ups at the end of December](https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/), I added to three positions at the end of March: - A **FTSE 100** financial with an **8%+ dividend yield**; - A **biotech** stock with potentially exciting prospects and an 8**% yield**; - A **FTSE 100 industrial group** that's in the global top four in its sector. Subscribers can see full details of these purchases and my thoughts on each company's recent results in [**my March write-up**](https://www.rolandhead.com/portfolio/mar-26-dividend-portfolio-update-3-top-ups-5-results-34-of-my-portfolio/). --- ## Position weightings Here's a snapshot of how the model portfolio looked following these top ups, on the 1 April 2026 *(paid subscribers can see this chart with company names on my* [*portfolio page*](https://www.rolandhead.com/dividend-portfolio/)*)*: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/04/rh-pf-1q26-positions-anon.png) The portfolio was originally conceived with a fixed target of 20 stocks, but it's only had 19 since the sale of **Somero Enterprises** [in September](https://www.rolandhead.com/portfolio/q3-2025-dividend-portfolio-review-income-growth-expensive-lessons/). I have not yet added back a 20th stock to the portfolio and I'm undecided if I will. I am inclined to move to a more flexible approach targeting 15-20 stocks. Although I have some ideas for one or two new positions, I'm also considering trimming some other underperformers as the year unfolds. Time permitting, I hope to look at some potential dividend stock ideas in some new [share reviews](https://www.rolandhead.com/tag/dividend-shares/) in the coming months. --- ## Portfolio: key financial metrics Using an approach borrowed from [Terry Smith](https://www.fundsmith.co.uk/?ref=rolandhead.com) (and others), I like to calculate average metrics for all of my stocks so that I can view the portfolio as it if was a single company. Doing this allows me to track any changes in the overall profile of the portfolio and gauge whether – in aggregate – the stocks I hold have the characteristics I'm targeting. Here's how the model portfolio looked on **31 March 2026:** | **Period end** | **31 Dec 21** | **31 Dec 22** | **31 Dec 23** | **31 Dec 24** | **31 Dec 25** | **31 Mar 26** | | -------------------------- | ------------- | ------------- | ------------- | ------------- | ------------- | ------------- | | Median mkt cap | £3,200m | £2,300m | £1,700m | £983m | £1,230m | £1,460m | | TTM ROCE | 20.6% | 22.2% | 21.0% | 22.5% | 20.2% | 21.1% | | TTM EBIT yield | 8.7% | 9.4% | 11.3% | 11.0% | 8.7% | 9.0% | | TTM FCF yield | 6.7% | 7.0% | 7.1% | 8.0% | 6.4% | 7.5% | | Net debt/5yravg net profit | \-0.2x | 0.3x | 0.2x | \-0.3x | 0.0x | 0.2x | | TTM div yield\* | 4.1% | 4.5% | 5.3% | 5.4% | 5.1% | 5.6% | | 5yr avg div grth | 8.3% | 7.6% | 6.3% | 6.3% | 5.0% | 5.0% | | fc div yield\* | 4.4% | 5.0% | 5.2% | 5.4% | 5.3% | 5.7% | | No. yrs div paid | 24 | 21 | 24 | 24 | 26 | 26 | *Scroll L-R (Data source: SharePad/company accounts. Some adjustments were needed. \*Dividend yields were weighted to reflect position size from 2025 onwards. Prior to this they were simply averaged.)* The average **market cap** of the companies in the portfolio rose once again during the first quarter of this year. I'm happy to see this rising as my aim is to have a mix of smaller, mid-sized and larger companies. Profitability (**ROCE**) and valuation (**EBIT & FCF yield**) both remain at similar levels to the end of last year. In my view, these figures suggest that in aggregate, at least, the companies in my portfolio are good quality businesses at affordable prices. Whether this translates into encouraging *future* performance remains to be seen, of course. It's also worth remembering that an attractive average can mask some ugly individual values. I'm more confident with regard to **leverage**. Twelve of the 19 companies in the portfolio reported net cash positions in their most recent accounts. Of the remaining seven, five are well-established FTSE 100 businesses where I judge that the level of gearing in use can comfortably be managed. Only two of my leveraged companies are small or mid caps. In my view only one of these carries any real risk in relation to debt. In this case, I expect to see progress on deleveraging during the current year and may decide to sell if this does not happen. The portfolio's **dividend metrics** remain attractive and this remains at the core of my strategy. Annual income from the portfolio has risen above inflation every year since inception, despite the lamentable share price performance of some stocks. Looking at the table above, the **increased dividend yield** in Q1 versus December 2025 was largely due to share price declines over the last three months. Looking ahead, the portfolio's **forecast dividend yield of 5.7%** reflects expectations for continued dividend growth this year. The companies in the portfolio have all paid dividends for **at least the last 12 years**, although this may have included some cuts. The average is 26 years and some have made consecutive annual payouts for more than 30 years. This too is a core element of my strategy. In my opinion, a company that has demonstrated a commitment to providing shareholders with **a tangible (cash) return** on their investment over many years is more likely to have a sustainable long-term strategy than one which doesn't. While buybacks may be effective in some circumstances, I don't consider them to be a tangible return on investment. As income fund manager Daniel Peris [explains](https://danielxperis.substack.com/p/philosophy-not-finance), a dividend is a business outcome for owners, while a buyback is a market action that only provides a tangible benefit (if it at all) to sellers of the stock. --- ## Final thoughts It's been a poor start to the year for my portfolio, made worse by the impact of the Middle East conflict. The situation doesn't seem to be settled at the time of writing and I think it's reasonable to expect further geopolitical disruption to markets this year. Fortunately, *most* of the companies in my portfolio still appear to be in good health and performing largely as expected. For the minority where performance hasn't been satisfactory, I'll be looking to see (expected) improvement this year or else considering a sale. As always, thank you for reading – and good luck in the markets! Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Mar '26 dividend portfolio update: 3 top ups, 5 results & 34% of my portfolio URL: https://www.rolandhead.com/portfolio/mar-26-dividend-portfolio-update-3-top-ups-5-results-34-of-my-portfolio/ Last updated: 2026-03-31T06:00:04.000Z Five companies in my model dividend portfolio reported results in March, bringing to an end a busy results season. This selection included three of my top five holdings. Collectively, they accounted for around 34% of the [model portfolio](https://www.rolandhead.com/dividend-portfolio/) and a similar proportion of my own real-money holdings. Among the companies reporting were a newly-promoted FTSE 100 business, a FTSE high-yield stalwart and two FTSE 250 companies that are both market leaders in their sectors. There were also interim results from an AIM stock with a 10% yield, where in-line guidance and positive commentary left me with a view that the business could be attractively valued. To reflect my views on valuation and the long-term prospects of each business, I've decided **to top up three of these positions at the end of Q1**. I will make equivalent changes to my own real-money holdings, subject to any real-world constraints. **As usual, full details of all top ups will be added to the model portfolio page shortly after completion.** *Quick reminder: my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section: _This post is for paying subscribers only._ ### Feb '26 dividend portfolio update: dependable quality + turnaround progress URL: https://www.rolandhead.com/portfolio/feb-26-dividend-portfolio-update-dependable-quality-turnaround-progress/ Last updated: 2026-03-01T08:09:19.000Z Happy March! February flew by, but four of [my model portfolio](https://www.rolandhead.com/dividend-portfolio/) companies issued results as the UK reporting season gathered pace. Among those which issued results in February were a niche financial stock whose 8% dividend yield now looks much safer to me than it did six months ago. Also on the list are two large consumer-facing businesses (one FTSE 100 stock and one FTSE 250 member). Both reported resilient cash flow and profitability, despite widespread pressure on consumer spending and weak sales growth. Finally, there was an AIM high yielder whose newish management now appears to be running down the group's cash pile in order to position the business for future growth. This particular stock has performed well since I added it to the model portfolio in September '24 and I still have confidence in the strategy. But my analysis now makes me think that further upside could be more limited than I previously thought. Happily there were no further profit warnings from any of my portfolio companies in February! *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** --- ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Jan '26 dividend portfolio update: a promising start to 2026 URL: https://www.rolandhead.com/portfolio/jan-26-dividend-portfolio-update-a-promising-start-to-2026/ Last updated: 2026-02-25T14:15:10.000Z Welcome to my first monthly update of 2026\. Any comments on market conditions run the risk of becoming quickly outdated, but at the time of writing the UK market has made a fairly perky start to the year: - FTSE 100 YTD: +2.8% - FTSE 250 YTD: +3.7% - FTSE SmallCap ex-ITs YTD: +5.9% I hope your portfolios have also enjoyed a positive beginning to 2026. These monthly reviews normally only cover interim and full year results, not trading updates (unless they are particularly dramatic). However, none of the companies in my portfolio issued results in January, so in order to avoid skipping a month I've opted for a different format. Seven of my companies issued trading updates in January, representing around 37% of the model portfolio by value. These included a mix of in line statements, upgrades and mild downgrades: - **Three** companies trading **in line** with expectations\- including two niche financials with 8%+ yields and a high-quality FTSE 100 stock; - **Two** companies trading **ahead of expectations** – both are FTSE 250 stocks with leading reputations in their respective markets; - **Two (mild) downgrades** – a UK retailer I rate highly and a manufacturer that's exposed to sluggish economic growth in a number of markets. Both are very minor downgrades (so far). In the remainder of this update, I'm going to summarise the news from each. I'll take a more detailed look at them when they publish interim or full-year accounts in due course. Normal service will resume in February, when I expect a number of results to be published. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** --- ## In this month's report Here is the full list of January trading updates from my portfolio companies. Please click on the links or scroll down for a short summary of the news from each of these stocks: _This post is for paying subscribers only._ ### 2025 dividend portfolio review: rising income wasn't enough URL: https://www.rolandhead.com/portfolio/2025-dividend-portfolio-review-rising-income-wasnt-enough/ Last updated: 2026-01-11T14:23:25.000Z Welcome to my quality dividend portfolio review for 2025\. As a quick reminder, the portfolio documented on this website is a model portfolio that largely mirrors my main personal portfolio. My primary goals for the model portfolio are: - Provide a **dividend yield greater than the FTSE 100**; - Provide **inflation-beating income growth**. Underlying this strategy is the theory that steady income growth *should* lead to corresponding share price growth over longer periods, as stocks re-rate to maintain stable yields. In theory at least, this should mean enjoying useful capital gains over time, while also receiving a rising income. I'm happy to report that the portfolio met its income goals in 2025: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/01/rh-pf-income-2025-1.png) Dividend yield based on the portfolio's initial capital of £100k (Dec 2021) Unfortunately, the hoped-for capital gains did not materialise. I'll discuss this shortly. Given the strength of the UK market last year, this is especially disappointing. In the remainder of this review, I'll take a closer look at the portfolio's performance in 2025, summarise the year's trades and review my plans for managing the portfolio over the coming years. I'll also update my record of the portfolio's key financial metrics. - [Q4/2025 performance review](#2025-performance-review) - [Portfolio changes in 2025](#portfolio-changes-in-2025) - [Position weightings](#position-weightings) - [Key financial metrics for the portfolio](#portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) --- ## 2025 performance review Here's how the portfolio's performance panned out at the end of the quarter, measured on a total return basis (share price movements + dividend income): **2025 performance:** - RH model portfolio total return: 1.5% - FTSE 100 Total Return index: 25.8% The chart below gives a broader view on the model portfolio's performance since its inception in December 2021\. It's undeniably disappointing; the portfolio underperformed cash last year, during a period when the FTSE 100 delivered a 20%+ return: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/01/fy25-portfolio-perf-chart-2.png) My model portfolio is focused on delivering a rising and reliable income. But capital gains are also needed in order to achieve a satisfactory long-term total return. The model portfolio has fallen woefully short in this regard, delivering a total return of just 9.2% since inception in December 2021 (2.2% annualised). This compares to a 60.8% for total return for the FTSE 100 (12.3% annualised). As I discussed in my [Q3 review](https://www.rolandhead.com/portfolio/q3-2025-dividend-portfolio-review-income-growth-expensive-lessons/#position-sizing-a-new-plan), I believe the lack of capital growth is largely due to losses that have resulted from opening new positions at the wrong time, in too large a size. For this reason, I've altered my approach so that I start new positions with a smaller weighting than previously, only increasing them as they deliver on expectations. Alongside this, I've introduced added some [new momentum rules](https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/) to my scoring system which I hope will help to highlight stocks where the outlook is positive and improving This chart showing 2025 share price movements across the portfolio highlights this point again. While there were some respectable gains that could have supported a positive overall result, there was a painful drag from three big losers: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/01/rh-pf-fy25-price-chg.png) I plan to follow my amended approach in 2026 to see if it delivers an improved result. If not, I may need to consider a more drastic change of strategy. It's painful to realise that if I'd invested in a FTSE 100 tracker in December 2021 and done nothing since, my portfolio could be worth c.50% more than it is today. --- ## Portfolio changes in 2025 Portfolio changes were relatively limited last year, with **one stock leaving the portfolio and no new additions**. - I sold concrete floor levelling specialist **Somero Enterprises** at the start of October, as discussed in [my September update](https://www.rolandhead.com/portfolio/september-25-dividend-portfolio-update-improving-performance-resilient-quality-but-im-selling-one-stock/). In short, I concluded the company's competitive advantages and growth potential were less compelling than they might have been in the past: > "I fundamentally misunderstood the exceptional market conditions Somero was benefiting from when I originally purchased this business – management now admits that a significant amount of demand was pulled forward during the 21/22 warehouse boom, thus contributing to weaker sales currently." > ... the new CEO has indicated a potential change of strategy as he pursues new lines of growth. I can't really fault his logic, but the company's commentary on current market conditions doesn't seem that encouraging to me and I note there are not yet any broker forecasts for 2026. As a result of the Somero sale and accumulated dividend income throughout the year, the portfolio's cash weighting had reached 12% by early October – before even adding fourth quarter dividend income. While I like to have some cash, this was too much. To put some of this cash to work, I made a series of seven top ups at the end of December. I summarised my thinking behind each purchase in this update: - [My portfolio top ups for December + new momentum rules](https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/) --- ## Position weightings Here's a snapshot of how the model portfolio looked at the end of the quarter *(paid subscribers can see this chart with company names on my* [*portfolio page*](https://www.rolandhead.com/dividend-portfolio/)*)*: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2026/01/rh-ph-weightings-anon-010126.png) *As mentioned above, I sold the Somero Enterprises in October. *This means the portfolio now has 19 stocks.** My target is to maintain the portfolio at 20 stocks, although there's some flexibility about this. I'm likely to add a 20th company this year but am not in a desperate rush to do so. I'm hoping to review some potential ideas in some new [share reviews](https://www.rolandhead.com/tag/dividend-shares/) in the coming months. --- ## Portfolio: key financial metrics In the final section of each quarterly review I take a look at the portfolio as if it was a single stock. I think it's useful to view the portfolio in this way to ensure that it still has the aggregate characteristics I'm looking for, such as strong profitability and good cash generation. Of course, averages can mask a multitude of company-specific issues. This approach will not protect against that, but I still think it's a useful way to track broad changes in the quality and valuation of the portfolio over time. Here's how the model portfolio looked at the **end of December 2025:** | **Period end** | **31 Dec 21** | **31 Dec 22** | **31 Dec 23** | **31 Dec 24** | **31 Dec 25** | | -------------------------- | ------------- | ------------- | ------------- | ------------- | ------------- | | Median mkt cap | £3,200m | £2,300m | £1,700m | £983m | £1,230m | | TTM ROCE | 20.6% | 22.2% | 21.0% | 22.5% | 20.2% | | TTM EBIT yield | 8.7% | 9.4% | 11.3% | 11.0% | 8.7% | | TTM FCF yield | 6.7% | 7.0% | 7.1% | 8.0% | 6.4% | | Net debt/5yravg net profit | \-0.2x | 0.3x | 0.2x | \-0.3x | 0.0x | | TTM div yield\* | 4.1% | 4.5% | 5.3% | 5.4% | 5.1% | | 5yr avg div grth | 8.3% | 7.6% | 6.3% | 6.3% | 5.0% | | fc div yield\* | 4.4% | 5.0% | 5.2% | 5.4% | 5.3% | | No. yrs div paid | 24 | 21 | 24 | 24 | 26 | *Scroll L-R (Data source: SharePad/company accounts. Some adjustments were needed. \*Dividend yields were weighted to reflect position size from 2025 onwards. Prior to this they were simply averaged.)* In Q3, I commented on the gradual decline in the median size of the companies in the portfolio. I'm pleased to see this started to rise again last year. While I am agnostic on market cap, my feeling is that the optimum position for my strategy is to have a balanced mix of small, mid-sized and larger companies. Looking at the table above, the average return on capital from the companies in the portfolio remained high, suggesting that collectively, they remain good quality businesses. Valuation metrics (EBIT yield and FCF yield) remain at levels I'd see as decent value, but are notably lower (i.e. more expensive) than one year ago. Fortunately, my portfolio companies haven't succumbed to the temptation of borrrowed cash. In aggregate, they had a broadly neutral net cash/debt position at the end of 2025. The portfolio's forecast dividend yield of 5.3% is in line with past performance and comfortably ahead of the FTSE 100's expected 3%-4% yield in 2026. My companies have also maintained their strong record of unbroken dividend payouts. On average, my stocks have paid unbroken dividends for the last 26 years (although this may have included some cuts). --- ## Final thoughts My quality dividend strategy was always intended to be a long-term approach that relies partly on compounding of companies' reinvested earnings and mean reversion of yields to deliver capital gains. Periods of underperformance were inevitable, as with any strategy. But there's no doubt that total return performance has been disappointing so far, despite the progressive income the portfolio has generated. Being a stockpicking investor requires a certain level of inherent optimism. Otherwise it would be illogical to choose to own individual stocks. Naturally I am hoping performance will improve in 2026, with consistent application of the strategy. But I know there is no guarantee of this. I will continue to document progress over the coming year. As always, thank you for reading – and good luck in the markets in 2026! Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dec '25 dividend portfolio update: why I'm buying more of this 8% yielder URL: https://www.rolandhead.com/portfolio/dec-25-dividend-portfolio-update-why-im-buying-more-of-this-8-yielder/ Last updated: 2026-01-14T19:23:45.000Z **Season's Greetings,** and welcome to my final monthly portfolio review of 2025. As is usually the case in December, just two of my companies issued results during the month. One of these is a quirky and obscure small cap that's listed on the London Main Market and has a near-perfect thirty-year record of dividend growth. It's just increased its dividend by 5% (again!). The other company I discuss in this review is an AIM-listed technology stock that has just cut its dividend. While past results have certainly disappointed here, I am cautiously encouraged by these numbers. I believe that the new CEO (backed by the company's largest shareholder) has the strategy and discipline needed to return this business to growth. Indeed, I think this business could turn out to be a genuine AI winner, on a medium-term view. The shares already offer an 8% dividend yield. If I'm right about the prospects for the business, I think the stock could prove to be much too cheap at current levels. While I'm obviously biased and could be wrong, I have included this company on my top-up list for December. I will be buying more shares before the end of the year. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* **For an explanation of my Quality Dividend score,** [**see here**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)**.** --- ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. ***This piece has been written in advance and scheduled to publish on Boxing Day, so I hope it finds you rested and well.*** If any unexpected developments do arise in the final days of 2025, I will update this review as needed. _This post is for paying subscribers only._ ### My portfolio top ups for December + new momentum rules URL: https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/ Last updated: 2025-12-14T20:11:53.000Z In November [I promised](https://www.rolandhead.com/portfolio/nov-25-dividend-portfolio-update-reassuring-trends-vs-turnarounds/) further news on my top-up decisions before the end of the year. In October, I flagged up some [changes to my plans](https://www.rolandhead.com/portfolio/q3-2025-dividend-portfolio-review-income-growth-expensive-lessons/#position-sizing-a-new-plan) for position sizing and buying shares. This update will bring these various threads to a conclusion. To start, I'll explain how I've now incorporated a modest momentum weighting to my scoring system – the first change since its inception. I'll follow this with a summary of the top up share purchases I plan to make later this month in the [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and my own personal holdings. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* --- ## Adding a Momentum score to my system You can read a full description of my new position sizing framework [here](https://www.rolandhead.com/portfolio/q3-2025-dividend-portfolio-review-income-growth-expensive-lessons/#position-sizing-a-new-plan). The short version is: > My aim will be to try and increase the portfolio's weighting to a group of stable and well-understood core positions, with smaller starting \[satellite\] positions that either gradually become core or are traded out more readily. How does momentum fit into this? As I explained in my third-quarter update, I believe most of the portfolio's largest losses to date have resulted from me entering new positions at the wrong time, in the face of negative momentum. To help me select shares to buy (and for top ups), I use a set of screening rules to generate a list of stocks that I can score for attributes such as dividend culture and profitability. There's a simple summary of the rules I use and my scoring criteria [here](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). Until now, my rules have focused on quality and value measures alone. As a long-term investor I thought I could do without explicit momentum measures, instead relying on absolute valuation and my own judgement of the outlook. This view has changed somewhat over the last year. To reflect this, I have added four fairly simple momentum criteria to my scoring system: #### Trailing 12-month (TTM) dividend yield as a % of 5yr average yield Technically this is more of a valuation metric, but I think it indicates the likely direction of travel of the underlying business. In my view, the ideal scenario here (for a buyer) is that the yield should be slightly lower than the five-year average, or else only *slightly* higher. This is likely to suggest some combination of progressive dividend growth, stable or positive earnings or share price growth. If a stock's yield is **much** higher or lower than its five-year average, then something disruptive has probably happened (good or bad). This kind of situation deserves closer inspection. It might be an opportunity, or it might be a reason for caution. #### 2yr forecast EPS as a % of 1y forecast EPS This is more straightforward, simply comparing forecasts earnings growth for the next two years. An ideal long-term income investment will deliver steady incremental earnings growth each year. #### 1yr forecast EPS as a % of TTM EPS Similar to above, but this compares the current year forecast earnings with earnings over the previous 12-month reporting period (i.e H1/H2 or H2/H1). #### 50-day share price moving average as a % of 200-day moving average This final measure is pure technical momentum, but I find it a useful measure of whether a share price is trending higher or lower. The 50-day moving average is a faster moving measure than the 200-day moving average. For a stock in an uptrend, the 50dMA will normally be higher than the 200dMA. ### Scoring: how I'm using these measures I've added these stocks to my screening rules, but without any minimum or maximum thresholds. The reason for this is that I'm not using them to include or exclude stocks from consideration. Instead, I'm using these measures to score stocks for momentum, with the resulting output ranked by my system against a pre-determined scoring framework. As an approximation, I've allocated a 20%-25% weighting to momentum-related factors in my overall dividend share scores. In terms of impact, what I've observed is a modest tilt to my scoring results, rather than a wholesale change. This is what I hoped to see. While I am not able to back-test scientifically to calculate the optimum weightings to use, empirically I am comfortable with the changes so far. ## Top Ups: December 2025 The model portfolio's cash weighting has risen to 11%, even before adding Q4 dividend income. That's too high for me, as my general policy is to remain largely invested at all times. As a result, I've been reviewing each of the current holdings to identify potential top-up candidates. I've settled on seven choices that will collectively reduce the portfolio's cash weighting to around 4%. When Q4 dividends are added in, that should still leave me sufficient cash to fill the vacant 20th slot in the portfolio, if I should decide to. I'm mulling over some options for a new stock, but am not in a big rush to fill this vacancy. I've listed each of the model portfolio holdings I plan to top up below, with a brief comment on my current thinking about each company. **I'll aim to make each model portfolio trade in the final week of December 2025 and will make similar trades in my own real-money portfolio.** Details of each top up will be added to the portfolio page after completion. **As always, these are personal decisions, reflecting my personal circumstances and views alone. They aren't recommendations to buy or sell stocks.** _This post is for paying subscribers only._ ### Nov '25 dividend portfolio update: reassuring trends vs turnarounds URL: https://www.rolandhead.com/portfolio/nov-25-dividend-portfolio-update-reassuring-trends-vs-turnarounds/ Last updated: 2025-11-30T08:40:38.000Z Recognising what state a company is in can be a useful way to help minimise losses and timing errors: - Is the business in a stable, positive trend, delivering reliable growth each year? - Is it midway through transforming itself into a different kind of business? - Is it stuck in a cyclical downturn (or at a cyclical peak), where management and shareholders are largely just along for the ride? Understanding these factors can provide a more informed context for valuation metrics and fundamental analysis. Needless to say, this is an area where I've often gone astray, failing to reading the runes correctly until *after* I've invested. Turning to this month's results from my portfolio, I'm fairly confident the five companies covered in this review variously fit into all three of the categories above. By size and index they include three FTSE 100 firms, an AIM small cap and a specialist financial stock. While one or two are facing challenges, I am I am hopeful that one or two of the might even become candidates for a top up. **Screen update & top-up plans:** some additional share purchases are certainly needed. My personal policy is generally to be (almost) fully invested, most of the time. But the model portfolio's cash weighting has now topped 10%, even before adding Q4 dividend income. I plan to rectify this with some share purchases in my usual end-of-quarter window in December. Subscribers will receive full details before Christmas. However, before I finalise these choices I've been working on an update to my screening system to incorporate some simple momentum factors. As [discussed in my Q3 2025 review](https://www.rolandhead.com/portfolio/q3-2025-dividend-portfolio-review-income-growth-expensive-lessons/#position-sizing-a-new-plan), I'd like to think it's possible to improve the timing of my entry points so that I'm less likely to buy into a downwards trend – a classic value investing error. I'll share more on this in the coming weeks. But first, here's a review of this month's company results. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* --- ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### October '25 dividend portfolio update: will this UK manufacturer be an AI winner? URL: https://www.rolandhead.com/portfolio/october-25-dividend-portfolio-update-will-this-uk-manufacturer-be-an-ai-winner/ Last updated: 2025-11-02T08:08:54.000Z Only two companies from my dividend portfolio published accounts in October. I think it's fair to say that both are facing headwinds at the moment; both reported small declines in revenue and profit last year. However, I believe they both have intriguing prospects that continue to justify a place in my portfolio. One of these is a biotech company whose long-term prospects could be transformed by a new product. In the meantime, its existing portfolio looks likely to continue providing an attractive run-off income – although tougher competition is putting these previously reliable earnings under some pressure. The second company is a leading UK manufacturer in its sector. These results suggest it has the potential to benefit from the accelerated global rollout of new AI data centres. While the business itself has nothing to do with computing, it does make a product that's widely used in facilities hosting high-end electronic equipment. Management at this family firm have invested in upgrades over the last year to better target the AI opportunity. They are confident that trading headwinds elsewhere in its business can be managed and addressed. With a 6.5% dividend yield and a very strong balance sheet, I'm happy to remain patient with this stock. It's also currently one of the highest-ranked stocks in my screen results. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* --- ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Q3 2025 dividend portfolio review: income growth + expensive lessons URL: https://www.rolandhead.com/portfolio/q3-2025-dividend-portfolio-review-income-growth-expensive-lessons/ Last updated: 2025-10-17T14:46:04.000Z Welcome to my third quarter dividend portfolio review. After a [relatively upbeat Q2](https://www.rolandhead.com/portfolio/h1-2025-dividend-portfolio-review-positive-returns-suggest-my-income-strategy-remains-on-track/), I have to report that Q3 was a poor period for the stocks in my model portfolio (and my personal holdings). Let's start with some good news, though! My primary goals for this portfolio are: - Provide a **dividend yield greater than the FTSE 100**; - Provide **inflation-beating income growth**. So far this year, the portfolio has achieved both of these targets, maintaining its track record: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/10/rh-pf-div-income-3q25.png) Dividend yield based on ex-dividend dates and the portfolio's initial capital of £100k (Dec '21) Now for the bad news... Market movements continued to favour the FTSE 100 in Q3: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/10/ukx-mcx-smxx-3q25-chart.png) Source: [Stockopedia](https://app.stockopedia.com/index-prices/ftse-100-index-FTSE:UKX/chart?source=StockReport) Unfortunately, the portfolio's all-cap mandate and median market cap of c.£850m means that my exposure to these big market movers was limited. I was also forced to acknowledge some self-inflicted problems during the quarter. One of my shares fell by 40%, providing me with a costly reminder of the risks of ignoring negative momentum in cyclical businesses. In addition, I decided to sell my shares in one company after realising that I had misunderstood the exceptional market conditions that existed when I originally invested. These problems (and others) have compounded the portfolio's long-term underperformance. They've also prompted me to rethink my approach to managing the portfolio. While my core strategy of looking for good quality dividends will remain unchanged, I am planning some changes to the way I approach position sizing and future trading activity. In the remainder of this review, I'll take a closer look at the portfolio's performance during Q3, highlight any trades (there was only one, a sale) and explain a little more about the changes I'm going to make. I will also update my record of the portfolio's key financial metrics. - [Q3/9M 2025 performance review](#q3-2025-performance-review) - [Portfolio changes in Q3 2025](#portfolio-changes-in-q3-2025) - [Position weightings](#position-weightings) & [upcoming changes](#position-sizing-a-new-plan) - [Key financial metrics for the portfolio](#portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) --- ## Q3 2025 performance review Here's how the portfolio's performance panned out at the end of the quarter, measured on a total return basis (share price movements + dividend income): **Q3 2025 performance:** - RH model portfolio total return: -2.3% - FTSE 100 Total Return index: 7.2% **9M 2025 performance:** - RH model portfolio total return: 0.0% - FTSE 100 Total Return index: 17.7% The chart below gives a broader view on the model portfolio's performance since its inception in December 2021\. Sadly, the Q2 improvement in performance against the benchmark was not maintained in Q3: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/10/3q25-portfolio-perf-chart.png) The portfolio's longstanding lead over the FTSE 250 Total Return index is also now at risk: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/10/rh-vs-mcx-tr-011025-1.png) Source: SharePad Looking within the portfolio suggests that Q3 underperformance was primarily due to the absence of big risers during the period, relative to the FTSE 100: - **FTSE 100:** nine stocks rose by 20% or more in Q3, with 32 rising by 10% or more - **RH portfolio:** 2/20 stocks rose by at least 10%, but none registered gains of more than 15% Here's a breakdown of movements within the portfolio. The majority of the overall loss was due to the portfolio's biggest faller, *"C"*, which contributed -2% to the portfolio's overall negative performance: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/10/rh-pf-3q25-share-price-chg.png) Looking at the rest of the stocks in the portfolio, I don't think there's really much of significance to report. Two of the biggest risers reported positive results during September (covered [here](https://www.rolandhead.com/portfolio/september-25-dividend-portfolio-update-improving-performance-resilient-quality-but-im-selling-one-stock/)), but in general I don't see +/-10% moves as especially significant over a three-month period. I think the lack of big risers was the main reason for underperformance here – the FTSE 100 also had some losers during the quarter, but these were outweighed by winners. That wasn't the case in my portfolio. --- ## Portfolio changes in Q3 2025 After top-slicing the portfolio's largest position in July (see [here](https://www.rolandhead.com/portfolio/june-25-dividend-portfolio-update-top-slicing-my-biggest-winner-mixed-results-from-these-small-caps/#model-portfolio-trade-imperial-brands-imb)), I only made one further changes in Q3, selling the portfolio's entire position in **Somero Enterprises (LON:SOM)**. Here's an extract from [my sale report](https://www.rolandhead.com/portfolio/september-25-dividend-portfolio-update-improving-performance-resilient-quality-but-im-selling-one-stock/) to subscribers at the end of September: > I now believe my view on Somero's valuation and growth potential was mis-framed when I bought the stock. I didn't recognise the exceptional peak in cyclical earnings, leading me to think the shares were a lot cheaper than they really were. > **Conclusion:** I think there's a reasonable chance Somero will become a larger but less profitable business in the future. There is perhaps also some prospect of a takeover bid. > I also suspect that there will be be less focus on dividend returns than in the past. > The end result is that I'm left holding a niche US firm facing sector headwinds and growing competition at home and abroad. > In fairness, the new CEO hasn't yet had a chance to prove himself. I could remain patient and hope that current earnings represent a cyclical low. > However, my general policy is to sell a stock when I think the investment case has changed – or when I realise I've misunderstood the investment case. I think both are probably true here. I sold the model portfolio's position on **9 October 2025 for 235p per share**, giving a **total return loss of -34.7%, including a +18% contribution from dividends**. (*See the* [*portfolio page*](https://www.rolandhead.com/dividend-portfolio/) *for further details*.) --- ## Position weightings Here's a snapshot of how the model portfolio looked at the end of the quarter *(paid subscribers can see this chart with company names on my* [*portfolio page*](https://www.rolandhead.com/dividend-portfolio/)*)*: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/10/rh-pf-3q25-positions-anon.png) *As mentioned above, I sold the <3% position 'S' (Somero Enterprises) earlier in October. *This means the portfolio now has 19 stocks – and a 12% cash weighting.** I plan to deploy some of this cash in top ups and a possible new buy over the coming months. But the way I do this may be affected by my changing approach to position sizing and trading. ### Position sizing: a new plan To date, my model portfolio positions have all been initiated with a weighting equivalent to about 4.7% of the original portfolio capital, with a target of 20 positions. Going forward, I will be changing this approach slightly, as I flagged earlier [this month](https://www.rolandhead.com/portfolio/september-25-dividend-portfolio-update-improving-performance-resilient-quality-but-im-selling-one-stock/): > My aim will be to try and increase the portfolio's weighting to a group of stable and well-understood core positions, with smaller starting \[satellite\] positions that either gradually become core or are traded out more readily. Here is the new framework I'm going to use: - **New positions:** 2.5-3.0% initial weighting; - **Entry points:** pay greater attention to price and earnings momentum when considering entering a new position; - **Top ups:** in 1%-2% increments, when justified by valuation and trading outlook; - **Core:** long-term holdings that have likely been accumulated over >1yr and which I intend to hold indefinitely; - **Satellite:** new holdings which may be either potential future core holdings **or** more cyclical/value income stocks to be held for 1-3 years and then sold, hopefully delivering capital gains alongside income; - **Portfolio size:** this sounds counterintuitive in terms of reducing risk, but I may allow the portfolio to become *slightly* more concentrated (i.e. fewer positions). The underlying reason for these changes is that most of the portfolio's largest losses to date have come because I have entered a new position at the wrong time, in the face of negative momentum. As a result, I have quickly suffered large share price losses. As the saying goes, *you make your money when you buy*. My hope is that I can improve outcomes by considering my entry points more carefully. Rather than looking at valuation in isolation, I aim to pay greater attention to the trading outlook and to technical factors affecting the price. In addition, by opening positions with a lower weighting, I hope to be able to exit with smaller losses when things don't go to plan: - A 40% loss on a 4.7% position is 1.9% of the portfolio; - A 40% loss on a 2.5% position is 1% of the portfolio. --- ## Portfolio: key financial metrics In the final section of each quarterly review I take a look at the portfolio as if it was a single stock. I think it's useful to view the portfolio in this way to ensure that it still has the aggregate characteristics I'm looking for, such as strong profitability and good cash generation. Of course, averages can mask a multitude of company-specific issues. This approach will not protect against that, but I still think it's a useful way to track broad changes in the quality and valuation of the portfolio over time. Here's how the model portfolio looked at the **end of September 2025:** | **Date** | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield\*** | **5yr avgdiv grth** | **fc divyield\*** | **No. yrsdiv paid** | | ------------- | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ------------------ | ------------------- | ----------------- | ------------------- | | **30 Sep 25** | £847m | 21.2% | 10.3% | 7.1% | \-0.2x | 5.3% | 5.3% | 5.0% | 25 | | 31 Dec 24 | £983m | 22.5% | 11.0% | 8.0% | \-0.3x | 5.4% | 6.3% | 5.4% | 24 | | 31 Dec 23 | £1,700m | 21.0% | 11.3% | 7.1% | 0.2x | 5.3% | 6.3% | 5.2% | 24 | | 31 Dec 22 | £2,300m | 22.2% | 9.4% | 7.0% | 0.3x | 4.5% | 7.6% | 5.0% | 21 | | 31 Dec 21 | £3,200m | 20.6% | 8.7% | 6.7% | \-0.2x | 4.1% | 8.3% | 4.4% | 24 | *Scroll L-R (Data source: SharePad/author analysis. Some adjustments were needed. \*Dividend yields were weighted to reflect position size from 2025 onwards. Prior to this they were simply averaged.)* Looking at the table, what strikes me is the general lack of change since the portfolio's inception. The one exception to this is the median market cap of the stocks in the portfolio, which has fallen by over 70%. When I compare the size of the companies in the portfolio at its inception with the picture at the end of September, the explanation becomes clear: | **\# Holdings** | **Dec 2021** | **Oct 2025** | | -------------------- | ------------ | ------------ | | Market cap >£5bn | 8 | 5 | | Market cap £1-5bn | 3 | 5 | | Market cap £500m-1bn | 2 | 1 | | Market cap <£500m | 7 | 9 | I don't have a strong view on the ideal mix of market caps, but my instinct is that it might be useful to increase the weighting to larger companies slightly. --- ## Final thoughts There's no escaping the reality that the portfolio has performed poorly since its inception. While it's true that the UK's small and mid-cap indices have also underperformed the FTSE 100 since 2022, I think this is only a partial excuse: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/10/ukx-mcx-smxx-dec21-3q25-chart.png) Source: [Stockopedia](https://app.stockopedia.com/index-prices/ftse-100-index-FTSE:UKX/chart?source=StockReport) The main point of a stock-picking portfolio is to outperform the wider market. While December 2021 appears to have been a poor time to launch an all-cap portfolio, plenty of other stock-picking strategies have performed much better over this period. With one or two exceptions, I'm still happy with the valuation and quality of the stocks I own. Indeed, in a number of cases I think they've improved since my original purchase. Clearly, this hasn't always been reflected in share price performance – at least, not yet. Looking ahead, I'm cautiously optimistic that my new approach to position sizing and trading may to control the size of any further losses, while allowing me to build larger core positions. In Q4 the model portfolio will also receive shares in an upcoming spinout from an existing holding. The nature of the situation means I'll either have to sell the spinoff shares or buy more of them to form a suitably-sized position. I plan to make a decision when the prospectus is published next month, so I'm keeping an open mind for now. However, at this stage I think it's more likely that I'll allocate cash either to existing positions or to a replacement 20th stock sourced from among the results of my [stock screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). I plan to publish more on this in the coming weeks for subscribers, together with details of any top-ups I decide to make. Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### September '25 dividend portfolio update: improving performance + resilient quality, but I'm selling one stock URL: https://www.rolandhead.com/portfolio/september-25-dividend-portfolio-update-improving-performance-resilient-quality-but-im-selling-one-stock/ Last updated: 2025-10-20T17:57:29.000Z September brought results from four of my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) stocks. These included: - A FTSE 250 firm benefiting from the AI boom (bubble?); - A well-run UK retailer; - A niche asset manager; - A small-cap US industrial group. On the whole, numbers from three of these four were quite satisfactory, at least relative to my expectations. The fourth was poor, but no worse than expected, in my view. However, as we roll into autumn I've decided to sell one of these stocks from the model portfolio and my own holdings. I've made this decision because I feel that this this stock is no longer likely to be the investment I hoped it would be, for a variety of reasons that I discuss below. More broadly, I am planning a slight change to the way I manage position sizing and buying/selling in the portfolio. My aim will be to try and increase the portfolio's weighting to a group of stable and well-understood core positions, with smaller starting positions that either gradually become core or are traded out more readily. I'll discuss this in more detail in my Q3 portfolio review (free to read) which will be published in the next week or so. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### August '25 dividend portfolio update: is the dry spell about to end? URL: https://www.rolandhead.com/portfolio/august-25-dividend-portfolio-update-is-the-dry-spell-about-to-end/ Last updated: 2025-09-10T15:23:28.000Z Welcome to my monthly portfolio update for August. I hope readers have enjoyed a relaxing end to a warm summer. Here in North Yorkshire, water levels in the region's reservoirs are worryingly low and moorland fires have been burning in the local area for the last three weeks. So I'm hoping for a wet autumn. However, with luck, any weather-related dampness won't spill over to the stock market. Valuations certainly don't seem too demanding in my view, outside a pocket of highly-rated larger companies. The FTSE 250 currently offers a forecast yield over 4%, while average forecast yield on the Small Cap index (ex-ITs) is over 4.5%. I reckon there should be scope for growth, unless we're about to see broad-based cuts to earnings forecasts. Many of the companies in my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) certainly seem attractively valued to me, despite question marks over near-term growth prospects in some sectors. Uncertainty is a necessary part of investing and I plan to put some of the portfolio's cash pile to work later this year. More on that to follow. In the mean time, three of the larger companies in my model dividend portfolio found time to issue half-year results during the summer lull: - A market-leading **FTSE 250** firm with a 170-year history, whose CEO earns more than many FTSE 100 bosses; - A **FTSE 100** financial stock with an 8%+ dividend yield, where I suspect the newish CEO may be dialling up risk *slightly* in an attempt to stimulate growth; - A **FTSE 100** industrial with an impressive record of compound growth, but which *may be* seeing some weakness from changing market conditions in the US. I've reviewed each of these below and shared my thoughts on their progress and on any potential concerns I might have. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/#disclaimer)*.* ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### July '25 dividend portfolio update: 50% profit margins + 2 profit warnings! URL: https://www.rolandhead.com/portfolio/july-25-dividend-portfolio-update-50-profit-margins-2-profit-warnings/ Last updated: 2025-08-20T15:51:23.000Z July brought strong results from two of my portfolio holdings, solid results from a third and – sadly – [two more](https://www.rolandhead.com/portfolio/apr-25-dividend-portfolio-update-patient-quality-a-double-profit-warning/) profit warnings. In this update I review all of this news and explain which of the shares in the [model portfolio](https://www.rolandhead.com/dividend-portfolio/) is most likely to be on the chopping block at the end of the quarter. Companies covered in this update include one of the largest firms in the FTSE 100, a FTSE 250 firm with a near-50% profit margin and three AIM-listed dividend stocks. Read on for my thoughts on all of these shares. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](#disclaimer)*.* ## In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### H1 2025 dividend portfolio review: positive returns suggest my income strategy remains on track URL: https://www.rolandhead.com/portfolio/h1-2025-dividend-portfolio-review-positive-returns-suggest-my-income-strategy-remains-on-track/ Last updated: 2025-10-16T15:57:02.000Z The second quarter of 2025 proved to be a strong period for UK small and mid-cap stocks. This helped to produce a favourable result for my model dividend portfolio, which has a median market cap of just under £900m. Income from my companies also remained reliable. My primary goal for this portfolio is for it to provide a **dividend yield greater than the FTSE 100** and **inflation-beating income growth**. So far this year, the portfolio has achieved these targets. Dividends for the first half of this year were 5.5% higher than during the first half of 2024\. The portfolio's rolling 12-month yield of 5.3% is comfortably above the FTSE 100 average of c.3.5%. After generating income of 2.9% in the first six months of the year, I'm hopeful the portfolio is on track to generate a yield of more than 5% on its initial capital this year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/07/rh-pf-div-income-1h25-4.png) Dividend yield based on ex-dividend dates and the portfolio's initial capital of £100k (Dec '21) In the remainder of this review I'll take a closer look at the portfolio's performance during Q2, highlight any trades (there was only one, a top slice) and update my record of the portfolio's key financial metrics. - [Q2/H1 25 portfolio performance review](#q2-25-performance-review) - [Portfolio changes in Q2 25](#portfolio-changes-in-q2-24) - [Position weightings](#position-weightings) - [Key financial metrics for the portfolio](#portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) --- ## Q2 25 performance review Shares within my portfolio delivered the usual broad range of price movements during the second quarter. Happily there was a strong positive bias in Q2, providing a pleasant contrast [to Q1](https://www.rolandhead.com/portfolio/q1-25-dividend-portfolio-review-taking-a-look-at-the-big-picture/): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/07/rh-pf-1h25-share-price-chg.png) My portfolio's performance reflects the V-shaped recovery in UK markets following April's 'tariff tantrum'. But the portfolio ended the half year in positive territory and outpaced the FTSE 100 during the second quarter, reclaiming some of the underperformance from Q1: **Q2 2025 performance:** - RH model portfolio total return: 8.0% - FTSE 100 Total Return index: 2.9% **H1 2025 performance:** - RH model portfolio total return: 2.3% - FTSE 100 Total Return index: 9.8% Here's a broader view on the model portfolio's performance since its inception in December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/07/1h25-portfolio-perf-chart-1.png) The portfolio's mid-cap bias has left it lagging a resurgent FTSE 100 over the last couple of years. But for what it's worth, my selections (average market cap c.£900m) have outperformed the FTSE 250 since inception: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/07/rh-vs-mcx-tr-010725-1.png) Source: SharePad I'm hopeful the momentum we've started to see in UK small and mid-caps will help to narrow the gap with the FTSE 100\. I'll talk more about this shortly. But of course, it's always possible that I've just not picked the right stocks! --- ## Portfolio changes in Q2 25 I didn't add or remove any companies from the portfolio during the second quarter. I didn't make any top ups, either. However, I did decide to top slice the portfolio's largest position, **'I'**. Shares in this high yielder have risen by 85% since the portfolio's inception, leaving this position weighting at more than 8%. Including dividends, the total return from this position has been over 115%. It continues to provide an attractive income, but my conviction is weakening on both fundamental and valuation grounds. I discussed this company in more detail in my [June update to subscribers](https://www.rolandhead.com/portfolio/june-25-dividend-portfolio-update-top-slicing-my-biggest-winner-mixed-results-from-these-small-caps/). For all of these reasons, I decided to top-slice this position, which I did on 7 July. ## Sign up for Roland Head Searching for the best UK dividend stocks Subscribe Email sent! Check your inbox to complete your signup. No spam. Unsubscribe anytime. --- ## Position weightings My model portfolio positions are all initiated with a weighting equivalent to about 4.7% of the original portfolio capital. Occasionally I make top ups or (more rarely) partial sales, as discussed above. Here's how the model portfolio looked at the end of the quarter. **Paid subscribers can see this chart with company names on my** [**portfolio page**](https://www.rolandhead.com/dividend-portfolio/)**:** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/07/rh-pf-1h25-positions-anon.png) I top-sliced the portfolio's largest position 'I' on 7 July, so it's now just under 5%. This change was discussed in [my June portfolio update](https://www.rolandhead.com/portfolio/june-25-dividend-portfolio-update-top-slicing-my-biggest-winner-mixed-results-from-these-small-caps/). After top-slicing 'I' on 7 July, the portfolio's cash weighting has risen to over 6%. I expect to use some of this cash to top up some existing positions later this year, probably in at the end of the third quarter. I'll share details of any planned purchases with subscribers prior to this. --- ## Portfolio: key financial metrics I like to think of investing as a portfolio sport. The performance of individual stocks is interesting and can provide satisfying dopamine hits. But wins (or losses) on individual stocks have limited value without considering overall portfolio performance. In this final section of each quarterly review I take a look at the portfolio as if it was a single stock. Although I this doesn't provide any protection from stock-specific issues, I find it a useful way of ensuring the companies in the portfolio still have most of the characteristics I'm look for. It's also a useful way of tracking broad changes in the quality and valuation of the overall portfolio over time. Here's how the portfolio looked at the **end of June 2025:** | **Date** | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield\*** | **5yr avgdiv grth** | **fc divyield\*** | **No. yrsdiv paid** | | ------------- | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ------------------ | ------------------- | ----------------- | ------------------- | | **30 Jun 25** | £859m | 22.0% | 10.2% | 6.7% | \-0.2x | 5.3% | 5.2% | 5.3% | 25 | | 31 Dec 24 | £983m | 22.5% | 11.0% | 8.0% | \-0.3x | 5.4% | 6.3% | 5.4% | 24 | | 31 Dec 23 | £1,700m | 21.0% | 11.3% | 7.1% | 0.2x | 5.3% | 6.3% | 5.2% | 24 | | 31 Dec 22 | £2,300m | 22.2% | 9.4% | 7.0% | 0.3x | 4.5% | 7.6% | 5.0% | 21 | | 31 Dec 21 | £3,200m | 20.6% | 8.7% | 6.7% | \-0.2x | 4.1% | 8.3% | 4.4% | 24 | *Scroll L-R (Data source: SharePad/author analysis. Some adjustments were needed. \*Dividend yields were weighted to reflect position size from 2025 onwards. Prior to this they were simply averaged.)* Working from left to right, we can see that the portfolio's median market cap has continued to shrink this year, but its core profitability metric – **return on capital employed** – has remained stable. *Note I substitute this with return on equity for financial stocks.* The valuation (**EBIT yield** & **free cash flow yield**) became slightly more expensive during the second quarter, reflecting rising share prices. However, I'd argue that an EBIT yield of 10% and FCF yield of nearly 7% remain attractive in valuation terms. Continuing across the table, the companies in the portfolio have a small aggregate **net cash position** and offer a **weighted average dividend yield** (reflecting position sizes) of 5.3%. **Five-year average dividend growth** of 5.2% supports my hope for continued above-inflation income growth. Income growth of 5.5% during the first half of this year seems encouraging to me in this regard. Finally, the companies in the portfolio have **paid unbroken dividends** for an average of 25 years. While this period has included dividend cuts in some cases, I think it demonstrates a commitment to this form of shareholder return. This is important to me. At some point I'd hope to see the average market cap of the portfolio edge higher again. But I am comfortable with this financial profile – if it was a single company, I would very likely be buying more shares in it! ## Final thoughts In my view, rising interest rates and the events that followed the war in Ukraine (higher energy prices & rising defence spending) were broadly favourable for many of the FTSE 100's largest names. This may be a crude simplification, but I think this helps explain the outperformance of the big cap index over the last few years. However, UK small and mid caps have historically outperformed the FTSE 100, at the cost of greater levels of volatility. I don't see any reason why this pattern shouldn't reassert itself over time. This is a theme I touched on in more depth in [an article at Stockopedia](https://app.stockopedia.com/content/how-the-stock-ranks-could-be-signalling-an-opportunity-in-smaller-companies-1030992?ref=rolandhead.com) recently. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/07/ukx-mcx-smxx-20y-180625.png) Source: [Stockopedia](https://app.stockopedia.com/content/how-the-stock-ranks-could-be-signalling-an-opportunity-in-smaller-companies-1030992?ref=rolandhead.com) Unfortunately, the launch of my portfolio in December 2021 coincided with the start of a period of underperformance for the SmallCap and FTSE 250 indices: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/07/dec21-130725-chart-ukx-mcx-smxx.png) Source: [Stockopedia](https://app.stockopedia.com/index-prices/ftse-100-index-FTSE:UKX/chart?source=StockReport) I am hopeful that we will see some mean reversion in performance from smaller companies over the coming months or years. Alongside this, I am cautiously optimistic that the companies in the model portfolio remain in decent health with good long-term prospects and (mostly) quite reasonable valuations. The market gods may have other ideas, of course. We'll have to see what unfolds over the next quarter. Until then, stay safe in the markets, Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### June '25 dividend portfolio update: top-slicing my biggest winner + mixed results from these small caps URL: https://www.rolandhead.com/portfolio/june-25-dividend-portfolio-update-top-slicing-my-biggest-winner-mixed-results-from-these-small-caps/ Last updated: 2025-06-30T19:13:28.000Z I don't normally top slice successful positions unless I feel they're starting to fail the *sleep at night test*. That's true this month. The model portfolio's largest position – a [defensive FTSE 100 high yielder](https://www.rolandhead.com/portfolio/may-25-dividend-portfolio-update-ftse-100-triple-header/) – has grown to account for more than 8% of the portfolio. I don't see this business as a quality compounder, so I've decided to take some profits and reduce it back down to its original size. Doing this should reduce the impact of any future disappointment, while still providing me with a useful income stream and exposure to any further gains. A partial sale will also free up some cash to top up some other promising positions over the coming quarter. In addition to this trading decision, I've also reviewed results from four of the model portfolio's small caps over the last month. These include an AIM stock yielding 14% that's in the early stages of a turnaround. I've been following this story for a while and am cautiously optimistic about changes being made by a new CEO. The other three stocks covered are all Main Market-listed companies that operate in specific niches where they enjoy strong market share. Two of these businesses have unbroken dividend records stretching back more than 30 years – I think there's a good chance that at least one of these may be maintained for another 30 years. Read on for full details of my thoughts on each of these companies. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/#disclaimer)*.* ### In this month's report Here is a list of the topics covered in this month's report, together with a short summary of the longer sections below. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### May '25 dividend portfolio update: FTSE 100 triple header URL: https://www.rolandhead.com/portfolio/may-25-dividend-portfolio-update-ftse-100-triple-header/ Last updated: 2025-06-01T07:01:27.000Z My [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) has a median market cap under £1bn and is weighted to FTSE 250 and small-cap stocks. However, none of these smaller companies have reported over the last month – instead, we've had results from three of the FTSE 100 companies I own. Two of these are among the portfolio's strongest performers since its inception in December 2021: - a defensive stock that's up 75% and still offers a yield of almost 6% (my position is **yielding 10%** on cost); - a high-quality compounder that's up 55% but could deliver further gains; - an overlooked conglomerate that's slimming down to focus on its most profitable division (and returning £800m to shareholders). Read on for full details of my thoughts on each of these companies. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position sizing and cost will vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/#disclaimer)*.* --- ### In this month's report Here is a list of company results covered in this month's report, together with a summary of my thoughts on each stock. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Apr '25 dividend portfolio update: patient quality + a double profit warning URL: https://www.rolandhead.com/portfolio/apr-25-dividend-portfolio-update-patient-quality-a-double-profit-warning/ Last updated: 2025-05-04T07:15:21.000Z Welcome to my review of April's results (and profit warnings!) from the companies in my [quality dividend share portfolio](https://www.rolandhead.com/dividend-portfolio/). Rather unusually, all four of the companies featured in this month's update are AIM-listed small-cap stocks. Unfortunately, two of them issued profit warnings last month. Fortunately, three out of four benefit from strong net cash positions and generally strong quality metrics. The fourth is fast falling into special situation territory, but I remain stubbornly confident in the investment opportunity and – more tentatively – the turnaround potential for the shares. This situation has given rise to a new problem I need to address – style drift. The model portfolio's original mandate was for quality income, but at least one stock covered this month has now slipped out of that category and become a value play or even a special situation. Style drift is never a good thing, especially in a systematic portfolio. In the coming weeks, I will be giving some thought to how I should address this issue. This could include changes to my holdings or to my process. I hope to include an update on this in July's half-year review (free to read). *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position pricing/sizes may vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/#disclaimer)*.* --- ### In this month's report Here is a list of topics covered in this month's report, together with a summary of each section. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Q1 25 dividend portfolio review: taking a look at the big picture URL: https://www.rolandhead.com/portfolio/q1-25-dividend-portfolio-review-taking-a-look-at-the-big-picture/ Last updated: 2025-04-10T06:05:09.000Z The second quarter of 2025 has got off to a volatile and difficult start for investors. Commiserations if your portfolio has been hit badly and congratulations if you've somehow escaped unscathed. In situations like this, I find it's much easier to remain objective if I own shares that are providing me with a reliable cash income. So far in 2025 that has remained the case. My model dividend portfolio provided a flat income during Q1\. Share price falls and some dividend growth mean that the average yield on my shares has now risen to over 6%, from 5.4% at the [end of 2024](https://www.rolandhead.com/portfolio/2024-dividend-portfolio-review-rising-income-despite-dividend-cuts/#model-dividend-portfolio-key-financial-metrics). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/04/rh-pf-div-income-1q25-1.png) Income based on ex-dividend dates for a £100k model portfolio created in December 2021\. All dividends are held in the portfolio and reinvested. In this review I'll take a closer look at the portfolio's Q1 performance and then step back to consider how the portfolio's financial metrics have evolved since its inception. Have the companies in the portfolio simply got cheaper – or are they not as good as they used to be? - [Q1 25 portfolio performance review](#q1-25-portfolio-performance-review) - [Portfolio changes in Q1 25](#portfolio-changes-in-q1-25) - [Position weightings](#position-weightings) - [Key financial metrics for the portfolio](#model-dividend-portfolio-key-financial-metrics) \- what's changed? - [Final thoughts](#final-thoughts) --- ### Q1 25 portfolio performance review Individual stocks within the portfolio saw the usual wide range of share price movements in Q1, albeit with a negative bias. Here's a snapshot of the changes seen during the first quarter – the average share price in the portfolio fell by 7.5%: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/04/rh-pf-1q25-share-price-chg.png) Share price movements can be gratifying and worrying in equal measure. But short-term changes are often not that significant. For long-term investment, I prefer to focus on the total return delivered by the portfolio over time. My longstanding goal is to outperform the FTSE 100 Total Return index. Sadly, strong performance from some of the largest FTSE stocks (and weaker performance from my own) meant that this goal moved further away during Q1. **Q1 2025 performance:** - RH model portfolio total return: -5.3% - FTSE 100 Total Return index: +6.8% Here's a broader view on the model portfolio's performance since its inception in December 2021\. It's not a pretty picture: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/04/1q25-portfolio-perf-chart.png) The volatility seen so far in April has actually narrowed this gap; it remains to be seen whether this trend continues. Competing with a market-cap weighted index is not easy when big caps outperform. Blaming big cap outperformance sounds like a lame excuse. Perhaps it is. However, the market cap of the FTSE 100 rose by £104bn in Q1, while the market cap of the FTSE All Share index only rose by £75bn. This means that companies outside the FTSE 100 lost £29bn of market cap during the quarter. Excluding companies with a market cap over £5bn, ShareScope data suggests that only 28% of UK shares rose during the first quarter of 2025. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/04/ukxtr-mcxtr-1y-chart-090425.png) FTSE 100 TR (black) vs FTSE 250 TR (blue) As I discussed at in my 2024 review, the model portfolio *has* beaten the FTSE 250 Total Return index since inception – this remained true in Q1: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/04/rh-vs-mcx-tr-310325-1.png) Source: ShareScope - RH model portfolio TR (green) vs FTSE 250 TR (yellow) The problem with this is that *"you can't eat relative outperformance"*... I remain hopeful that my portfolio can outperform the FTSE 100 over time. But I'm not holding my breath at this point. --- ### Portfolio changes in Q1 25 I did not make any portfolio changes during the quarter, except to top up three existing positions. All three shares were AIM-listed companies offering above-average dividend yields – subscribers can read more about my choices in [my March review](https://www.rolandhead.com/portfolio/mar-25-dividend-portfolio-update-strong-balance-sheets-in-tough-times-3-top-ups/). I've since added details of each transaction to the [portfolio page](https://www.rolandhead.com/dividend-portfolio/). 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). --- ### Position weightings My model portfolio positions are all initiated with a weighting equivalent to about 4.7% of the original portfolio capital. Occasionally I make top ups, as discussed above. Here's how the model portfolio looked at the end of the quarter, after the top ups were made. **Subscribers can see this chart with company names on my** [**portfolio page**](https://www.rolandhead.com/dividend-portfolio/)**:** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/04/rh-pf-1q25-positions-anon-1.png) As always, I hope to make some top ups during the remainder of the year, assuming dividend cash accumulates on schedule. None of the portfolio's positions are currently large (or small) enough for me to consider carrying out any rebalancing. --- ### Model dividend portfolio: key financial metrics In this section I like to take a look at the portfolio as if it was a single stock. I recognise that this doesn't provide any protection from stock specific issues. But I think this is still a useful way of ensuring that the companies in the portfolio have most of the characteristics I'm looking for. This is also a handy way of monitoring any changes in the financial profile of the portfolio over time. **Note:* I have made one change to this format for this update – the portfolio's dividend yield is now weighted to reflect position sizes. In this case, the result is that the portfolio's forecast yield of 5.6% is lower than the simple average forecast yield of 6.2%.* Here's how the portfolio looked at the **end of March 2025:** | **Date** | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield\*** | **5yr avgdiv grth** | **fc divyield\*** | **No. yrsdiv paid** | | ------------- | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ------------------ | ------------------- | ----------------- | ------------------- | | **31 Mar 25** | £853m | 23.9% | 12.7% | 9.0% | \-0.3x | 5.7% | 7.4% | 5.6% | 25 | | 31 Dec 24 | £983m | 22.5% | 11.0% | 8.0% | \-0.3x | 5.4% | 6.3% | 5.4% | 24 | | 31 Dec 23 | £1,700m | 21.0% | 11.3% | 7.1% | 0.2x | 5.3% | 6.3% | 5.2% | 24 | | 31 Dec 22 | £2,300m | 22.2% | 9.4% | 7.0% | 0.3x | 4.5% | 7.6% | 5.0% | 21 | | 31 Dec 21 | £3,200m | 20.6% | 8.7% | 6.7% | \-0.2x | 4.1% | 8.3% | 4.4% | 24 | *Scroll L-R (Data source: SharePad/author analysis. Some adjustments were needed. \*Dividend yields were weighted to reflect position size from 2025 onwards. Prior to this they were simply averaged.)* I usually review this table by stepping through the metrics from left to right. But given market conditions and the underperformance of the portfolio since 2022, I thought it might be informative to trace the evolution of these metrics over the portfolio's lifetime to date. Starting on the left, we can see that the average **market cap** of the companies in the portfolio has fallen markedly. Some of this is due to share price losses, but the majority of it is due to my stock picks tilting progressively towards smaller companies. This may partly be due to a tilt to value, which has been particularly abundant among small caps over the last couple of years. Whether this will translate to improved future performance remains to be seen. So far, my value picks have stayed cheap – and often become cheaper. This is illustrated by the portfolio's average **EBIT yield** and **free cash flow yield**, which have risen progressively. The average **dividend yield** has also risen, although I'm pleased that income has remained comfortably covered by free cash flow, in aggregate. Another positive is that profitability hasn't changed much. The portfolio's average **return on capital employed** is almost unchanged from inception, in the low 20s%. That's firmly in quality territory, in my opinion. Average **dividend growth** has also remained broadly unchanged, as has the average **number of consecutive years** my companies have paid dividends (including any cuts). ### Final thoughts Naturally, I'm talking my own book here. My main personal portfolio contains the same stocks as the model portfolio. Even so, I think these numbers support my view that valuation de-rating rather than fundamental underperformance has been my main problem. Of course, paying too much for a good stock can be nearly as damaging to portfolio performance as buying a bad stock. There's clearly a risk I have misjudged the value and growth prospects on offer when I originally purchased some of these shares. If I have, I could be condemned to years of underperformance, despite seemingly acceptable company results. For now, I remain fairly confident that the portfolio contains a selection of good quality companies with competent management. Time will tell. I'll be back at the end of what promises to be an eventful quarter with a further update. Until then, I wish you good luck in the markets! Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Mar '25 dividend portfolio update: strong balance sheets in tough times + 3 top ups URL: https://www.rolandhead.com/portfolio/mar-25-dividend-portfolio-update-strong-balance-sheets-in-tough-times-3-top-ups/ Last updated: 2025-08-20T16:08:27.000Z Welcome to my review of March's results from the companies in my [quality dividend share portfolio](https://www.rolandhead.com/dividend-portfolio/). As usual at this time of year, it was a busy month for results. Companies covered in this update include a **FTSE 100** financial heavyweight with an 8%+ yield, two high quality **FTSE 250** stocks, and two **AIM**\-listeddividend shares with well-supported 6% yields – but sluggish growth. While I don't think there are any major problems to report, perhaps the common theme for many of my companies is that geopolitical and economic conditions have constrained sales. For scheduling reasons I am publishing this before the end of the month. Should anything noteworthy occur on the 31st, I'll provide an update for subscribers if needed. **Top up buys:** dividend cash is accumulating in the model portfolio. My sums suggest the cash weighting will be over 5% when Q1 dividends are added. As I don't aim to hold too much cash, I have decided to top up three of the portfolio's holdings, each with a further c.1% weighting. Full details below for subscribers. *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *broadly mirrors the shares in my main personal portfolio, although position pricing/sizes may vary for practical reasons.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/#disclaimer)*.* --- ### In this month's report Here's a list of topics covered in this month's report, together with a summary of each section. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Feb '25 dividend portfolio update: mixed news, top-up candidates URL: https://www.rolandhead.com/portfolio/feb-25-dividend-portfolio-update-mixed-news-top-up-candidates/ Last updated: 2025-03-02T08:07:03.000Z Welcome to my review of February's results from the companies in my [quality dividend share portfolio](https://www.rolandhead.com/dividend-portfolio/). With UK results season heating up, four of the companies in my model portfolio released half-year or full-year results last month – including one of the largest companies in the **FTSE 100**. In addition to this, one of my holdings delivered a hefty profit warning, prompting its house broker to cut earnings estimates in half for the current year. I give my view on all five of these companies below and highlight three companies I see as potential top-up candidates (including the profit warning stock!). *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *mirrors the shares in my main personal portfolio.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/#disclaimer)*.* ### In this month's report Here's a list of topics covered in this month's report, together with a summary of each section. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Jan '25 dividend portfolio update: a turnaround situation? URL: https://www.rolandhead.com/portfolio/jan-25-dividend-portfolio-update-a-turnaround-situation/ Last updated: 2025-02-04T13:49:07.000Z Ahead of a busy February and March reporting season for my portfolio, just one company issued results in January. The company in question is a FTSE 250 financial firm that's been one of my more profitable long-term holdings. However, market share is under pressure and I am coming to the conclusion I should start looking at this business through a turnaround lens. **Read on for my thoughts on this company's results.** *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *mirrors the shares in my main personal portfolio.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/#disclaimer)*.* --- ### In this month's report Here's a list of topics covered in this month's report, together with a summary of each section. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### 2024 dividend portfolio review: rising income despite dividend cuts URL: https://www.rolandhead.com/portfolio/2024-dividend-portfolio-review-rising-income-despite-dividend-cuts/ Last updated: 2025-03-28T13:51:26.000Z The primary goal of my quality dividend model portfolio is to produce a market-beating dividend yield with above-inflation income growth from UK shares. Although the portfolio suffered two dividend suspensions last year, I am happy (and slightly surprised) to report that this goal was met in 2024\. Income generated by the model portfolio rose by 6.8% to £4,915 last year (FY23: £4,604). This represents a yield of 4.9% on the model portfolio's £100k initial capital. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/01/rh-pf-income-fy24-1.png) Dividend income based on a £100k model portfolio created in December 2021\. All dividends are held in the portfolio and reinvested. The most recent [UK CPIH inflation](https://www.ons.gov.uk/economy/inflationandpriceindices?ref=rolandhead.com) reading is 3.5% (Nov 24) and the FTSE 100 dividend yield is around 3.6%. Read on for a more detailed review of the portfolio's performance in 2024, including details of the dividend suspensions mentioned above and the subsequent changes I've made to the portfolio. - [2024 portfolio performance review](#2024-portfolio-performance-review) - [Portfolio changes in 2024](#portfolio-changes-in-2024) - [Position weightings](#position-weightings) - [Key financial metrics for the portfolio](#model-dividend-portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) --- ### 2024 portfolio performance review Individual stocks within the portfolio saw the usual wide range of share price movements last year. Here's a snapshot of the changes seen during **Q4** alone: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/01/rh-pf-4q24-shareprice-changes.png) Share price movements can be gratifying and frustrating in equal measure. But short-term changes are often not that significant. For long-term investment, I prefer to focus on the total return delivered by the portfolio over time. My aim is to beat the FTSE 100 Total Return index. Sadly, I did not achieve this goal last year, as a healthy dividend income was largely offset by adverse share price movements. **2024 performance:** - RH model portfolio total return: 1.3% - FTSE 100 total return index: 9.7% For a broader view, here's how the portfolio has performed against the FTSE 100 Total Return index since its inception in December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/01/fy24-portfolio-perf-chart.png) The strength of some big FTSE 100 names has made the big cap index a more formidable opponent than usual over the last three years. My model portfolio has a median market cap of £1bn and is weighted towards FTSE 250 and small cap stocks – areas of the market that have been weaker since 2022\. As I discussed in my [Q3 2024 update](https://www.rolandhead.com/portfolio/q3-24-dividend-portfolio-review-cash-yield-up-25-ytd-im-beating-the-wrong-benchmark/), the portfolio *has* beaten the FTSE 250 since inception. This remained true at the end of 2024: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/01/rh-pf-vs-mcx-tr-040125-1.png) Source: SharePad - RH model portfolio TR (green) vs FTSE 250 TR (yellow) I'm hoping that my mixed-cap portfolio may benefit from a renewed appetite for smaller UK stocks in 2025\. I'm confident plenty of value remains at this end of the market, but I'm aware UK stocks remain a tough sell to retail investors when compared with the Mag 7 US tech stocks. --- ### Portfolio changes in 2024 My slow trading policy allows me to make up to two changes to the model dividend portfolio at the end of each quarter. Last year saw the highest level of portfolio turnover so far: - 2024: five stocks sold - 2023: three stocks sold - 2022: four stocks sold This is higher than I would really like, but I don't have any regrets about the stocks I sold or the ones I bought to replace them (at least, not yet...). Here's a **summary of the stocks I sold in 2024**, together with links to the write-ups I published on each new buy. #### Q1 2024 I exited merchant banking group [**Close Brothers (LON:CBG)**](https://www.rolandhead.com/dividend-portfolio/#close-brothers)as the motor finance commission storm grew. The company battened down the hatches to face a barrage of claims and suspended its dividend. It's since also sold its asset management arm. I think management are doing the right things, but [I concluded](https://www.rolandhead.com/dividend-shares/a-uk-business-with-a-35-year-dividend-history-and-5-yield/) that *"there's a risk the overall impact of the FCA motor finance review could be greater and longer-lasting than expected".* I sold for a near-50% loss at 451p. - **Replacement:* I replaced Close Brothers with* [*a small-cap engineer*](https://www.rolandhead.com/dividend-shares/a-uk-business-with-a-35-year-dividend-history-and-5-yield/) *that has a strong balance sheet, 35-year dividend record and a leading reputation in its niche.* #### Q2 2024 Israeli electronics group [**MTI Wireless Edge (LON:MWE)**](https://www.rolandhead.com/dividend-portfolio/#mti-wireless-edge)was the next stock to leave the portfolio. I like some aspects of this business as an investment and would probably still own the shares if it was a UK company. However, [I concluded](https://www.rolandhead.com/dividend-shares/new-stock-a-new-family-firm-to-hopefully-improve-the-sleep-at-night-qualities-of-my-portfolio/) that *"I am increasingly reluctant to shoulder the unknowable additional risks of investing in overseas businesses listed in the UK.".* I exited MTI at 39.5p for a total loss of 40%. - **Replacement:* I replaced MTI with a* [*UK-based family business*](https://www.rolandhead.com/dividend-shares/new-stock-a-new-family-firm-to-hopefully-improve-the-sleep-at-night-qualities-of-my-portfolio/) *whose operations look more transparent to me and (hopefully) carry less geopolitical risk.* #### Q3 2024 I made two changes, exiting the portfolio's positions in FTSE 250 housebuilder [**Bellway (LON:BWY)**](https://www.rolandhead.com/dividend-portfolio/#bellway)and consumer goods group [**PZ Cussons (LON:PZC)**](https://www.rolandhead.com/dividend-portfolio/#pz-cussons). **Bellway:** I exited Bellway at 3,114p, delivering a total return of 97% in two years. I decided to sell Bellway as I felt the balance of risk and reward had changed since I added the stock to the model portfolio in September 2022\. At £31, the discount to NAV had closed and – in my view – a substantial recovery was priced into the shares. The dividend had also been cut, leaving Bellway as the model portfolio's largest and lowest-yielding position. Given the political and cyclical exposure of housebuilders, I decided it might be a good time to recycle some capital into a higher-yielding opportunity. - **Replacement:* I replaced Bellway with a cyclical stock trading at a deep discount to book value, in the hope that I could repeat the success of my housebuilding trade. The company in question is an AIM-listed small cap with a 20-year record of dividend growth and a 5%+ yield.* [*Read my full write-up here*](https://www.rolandhead.com/dividend-shares/new-stock-2-20-years-of-dividend-growth-a-6-yield/)*.* **PZ Cussons:** the consumer goods group's oversized exposure to the Nigerian economy has proved disastrous for investors. Currency devaluation led to a £121m cash loss for PZC last year and the outlook for this market remains uncertain, as far as I can see. Elsewhere, the performance of the company's flagship brands has been somewhat mixed. I probably should have decided to sell PZC sooner than I did. In the event, I exited at the end of September 2024 at 96p, for a total loss of 44%. - **Replacement:* I chose a small-cap financial specialist with a high yield and strong balance sheet to replace PZ Cussons. You can read* [*my buy report here*](https://www.rolandhead.com/dividend-shares/new-stock-1-a-respected-specialist-with-a-7-dividend-yield/)*.* #### Q4 2024 Unfortunately, Close Brothers was not the only member of my portfolio to suspend its dividend last year. Luxury fashion group [**Burberry (LON:BRBY)**](https://www.rolandhead.com/dividend-portfolio/#burberry)also paused its payout, as a 22% sales slump caused the company crash to a half-year loss. I waited for new CEO Joshua Schulman to take charge to see what he'd say. But while [I think his plans are sensible](https://www.rolandhead.com/portfolio/nov-24-dividend-portfolio-update-top-performers-and-a-problem-stock/), I have no view on the likely scale or pace of a potential recovery. Perhaps worse, I concluded that Burberry may not have the intrinsic value or dependability of some of the other stocks in my portfolio. Some conservative modelling suggested to me that c.1,000p could be close to fair value, at least in the short term. I exited Burberry on 31 December 2024 at 980p for a total loss of 35%. - **Replacement:* to replace Burberry, I chose a market-leading British business with a long track record of providing differentiated products to its customer base. While end-user demand is currently depressed, I think it will recover over time. A modest valuation, 5% yield and long-term management focus* [*persuaded me to take the plunge*](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/)*.* 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). --- ### Position weightings My model portfolio positions are all initiated with a weighting equivalent to about 4.7% of the original portfolio capital. Occasionally I make top ups – although there was only one in 2024, which I discussed [in December](https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/). Here's how the model portfolio looked at the end of 2024, after the transactions discussed above. **Subscribers can see this chart with company names on my** [**portfolio page**](https://www.rolandhead.com/dividend-portfolio/)**:** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2025/03/rh-pf-weightings-anon-010125.png) As a rule of thumb, I aim for cash to be between about 4% and 8%. If cash continues to accumulate in Q1, I may consider some further top ups as the year unfolds. I don't have any limits on position sizing, but any holding dropping towards 2% is likely to be under review. Equally, if a holding rose above 10%, I might take a fresh look at the situation. --- ### Model dividend portfolio: key financial metrics Every quarter, I average together the financial metrics that are most important to me for the stocks in the model portfolio. I find this a useful tool for tracking the underlying characteristics of the portfolio – and hopefully, its ability to produce a rising stream of surplus cash. Of course, I know that a benign average can mask a multitude of problematic individual data points. On the other hand, I know that [the perfect stock doesn't exist](https://app.stockopedia.com/content/the-perfect-stock-does-not-exist-stop-searching-for-it-951719?ref=rolandhead.com). So instead, I try to synthesise it across a portfolio of shares. Time will tell if this method can deliver the results I hope for. But here are the average metrics for the model portfolio at the **end of 2024**: | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield** | **5yr avgdiv grth** | **F'cast divyield** | **No. yrsdiv paid** | | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ---------------- | ------------------- | ------------------- | ------------------- | | £983m | 22.5% | 11.0% | 8.0% | \-0.3x | 5.4% | 6.3% | 5.4% | 24 | *Scroll L-R (Data source: SharePad/author analysis 03/01/2025\. Some adjustments were needed, e.g. for financial stocks. Please DYOR and don't take this as gospel.)* ([Here's how these statistics looked at the end of Q3 2024*.*](https://www.rolandhead.com/portfolio/q3-24-dividend-portfolio-review-cash-yield-up-25-ytd-im-beating-the-wrong-benchmark/)) These metrics reflect the qualities I think are most important in a dividend stock – profitability, valuation and cash generation. But there's also a certain method to this selection and I find it useful to work through the numbers each quarter. Starting at the left, the portfolio's **median market cap** of £983m is significantly lower than the £1.7bn I reported at the end of Q3\. This drop reflects the new stocks added to the portfolio in Q3 and Q4 – all three of them were significantly smaller than the companies they replaced (these metrics are compiled after any trades take place). Moving along, I'm reassured to see **return on capital employed (ROCE)** is broadly unchanged at a level I see as very attractive. Equally, an **EBIT yield** of 11% is firmly in value territory, for me, while a trailing **free cash flow (FCF) yield** of 8% is also appealing. As I saw last year, portfolio free cash flow doesn't guarantee that individual companies won't need to cut their dividend. But in aggregate, I'm pleased to see that the portfolio's free cash flow yield is greater than its **dividend yield** of 5.4%. This shows that *on average*, my companies' payouts are covered by surplus cash. As an equity investor, balance sheet strength is also very important to me. My measure of **net debt/5yr average net profit** is intended to give me an idea of how quickly a company could repay debt if needed. In this case, a ratio of **\-0.3x** indicates that on average, my companies reported a net cash position in their most recent accounts. Finally, while past performance is not a guide to future returns, I do find it useful. On average, the companies in my portfolio have **paid a dividend** in each of the last **24 years**. Over the last **five years**, their payouts have risen by an average of 6.3% per year. However, based on current consensus forecasts, it's not clear if this record will be maintained in 2025\. The portfolio's **forecast dividend yield** of 5.4% is the same as its **trailing 12-month yield**. That suggests zero or at least minimal growth this year. I'm hopeful that I'll be able to report some income growth in 12 months' time. But at this point, there seems to be a risk that portfolio income may not maintain its past growth rate in 2025. --- ### Final thoughts 2024 was an eventful year on the macro front and a pretty mixed period for UK stocks. While I'm pleased by the income growth from the portfolio, I can't deny I'm disappointed by the total return generated. I can't rule out a change to my approach at some point if this portfolio continues to underperform. But for now I remain committed to a systematic income approach and intend to continue to focus on companies that are profitable, cash-generative and reasonably priced. Good luck in the markets in 2025 – and as always, thank you for reading. Roland Head 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Stockopedia Companies & Markets podcast 20/12/24: Takeovers, £100m whisky, and decoding stock market jargon URL: https://www.rolandhead.com/podcasts/stockopedia-companies-markets-podcast-20-12-24-takeovers-100m-whisky-and-decoding-stock-market-jargon/ Last updated: 2025-01-03T15:54:04.000Z I appeared on the Stockopedia Companies & Markets podcast this week with host Lawrence Judd and my fellow Daily Report writers and analysts Graham Neary and Megan Boxall. We covered a broad range of topics, including a wide range of companies including IntegraFin, ShoeZone and Artisanal Spirits (which claims to have £100m of whisky!). We also looked at the *real* meaning of corporate reporting jargon and covered some planned changes to Stockopedia's model portfolios for 2025. You can find the podcast at the usual locations (below) or on YouTube: - [Spotify](https://open.spotify.com/episode/6i00TYMuFlZUW8Ka7fHUAx?si=LaYpIwEJR8-4HnHqf4FSeg&ref=rolandhead.com) - [Apple Podcasts](https://podcasts.apple.com/us/podcast/takeovers-%C2%A3100m-whisky-and-decoding-stock-market-jargon/id1784497452?i=1000681154326&ref=rolandhead.com) Thanks for listening! --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dec '24 dividend portfolio update: 1 new stock to replace Burberry, a top up & 2 sets of small-cap results URL: https://www.rolandhead.com/portfolio/dec-24-dividend-portfolio-update-1-new-stock-to-replace-burberry-a-top-up-2-sets-of-small-cap-results/ Last updated: 2025-01-29T15:02:14.000Z Welcome to my final monthly portfolio update of 2024. In this report, I discuss the new stock I've chosen to [replace Burberry](https://www.rolandhead.com/portfolio/nov-24-dividend-portfolio-update-top-performers-and-a-problem-stock/) in my model [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). I also explain why I've decided to use some of the portfolio's cash position to increase my holding in a FTSE 250 company that's a top-ranked stock in my [screening system](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). Shares in this business have fallen recently, but I remain confident it's a quality business at a reasonable price. I have decided to average down. Last but not least, I review two sets of annual results published by portfolio stocks in December. The companies concerned are an AIM-listed high yielder and a rather niche Main Market small cap. **Read on for full details of these upcoming share trades and my thoughts on these recent company results.** *As a quick reminder, my* [*model dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/) *mirrors the shares in my main personal portfolio.* *Please note that my comments reflect *my personal views* and are *not* investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](#disclaimer)*.* --- ### In this month's report Here's a list of topics covered in this month's report, together with a summary of each section. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Nov '24 dividend portfolio update: top performers and a problem stock URL: https://www.rolandhead.com/portfolio/nov-24-dividend-portfolio-update-top-performers-and-a-problem-stock/ Last updated: 2024-12-01T08:02:36.000Z This month's crop of six results from the companies in my dividend portfolio include the portfolio's top two performers since its inception – and the current worst performer. The top performers have both delivered an annualised total return in excess of 20% since December 2021\. The worst performer is trading 40% below its cost price, with a suspended dividend. In this review I discuss my plans for this problem stock and explain why I'm not completely happy with results from one of its top performers. I also consider the latest numbers from a long-term holding that's planning to split itself up in order to improve its profitability. Five of these six companies have announced plans to hold or increase their dividends over the last month. I'm remain confident that income from the portfolio this year should [remain](https://www.rolandhead.com/portfolio/q3-24-dividend-portfolio-review-cash-yield-up-25-ytd-im-beating-the-wrong-benchmark/) comfortably ahead of that generated last year. --- ### In this month's report Here is a list of the topics covered in this month's model dividend portfolio update. The full review is quite a long read, so I've included a summary of my thoughts on each of the six companies covered at the top. Please scroll down for the full report, or click on the links to go directly to a specific section. _This post is for paying subscribers only._ ### Down 60%! Is Churchill China a dividend share I should buy? URL: https://www.rolandhead.com/dividend-shares/down-60-is-churchill-china-a-dividend-share-i-should-buy/ Last updated: 2024-11-20T15:02:58.000Z In this review I'm considering a company that looks like it *could* offer an appealing mix of value and quality. Stoke-on-Trent based tableware manufacturer **Churchill China (LON:CHH)** can trace its roots back to 1795 and remains a UK-based pottery today. While most other commercial potteries in the UK have fallen by the wayside since the 1970s, Churchill has survived to become a leading supplier of quality tableware to the hospitality trade. If you check underneath your mug or plate next time you eat out, there's a good chance you'll find the name Churchill. However, although the group's profits have quadrupled over the last 23 years, it hasn't all been smooth sailing. Earnings appear somewhat cyclical and sales growth has clearly been a struggle at times: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-pat-revenue-161124.png) More recently, inflation, supply chain problems and labour issues have all had an adverse impact on the business. So too have the commercial pressures facing hospitality operators – Churchill's customers. This is a sector whose growth has slowed markedly following the pre-pandemic boom. For these reasons, I probably wouldn't want to pay too much of a premium for Churchill shares. And until recently, that's ruled the company out of consideration for me. This stock has often looked expensive to me in the past, perhaps because it's popular with AIM IHT funds. However, the pressures I've mentioned above have combined with wider UK small cap weakness to leave Churchill's share price more than 60% below the 2,025p high seen in 2012\. The stock is now trading at levels first seen eight years ago: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-10y-chart-111124.png) Churchill shares now offer a forecast dividend yield of 4.6% and look quite modestly valued to me. In this share review, I'm going to take a closer look at the business through the lens of my dividend share scoring system. Could Churchill China be a useful addition to my dividend portfolio? 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). --- ### Table of contents - [**What makes Churchill China special?**](#what-makes-churchill-china-special) - [**Recent trading & outlook**](#recent-trading-outlook)*(updated 20 Nov 24 to include new comments following the profit warning)* - [**Crunching the numbers**](#churchill-china-crunching-the-numbers) \- how does Churchill China score in my dividend screen? - [**Dividend culture**](#dividend-culture-family-roots) \- family ownership underlies a strong history - [**Dividend safety**](#dividend-safety-solid)\- is the payout well supported? - [**Dividend growth**](#dividend-growth-short-term-headwinds)\- short-term headwinds have weighed on cash conversion - [**Dividend yield**](#dividend-yield-a-12-year-high)\- the stock's yield has recently risen to a 12-year high - [**Valuation**](#valuation-starting-to-look-cheap)\- the shares look cheap to me, but is the growth outlook a concern? - [**Profitability**](#profitability-a-modest-compounder)\- looking for evidence the business can deliver compound returns - [**Fundamental health**](#fundamental-health-reassuringly-strong)\- strong foundations support long-term planning - [**Conclusion**](#conclusion-a-watchlist-stock)\- should I buy Churchill China for my dividend portfolio? --- ### What makes Churchill China special? Churchill is one of the leading suppliers of tableware to the UK hospitality sector and has a growing following abroad. Overseas sales accounted for nearly 60% of revenue in 2023. [Since 1980](https://www.churchill1795.com/en/our-history/?ref=rolandhead.com), the company has been focused solely on the hospitality market, producing vitrified tableware that's significantly stronger and more durable than conventional household tableware. For example, Churchill's ceramic glaze [is tested](https://churchillhome.co.uk/blogs/news/technical?ref=rolandhead.com) to withstand 5,000 industrial dishwasher cycles. For domestic use, that would be equivalent to one wash every day for over 13 years! This short video provides an interesting overview of the company's manufacturing process: The group also has a materials business, [Furlong Mills](https://www.furlongmills.co.uk/about/?ref=rolandhead.com). This supplies raw materials to both Churchill's own factory and other ceramic manufacturers. The materials division contributes c.15% of revenue at slightly lower margins than the core tableware business, but it's complementary and helps to provide security of supply for the business. --- ### Recent trading & outlook **Update 20/11/24:** a few days after publishing this article, Churchill China issued [a profit warning](https://www.investegate.co.uk/announcement/rns/churchill-china--chh/trading-update-/8560529?ref=rolandhead.com), as I suggested could happen in my comments below. The company says it hasn't seen the normal Q4 seasonal uplift, particularly from independent hospitality operators. As a result, management now expect 2024 profits to be *"materially below market expectations"*. The *"softness in our key hospitality markets"* is also expected to continue into 2025, so expectations for next year are also being cut. While this is clearly not good news, in many ways it does not change my view on this business as a potential investment. As the company says: > "This situation does not change the fundamentals of our business. We have high-quality differentiated products with significant growth potential as markets recover, particularly where we currently have low market share. All of which is backed by solid financials of operational cash generation and a strong unencumbered balance sheet." At the time of writing, the shares are now trading close to 700p, giving a potential dividend yield over more than 5%, assuming the payout isn't cut. This slump has left the stock trading closer to its £60m NAV, as well. **My view:** in my piece below I discuss the group's strong balance sheet, cash generation, long history and market leadership. Looking ahead, I don't think the hospitality sector is going to disappear and nor do I think customers are going to desert Churchill for an alternative supplier. Given this combination of circumstances, I'm increasingly interested in this stock given the newly depressed valuation. I think the shares may be starting to offer interesting value. \-- For some background, I covered Churchill China's 2023 results [here](https://www.rolandhead.com/dividend-notes/emerging-opportunities-azn-iom-chh-12-04-24/), in April. **2024 half-year results (05/09/24):** these accounts covered the six months to 30 June 2024\. Sales fell by 7.8% to £40.6m during the period as volumes weakened but productivity improved. Pre-tax profit for the half year rose by 3.1% to £3.6m. This improvement in margins was driven by more normal energy costs and improved yields from production as staff training and automation delivered benefits. The interim dividend was increased and Churchill ended the half year with a robust (albeit reduced) net cash position of £7.8m. The narrative suggested to me that Churchill was sensibly continuing to invest in factory efficiency and operational improvements while awaiting a recovery in customer demand. With a strong balance sheet and freehold property assets, management can afford to stay focused on the medium term. However, the timing of a recovery remains unclear, a point that was emphasised chairman Robin Williams' outlook statement: > "We remain dependent on the stronger demand normally experienced in the final four months to meet our expectations for the year." Guidance was left unchanged and broker consensus forecasts seem to have remained flat since the results were published. But I think it's fair to say there's a meaningful risk of late H2 profit warning if conditions don't improve. However, markets may already have priced in some of this risk. Churchill shares fell sharply following the publication of the interim results: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-1y-chart-111124.png) It this latest dip a buying opportunity? Let's take a look. --- ### Churchill China: crunching the numbers **Description:* founded in 1795, this Stoke-on-Trent pottery produces high quality tableware for the global hospitality trade.* | **Churchill China(LON:CHH)** | **Quality Dividend score: 64/100** | **Forecast yield: 4.6%** | | ---------------------------- | ---------------------------------- | ------------------------------ | | Recent share price: 825p | Market cap: £91m | *All data at 16 November 2024* | ***Latest accounts:*** [*interim results for six months ended 30 June 2024*](https://www.investegate.co.uk/announcement/rns/churchill-china--chh/interim-results/8400445?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think Churchill China could be a suitable addition to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). As a reminder, this is a scoring system I've developed to rank shares for the qualities that are important to me, from a quality dividend perspective. My choice of scoring factors is of course personal and highly subjective. These scores are not intended to be used as a guide on when to buy or sell shares. They're simply one factor I use to assess a stock's potential attractions, in addition to broader, company-specific analysis. Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: family roots Family ownership is often a reliable way to find companies with a strong dividend culture. That's certainly true here. The Roper family gained a controlling shareholding in 1922\. They remain [major shareholders](https://www.churchill1795.com/en/investor-relations/shares/?ref=rolandhead.com) today, with around 20% of shares through multiple family holdings. This constancy is also reflected in Churchill's dividend history: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-dividends-111124.png) Barring a a pandemic pause, Churchill has paid an unbroken dividend for the last 23 years. I'm confident the dividend is likely to remain a priority for the company. **Churchill China scores 4/5 for dividend culture in my screening system.** --- ### Dividend safety: solid I score stocks for dividend safety by looking at dividend cover by earnings and free cash flow, combined with leverage. This chart shows how Churchill has generally maintained dividend cover at two times earnings, with a similar level of free cash flow cover. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-div-cover-leverage-111124.png) We can also see that Churchill has consistently reported a year-end net cash position for the last 24 years. Free cash flow cover for the dividend is inevitably more lumpy than earnings cover. But barring a major slump in profits, I don't see any obvious reason to fear a dividend cut in the near future. **Churchill China scores 3.9/5 for dividend safety in my screening system.** --- ### Dividend growth: short-term headwinds? My dividend growth score is intended to test the *sustainability* of dividend growth, rather than the scale of the growth itself. Unsustainable dividend growth often ends up leading to dividend cuts, so it's something I want to avoid where possible. To gauge the underpinning of a dividend, I compare dividend growth with the growth of a company's net asset value and free cash flow. In my view, these are the truest indicators of a company's sustainable dividend-paying capacity. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-divps-navps-fcfps-111124.png) The only caveat to this is that free cash flow is often lumpier than earnings, due to capex and other irregular cash flows. This can introduce short-term distortions to my scoring. That's what's happening here, unfortunately. If I redo this chart using three-year average free cash flow, dividend growth looks more sustainable, albeit less so since the pandemic: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-divps-navps-3yfcfps-111124.png) There is some room for improvement here. But on balance, I think Churchill's dividend growth score of 1/5 understates the quality of dividend growth in this business. A number of factors have depressed free cash conversion in the years since the pandemic. These include energy price inflation, supply chain issues, rising labour costs. More recently, the 2023 accounts show that Churchill spent £5.4m on improving productivity and yields in its factory last year. £6m of additional stock was also added to its UK, European and US fulfilment centres, to improve customer service levels. Stripping out these cash outflows shows continued strong underlying cash generation. I would expect to see free cash flow strengthen over the next year or so as trading conditions normalise for hospitality operators. I don't see this low score as a dealbreaker at the moment. **Churchill China scores 1/5 for dividend growth in my screening system.** --- ### Dividend yield: a 12-year high As a dividend investor, I see a stock's dividend yield as a useful indicator of its valuation. One area where I think yield is particularly useful is to provide long-term historic context on valuation. For example, for investors whose experience has been gained in the low interest rate era, low dividend yields from mature businesses might seem unremarkable. However, looking back beyond the 2008 financial crisis suggests that in Churchill's case at least, such low yields are not necessarily normal: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-div-yield-111124.png) While interest rates aren't the only determinant of dividend yields, I think they are a factor. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/uk-intt-base-rate-2000-nov24.png) In this context, I think one possible view of Churchill's falling share price and rising yield is that the stock is being repriced to reflect the return to a more normal interest rate environment. That might suggest that a return to the lofty share price and low yields of the past is unlikely, at least for the foreseeable future. Even so, I think the yield on offer here may be starting to offer quite reasonable value, using one of my favourite rule-of-thumb valuation methods. Adding the forecast dividend yield of 4.6% to next year's expected dividend growth of 5.3% suggests an expected return from the shares of 9.9%. This is in line with the 10% minimum I usually look for. **Churchill China scores 2.4/5 for dividend yield in my screening system.** --- ### Valuation: starting to look cheap? Looking at Churchill's valuation relative to its earnings also suggests to me the share price may be approaching value territory. A trailing 12-month operating profit of £10.3m gives me an EBIT/EV yield of over 12%. That's comfortably above the 8% level I use as a benchmark for value. Of course, there are a couple of caveats to consider. The first is that profits could fall in the near term if demand remains weak. The other is the recent poor conversion to free cash flow, which I've already discussed: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-ebit-fcf-yield-111124.png) I'm happy to trust that free cash flow conversion will recover. But more broadly, I am wondering if Churchill China is simply a mature business with limited growth potential. The company's long-term record of revenue growth does not provide much evidence to suggest otherwise, especially if we strip out the impact of price rises in 2022, which I estimate at 10-15% of FY22 revenue: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-revenue-161124.png) The company says that export markets form its main focus for revenue growth. Europe now generates equal sales with the UK and is considered to be the main focus for near-term growth. Sales in the US are much lower, but presumably could grow significantly if Churchill can manage to crack this market: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-geog-rev-split-161124.png) Source: SharePad I think it's reasonable to expect further growth in some export markets. However, I would imagine competition for overseas sales is much tougher than in the UK, where the company is already the market leader. This could mean that growth rates and/or margins are lower than in the core UK business. Another factor that's not clear to me is the level at which UK sales volumes might normalise. The last few years have seen significant distortion to volumes that I suspect is not typical. For example, my reading of the 2022 accounts suggest that UK volumes rose by more than 20% in 2022, before falling by 17% in 2023\. Total group volumes are said to have fallen again during the first half of 2024. I suspect we may have to wait until 2025 to get an idea of a normalised level of trading. That adds some risk to the current valuation, in my opinion. I don't have access to any recent broker notes for this business, as they're not available on Research Tree. But for what it's worth, consensus forecasts on SharePad currently suggest modest growth in profits and a substantial recovery in free cash flow over the next couple of years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-sharepad-forecasts-161124.png) If Churchill can deliver results somewhere close to these forecasts, I think the shares could offer value at current levels. **Churchill China scores 3/5 for valuation in my screening system.** --- ### Profitability: a modest compounder I score (non financial) stocks for profitability using a combination of return on capital employed and net asset value per share (NAVps) growth. What I hope to see is stable ROCE and rising NAVps. This tends to suggest the company is able to reinvest surplus profits and generate all-important compound returns. Over time, this process should support a *sustainable* increase in a company's capacity to pay dividends. Churchill's track record on these metrics is a little mixed, but appears to have improved significantly over the last decade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-roce-navps-161124.png) What will happen next? I think the outlook here is linked to the company's ability to gain market share in its main export markets. If it does, then Churchill may be able to invest in additional factory capacity and generate attractive returns on this spending. If growth proves difficult or sub-profitable, then the picture could be less favourable. At this point in time, after a difficult few years, I am inclined to give the company the benefit of the doubt. **Churchill China scores 3.2/5 for profitability in my screening system.** --- ### Fundamental health: reassuringly strong If Churchill had a weak balance sheet with lots of debt and few assets, I would be far more cautious. I probably wouldn't be interested. But that's not the case. Like many of my [small and mid-cap holdings](https://www.rolandhead.com/dividend-portfolio/), Churchill has a remarkably strong balance sheet. The interim accounts showed net tangible assets of £60m against a market cap of £91m. Highlights from the debt-free balance sheet include net cash of £7m, £21m of inventories and unencumbered freehold land and buildings with a depreciated value of c.£12m. As the company notes in its results, these property holdings represent a potential source of funding if ever required. Strong financial foundations also give companies the ability to make good quality long-term decisions during difficult times. I think that's probably been happening here over the last 18 months. In terms of scoring, I rate stocks for fundamental health based on a combination of interest cover (I previously used fixed charge cover) and leverage. For a company with no debt these metrics are not always that meaningful, so I've also added in the quick ratio to the chart below: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/11/chh-intcover-quickratio-leverage-161124.png) The quick ratio compares a company's current assets and current liabilities, but *excludes* inventory. For a manufacturer I think this can be useful, as inventory is not always especially liquid, particularly if times are troubled. Churchill's quick ratio of c.2x looks reassuring to me, especially given its long-term stability. **Churchill China scores 5/5 for fundamental health in my screening system.** --- ### Conclusion: a watchlist stock **My dividend screening system awards Churchill China an overall score of 64/100 at the time of writing (November 2024).** I think Churchill deserves some credit for navigating the last few years while maintaining a strong balance sheet and protecting its profitability. However, the near-term outlook still looks difficult to me. In the UK, rising national insurance and minimum wage costs are likely to hit hospitality operators relatively hard. I'm not sure there's much evidence yet of a recovery in consumer spending, either. In its interim results Churchill commented that smaller operators in the hospitality sector were having particular problems. I'd imagine this will continue into 2025, although larger operators such as **JD Wetherspoon** (a Churchill customer!) are likely to be more resilient. Here's a summary of the main points, as I see them: **Pros:** - Churchill China is a market leader in the UK with a growing presence in Europe - Mid-teens ROCE is respectable and supports growth and an attractive dividend - Good cash generation and a very strong balance sheet - Valuation is at a 10-year low, shares could be cheap **Cons:** - Long-term growth potential is unclear, track record of growth is mixed - Cyclical conditions are difficult and might worsen - Higher interest rates may mean that Churchill will remain more modestly valued unless growth accelerates - Capital intensity of business likely to limit any improvement in profitability **My view:** although I have some reservations about the maturity and growth potential of this business, I can see plenty to like at current levels. Churchill's valuation and 4.6% yield look increasingly attractive to me, especially when paired with its very strong balance sheet. There's a decent chance I'll decide to replace one of the stocks in my portfolio at the end of this year. If I do, Churchill China will be on the shortlist of stocks I consider as a potential replacement. Roland Head 💡 Don't miss any of my free dividend share reviews – [subscribe today!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Oct '24 dividend portfolio update: strong results from two very different AIM shares URL: https://www.rolandhead.com/portfolio/oct-24-dividend-portfolio-update-strong-financials-from-two-very-different-aim-shares/ Last updated: 2024-11-16T13:45:52.000Z This year's Autumn Budget was the most keenly awaited I can remember, but I'm glad it's out of the way. Hopefully investors will regain a little more enthusiasm for UK small caps now there's some clarity over tax changes. October was a quiet month for results from my investments. Only two of [my dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) companies published accounts during the period. Both are AIM-listed firms with owner-management, long track records and impressive financials. I believe their appeal goes well beyond any IHT tax benefit that might accrue from a long-term holding in these shares. Having said that, please consult a financial advisor if you are at all unsure about any such matters. There was no trading activity in the portfolio this month, following [two new purchases](https://www.rolandhead.com/portfolio/sept-24-dividend-portfolio-update-a-mixed-bag-of-results-2-new-stocks/) at the end of the third quarter. --- ### In this month's report Here is a list of the topics covered in this month's model dividend portfolio update. Please click on the links for each section, or scroll down to read the full report. _This post is for paying subscribers only._ ### Q3 24 dividend portfolio review: cash yield up 25% YTD + I'm beating the (wrong) benchmark! URL: https://www.rolandhead.com/portfolio/q3-24-dividend-portfolio-review-cash-yield-up-25-ytd-im-beating-the-wrong-benchmark/ Last updated: 2025-01-03T14:00:21.000Z The dividend income received from my model portfolio has rose by 25% during the first nine months of 2024, compared to the same period last year. To be transparent, these payouts have been helped by factors including changes to the portfolio, special dividends, and one-off increases. I don't expect this rate of growth to continue. But I do think this is a useful demonstration of the stable cash returns dividend income can provide, against a background of market uncertainty and share price volatility. My main goal with this model portfolio and my matching personal portfolio is to provide dividend growth with a yield above the market average, which I take as the FTSE 100 yield (currently 3.6%). If I can achieve this over a long-enough timescale, then in theory, proportionate capital gains *should* follow, as the market reprices my stocks to reflect the increased level of income they provide. There's no guarantee of this, of course. So-called dividend traps can provide high yields while destroying shareholder value (and share prices) in the background. Over the last couple of years, the impact of rising interest rates has also distorted this process (or perhaps I've just picked some duff stocks!). Certainly, the portfolio's capital performance has lagged badly behind its income growth since 2022\. Despite this, I'm still confident in the theory behind my approach. I'm also broadly reassured by the growing – and I believe sustainable – stream of surplus cash provided by the companies in my portfolio. While a few of my companies have faced specific setbacks this year, the majority have performed broadly as expected, supporting a pleasant improvement in cash income: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/rh-pf-div-income-9m24-1.png) Dividend income based on a £100k model portfolio created in December 2021\. All dividends are held in the portfolio and reinvested. The model portfolio received £1,215 in dividend income during the third quarter, based on ex-dividend dates during the period. This lifted nine-month dividend income to £3,965\. That's equivalent to a yield of 4% on the portfolio's original £100k of virtual capital. Read on for a more detailed review of the portfolio's performance in Q3, including details of two changes I've made to the portfolio. - [Q3 2024 portfolio performance review](#q3-2024-portfolio-performance-review) - [Portfolio changes in Q3 2024](#portfolio-changes-in-q3-2024) - [Position weightings](#position-weightings) - [Key financial metrics for the portfolio](#model-dividend-portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) ### Q3 2024 portfolio performance review Total return from the portfolio was slightly negative in Q3, as falling share prices offset dividend income. **Q3 2024 performance:** - RH model portfolio total return: -1.1% - FTSE 100 TR: 1.8% Here's how share prices within the portfolio moved around during Q3: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/rh-pf-3q24-shareprice-changes-1.png) The biggest faller here – 'B' – has also suspended its dividend this year. I believe this business can recover. But I'm awaiting results and a strategy update from the new CEO later this year, before making any further judgement. For now, the holding remains under review. **2024 YTD performance:** larger gains for the FTSE 100 during the first half of this year mean that the portfolio's nine-month performance is somewhat worse than the Q3 numbers: - YTD RH model portfolio total return: -1.1% - YTD FTSE 100 TR: 9.9% Finally, here's how the portfolio has performed against the FTSE 100 Total Return index since its inception in December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/3q24-portfolio-perf-chart-2.png) During this period, the market-cap weighted FTSE 100 index [has been lifted](https://www.rolandhead.com/portfolio/h1-2024-quality-dividend-portfolio-review-cash-income-up-22/) by big gains for a handful of its largest companies – most of which I don't own (except Unilever): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/ftse100-movers-dec21-oct24.png) Source: SharePad #### FTSE 100 vs FTSE 250: have I chosen the wrong benchmark? I may have chosen an unfortunate time to launch an all-cap portfolio benchmarked against the FTSE 100\. My model portfolio contains 20 stocks, split roughly equally across the FTSE 100, FTSE 250 and SmallCap/AIM markets. For *most* of the last 20 years, the FTSE 250 and FTSE SmallCap indices have reliably outperformed the big cap FTSE 100\. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/stocko-ukx-mcx-smx-all-111024.png) Source: Stockopedia However, over the last five years, the FTSE 100 has gained the upper hand. Since I launched my model dividend portfolio in December 2021, the big cap index has seemingly gained a new lease of life, outperforming the FTSE 250 by more than 20% (excluding dividends). As a result, the model portfolio's small/mid-cap bias may have worked against me: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/stocko-ukx-mcx-smx-011221-111024.png) Source: Stockopedia It is perhaps cold comfort, but my model portfolio *has* outperformed the FTSE 250 Total Return index since inception, according to SharePad data: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/rh-pf-vs-mcx-tr-inception-111024.png) RH model portfolio (green) versus FTSE 250 Total Return index (yellow) (source: SharePad) The problem is that the FTSE 250 TR is not my benchmark. As a lower-yielding index, choosing it as a benchmark for a high yield portfolio would be illogical. I remain hopeful that over time, my stock selections will also outperform the FTSE 100\. In the meantime, I'm continuing to focus the portfolio on quality income opportunities with the potential to compound over time. However, I'm also [allowing myself a little more leeway](https://www.rolandhead.com/portfolio/sept-24-dividend-portfolio-update-a-mixed-bag-of-results-2-new-stocks/) to trade more cyclical dividend stocks that might not suit long-term holding periods. ### Portfolio changes in Q3 2024 My [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/) allows me to make up to two changes to the model dividend portfolio at the end of each quarter. During the third quarter I opted to max out this policy and replaced two shares in the portfolio. #### Stocks sold in Q3 **September 2024:** I sold two stocks at the end of September. I shared the details with subscribers in my monthly review for September, but here's a quick summary of the two companies I decided to leave behind. **Bellway (LON:BWY):** this FTSE 250 housebuilder is one of the best quality companies in this sector, in my view, with a long record of (cyclical) growth. But the share price looks up with events to me now, potentially pricing in several more years of recovering earnings. I may have sold Bellway too soon. But the stock is now trading at a premium to its book value and its dividend yield has fallen below 2%. Given this, I think the balance of risk and reward has changed since I added the shares to the model portfolio at £17 in September 2022. I sold on 30 September 2024 to realise a total return of 97%, equivalent to 40% annualised. **PZ Cussons (LON:PZC):** my investment in this consumer goods firm has been considerably less successful. PZ Cussons' balance sheet was gutted [last year](https://www.rolandhead.com/portfolio/sept-24-dividend-portfolio-update-a-mixed-bag-of-results-2-new-stocks/#pz-cussons-pzc) by £140m of currency devaluation losses on cash held in Nigeria. Profits slumped too, even on an adjusted basis, and the underlying sales performance of the group's brands has also been somewhat mixed. I believe PZC shares could *theoretically* be cheap, but I think there's also a meaningful risk things could get worse for shareholders. Certainly, I think the company's dividend payment capacity is likely to be reduced for the foreseeable future. I sold PZ Cussons on 30 September for a total loss of 44%, equivalent to -18% annualised. #### New stocks in Q3 **September 2024:** I added two new shares to the portfolio to replace Bellway and PZ Cussons. Both are small caps with high yields, cash-rich balance sheets and a long records of paying attractive dividends. One of the new shares is listed on London's Main Market, while the other is an AIM stock. I'm conscious of the risks relating to the uncertainty over AIM IHT relief ahead of October's budget, but I don't believe in letting the tax tail wag the investment dog. In addition, I think the company in question is probably cheap enough to offset some of the risk of short-term volatility. This particular AIM share currently trades at an attractive discount to book value, with a sizeable net cash balance. I published a full write-ups of these new purchases for subscribers here: - [New stock #1: a respected specialist with a 7% dividend yield](https://www.rolandhead.com/dividend-shares/new-stock-1-a-respected-specialist-with-a-7-dividend-yield/) - [New stock #2: 20 years of dividend growth & a 6% yield](https://www.rolandhead.com/dividend-shares/new-stock-2-20-years-of-dividend-growth-a-6-yield/) *Both trades were made on 30 September 2024, the final trading day in the quarter.* 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). ### Position weightings Model portfolio positions are all opened with a default sizing equivalent to about 4.7% of the original portfolio capital. Occasionally I make top ups, although there haven't been any yet in 2024. Here's how the model portfolio looked at the start of October 2024, after the transactions discussed above. **Subscribers can see this chart with ticker codes included on my** [**portfolio page**](https://www.rolandhead.com/dividend-portfolio/)**:** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/10/3q24-position-weight-anon.png) As a rule of thumb, I aim for cash to be between about 4% and 8%. With cash now in excess of 5%, I may consider topping up some of the portfolio's positions at the end of this year or in Q1 2025, when further dividends should have been received. I don't have any limits on position sizing, but any holding dropping towards 2% is likely to be under review (e.g. 'B' – discussed earlier). Equally, if a holding rose above 10%, I might take a fresh look at the situation. --- ### Model dividend portfolio: key financial metrics There's no such thing as the perfect stock. But a number of companies with attractive characteristics can be combined to create a portfolio with near-perfect financial metrics. Of course, an attractive average can conceal many less appealing stock-specific metrics. Each investor's definition of perfection is also likely to vary. Even so, I like to use this whole-portfolio approach as a way of checking that the shares I'm buying are – in aggregate – following my strategy. Some examples of the qualities I'm looking for include: - FTSE-beating portfolio dividend yield - dividends covered by free cash flow - reasonable valuation, leaning towards value - above-average profitability - long track record of unbroken dividend payouts - target annual return of 10%, calculated as dividend yield + expected dividend growth At the end of each quarter, I calculate portfolio averages for each of the measures below. Here's how things looked at the end of September: | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield** | **5yr avgdiv grth** | **F'cast divyield** | **No. yrsdiv paid** | | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ---------------- | ------------------- | ------------------- | ------------------- | | £1.7bn | 22.7% | 10.3% | 8.8% | \-0.1x | 5.5% | 6.7% | 5.0% | 24 | *Scroll L-R (Data source: SharePad/author analysis 01/10/2024\. Some adjustments were needed, e.g. for financial stocks. Please DYOR and don't take this as gospel.)* [**Here's how these statistics looked at the end of H1 2024**](https://www.rolandhead.com/portfolio/h1-2024-quality-dividend-portfolio-review-cash-income-up-22/#model-dividend-portfolio-key-financial-metrics) The biggest change over the last quarter was probably the reduction in **median market cap** from £2.7bn to £1.7bn. This primarily reflects the sale of Bellway and PZ Cussons and their replacement with two small caps. Moving along, my trailing valuation metrics **EBIT yield** and **FCF yield** have both improved (got cheaper) since the end of June, when the equivalent figures were 9.1% and 6.9%. This reflects a combination of falling share prices and the valuations of the new stocks I've added to replace Bellway and PZ Cussons. Both of these metrics are now squarely in value territory, in my opinion, assuming the company profits which underly them remain broadly sustainable. Happily, profitability across the portfolio remains excellent. The average return on capital employed (**ROCE**) at the end of Q3 was 22.7%, up from 21.5% at the end of H1. My portfolio companies also have a small **aggregate net cash position** and have paid dividends for an **average of 24 years**. Perhaps the only potential concern highlighted by this table is that the portfolio's **trailing dividend yield** of 5.5% is lower than its **forecast dividend yield** of 5%. This implies that the level of income received over the last 12 months could fall and is at odds with the portfolio's **five-year average dividend growth** of 6.7%. I can't rule out the risk of dividend cuts. But there are also a couple of other contributing factors: - The portfolio has received several special dividends over the last year. These may not be repeated; - One of the stocks in the portfolio has suspended its dividend. --- ### Final thoughts I cannot be entirely happy about the portfolio's total return lagging the FTSE 100 by so much. But I am pleased by the portfolio's continuing cash income generation. The widespread underperformance of UK mid caps and small caps may reverse if the Autumn Budget provides the supportive clarity businesses are hoping for. Equally, it could persist, especially if the domestic economy slows, or if Budget changes are unfavourable to investors. Risk and uncertainty are permanent in the stock market. But I continue to believe that holding well-established businesses with strong profitability, good cash generation and a long record of dividends is a sensible – if unexciting – strategy. Until next time, thank you for reading – and good luck in the markets! Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### New stock #2: 20 years of dividend growth & a 6% yield URL: https://www.rolandhead.com/dividend-shares/new-stock-2-20-years-of-dividend-growth-a-6-yield/ Last updated: 2024-09-29T07:05:19.000Z In this piece I'm going to introduce the second new stock I am adding to my portfolio at the [end of September](https://www.rolandhead.com/portfolio/sept-24-dividend-portfolio-update-a-mixed-bag-of-results-2-new-stocks/). This timing maintains the quarterly trading schedule I've followed since launching the [model portfolio](https://www.rolandhead.com/dividend-portfolio/) at the end of 2021. The company I discuss in this article is listed on London's AIM market and was founded more than 100 years ago. It boasts 20 years of unbroken dividend growth and a forecast dividend yield of just over 6%. This business has fallen out of favour with investors over the last year and its shares now trade at a deep discount to their book value. In part, I think this de-rating has been justified by external pressures on profits. However, I think negative market sentiment is also a factor here. Many AIM stocks and UK small caps are out of favour at the moment – including some better quality businesses than this one. The underlying reasons for this malaise include a general lack of interest in UK small caps, plus some specific concerns about potential changes UK tax policy in the Autumn Budget. I don't know what will happen in the budget. If [AIM IHT relief is scrapped](https://www.investcentre.co.uk/articles/pros-and-cons-scrapping-inheritance-tax-relief-aim-shares?ref=rolandhead.com), many City figures believe [AIM stocks could take a bath](https://www.ft.com/content/206cc599-e0aa-4e88-969a-9ce8a98c64a1?ref=rolandhead.com). On a medium-term view, however, I think the underlying business here looks solid and the value of its equity should be supported by its balance sheet. In my view, the shares have attractive recovery potential from current levels. In the meantime, the 6% yield looks fairly safe to me, given support from the strong, net cash balance sheet. Read on to find out more about this business, and why I've decided to add the shares to my portfolio. _This post is for paying subscribers only._ ### New stock #1: a respected specialist with a 7% dividend yield URL: https://www.rolandhead.com/dividend-shares/new-stock-1-a-respected-specialist-with-a-7-dividend-yield/ Last updated: 2024-09-28T16:04:09.000Z After a period of stability in my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/), I've decided to make two changes at the end of September – the maximum I allow myself under my quarterly trading policy. I discussed the reasons for this in my September portfolio review, which subscribers can read [here](https://www.rolandhead.com/portfolio/sept-24-dividend-portfolio-update-a-mixed-bag-of-results-2-new-stocks/). In this article, I'm going to introduce one of the new stocks I've decided to add to the portfolio. The company in question is a small cap stock listed on London's Main Market that is an established expert in its niche. While growth hasn't always been consistent, founder ownership and strong cash generation have always underpinned attractive dividends. The stock currently offers a 7% yield. To find out why I think this could be a good time to add this stock to my portfolio, read on. _This post is for paying subscribers only._ ### Sept '24 dividend portfolio update: a mixed bag of results + 2 new stocks URL: https://www.rolandhead.com/portfolio/sept-24-dividend-portfolio-update-a-mixed-bag-of-results-2-new-stocks/ Last updated: 2024-10-02T10:16:08.000Z The UK market continues to offer good value in many areas, in my opinion, and I've decided to make two changes to my portfolio at the end of the third quarter. Broadly speaking, I want the portfolio to contain quality companies with the potential to deliver reliable dividends and some growth over many years. But I'm coming to believe that the portfolio's performance may be enhanced by a small amount of trading in cyclical stocks where value opportunities might exist. I've also decided to try focusing my stock choices more closely on the highest-scoring shares in my [dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) results. Both the new stocks I'm considering replace much lower-scoring stocks. **New stock #1:** one trade I'm considering is designed to recycle a successful cyclical value play into another similar opportunity. My hope is that this will increase the upfront dividend yield received from the position while also offering the potential for a further capital gain. **New stock #2:** I've decided to sell a troubled business that's sitting near the bottom of my portfolio's returns. To replace it, I've chosen a small cap dividend stock that's a respected specialist in its sector and – as far as I can see – is likely to remain so for the foreseeable future. The shares in question currently offer a 7% yield, and the overall valuation of this very profitable business looks reasonable to me at current levels. **Subscribers can read full details of these trades below, along with results analysis on four existing portfolio stocks that have reported over the last month.** --- ### In this month's report... Here is a list of the topics covered in this month's model dividend portfolio update. Please click on the links for each section, or scroll down to read the full report. _This post is for paying subscribers only._ ### Aug '24 dividend portfolio update: quality, value & the possible benefits of age URL: https://www.rolandhead.com/portfolio/aug-24-dividend-portfolio-update-quality-value-the-possible-benefits-of-age/ Last updated: 2024-09-01T07:03:12.000Z This month's newsletter includes my thoughts on the latest accounts from four of the companies in my quality dividend portfolio. These firms cover sectors ranging from finance to construction equipment. They include two FTSE 100 shares, one FTSE 250 stock and an AIM-listed small cap. The dividend yields on offer from this group range from less than 3% to more than 9%, while the companies themselves have an average age of more than 100 years. While these (mostly) cyclical companies all face some uncertainty at the moment, I believe they should all have the ability to survive and prosper as external conditions continue to evolve. --- ### In this month's report... Here is a list of the companies covered in this month's model dividend portfolio update. Please click on the links alongside each summary, or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### Is multibagger RS Group a quality dividend buy? URL: https://www.rolandhead.com/dividend-shares/is-multibagger-rs-group-a-quality-dividend-buy/ Last updated: 2024-08-18T07:02:31.000Z Today I'm looking at a stock that's consistently been one of the top-scoring shares in my [dividend stock screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) in recent months. In this in-depth share review, I'll consider whether this FTSE 250 industrial component distributor could be the kind of quality dividend growth stock I might want to include in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). The group's performance over the last decade has certainly been strong. Despite the sell-off seen over the last two years, RS shares have three-bagged since 2014\. Shareholders enjoyed a total return (including dividends) of 14% annualised during this period, according to SharePad data. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-10y-chart-pr-160824.png) Much of the 2014-2024 period was spent under the leadership of former CEO [Lindsley Ruth](https://www.linkedin.com/in/lindsley-ruth/?ref=rolandhead.com). He was in role from 2015 until December 2022, when he stepped down for [health reasons](https://www.investegate.co.uk/announcement/rns/rs-group--rs1/directorate-change/7445100?ref=rolandhead.com). During this time, RS Group's operating profit tripled from £101m to £309m. The company also changed its name in 2022, from Electrocomponents to RS Group. However, a longer-term view – from 1994 until August 2024 – provides a reminder that this business was somewhat sleepier before Ruth's arrival. The share price in 1994 was roughly the same as in 2015, when Mr Ruth was appointed. As a result, the annualised total return delivered by the stock since 1994 has been just 5.2%, according to SharePad. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-all-chart-160824.png) Current CEO Simon Pryce only took charge in March 2023, although he'd been a non-executive director since 2016\. He has since spent most of his first 15 months dealing with a severe round of customer destocking and the impact of supply chain normalisation. > "Our financial performance in 2023/24 reflected weakness in global industrial production and the unwinding of unusual post-pandemic trading tailwinds." This situation left inventory levels raised, and profits down. But this destocking process won't continue indefinitely. I expect conditions to return to normal sooner or later. Mr Pryce certainly seems confident he can return the business to growth: > "The actions we are taking are improving the fundamentals of the business and will support stronger and more sustainable outperformance when markets return to growth, which will deliver excellent, first choice outcomes for all our stakeholders." I wonder if [Mr Pryce's CV](https://www.linkedin.com/in/simon-pryce-8285b444/?ref=rolandhead.com) also points to another possibility for RS Group. His previous two roles were as CEO of Ultra Electronics and BBA Aviation. Both firms were UK-listed equities at the time of his appointment. Both received takeover offers and were taken private during Pryce's tenure. In this in-depth share review, I'll take a closer look at RS and explain why it's caught my eye as a potential purchase. I'll also run the stock through my [dividend scoring system](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/), to see how well it scores on important factors (for me), such as dividend growth, profitability, and valuation. --- ### Table of contents - [**What does RS Group do?**](#what-does-rs-group-do) - [**History**](#history-87-years-of-spare-parts)\- 87 years of spare parts - [**Recent trading & outlook**](#recent-trading-outlook) - [**Crunching the numbers**](#rs-group-crunching-the-numbers)\- how does RS score in my dividend screen? - [**Dividend culture**](#dividend-culture-very-good)\- 35 years of payouts, one big cut - [**Dividend safety**](#dividend-safety-comfortable)\- no serious concerns - [**Dividend growth**](#dividend-growth-well-supported)\- intermittent, but well supported - [**Dividend yield**](#dividend-yield-average)\- average, but historically informative - [**Valuation**](#valuation-middling)\- could be cheap if RS meets forecasts - [**Profitability**](#profitability-strong)\- the business has generated attractive returns on capital - [**Fundamental health**](#fundamental-health-robust) \- no serious concerns - [**Conclusion**](#conclusion-i-am-interested)\- would I consider buying RS Group shares for my portfolio? --- ### What does RS Group do? RS Group sources and resells a vast range of industrial products – such as electronic components – to customers all over the world. The company serves the MRO (Maintenance, Repair and Operations) market and carries more than 750,000 products in stock, in order to meet customer demand quickly and reliably. This £3.6bn group is one of a number of distribution specialists listed on the UK market. What they have in common is that they link suppliers and customers who cannot trade directly with each other (my **emphasis**): > "Our suppliers do not tend to have the distribution capabilities, or desire, to service or deliver directly to these customers in such small volumes. RS plays a very important role connecting over **2,500 suppliers and 1.1 million customers**." Another – very different – example of this type of business is AIM-listed fuel, food and feed supplier **NWF Group (LON:NWF)**, which I've looked at in [a previous review and liked](https://www.rolandhead.com/dividend-shares/is-nwf-a-dividend-share-to-buy-now/). --- ### History: 87 years of spare parts Electronic engineering students of a certain age (including me) will remember [the RS catalogue](https://www.rs-online.com/designspark/a-look-back-over-the-last-10-years-of-designspark?ref=rolandhead.com). These multi-volume tomes were the size of pre-internet telephone directories and were regularly reissued. In the 1990s, at least, the RS catalogue was filled with pages such as this: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs-directory-image.png) Source: [UK Vintage Radio Repair and Restoration Forum](https://www.vintage-radio.net/forum/showthread.php?p=778968&ref=rolandhead.com) When you wanted some electronic components, you looked them up and then ordered them by phone or post. The company's first transactional website was launched in 1998, while I was at university. **1937 - 2024 timeline:** RS Group's [history](https://www.rsgroup.com/about-us/our-history/?ref=rolandhead.com) stretches back to 1937, when JH Waring and PM Sebestyen launched Radiospares from a garage in London. The pair sold spare parts for radios – which were readily repairable – later expanding to offer parts for televisions. In the 1950s, the world was becoming increasingly electrified. Radiospares saw the opportunity and expanded to offer a broader range of electronic components. In 1967, the business listed on the London Stock Exchange as Electrocomponents, a name that persisted until 2022\. In the 1970s, the core trading business was renamed from Radiospares to RS Components. RS remains the group's core branding, leading to the the 2022 name change. Since the 1990s, RS has grown steadily through a mix of organic growth and acquisitions. Today, the business generates annual sales of £3bn and and operates in more than 30 countries. About 60% of sales come from the EMEA region, with, c.30% from The Americas and the remainder from Asia Pacific. --- ### Recent trading & outlook As I've mentioned already, trading over the last 18 months has been challenging. Many of the group's customers built up their parts inventories to meet elevated order books during the 2022 supply chain crisis. As demand weakened in 2023, many RS customers were left with too many parts in stock and shrinking order books. To bring the situation back into balance, they cut their orders to RS. The electronics industry suffered a particularly big slump in demand, leading to a 22% drop in like-for-like revenue from RS customers in this sector: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-fy24-lfl-categories.png) Source: RS Group FY24 presentation In turn, this left RS facing a combination of elevated inventories and weaker orders. **2023/24 results** ([y/e 31 March 24](http://www.investegate.co.uk/announcement/rns/rs-group--rs1/final-results/82129424?ref=rolandhead.com)): Full-year revenue fell by 1% to £2,942m. The acquisition of Distrelec (June '23) and Risoul (Jan '23) provided contributions that helped to offset an 8% drop in like-for-like sales. Pre-tax profit for 23/24 dropped by 33% to £249m, with earnings down 36% to 38.8p per share. The dividend was lifted 5% to 22p, remaining comfortably covered by earnings. ***I reviewed these results in more detail back in May –*** [***see here***](https://www.rolandhead.com/dividend-notes/quality-operators-rs1-cwk-ajb-ihp-hl/)***.*** [**AGM update 11 July 2024**](https://www.investegate.co.uk/announcement/rns/rs-group--rs1/final-results/8212942?ref=rolandhead.com)**:** revenue for the three months to 30 June 2024 was 3% lower on a like-for-like basis. However, contributions from acquisitions provided a further contribution, lifting total sales by 3%. The company said that trading conditions have continued to normalise as expected: > "As trading conditions stabilise and comparatives get easier, the pace of decline in like-for-like revenue across all three regions continues to slow as anticipated." **Outlook:** Broker forecasts appear to have remained unchanged following the recent AGM update. Consensus estimates suggest adjusted earnings of 42.4p per share in 2024/25\. This would be a 3% decline from 2023/24's adjusted figure of 43.8p per share. Based on these forecasts, RS shares trade on a forecast price-to-earnings ratio (P/E) of 18 at the time of writing, with a potential dividend yield of 2.9%. One possible note of caution is that although forecasts appear to be stabilising, they have been cut extensively over the last year. This useful broker consensus chart from Stockopedia highlights the decline in expectations since February 2023: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-broker-trend-stocko-160824.png) Source: [Stockopedia](https://app.stockopedia.com/share-prices/rs-LON:RS1?ref=rolandhead.com) While I'm optimistic that the downtrend is levelling out, it's probably too soon to really be sure. I might be tempted to wait (at least) for November's half-year results before taking a positive stance on a return to earnings growth. Let's move on and take a broader look at the financial qualities of this business through the lens of my dividend screening system. --- ### RS Group: crunching the numbers **Description:* RS Group is a distribution specialist that provides industrial customers with access to a huge range of parts and products. The company carries more than 750,000 items in stock globally.* | **RS Group(LON:RS1)** | **Quality Dividend score: 73/100** | **Forecast yield: 2.9%** | | --------------------- | ---------------------------------- | ---------------------------- | | Share price: 760p | Market cap: £3.6bn | *All data at 09 August 2024* | ***Latest accounts:*** [*final results y/e 31 March 2024*](https://www.investegate.co.uk/announcement/rns/rs-group--rs1/final-results/8212942?ref=rolandhead.com) *and* [*AGM Update (11 Jul '24)*](https://www.investegate.co.uk/announcement/rns/rs-group--rs1/agm-update/8305160?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think RS Group could be a suitable addition to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). As a reminder, this is a scoring system I've developed to rank shares for the qualities that are important to me, from a quality dividend perspective. My choice of scoring factors is of course highly subjective. These scores are not intended to be used as a guide on when to buy or sell shares. They're simply one factor I use to assess a stock's potential attractions, in addition to broader, company-specific analysis. Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: very good I score stocks for dividend culture by counting the number of consecutive years they've made a payout, including any cuts. RS Group's record looks good by any standard, I think. The company has been listed on the London stock market since 1986\. SharePad only shows payouts back to 1995, but in Stockopedia I can see a record of payouts stretching back to 1989. In the 35 years since then, the dividend has never been passed and has only been cut once, in 2009\. However, subsequent growth was almost non-existent until 2015, when former CEO Lindsley Ruth took over – a theme I'll return to: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-dividends-090824.png) Despite this, I don't have any concerns about RS Group's commitment to the shareholder payout. This business appears to have consistently prioritised dividends over the last 30 years. **RS Group scores 5/5 for dividend culture in my screening system.** --- ### Dividend safety: comfortable For dividend safety in non-financial stocks I score companies based on their historic payout ratios, free cash flow dividend cover and leverage. The chart below is slightly complicated but provides a fairly positive picture, in my view. - RS Group's dividend has been consistently covered by earnings (red line), except briefly during the 2008 financial crisis. - The dividend has also been covered by free cash flow (blue bars) on a rolling average basis, although year-on-year results have been somewhat lumpy. I suspect this reflects stocking/destocking cycles in the business, acquisitions and wider economic trends. - Leverage (grey line) has never been excessive, by my measurement, and looks comfortable at the moment. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-div-fcf-cover-leverage-160824.png) This dividend isn't the safest I have ever scored, but looks pretty reliable and well supported to me. I don't have any serious concerns on this score. **RS Group scores 3.6/5 for dividend safety in my screening system.** --- ### Dividend growth: well supported Much as I like to receive rising dividends, I get uncomfortable if I feel they are not well supported by underlying growth in the business. The two main criteria I use to gauge the fundamental support for dividend growth are free cash flow per share and net asset value per share. This reflects my belief that good quality business growth will normally be reflected by increasing book value and increased cash generation. Without an increase in book value, profit growth requires a continual increase in returns on capital. Likewise, if a business is growing profits but not producing any extra surplus cash, then I would have doubts about the quality of the underlying growth. RS Group scores well on these quality measures. However, a long-term view of the company's history again highlights a long period (2005-17) without meaningful growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-fcfps-divps-navps-160824.png) Looking more closely at the underlying performance of the business over the last 30 years, we can see that revenue generally continued to rise each year, but earnings did not: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-turnover-eps-170824.png) I'd want to understand a little more about the pressures on margins from 2012-2016 before buying the shares. In summary, dividend growth has been inconsistent over the years. But when RS *has* increased its dividend, it has done so without sacrificing the quality of the payout, in my view. **RS Group scores 3.7/5 for dividend growth in my screening system.** --- ### Dividend yield: average As I write, RS shares offer a forecast dividend yield of 2.9% for the 2024/25 financial year. This is at the lower end of what I'd consider for my quality dividend portfolio, but I'd consider it if I was confident of the quality and growth potential on offer. In this case I'm also interested to see if the yield can tell me anything about the valuation of this business. The chart of RS's historic dividend yield below suggests to me that the current valuation may not be all that compelling, unless the company can return to strong growth fairly quickly: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-div-yield-160824.png) In terms of yield, this business looked most attractive prior to the 2008 financial crisis and then between 2010 and 2016\. Despite a 40% dividend cut in 2009, RS shares continued to offer an appealing 4%-5% yield during the subsequent period. The chart below provides some interesting context to this. RS's profits appear to have been relatively flat between 2002 and 2016\. Profit growth then accelerated from 2017, presumably as then-CEO Lindsley Ruth's strategy began to deliver results following his appointment in 2015. Shareholders then enjoyed a corresponding share price re-rating, hence the lower dividend yield since that time: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-ebit-price-160824.png) The question now, for me, is whether the company is about to resume its previous growth trajectory, or whether a period of flatter performance is likely. In the former case, the current yield could be attractive for me. In the latter, I might prefer to hold out for a lower valuation. **RS Group scores 2/5 for dividend yield in my screening system.** --- ### Valuation: middling I think dividend yield can be a useful part of a valuation toolkit, but it's not the main metric I use. My scoring system relies on EBIT/EV yield and free cash flow yield to gauge the current valuation of a stock. Looking at these measures on a long-term chart provides useful historical context, in my opinion. *How has the company been valued in the past, and how does this compare to today's valuation?* In this case, I would suggest that the business is potentially quite reasonably valued, with a trailing EBIT yield of c.7%. Although trailing free cash flow is depressed, this reflects the major customer destocking cycle the company was going through last year, which resulted in elevated inventories. Half-year results, which I looked at [here](https://www.rolandhead.com/dividend-notes/quality-operators-rs1-cwk-ajb-ihp-hl/), suggest this situation is now unwinding and returning to normal. Looking ahead (shaded lines), broker forecasts suggest both EBIT and free cash flow will be on an improving trend. These forward valuations look reasonably appealing to me, although of course there is no guarantee they can be delivered. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-fcf-ebit-yield-fc-160824.png) I think RS Group is *potentially* reasonably valued at current levels, with the caveat (again) that if the business is facing a period of stagnation, a further de-rating might be justified. **RS Group scores 3/5 for valuation in my screening system.** --- ### Profitability: strong Distributors often have quite low margins, but large-scale operators can achieve high returns on capital due to favourable working capital arrangements. Quite often, supplier credit terms allow such companies to sell stock and collect payment from customers before having to pay suppliers. RS says it holds more than 750,000 products in stock in order to be able to fulfil customer orders quickly and reliably. My previous [analysis](https://www.rolandhead.com/dividend-notes/quality-operators-rs1-cwk-ajb-ihp-hl/) has suggested that at least some of this stock sits in RS warehouses for more than 90 days before being sold. Even so, my number crunching led me to believe that the company took an average of 135 days to pay its suppliers last year. This highlights the attractive economics of this type of business; when it's well run, your suppliers effectively provide free credit that can be used to stock your warehouses. These characteristics are reflected in RS Group's historic profitability, especially when measured using my preferred metric of return on capital employed: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-roce-navps-160824.png) The rapid growth in net asset value per share from 2017 onwards reflects higher stock levels and receivables, plus additional goodwill as RS made acquisitions. That fact that RS was able to maintain ROCE within a stable range during that period suggests to me that the acquisitions were – on the whole – successful and reasonably priced. When external market conditions recover, I don't see any reason why RS cannot achieve 15%-20% returns on capital, as it has done previously. Assuming a cost of capital of 8%-10%, ROCE of >15% implies the business is generating significant excess capital that can be reinvested or returned to shareholders. This is why ROCE is so important to me – it's the engine of value creation for shareholders. For an example of what happens when ROCE is too low, we need only consider the progress of Vodafone shares over the last 20 years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/vod-roce-price-20y-160824.png) Turning back to RS Group, I believe this business enjoys above-average profitability. If this can be paired with a return to growth, then I think shareholders could benefit. **RS Group scores 4.2/5 for profitability in my screening system.** --- ### Fundamental health: robust My fundamental health score is intended to give a rough indication of whether a company's debt and other financial obligations could potentially put its dividend at risk. To score this I use two metrics: - Fixed charge cover (operating profit plus rent/lease costs divided by net interest plus rent/lease costs) - Leverage - the measure I use is net debt divided by five-year average post-tax profit. I don't have any serious concerns about RS's balance sheet. Fixed charge cover is ample and leverage is well below my preferred limit of 5x. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/08/rs1-leverage-fixchgcov-160824.png) As a side note, RS's generous use of supplier credit means that I would see elevated debt levels as a serious risk. In a downturn, this combination could leave the company struggling to fund the cash outflows needed to unwind inventory while also servicing its borrowings. Fortunately, that doesn't seem to be a concern here. **RS Group scores 4/5 for fundamental health in my screening system.** --- ### Conclusion: I am interested **My quality dividend system awards RS Group an overall score of 73/100 at the time of writing (August 2024).** By my reckoning, CEO Simon Pryce has spent around £1.1m buying RS shares since taking charge in March 2023\. As far as I can see, he's bought at prices ranging from 907p down to 647p. Some of these purchases may simply be to meet his contractual obligation to *"start to build up"* a personal shareholding of 400% of his £750k base salary. But I would like to think he has some personal conviction buying at these levels. I also think RS shares could be a reasonable purchase below 800p, although I still have some concerns. Here's a summary of the main points, as I see them. **Pros:** - RS has good scale in a fragmented market and has the potential to continue expanding through consolidation; - The economics of the business appear attractive – the company is able to generate high returns on capital, fairly consistently; - Cash generation has generally supported the dividend and RS appears to have a strong commitment to shareholder returns; - If the business returns to growth as forecast, the shares could be quite reasonably valued. **Cons:** - RS shares currently trade on 18 times forecast earnings. Any further downgrades to expectations could see the stock de-rate to a more compelling valuation; - In the last 30 years, the company has struggled to deliver consistent earnings growth, only achieving this during the tenure of former CEO Lindsley Ruth; - The business is unavoidably exposed to the economic cycle. Recessions in any major markets, especially the US, could further delay a return to growth. **My view:** I still have some concerns about the timing of a recovery in this business, especially as it appears to be largely dependent on external conditions. I'm mindful of Jim Slater's warning about investing in turnarounds in his classic book *The Zulu Principle*: > "It is absolutely essential that the forecast for the year ahead shows rising profits or a return to profits" That criteria isn't yet satisfied here. Consensus forecasts suggest adjusted earnings for the year to 31 March 2025 will be slightly lower than in FY24\. Despite this niggle, on balance my view of RS Group is positive. I believe the shares could be attractively valued at under 800p, on a medium-term view. RS stays on my watch list, for now. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Jul '24 dividend portfolio update: will new brooms sweep clean? URL: https://www.rolandhead.com/portfolio/jul-24-dividend-portfolio-update-will-new-brooms-sweep-clean/ Last updated: 2024-08-23T11:19:06.000Z The theme of this month's portfolio update seems to be new management – all three of the companies covered have fairly new top management. In one case, the new CEO has not even had a chance to make a public statement yet. Unsurprisingly, his arrival was preceded by a nasty profit warning. With so much management change underway, I am remaining patient and continuing to hold all of the stocks discussed below in [the quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) and in my equivalent personal holdings. In the reviews below, I've explained why I'm taking this approach. I've also admitted that in one case, this might lead to a slight change to my investing decision framework. --- ### In this month's report... Here is a list of the companies covered in this month's model dividend portfolio update. Please click on the links alongside each summary, or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### The Exchange on Vox Markets with Paul Hill (19/07/24) URL: https://www.rolandhead.com/podcasts/the-exchange-on-vox-markets-with-paul-hill-19-07-24/ Last updated: 2024-08-20T09:19:02.000Z I recently got together with Paul Hill of Vox Markets to do a live show discussing interesting UK shares that are on our radar or in our portfolios right now. We also answered live questions from listeners throughout the show, making for an interesting and dynamic mix of topics. As always with Paul's podcasts, we covered a lot of ground. Stocks mentioned included BRBY, DUKE, SQZ, JHD, RNO, PAGE, TPFG, PAY, MBH, RWS, RS1, ECEL, SOM, BATS, AGR, TRIG, CLIG. This recording was made on 19 July 2024. *Disclosure: at the time of the recording Roland Head owned shares in Burberry, James Halstead, PayPoint, RWS Holdings, Somero Enterprises and City of London Investment Group.* #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Jun '24 dividend portfolio update: two very different stories URL: https://www.rolandhead.com/portfolio/jun-24-dividend-portfolio-update-two-very-different-stories/ Last updated: 2024-07-07T07:03:47.000Z June was a relatively quiet month for corporate results, with just two companies in my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) reporting results during the period. Both of these businesses are facing weaker external demand than they would like to see, largely to cyclical factors. However, the first of these companies has a strong balance sheet and is investing to add capacity to support future growth. Despite this extra expenditure, the company in question has also found enough surplus cash to fund a generous special dividend. I expect this stock to give me a yield on cost of nearly 7% for the financial year just ended. Although the second company discussed in this review is also investing for the future, I feel it's playing catchup somewhat and is potentially more vulnerable. Last month's quiet reporting schedule gave me a chance to learn a little more about the technology behind this business, which is currently one of the portfolio' weaker performers. While I remain confident in the opportunity, I have also flagged up the bear arguments below, as I see them. --- ### In this month's report... Here is a list of the companies covered in this month's model dividend portfolio update. Please click on the links alongside each summary, or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### H1 2024 quality dividend portfolio review: cash income up 22% URL: https://www.rolandhead.com/portfolio/h1-2024-quality-dividend-portfolio-review-cash-income-up-22/ Last updated: 2024-10-11T09:11:40.000Z The model dividend portfolio delivered a record level of cash income during the first half of this year. Payouts received (or ex-dividend) during H1 totalled almost 60% of the total income generated by the portfolio in 2023: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/07/rh-pf-div-income-1h24-1.png) Based on a £100k model portfolio created in December 2021, including estimated costs Dividends earned during the half year rose by 22% to £2,750, compared to the same period in 2023\. At the end of June, the average forecast dividend yield of the stocks in the model portfolio was 5%, compared to c.3.8% for the FTSE 100. I'm comfortable the model portfolio is on track to deliver another year of inflation-beating income growth and market-beating yield in 2024. Unfortunately, the capital (share price) performance of the portfolio continued to lag its FTSE 100 benchmark in Q2, albeit by a smaller margin than [in Q1 2024](https://www.rolandhead.com/portfolio/q1-2024-quality-dividend-portfolio-review-rising-growth/). **Q2 2024 performance:** - RH model portfolio total return: 1.2% - FTSE 100 Total Return index: 3.8% Even when dividends are included, the total return from my portfolio has still lagged the UK's main index so far this year: **H1 2024 performance:** - RH model portfolio total return: 0.0% - FTSE 100 Total Return index: 7.9% This slump is largely down to poor performances from a handful of stocks, as I discuss below. I'm hopeful that changes made to the portfolio this year will help me reverse this losing trend over time. However, as a general rule, I think it's unrealistic for active investors to expect to track index movements neatly. In fact, this may not even be a desirable goal. #### **Why private investors rarely track the index** The FTSE 100's [market-cap weighted index structure](https://www.investopedia.com/terms/c/capitalizationweightedindex.asp?ref=rolandhead.com) means that the share price movements of mega-caps such as **Shell** and **AstraZeneca** tend to have an outsized impact on the index. I am only invested in one of the five largest companies in the FTSE 100 – but three of these giants delivered gains of more than 10% during H1, with only one recording a loss. In total, I estimate that the share price movements of the five largest FTSE 100 stocks added around £50bn to the total market cap of the FTSE 100 in H1\. That's roughly equivalent to the *entire* market cap of the 12 smallest companies in the index. A company such as **Rightmove** (mkt cap £4.3bn) could go to zero and would have less impact on the FTSE 100 than a 2.5% gain for AstraZeneca (mkt cap £186bn). This is not an excuse for the underperformance of my portfolio. But I think it is an explanation of why actively-managed portfolios are never likely to track market-cap weighted indices over short periods, unless they hold all the largest stocks in that index. If that's the case, then it's worth considering whether the portfolio's (or funds) are really actively managed, or just closet index trackers. Whatever its faults, my portfolio is definitely not a closet index tracker. I hold shares with market caps ranging from £100bn+ to c.£100m. Some are listed on the Main Market and some on AIM. What they all share – I hope – is the ability to provide reliable dividends and deliver compound gains over long periods. Read on for a summary of my portfolio's capital returns and dividend performance in H1, plus a review of its current financial profile and why this matters to me. - [H1 2024 portfolio performance](#h1-2024-portfolio-performance-review) - [Portfolio changes in Q2 2024](#portfolio-changes-in-q2-2024) - [Position weightings](#position-weightings) - [Portfolio: key financial metrics](#model-dividend-portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) ### H1 2024 portfolio performance review The portfolio I'm discussing here is my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/), which is run using my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). This model portfolio was launched on 1 December 2021\. It contains largely the same shares as my personal portfolio, which has been run on a similar basis for a number of years. Although this is a dividend portfolio, no income is withdrawn and all dividends are reinvested. For this reason, my main metric for measuring progress against the wider market is total return (share price change + dividends). This chart shows the performance of the portfolio against the FTSE 100 Total Return index since the model portfolio's inception on 1 December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/07/pf-chart-vs-ukx-tr-010724-2.png) As always, this seemingly bland performance disguises a wide range of individual share price movements during the quarter: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/07/rh-pf-2q24-shareprice-changes.png) Volatility is part and parcel of equity investing. For all but the largest and most defensive stocks, I tend to view movements of less than 15%-20% during a quarter as relatively insignificant, unless they've been triggered by specific newsflow. On that basis, only one of the fallers above is causing me concern. I reviewed the latest results from the company concerned – 'B' – in my [May '24 portfolio review](https://www.rolandhead.com/portfolio/may-24-dividend-portfolio-update-consumer-demand-remains-uncertain/) for subscribers. Without going into too much detail, I believe the investment case for this business remains intact and should recover when sector conditions improve. I don't currently have any intention of selling this stock. However, I did make one change to the portfolio during the second quarter. ### Portfolio changes in Q2 2024 My [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/) allows me to make up to two changes to the model dividend portfolio at the end of each quarter. In Q2, I sold one share and bought a replacement stock. I did not top up any positions in Q2. #### Stocks sold in Q2 **June 2024:** I sold a small-cap AIM stock at the end of June. I decided to sell because I felt the broader, unknowable risks attached to the investment outweighed the potential attraction of the operating business itself. In simple terms, the shares were starting to keep me awake at night. At the time of my decision, the company concerned was the smallest in my portfolio, by market cap. A poor share price performance also meant that this position had shrunk to become the second smallest holding in the portfolio, at the time of my sale. I decided it was logical to cut my losses. I closed the model portfolio's position for an overall loss of around 40%. My own real-money position closed for a similar loss. I have reinvested the cash in a business that is simpler to analyse and which I expect to provide more reliable returns. Subscribers can read a more detailed explanation of my sale – including the name of the company sold – [here](https://www.rolandhead.com/dividend-shares/new-stock-a-new-family-firm-to-hopefully-improve-the-sleep-at-night-qualities-of-my-portfolio/). #### New stocks in Q2 **June 2024:** I added a new share to the portfolio to replace the company discussed above. The company concerned is an AIM stock with family ownership and an impressive history of dividend growth. The balance sheet looks very strong to me and I believe this business has an excellent reputation and good scale in its market niche. My analysis suggests that this company may also be in a position to enter a new phase of growth, when economic conditions improve. I published a full write-up of this new purchase for subscribers here: - [New stock: a new family firm to (hopefully) improve the sleep-easy score of my portfolio](https://www.rolandhead.com/dividend-shares/new-stock-a-new-family-firm-to-hopefully-improve-the-sleep-at-night-qualities-of-my-portfolio/) *Both trades were made on 28 June 2024, the final trading day in the quarter.* ### Position weightings Here's how the model portfolio looked at the end of the first half of 2024, following the transactions discussed above. **Subscribers can see this chart with ticker codes included on my** [**portfolio page**](https://www.rolandhead.com/dividend-portfolio/)**:** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/07/rh-pf-positions-anon-010724.png) 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). --- ### Model dividend portfolio: key financial metrics For me, investing is all about the performance of my portfolio as a whole. As an engineer by training, I reckon my investment goals can be expressed in terms of inputs (which I provide) and outputs (which I hope to benefit from). **Inputs:** I try to add quality companies with above-average profitability, strong financials and reliable dividends to the portfolio. **Outputs:** I hope to receive a cash income that provides a market-beating yield and above-inflation dividend growth. I also hope for gradual capital appreciation over time. I expect this to follow naturally through a process of compounding, if my income and profitability inputs are maintained. To help assess whether the portfolio is constructed in the way I wish, each quarter I take a look at some aggregate financial metrics for the entire portfolio. In other words, I look at the portfolio as if it was a single business: | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield** | **5yr avgdiv grth** | **F'cast divyield** | **No. yrsdiv paid** | | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ---------------- | ------------------- | ------------------- | ------------------- | | £2.7bn | 21.5% | 9.1% | 6.9% | 0.0x | 5.0% | 5.5% | 5.0% | 25 | *Scroll L-R (Data source: SharePad/author analysis 01/07/2024\. Some adjustments were needed; please don't take this as gospel.)* [**Here's how these statistics looked at the end of Q1 2024**](https://www.rolandhead.com/portfolio/q1-2024-quality-dividend-portfolio-review-rising-growth/#model-dividend-portfolio-key-financial-metrics) What do these numbers tell me? One trend that's continued from the first quarter is that the **median market cap** has continued to rise, gaining a further 7% to £2.7bn (Q1 2024: £2.5bn). This reflects changes to the portfolio and some share price gains. While I don't want to have a big cap portfolio, I am not worried about this increase. There are still plenty of smaller shares in the portfolio. However, rising share prices (and in a few cases, falling earnings) mean that some of my stocks have become a little more expensive. This is reflected in the **EBIT yield** of 9.1% (Q1 '24: 10.0%) and **FCF yield** of 6.9% (Q1 '24: 8.0%). While both figures still look decent value to me, they are not quite as cheap as three months ago. Happily, the portfolio's trailing free cash flow yield of 6.9% remains comfortably ahead of its 5% dividend yield. This reassures me that the cash payouts I receive should be covered, at least in aggregate, by companies' surplus cash. Profitability has not been affected either. The portfolio's average **return on capital employed** remains stable at c.21%, largely unchanged from Q1. One possible concern is that the portfolio's **forecast dividend yield** and **trailing 12-month dividend yield** are both the same, at 5.0%. At face value, this suggests the portfolio will not provide any dividend growth this year. In practice, I don't think this is likely. These yield figures have been affected by two portfolio changes so far this year and by special dividends. I still expect the actual income from the portfolio to increase this year, although there are no guarantees. Even if cuts are necessary from time to time, I'm reassured by the strong **dividend culture** evidenced in the companies across the portfolio. On average, my shares have paid a dividend every year for the last 25 years – an increase from 24 years at the end of Q1. ### Final thoughts While I'm happy with the income performance of the portfolio, I am not happy with the capital returns it has generated. So far this year, I have closed out two positions at a c.40% loss. This has limited the benefit of the positive total returns that have been delivered by the majority of shares in this 20-stock portfolio. I guess this is a useful reminder of the importance of Warren Buffett's rule number one – *"don't lose money"*. Going forward, I'm aiming to improve my understanding of the risks inherent in the business I own. I also plan to put more effort into understanding both the valuation and the intrinsic value of the stocks I own and consider buying. Until next time, thank you for reading – and good luck in the markets! Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### New stock: a new family firm to (hopefully) improve the sleep-easy score of my portfolio URL: https://www.rolandhead.com/dividend-shares/new-stock-a-new-family-firm-to-hopefully-improve-the-sleep-at-night-qualities-of-my-portfolio/ Last updated: 2024-06-16T07:09:58.000Z I've decided to sell one of the small-cap dividend shares in [my quality income portfolio](https://www.rolandhead.com/dividend-portfolio/) at the end of this quarter. Unusually, I don't have any serious concerns about the performance or valuation of this business. Instead, what's concerning me is a different type of risk – potential problems that I can imagine, but whose impact and likelihood I cannot understand. All investments come with a measure of such risks, of course. But in this case, I feel the balance has tilted beyond my comfort zone. As a result, I am spending too much time worrying about the unknowable. After some consideration, I've decided to take advantage of my quarterly trading window to remove this source of stress from the portfolio and replace it with a dividend stock I believe should be easier to live with. ### New stock: a family dividend stock The departing stock is a family firm, and in its place I am going to add another UK-listed family firm to my dividend portfolio. The company in question is a business I've followed with interest for some time and have previously commented on in [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/). It has an unbroken dividend history stretching back more than 30 years. I believe the valuation of this business has now fallen to a level that's attractive, assuming its long-term track record of growth remains intact. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/06/anon-dps-price-110624.png) I don't have a specific policy of investing in family-controlled businesses, but I find myself being drawn to them increasingly often. This may be because of their tendency to have reliable dividends, strong balance sheets and a long-term focus. These attributes are certainly present in this new stock, in my view, and reflect my main goals for the model portfolio and my own investments. **I will be making both trades on the final working day of the quarter (28 June 2024), in line with my normal quarterly trading policy.** **Paid subscribers can read on below for full details of the dividend stock I'm selling and the new share I'm going to buy.** _This post is for paying subscribers only._ ### The Dividend Note - accomplished retailers + a mystifying problem - SMWH, GHH, BME (07/06/24) URL: https://www.rolandhead.com/dividend-notes/accomplished-retailers-a-mystifying-problem-smwh-ghh-bme-07-06-24/ Last updated: 2024-06-07T16:15:46.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/), my weekly look at UK dividend shares I might be interested in adding to [my portfolio](https://www.rolandhead.com/dividend-portfolio/). This week I've taken a look at the latest results from FTSE 100 value retailer B&M and AIM-listed small cap engineer Gooch & Housego. One of them appears to be performing well, but the other has a problem that I don't fully understand. Other updates of interest to me this week included **WH Smith (SMWH)**, which reported sales up 5% during the 13 weeks to 1 June. I covered the travel retail specialist's half-year results [in April](https://www.rolandhead.com/dividend-notes/adding-to-my-watch-list-smwh-rec-hik-26-04-24/) and remain broadly positive on this business. WH Smith's share price edged higher on the day of the update as the market digested a mixed performance. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/06/smwh-1y-chart-070624.png) While revenue rose by 9% in UK Travel, performance in North America looked weaker. WH Smith is currently expanding its US travel business aggressively with the goal of achieving a 20% market share. However, like-for-like sales in North America travel were flat during the most recent quarter, and total sales were only 3% higher. The company says it is applying its *"forensic approach to retailing"* to improve the performance of its US stores. I think this update highlights the risks as well as the opportunities of WH Smith's US rollout. I suspect that the performance of the North American stores will improve over time. The company has proven expertise in travel retail. However, I wonder if flat LFL sales might be a sign that the post-pandemic air travel surge in the US has now fully annualised. Further growth could be more measured and may test the financial assumptions that lie behind the company's US growth spree. [I commented on](https://www.rolandhead.com/dividend-notes/adding-to-my-watch-list-smwh-rec-hik-26-04-24/) this in more depth in April. One to watch. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend-paying companies that are of interest to me. In general, these are stocks that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect my personal views and are not investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](#disclaimer)*.* - [**Gooch & Housego (LON:GHH)**](#gooch-housego-ghh)\- I really want to like this photonics business, but problems in one of its three divisions mean that it's not investable for me at the moment without a better understanding of how (and when) these issues can be resolved. - [**B&M European Value Retail (BME)**](#b-m-european-value-retail-bme)\- a solid set of results, although free cash flow was held back by higher tax and capex costs. I remain a fan of this well-run retailer, but I wonder about the company's decision to increase its long-term UK store target from 950 to 1,200. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Gooch & Housego (GHH) > "Full year expectations are unchanged; execution risks to H2 remain but have been reduced." [**Interim results for six months to 31 March 2024**](https://www.investegate.co.uk/announcement/rns/gooch-housego--ghh/interim-results/8239987?ref=rolandhead.com)/ Mkt cap: £143m *2023/24 forecast dividend yield: 2.4%* Gooch & Housego is a small-cap British engineering group that was founded in 1948\. It's a photonics specialist – it makes high-specification optical and laser components for the aerospace and defence, industrial and life sciences markets. The dividend yield here is a little low for me. But when I look at the company's half-year results [in June 2023](https://www.rolandhead.com/dividend-notes/reassuring-updates-pag-ghh/), I speculated that the business could be nearing a turning point and might offer value. I felt Gooch & Housego might be the kind of high-quality, innovative business that could be a long-term compounder for me. Unfortunately, this week's 23/24 half-year profits show flat revenue and a further profit slump. Closer investigation the problems are largely restricted to one part of the business, Aerospace and Defence. I have to admit I'm surprised how bad things seem in this business, especially given the broader strength of demand in the defence sector at the moment. I still think there could be a substantial turnaround opportunity here *if* management can overcome current problems. But I'm not sure I understand enough to make the call. Let's take a look. **23/24 half-year results summary:** the company says it has put in place *"important building blocks"* to support the delivery of the group's strategic plans. This appears to include outsourcing a greater proportion of manufacturing. Trading remained under pressure from *"significant destocking"* by many of the group's industrial (semiconductor) and medical laser customers. This weakness was partially offset by an increase in revenue from the telecoms market. This mainly relates to the growing subsea data cable market, which is supporting demand for some of the firm's fibre optic modules. The overall impact of these trends on G&H's financial results was decidedly negative: - Revenue fell by 1.4% to £63.6m on a continuing operations basis (-5.3% constant currency) - Adjusted pre-tax profit down 45% to £2.6m - Reported pre-tax profit down 92% to £0.3m - Adjusted earnings down 45% to 8.3p per share - Interim dividend up 2% to 4.9p per share These numbers give an adjusted operating margin for the period of just 6.0%. This is well below the double-digit level I'd expect from a business of this kind, on the assumption its products benefit from significant competitive advantages. **Outlook:** there are signs of hope. Gooch & Housego says its customers in the industrial laser and semiconductor market have advised the company that they expect to pass through increased orders from *"around the end of this calendar year"*.This should happen as these end users finally work through excess inventory accumulated previously: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/06/ghh-hy24-fy24-outlook-1.png) Source: Gooch & Housego HY24 presentation These excess orders previously caused problems for Gooch & Housego as it struggled to fulfil them during the supply chain crisis. The company now says it has reduced its past due backlog by 70% over the last 18 months. New orders are tracking slightly ahead of revenue and the order book for continuing operations was flat at £115.8m at the end of March (Sept 23: £115.3m). Management says full-year expectations are unchanged and consensus forecasts have remained flat at 29.5p per share, with a 13.3p dividend. This prices the stock on 19 times FY24 forecast earnings, with a 2.4% yield. Not a compelling valuation, given the low margins. But to really understand the group's performance, we need to look at the divisional results. **Segmental performance:** the devil is in the details. This isn't just a story about a cyclical slowdown in industrial demand. Indeed, I would argue that element is less of a concern. The real problem is harder for me to understand and appears to be more challenging for the company to fix. To understand more, we need to look at divisional performance for the first half of this year. **Industrial:** revenue fell by 13.1% to £31.7m, while adjusted operating profit fell 36.8% to £3.5m. This gave an adjusted operating margin of 10.5% (HY23: 15.0%). These results aren't great but they're relatively easy to understand, I think. A fall in volumes as customers destock has resulted in reverse operating leverage (profits falling faster than sales). This happens when fixed costs are spread across lower volumes. We've seen this in plenty of other industrial companies over the last year. All else being equal, I would expect this downturn to reverse over time. **Life Sciences:** revenue fell by 3.4% to £15.3m, while adjusted operating profit was 2.9% lower, at £2.2m. In this case, margins were maintained at a healthy 14.7% (HY23: 14.6%). The company says it's seen medical laser destocking, but also reports growth in some diagnostic categories following regulatory approval of new products. A c.15% operating margin seems encouraging to me. I'm not too worried about this division, either. **Aerospace and Defence:** this looks like a can of worms to me. Revenue **rose** by 35.8% to £16.6m in H1 from continuing operations. This translated into an increase of 19.6% on an organic constant currency basis. This should be good news. Unfortunately, the A&D division is loss making, with an operating loss of £1.6m during the six months to 31 March 2024 (HY23: £1.9m). This is equivalent to a *negative* margin of 9.4% (HY23: 15.5%). In other words, A&D lost £9.40 for every £100 of sales during H1. For reference, A&D generated an operating loss of £2.3m in FY23 and £2.7m in FY22\. So the trend is in the right direction. But this isn't a startup – how can such a well-established business be losing so much money on rising sales? The answer isn't entirely clear to me from the results. Management simply say that *"production yields and productivity are still below required levels"*. > "We still have much to do to improve production yields and generate acceptable returns in this part of the business but we are confident that our in house continuous improvement programmes, better use of our supply chain and the addition of more G&H content in to sub system and system offerings can generate acceptable returns for the Group from the A&D segment." Management commentary makes reference to growth in demand for *"super polished optical components used in ring laser gyros".* The new business pipeline is said to be positive, driven by requirements resulting from the Ukraine conflict. Apparently, the firm's products are also being used in the British Army's Challenger 3 (tank) upgrade programme. Even so, A&D is currently a huge drag on the profitability of the group – without this business, I estimate the other two divisions would have generated an operating margin of c.10% in H1. #### My view These results contain pages of commentary about the company's strategic priorities and progress to date. But there's no clear guidance as to when the A&D business is expected to become profitable. I have not done enough research to understand the history of the problems in the A&D division. But the lack of a clear target on profitability suggests to me that it may not happen in the next 12 months. As things stand, this division is acting as a drag on the returns achieved by the wider group. I estimate ROCE at around 5% – which must be well below the group's cost of capital. Given this, I would argue that it might have been better for the company to suspend its dividend and use the cash to reduce net bank debt, which rose to £22.2m during H1 (FY23: £20.9m) I want to like Gooch & Housego. But without a much better understanding of the problems in the A&D division, I don't think it makes any sense for me to consider investing. I will remain on the sidelines for now. --- ### B&M European Value Retail (BME) > "All fascias delivering volume growth through both positive like-for-like4 ("LFL") customer transaction numbers and new space growth" [**Results for 53 weeks ended 25 March 2023**](https://www.investegate.co.uk/announcement/rns/b-m-european-value-retail-s-a-di---bme/fy24-preliminary-results/8242589?ref=rolandhead.com)/ Mkt cap: £5.0bn *2024/25 forecast dividend yield: 5.2%* I've covered this diversified discount retail several times before, most recently [here](https://www.rolandhead.com/dividend-notes/profit-upgrades-x3-hils-azn-bme-14-11-23/) (Nov 23). I'm a fan of B&M's historic strong profitability, skilled management and good cash generation. I don't see too much in this set of results to change that view. The company now operates under three fascias (trading names), B&M UK, B&M France and Heron Foods (a discount convenience format with a focus on frozen/ambient food – a kind of mini Iceland). **2023/24 results summary:** B&M grew quickly during the pandemic but has maintained positive revenue growth since then, albeit profit growth has been less consistent as various cost headwinds have hit the business: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/06/bme-fy24-rev-ebitda-history.png) Source: B&M FY24 presentation Group revenue rose by 10.1% to £5.5bn last year, or by 7.8% excluding the 53rd week. The core UK business achieved like-for-like sales growth of 3.7%, supporting the company's claim of growth in transaction numbers and new space growth. Sales growth in the other divisions was stronger than this. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/06/bme-fy24-segmental-revenue.png) Pre-tax profit for the year rose by 14.1% to £498m, although a higher tax charge meant that reported earnings only rose by 5.2% to 36.5p per share. Profitability remained good with an operating margin of 11.1% (FY23: 10.8%) and a return on capital employed of just over 19%, by my calculation. I've deducted lease costs from operating profit here, given that they are a sizeable cost for B&M. Free cash flow for the year fell by 18% to £382m, due to higher tax and growth capex. New store opening costs rose from £33m to £59m last year. Even so, cash generation remained sufficient to cover FY24 dividends declared of £348m. This performance gives an attractive trailing free cash flow yield of 7.7%. This dividend total includes an ordinary dividend of 14.7p per share and a 20p special paid in January 2024\. Together, they give a trailing dividend yield of 7.1%. B&M has a track record of paying regular special dividends. **Trading commentary:** B&M opened 78 new stores last year (excluding closures), including 45 B&M stores in the UK. CEO Alex Russo remains confident about the opportunities in the UK and the company has now increased its long-term target for the UK to *"not less than 1,200 B&M UK stores"*. The previous UK target was 950 stores. B&M currently has 741 UK stores, so this suggests the core UK estate could increase by 60% over time. This could be a significant growth opportunity, if the company can deliver this strategy profitably. Russo says that he's confident of achieving cash payback in under 12 months on new stores. This seems plausible to me given the high returns on capital achieved by this business. The company says its volume growth is currently *"industry leading"*. Management say this is improving its relationships with both branded consumer goods firms and its suppliers in the Far East, where there is said to be excess capacity. As a result, the company says it's achieving higher volumes through a broadly unchanged infrastructure. In turn, this is helping with cost control in the face of higher labour and energy costs. B&M France saw sales rise by 19.2% to £514m last year and is benefiting from improved sales densities. CEO Russo believes the potential store count in France is *"multiples"* of the 124 stores currently in operation. The adjusted operating margin of the French business rose to 9.5% last year (FY23: 8.8%), getting closer to the 12.4% achieved by B&M's UK stores. **Outlook:** slightly disappointingly, the company didn't provide any explicit financial guidance for 2024/25\. Consensus forecasts suggest adjusted earnings could rise by 9.7% to 40.4p per share this year, supporting a total dividend of 25.5p. These estimates put the stock on a forecast P/E of 12 with a 5.2% dividend yield. #### My view These results received a cautious reception and B&M's share price looks set to end the week down by more than 10% at the time of writing: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/06/bme-chart-1y-070624.png) The lack of any financial guidance for 2024/25 is perhaps a little disappointing. Forecasting the maximum number of stores a retail chain can support also seems to be as much of an art as a science. I'm not sure of the rationale behind this increase, which suggests the existing store estate could expand by more than 50%. Although I think it's reasonable to suggest that B&M has more room to grow, anecdotally most of the small/medium towns in the area where I live already have a store. One larger town has two. However, the group's focus on value and a diversified food/non-food mix plays well with the current economic pressures facing many shoppers. I expect this will remain true. B&M shares certainly don't look expensive to me based on last year's results, especially given the strong profitability of the group relative to standard supermarkets. On balance, I think B&M is probably reasonably priced at under 500p, although I might be tempted to wait for a price closer to 450p if I was thinking of buying the shares for my portfolio. *As always, thanks for reading – and please let me know what you think in the comments below.* Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### May '24 dividend portfolio update: consumer demand remains uncertain URL: https://www.rolandhead.com/portfolio/may-24-dividend-portfolio-update-consumer-demand-remains-uncertain/ Last updated: 2024-06-02T07:04:25.000Z Welcome back to my monthly newsletter, in which I review results and trading updates issued by the UK dividend stocks in my systematic model portfolio over the last month. This month's update has more of a big-cap bias than usual – four of the five companies covered are FTSE 100 companies. The fifth helps to redress the balance slightly, as it's a quirky and somewhat illiquid small cap. The general theme running across all of these results seems to be uncertain consumer demand, for a variety of reasons. Personally, I think that all of the businesses I've covered this month are in reasonably good shape, fundamentally. In my view, most of them should benefit from an eventual upturn, although I think there could be one exception to this. On a different note, May also marked the first anniversary of my paid service, which [I launched last year](https://www.rolandhead.com/newsletter/making-changes-at-rolandhead-com/). Paid subscribers get full access to these [monthly reports](https://www.rolandhead.com/dividend-newsletters/) and to my [model portfolio](https://www.rolandhead.com/dividend-portfolio/) (which replicates my personal portfolio). I've been surprised by the support I've received for this new service during a tough period for many UK investors. I'd like to take this opportunity to thank everyone who has signed up so far. Your financial support really helps to justify the continued time and effort that goes into this site. --- ### In this month's report... Here is a list of the companies covered in this month's model dividend portfolio update. Please click on the links alongside each summary, or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### The Dividend Note - impressive profitability - PETS, IPX (31/05/24) URL: https://www.rolandhead.com/dividend-notes/impressive-profitability-pets-ipx/ Last updated: 2024-05-31T16:39:33.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/), my weekly look at UK dividend shares I might be interested in adding to my portfolio. This week I've taken a look at two well-known UK small/mid caps with impressive profitability – although in one case, this is somewhat hidden behind a quirky accounting entry. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend-paying companies that are of interest to me. In general, these are stocks that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect my personal views and are not investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [*here*](#disclaimer)*.* - [**Pets at Home (LON:PETS)**](#pets-at-home-pets)\- I dig down into the profitability of this business and am favourably impressed. However, profits depend heavily on the vet business which is currently exposed to a CMA review into this sector. With this caveat, I think there could be value here. - [**Impax Asset Management (LON:IPX)**](#impax-asset-management-ipx)\- a shift towards more direct distribution and a revision to the dividend policy are perhaps growing pains. Even so, I remain a big fan of this sustainability specialist and believe the shares are likely to offer value at this level. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Pets at Home (PETS) > "No change to FY25 underlying PBT guidance" [**Results for year ended 31 March 2024**](http://www.investegate.co.uk/announcement/rns/pets-at-home-group--pets/fy24-preliminary-results/8227003?ref=rolandhead.com)/ Mkt cap: £1.4bn *24/25 forecast dividend yield: 4.4%* Pets at Home floated on the London market in 2014\. Over the last decade this integrated pet superstore and vet business has provided somewhat volatile ride for shareholders, but has also produced a useful stream of dividends. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/pets-price-dps-310524.png) I last looked at Pets at Home [a year ago](https://www.rolandhead.com/dividend-notes/contrasting-approaches-pets-ajb-hils-ihp/) when I commented that the *"outlook looks a little weak to me and the valuation seems up with events"*. Profits were indeed lower last year and the share price has also fallen sharply since then. Investor sentiment towards this business has probably not been helped by the Competition and Markets Authority's (CMA) decision to launch [an investigation](https://www.gov.uk/government/news/cma-identifies-multiple-concerns-in-vets-market?ref=rolandhead.com) into the UK veterinary sector. The company sounds confident about the CMA review, but at this stage I would argue some risk remains: > "We believe that our vets growth strategy is not threatened by the CMA's review into the vet sector. Our key building blocks for growth support competition and deliver better outcomes for consumers." However, this week's full-year results suggested to me that Pets at Home is in relatively good shape and could be a more attractive investment prospect than it was a year ago. Let's take a look. **23/24 results summary:** Pets at Home is nearing the end of an investment programme that saw the company launch a new app and website last year and open a new distribution centre that now serves all of its stores. CEO says last year was *"a pivotal year for the business"*, but the consumer backdrop appears to have been a little softer. The company mentions *"continued caution among consumers"* and the *"normalisation"* of new puppy and kitten numbers. I assume this means a post-pandemic slowdown to more normal numbers of new pets. The company says that membership of its Pets Club loyalty scheme rose by just 1.6% last year, albeit it now has 7.8m active members. Against this backdrop, PETS' 23/24 financial performance looks acceptable to me, if not spectacular: - Revenue up 5.2% to £1.5bn (+5.1% like-for-like, so not driven by new store openings) - Underlying pre-tax profit down 3.2% to £132m - Reported pre-tax profit down 13.7% to £105.7m - Underlying earnings down 9% to 20.7p per share - **Dividend** held flat at 12.8p per share **Profit analysis:** the fall in underlying profits is blamed on temporary supply problems during the distribution centre changeover and a slowdown in discretionary accessory sales. Pet food sales rose by 9.3% to £814.2m last year, but accessory sales fell 4.3% to £466m. Against this backdrop, total retail profit fell by 22% to £77.9m (FY23: £99.8m). That's equivalent to a segmental margin of 5.9%. I don't know what the impact of supply chain problems was. But these numbers suggest to me that retail profits depend heavily on higher-margin accessory sales to offset lower-margin food sales (pet food is a competitive market, after all). The company says it has a plan to return accessories to growth this year. Fortunately, the vet business continues to expand and provide a higher-margin revenue stream. The company's owned and hosted vet practices generated total revenue of £576m last year, of which £146.5m accrued to Pets at Home (FY23: £125.5m). From this, PETS generated £58.1m of vet segment operating profit (FY23: £52.1m). This implies an impressive segmental margin of 39.7%. I think this super profitability can be explained by the franchise-like structure of the vet business. Around two-thirds of PETS' vet revenue is fee income from joint venture practices. The structure of these JVs entitles the company to a fee income, rather than a share of profits. In that sense, it's a bit like a franchise – very profitable for the parent. The remaining vet revenue comes from company-managed practices. Sadly, I can't see any way to determine how profitable these are. One final comment profits – the larger fall in reported profits is attributed to £26m of exceptional costs related to the new distribution centre and other restructuring activities. I'm normally sceptical of adjusted profits, but in this case the explanation and adjustments do seem reasonable to me as genuine one offs. **Cash flow & balance sheet:** cash generation also worsened last year but remained reasonable, in my view. I calculate **FY24 free cash flow of £66m**. That's down from a comparable figure of £75.8m last year, but is still enough to cover the dividend. Free cash flow of £66m is also equivalent to 83% cash conversion from net profit, which is not a terrible result. Pets at Home ended the year with net cash of £8.8m excluding leases and gross debt of under £50m. That looks fine to me. **Hidden profitability?** Pets at Home's vet business provides a useful boost to profitability, but margins have historically been quite variable. Last year's operating margin of 8.1% is at the bottom end of the historic range, but still quite respectable: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/pets-navps-roce-opmargin-310524.png) **ROCE:** at first glance, return on capital employed doesn't seem spectacular. My standard calculation gives a ROCE of just under 9% for last year. The chart above suggests this is fairly typical. Given this, I was surprised to see Pets at Home's FY24 results specify a far more impressive-sounding underlying cash return on invested capital (CROIC) of 19.4% for last year. So what's the difference? The company's underlying CROIC calculation has a number of moving parts and is a little too bespoke and complex for me. But the breakdown of the CROIC calculation did reveal an interesting quirk to the balance sheet. When PETS was floated by its former private equity owner KKR in 2014, KKR added **£906.5m of goodwill** to the balance sheet. This is listed within intangible assets. This goodwill is presumably an accounting construct that wouldn't have existed with the flotation. So what would PETS' ROCE be like without it, I wondered? It turns out that stripping out the goodwill from my ROCE calculation gives a FY24 ROCE of 27.4%. This highlights the relatively capital light business model and the way in which the vet business juices the group's profitability. However, in the interest of objectivity, I felt I should make a further tweak to my calculation. One problem with the IFRS 16 lease accounting rules are that rental payments are no longer included in operating expenses. Instead, they are listed as a finance cost, together with loan interest, below operating profit in the income statement. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/pets-fy24-income-stmt.png) Source: Pets at Home FY24 results A quick look at the footnotes revealed that Pets at Home paid £13.3m in so-called interest expense on lease liabilities last year. Deducting this from operating profit gives me a lease-adjusted operating profit of £106m. Applying this figure to my return on capital calculation gives me an adjusted **ROCE of 24.3%**. A very impressive result, I think, and not a million miles from the company's underlying CROIC figure of 19.4%. *(I'm aware of the contradiction of dismissing a company's own adjusted figure and then creating my own. But the point here is that my figure can be calculated from the standard accounts, without needing any extra insight. PETS' CROIC figure relies on an extra level of detail that's not easy/possible to extract from the accounts. More broadly, as investors we are all free to interpret accounts as we wish. In this case, I think my adjustments have helped me gain a better understanding of this business.)* **Outlook:** full marks to Pets at Home for providing clear guidance on FY25 expectations *and* a summary of current consensus estimates. > **"No change to FY25 underlying PBT guidance**. Whilst the external trading environment has been subdued, overall pet care spend has proven resilient, and in the year ahead, we should begin to benefit from previous investments and key productivity programs." The company specifies an analyst consensus for underlying pre-tax profit of c.£144m as the basis for this guidance. SharePad data suggests this could translate into earnings of 22p per share, a 6% increase from the year just ended. These broker estimates put Pets at Home shares on a forecast P/E of 13.8, with a prospective yield of 4.5%. #### My view Pets at Home's USP is that it combines a full range of clinical, pet care and retail services. These are all available in an integrated offering under one roof and online – 10% of revenue now comes from subscriptions for repeat purchase products such as pet food and worming tablets. This model allows the company to boost the profitability of big stores by offering high-margin services within an affordable large format retail space. However, I was struck by how low the average spend per consumer is – the average Pets Club member only spent £178 with Pets at Home last year. Clearly many customers are not spending across the full range of services. The growth opportunity here is for Pets at Home to continue expanding its share of customers' annual pet spend. I would say the main risk is that the high returns on capital I discussed earlier are dependent to some extent on the vet segment. This division generated more than 40% of operating profit from just 10% of revenue last year. If the profitability of the vet business is reduced for any reason following the CMA review, then I don't think the company will be able to make up for this by selling more low-margin pet food (where it must compete with supermarkets and Amazon, among others). With this caveat, I have to admit that I am more impressed by this business than I expected to be. Pets at Home has good scale and as far as I know, no direct competitors in the UK. I think PETS shares are potentially quite reasonably priced at current levels. --- ### Impax Asset Management (IPX) > "AUM growth of 5.9% to £39.6 billion, driven by investment performance" [**Half-year results for six months to 31 March 2024**](http://www.investegate.co.uk/announcement/rns/impax-asset-management-group--ipx/half-year-report/8226985?ref=rolandhead.com)/ Mkt cap: £554m *FY24 forecast dividend yield: 6.1%* When I last looked at specialist sustainability asset manager Impax following its [2022/23 results](https://www.rolandhead.com/dividend-notes/the-same-but-different-ipx-pmi/) one year ago, I commented that the shares had already de-rated sharply. When I wrote the review the shares were trading at 657p. As I write now, they are changing hands for 432p – another 34% lower. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/ipx-5y-chart-310524.png) I see this business as one of the most differentiated asset managers out there, with a strong track record. I've been bullish for a while, albeit prematurely. Interestingly (for me), Impax has also been one of the top-scoring shares in my dividend screen results for a while now. Given this, I was interested to see this week's half-year results. **HY24 results summary:** in [this recent piece](https://www.rolandhead.com/dividend-notes/turning-point-asset-managers-rto-ltg-19-04-24/) on asset managers I noted the pattern that seemed to be emerging of positive market performance *and* continued net outflows. I wondered if it could signify a turning point for asset manager shares and perhaps the wider UK market. Impax 's assets under management (AUM) rose by 5.9% to £36.9bn between 30 September 2023 and 31 March 2024\. Market gains of £4.9bn outweighed net outflows of £2.7bn to deliver a positive overall result. Revenue fell by 2% to £86.8m compared to H1 2023, while adjusted operating profit for the period fell 5.5% to £25.8m. Impax generated adjusted H1 earnings of 16.0p per share (H1 2023: 17.3p) and the interim dividend held unchanged at 4.7p per share. On a reported basis, I estimate Impax has a trailing 12-month (TTM) operating margin of 30% and TTM return on equity of 34% – both are excellent figures towards the top of the company's historic range. **Trading commentary & fund flows:** movements in AUM often correlate to revenue, as a large proportion of asset managers' income comes from fees charged as a percentage of AUM. In this case, the increase in AUM didn't result in an increase in revenue. This may have been because most of the market gains didn't take place until the latter part of the half year, or because outflows occurred earlier in the period. However, Impax's revenue margin remained stable at 0.45% which means that its annualised run-rate revenue improved to £177.1m (Sept 23: £169m). Operating costs appear to have flattened out. So assuming AUM is flat or better over the remainder of the current financial year, I'd expect revenue and profits to rise in H2. I don't have too many concerns about Impax's ability to allocate its assets well. My bigger worry is that the substantial outflows seen in H1 may continue. ESG funds in general have suffered above-average outflows as this sector of the market has fallen out of favour somewhat. But I've tended to see Impax as more differentiated and not simply a box-ticking ESG operation. For me, that's key to the appeal of the shares as a potential investment. The company says the outflows were predominantly through its wholesale channel. My understanding is that the main wholesale customer for the group is BNP Paribas. The French bank is Impax's largest shareholder and a longstanding partner, but Impax says it is now making more effort to develop its own direct distribution capabilities. Assuming this effort is successful, then Impax should become less dependent on BNP Paribas over time. However, I don't know how much of a challenge it might be to become less dependent on wholesale distribution. I have sometimes wondered if Impax's arrangement with BNP Paribas was the secret to its (previously) strong and consistent growth. **Dividend policy change:** one other change that caught my eye is that Impax has revised its dividend policy. The company previously targeted a payout of 55%-80% of adjusted profit after tax. This has now been reduced to *"at least 55% of adjusted profit after tax"*. There's a new emphasis on *"ensuring that we retain sufficient capital to invest in our future growth"*. This doesn't necessarily mean the payout will be cut, but it seems to lean in that direction, I feel. Consensus forecasts suggest earnings of 32.5p per share for the 23/24 financial year. That implies a minimum dividend of 17.9p per share under the new policy. This would imply a 35% cut from last year's 27.6p per share payout. Personally, I think a smaller cut is more likely. Impax is just coming to the end of a period of investment in staff and infrastructure. Unless AUM falls again, I think a modest recovery in profits should help to support a payout that's closer to last year's total. **Outlook:** consensus forecasts currently only reflect a very modest dividend cut to 25.6p per share. That gives a prospective yield of 6.1% at the time of writing. Interestingly, I note that sector specialist Paul Bryant at Equity Development has not pencilled in a cut at all – forecasts in his latest note are for the 27.6p to be maintained this year. Bryant notes Impax has £60m of regulatory surplus capital and has just completed a successful €459m private markets infrastructure fund raise. He argues this highlights the group's strong financial position and a potential improvement in flows. #### My view I remain a fan of Impax, which I think benefits from clear differentiation and a well-defined and proven approach to selecting potential investments. However, the business does now appear to have reached a size where further growth will be more dependent on its own direct distribution capabilities than in the past. Expansion into fixed income and private markets also offers the potential for missteps, although I think both are logical extensions to the group's equity investment model. On balance, I think Impax looks attractive at this level. The group's share price has now almost returned to pre-pandemic levels, but assets under management are now more than twice what they were at the end of March 2020. A P/E of 13 and a prospective dividend yield of 6% seem cheap to me for a well-established fund manager generating a 30% return on equity. If I was looking to add another financial to my portfolio at the moment, Impax would be on the short list of contenders. Let me know what you think – and thanks for reading! Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - quality operators - RS1, CWK + AJB, IHP, HL (24/05/24) URL: https://www.rolandhead.com/dividend-notes/quality-operators-rs1-cwk-ajb-ihp-hl/ Last updated: 2024-05-29T08:46:24.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/), my weekly look at UK dividend shares I might be interested in adding to my portfolio. This week I've looked at electronic component distributor RS Group and meat producer Cranswick. But I want to start with a quick look at the latest news from three of the UK's largest listed investment platforms. ### Market gains **AJ Bell (AJB)** and **IntegraFin Holdings (IHP)** tend to report results close together. Both released half-year numbers this week. These figures suggest to me that the downturn in the platform/asset management sector – and the opportunity to pick up some attractive dividend yields – may now be receding. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/ajb-ihp-1y-chart-240524.png) AJB (black) vs IHP (blue) AJ Bell reported H1 pre-tax profit up 47% to £61.4m, while IntegraFin reported pre-tax profit up 16% to £32.4m. AJ Bell's platform serves both retail customers and advisers, while IntegraFin only serves advisers. Both companies generate a proportion of their fees from charges based on the value of assets under management. This means that rising markets provide a boost to profits, in addition to the benefit generated by net inflows. I thought it was interesting to see how the balance between inflows and market movements has shifted over the last six months. In its 22/23 financial year, AJ Bell's assets under administration (AUA) rose from £64.1bn to £70.9bn. 62% of this increase came from net inflows, with the remaining 38% from market movements. During the first half of the current year, that split reversed. Between October and March, 69% of AJ Bell's AUA gains came from market movements, with only 31% from net inflows. For IntegraFin, the split was 55%/45% in favour of inflows in FY23\. This reversed sharply to an 82%/18% weighting in favour of market gains in H1 FY24. IntegraFin was more dependent on market movements than AJ Bell because its net inflows slowed in H1, falling by 31% to £1.1bn when compared to H1 last year. In contrast, AJ Bell's half-year net inflows rose to £2.9bn, versus £2.0bn last year. In both cases, however, the sharp rise in H1 profits was partly driven by rising markets. When asset values rise, fee income as a percentage of assets increases without having any impact on platforms' fixed operating costs. This drives the positive operating leverage that causes profits to rise faster than revenue, as we saw in H1\. This effect – but in reverse – has weighed on UK fund managers' results over the last couple of years. I suspect this period is now over and expect to see stronger results from UK asset managers over the coming months. #### My view I've covered both AJ Bell and IntegraFin in these notes already this year, [most recently here](https://www.rolandhead.com/dividend-notes/what-price-for-quality-expn-spt-dplm-ajb-ihp-cwk-19-01-24/). This week's results do not change my views and I remain a fan of both businesses. My feeling at the moment is that AJ Bell probably has superior growth prospects, due to its strong brand and dual focus on retail customers and advisers. However, with shares in both firms up by 40%-50% from the lows seen in December last year, I'm not seeing the same kind of value that was there previously. For me, the shares are up with events for now. I would be looking for a better opportunity to buy. I note that AJ Bell founder Andy Bell may agree – following this week's results he [sold](http://www.investegate.co.uk/announcement/rns/aj-bell--ajb/result-of-secondary-placing-of-aj-bell-plc-shares-/8219070?ref=rolandhead.com) 7.5m shares at 375p, collecting £28m and reducing his holding by 1.8% to 18.7% (£310m). #### Hargreaves Lansdown We also learned last week that market leader **Hargreaves Lansdown (HL)** has received bid interest from a private equity-led consortium. The company says it has [rejected an offer](https://www.investegate.co.uk/announcement/rns/hargreaves-lansdown--hl./offer-rejection/8215818?ref=rolandhead.com) at 985p, prompting the shares to levels last seen in 2022. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/hl-5y-chart-240524.png) I have been positive on Hargreaves for a while due to its high margins, strong cash generation and 40% share of the UK retail investment market. I covered the stock in a detailed review [back in November 2022](https://www.rolandhead.com/dividend-shares/should-i-add-hargreaves-lansdown-to-my-portfolio/), shortly after the shares dropped to the 800p level. More recently, in May, I published an [in-depth piece on Hargreaves](https://app.stockopedia.com/content/hargreaves-lansdown-contrarian-buy-or-a-fallen-star-996576?ref=rolandhead.com) for Stockopedia subscribers. My valuation estimate of c.930p was based on a steady-state scenario, but I agree that for a private buyer (or in the event of a return to stronger growth), the business should be worth considerably more. It will be interesting to see if Hargreaves manages to secure an offer that's acceptable to founders Peter Hargreaves and Stephen Lansdown, who still control around 25% of the stock. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend-paying companies that are of interest to me. In general, these are stocks that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect my personal views and are not investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](#disclaimer)***.*** - [**RS Group (LON:RS1)**](#rs-group-rs1)\- this electronic component distributor is one of the largest in its sector. Although it's suffering from a post-pandemic demand slump, I think the fundamentals could support a strong recovery when market conditions improve. - [**Cranswick (LON:CWK)**](#cranswick-cwk)\- this meat producer has an outstanding record as a compounder and has delivered 34 years of unbroken dividend growth. The latest results look good enough to me but it looks like growth could slow this year. I wonder if a better buying opportunity might emerge as the 2% yield is too low for me to consider in [my income portfolio](https://www.rolandhead.com/dividend-portfolio/). 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### RS Group (RS1) > "Results in line with market expectations, revenue down 1% with 8% like-for-like decline" [**Results for y/e 31 March 2024**](https://www.investegate.co.uk/announcement/rns/rs-group--rs1/final-results/8212942?ref=rolandhead.com) / Mkt cap: £3.6bn *FY25 forecast dividend yield: 3.0%* Electronic component supplier RS Group has been one of the higher-scoring stocks in my [dividend screening](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) results for a while. But the company has been battling a post-pandemic slowdown in demand and navigating the impact of cost inflation and supply chain disruptions. I've looked at this business a number of times and been attracted by the historically strong quality metrics. When I reviewed RS Group's [interim results in November](https://www.rolandhead.com/dividend-notes/turnaround-stock-overhang-mks-rs1-08-11-2023/) I said I didn't see any reason to rush in, given the ongoing headwinds. This week's full-year results cover the year to 31 March and suggest the company is still working through a difficult period. Even so, the full-year dividend for FY24 was lifted by 5% to 22p. I also note that CEO Simon Pryce has spent £370k buying shares over the last year, according to Stockopedia data. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-stocko-dirdeal-240524.png) Source: Stockopedia Both facts seem to suggest Pryce is confident in his ability to return the business to growth and rebuild returns on capital to the 20%+ levels enjoyed in the past. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-roce-240524.png) **2023/24 results summary:** RS Group's headline numbers for last year highlight the drag on profits caused by lower volumes: - Revenue down 1% to £2,942m - *Like-for-like revenue -8%, acquisition revenue +10%* - *Operating margin down 3.3% to 9.5%* - Pre-tax profit down 33% to £249m - Earnings down 36% to 38.8p per share - **Dividend up 5% to 22.0p per share** The business operates globally, but it's largest and most mature markets are in EMEA. Profit slowdown in these markets was less pronounced than elsewhere: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-fy24-region-opprofit.png) Source: RS Group FY24 presentation Lower volumes have depressed margins and profits as the group's cost base has remained broadly flat. This is a classic example of reverse operating leverage (see [my comments on **Victrex (VCT)**](https://www.rolandhead.com/dividend-notes/light-at-the-end-of-the-tunnel-vct-bt-a/) last week): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-fy24-opcost-bridge.png) Source: RS Group FY24 presentation However, I think the company does make a reasonable case when it argues that what's happening is at least *partly* the unwind of a significant boom in demand during the pandemic: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-fy24-pandemic-unwind.png) Source: RS Group FY24 presentation I'd hope to see these charts level out a little over the next year or so. Any failure to achieve this might suggest the group is losing market share, which would concern me. **Inventories:** one point that caught my eye [in November](https://www.rolandhead.com/dividend-notes/turnaround-stock-overhang-mks-rs1-08-11-2023/) was a sharp increase in gross inventories during the first half of the year, from £660m to £799m. This was caused by a slowdown in demand, just at the same time as order backlogs from RS's suppliers were delivered. Management guidance was for this situation to unwind in H2, and this does seem to have happened. Gross inventories fell from £799m to £725m during the second half of the year. RS says that stock turnover for the full year was flat at 2.6x – equivalent to 140 days. This appears to be within the normal range for this business. Indeed, SharePad data suggests RS has become slightly quicker at converting stock to cash (working capital days) over the last 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-stock-wcap-days-240524.png) However, stock that is held for an average of more than three months before being sold does highlight one of the characteristics of this business – RS carries a lot of stock so that it can fulfil orders quickly. This could lead to a bloated balance sheet and low returns on capital. Fortunately, much of RS Group's stock appears to be funded by generous payments terms from its suppliers. Based on the average payables figure for the year of £631m and cost of sales of £1,678.5m, my sums suggest RS waited an average of c.135 days last year before paying its suppliers. The chart below suggests this may be an extreme result, perhaps linked to destocking, but the company's payment terms do seem to have become more generous as the business has grown: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-creditor-days-240524.png) In effect, suppliers provide free credit to fund the majority of RS's inventory. This is a characteristic that I've found to be common to this type of large distribution business. What can go wrong? Sharp cash outflows can be required if payables need to be unwound to reflect a prolonged slowdown. But when well managed, I've found this model can support high returns on capital and strong cash generation, as the company does not need to use its own capital to buy stock. **Strategy + acquisitions:** RS Group's strategy is based on operating at scale with high levels of market share. In addition to organic growth, the company makes regular acquisitions. These are generally smaller firms that are either rivals or infill gaps in the company's coverage. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rs1-fy24-acquisition.png) Source: RS Group FY24 presentation The acquisition of German firm Distrelec for £333m last year was a relatively large deal which pushed net debt up by £305m to £418m. **Outlook:** CEO Pryce warns of limited visibility for the current year but says lead indicators suggest *"some market improvement"* during the second half. However, his commentary suggests to me that conditions could remain weak and that his main focus will be on cost savings and positioning the business so its ready to benefit when growth returns. Medium-term guidance is unchanged and sounds positive: - Mid-teens adjusted operating margin - High cash conversion - Over 20% return on capital employed Brokers have taken a fairly cautious view on the current year and appear to have trimmed their forecasts slightly following these results, suggesting earnings could be broadly flat this year at c.43p. That prices the stock on a forecast P/E of 17 with a prospective yield of 3%. #### My view Based on these valuation metrics and the flat outlook, RS shares don't seem obviously cheap. However, my sums suggest free cash flow of £126.5m last year, excluding acquisitions. This rises to £195.7m if working capital movements are excluded, giving an underlying FCF yield of c.5.5%. When compared to reported net profit of £183.7m, this also highlights the strong underlying cash generation of this business – a core attraction for me. Similarly, last year's return on capital employed of 13.5% (my calculation) was not a bad result for a down year. In my view, these numbers highlight the sharp rise in profitability and cash generation that *should* be possible if sales volumes start to recover. While risks remain around the timing and scale of a recovery, I don't see too much to concern me in RS Group's latest accounts. I am not looking to add a new stock to my portfolio right now, but personally I would probably be happy to buy RS at under 750p. For now, I will keep the stock on my watch list along with [other recent additions](https://www.rolandhead.com/dividend-notes/adding-to-my-watch-list-smwh-rec-hik-26-04-24/), as a possible future purchase. --- ### Cranswick (CWK) > "Strong reported revenue growth of 11.9%, with like-for-like revenue growth of 11.6%" [**Results for 53 weeks ended 30 March 2024**](https://www.investegate.co.uk/announcement/rns/cranswick--cwk/preliminary-results-/8209839?ref=rolandhead.com)/ Mkt cap: £2.4bn *FY25 forecast dividend yield: 2.1%* I looked at food producer Cranswick [in January](https://www.rolandhead.com/dividend-notes/what-price-for-quality-expn-spt-dplm-ajb-ihp-cwk-19-01-24/), when I provided an introduction to the company. I won't repeat those comments here. The TL;DR is that this FTSE 250 company is a vertically-integrated producer of pork and poultry products and is a big supplier to UK supermarkets. Cranswick is also a multibagger that's delivered a 6,370% total return for shareholders over the last 30 years – including 34 years of unbroken dividend growth. Shareholders bought early and held have enjoyed a compound average return of 14.9% per year since 1994: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/cwk-all-tr-240524.png) Chart shows total return (share price + dividends) Cranswick's management upgraded full-year guidance in January's update and we can now see this come through in the full-year results. - Revenue +11.9% to £2,599.3m - *Revenue +9.8% on a comparable 52-week basis with 4.5% volume growth* - Operating profit +14.4% to £166.9m - *Operating margin +0.1% to 6.4%* - *Return on capital employed (ROCE) +1% to 15.9% (my calculation)* - **Dividend +13.4% to 90p per share** Net debt excluding lease liabilities is just £20.2m and the balance sheet looks strong to me. **Trading commentary:** Cranswick CEO Adam Couch says last year saw a more stable environment for farmers, leading to a recovery in pig prices and more stable results. Customer service was said to be *"excellent"*, with Cranswick achieving 98% fulfilment across the group's product portfolio. However, export sales were lower due to a reduction in sales to China. This is the result of a key processing plant not having the required licence for exports – an issue the company says has been ongoing for four years. Labour shortages also remain *"a critical challenge"* that has worsened following the recent salary threshold increase for UK Skilled Worker visas. To help solve its manpower shortages, Cranswick has now recruited 650 workers from the Philippines. **Growth:** the company continued to invest in vertical integration, or self sufficiency, with capital expenditure of £91.4m. This included two acquisitions: - the £46.1m acquisition of an indoor pig farming business in Lincolnshire with 18 sites and its own feed mill. This business produces 3,200 finished pigs per week - the £13.3m acquisition of Froch Foods, a cooked meat and bacon processing facility A further three projects totalling £112m remain in progress to expand the group's pork and chicken facilities in Hull and fit out a new hummus facility near Manchester. **Outlook:** no new guidance was provided but Cranswick says trading so far this year has been in line with expectations. > "the outlook for the current financial year is unchanged" Consensus forecasts on Stockopedia suggest adjusted earnings could rise by 3% to 250p per share this year supporting 2% dividend growth to 91.9p. These estimates price the stock on a forward P/E of 17.7 with a 2.1% yield. #### My view My sums give Cranswick a trailing free cash flow yield of 4.5% and a EBIT/EV yield of 6.8%. Neither metric looks hugely expensive, given the company's track record. However, paying 2.6x book value for a business with a five-year average return on equity of 14% suggests that I might only receive a return on invested equity of less than 6%. The 2% dividend yield and modest growth forecasts for the current year also seem to support this view. Such a low yield is also simply below the level at which I'd invest, given the income focus of [my portfolio](https://www.rolandhead.com/dividend-portfolio/). I am confident Cranswick remains a high quality business with a solid outlook. But I'd prefer to wait for a better buying opportunity before considering a purchase. --- As always, please let me know what you think about the stocks I've discussed in the comments below – and signup to receive future updates. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Investor's Round Table: TPFG, MACF & VANL + interest rates (19/05/24) URL: https://www.rolandhead.com/podcasts/investors-round-table-tpfg-macf-vanl-interest-rates-19-05-24/ Last updated: 2024-05-21T15:56:39.000Z I've recently recorded a new podcast with my good friends and fellow private investors [Graham Neary](https://x.com/GrahamNeary?ref=rolandhead.com) and [Mark Simpson](https://x.com/DangerCapital?ref=rolandhead.com). In the latest episode of the Investor's Round Table we discussed UK small-cap shares on our radar, including: - Small-cap groundworks specialist and possible value candidate **Van Elle Holdings (VANL)** - Property group **Macfarlane (MACF)** \- my suggestion, which I've previously covered in depth [here](https://www.rolandhead.com/dividend-shares/is-macfarlane-a-good-dividend-share/) - Estate agency business **Property Franchise Group (TPFG)** \- and also Belvoir (BLV), as was prior to the recent merger of the two firms As always, we agreed on some points and did not agree on others... We rounded off the discussion with a look at **interest rates**: - would we buy shares as a speculation on interest rates falling? - are interest rates something we worry about generally when investing? - what kinds of business are likely to be most affected by changing interest rates? You can listen to all of this and more through the You Tube link below. *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research or seek professional advice. Full disclaimer* [***here***](https://www.rolandhead.com/podcasts/investors-round-table-hl-cbg-plus-jet2/#disclaimer)***.*** **As always, thank you for listening. Please do get in touch if you have any comments or questions you'd like us to answer in a future episode.** Roland Head #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - light at the end of the tunnel? VCT, BT.A (17/05/24) URL: https://www.rolandhead.com/dividend-notes/light-at-the-end-of-the-tunnel-vct-bt-a/ Last updated: 2024-05-24T16:28:04.000Z Welcome back to The Dividend Note, my weekly look at dividend shares I might consider adding to my portfolio. This time I'm looking at two FTSE 350 companies that have both been out of favour for a long time, **BT** and **Victrex**. In both cases, management would like us to believe that their businesses are reaching inflection points. In both cases, I think it they *might* be right. But as I'll discuss, significant uncertainties remain. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend-paying companies that are of interest to me. In general, these are stocks that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect my personal views and are not investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](#disclaimer)***.*** - [**Victrex (LON:VCT)**](#victrex-vct)\- this market-leading speciality polymers group has faced tough market conditions and is suffering from various financial headwinds. But I can't help feeling the bad news is in the price and that the shares could offer an opportunity. - [**BT Group (LON:BT.A)**](#bt-group-bta)\- new CEO Allison Kirkby surprised the market with a dividend increase and confident new cash flow guidance. I can see reasons for optimism, but I remain concerned about pricing power and profitability. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Victrex (VCT) > "not expecting FY PBT progress" [**2023/24 interim results**](https://www.investegate.co.uk/announcement/rns/victrex-plc--vct/victrex-plc-interim-results-2024/8190807?ref=rolandhead.com)/ Mkt cap: £1.1bn *FY24 forecast dividend yield: 4.5%* Victrex produces high performance polymers, or plastics. Its main product is PEEK, which is a kind of high-end product that's strong and versatile enough to be used in a range of industrial and healthcare applications, sometimes replacing metal parts. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/vct-snapshot-170524.png) Source: [Victrex website](https://www.victrexplc.com/about/markets-products/?ref=rolandhead.com) May 2024 This is a business I've [watched with interest](https://www.rolandhead.com/dividend-notes/looking-for-cyclical-buys-cch-vct-rwa-11-07-23/) in recent years. Historically it's benefited from strong profitability and good cash generation. I feel it *should* be the kind of good quality dividend growth stock that would fit in [my portfolio](https://www.rolandhead.com/dividend-portfolio/). Unfortunately, the company's performance (and its share price) have not lived up to this hope. Operating profit has fallen from a peak of £127m in 2018 to just £38m over the 12 months to 31 March. The Victrex share price has performed in a similar way. Long-term shareholders have suffered a 60% decline, from 2018's record high of 3,200p to around 1,300p today. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/vct-10y-chart-170524.png) VCT shares are currently worth less than they were 10 years ago. But I can see some reasons to believe the business could be approaching a turning point, so I was interested to take a look at this week's half-year results. **Half-year results summary:** there is no escaping the fact that this was another ugly set of numbers from Victrex. Revenue fell by 10% to £139.3m on a constant currency basis, during the six months to 31 March 2024\. Underlying pre-tax profit fell by 34% to £28.0m, while reported pre-tax profit fell to just £3.3m due to £24.7m of exceptional costs. The company says that while aerospace and automotive volumes rose by 18% and 14% respectively in Q1, medical revenue fell by 19% due to *"industry destocking"*. Medical revenue last year reached a record of £65m, so customers appear to have overbought. Victrex's balance sheet has also sacrificed its habitual net cash position in order to maintain its dividend. Net debt rose to £49.8m in H1 (H1 23: £5.3m). The company says this was largely due to a drawdown of the group's credit facility to fund the FY23 final dividend of £40m. I'm not keen on using debt to fund dividends, but I think this should be an exception. Cash generation is expected to improve this year, as capex eases following the completion of a new plant in China. **Falling volumes:** the underlying problem for Victrex at the moment is a fairly deep slump in customer demand. The volume of PEEK sold fell by 11% to 1,737 tonnes during the first half of the year, compared to a *"solid H1 23"* last year. Weaker demand appears to have undercut pricing power and the average selling price fell by 4% to £80.2/kg. One possible bright spot is that the volume trend may be improving. The company said Q2 volumes were 31% higher than in Q1 and were broadly flat with Q2 2023. However, even if this continues, the benefits aren't expected to flow through to profits this year. Victrex is currently operating *"much lower production rates"* than usual in its factories, as it works through a two-year inventory reduction programme. This is leading to reverse operating leverage, where fixed operating costs are being spread across smaller production volumes. To make matters worse, some of the inventory being sold was produced in FY23 when energy prices and material costs peaked. These costs are now passing through the cost of goods sold line in the P&L, depressing gross profits further. These factors caused Victrex's gross margin to fall to 48% during the half year, from 53.5% in H1 2023\. Gross margins are expected to remain at similar levels in H2, leading to a full-year gross margin *"lower than our* \[previous\] *guidance"*. **Dividend:** the interim dividend was held unchanged at 13.4p per share. This gives a 4.5% yield and suggests management remain confident the payout will remain affordable. The dividend has never been cut, but the recent period of flat payouts highlights Victrex's lack of growth in recent years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/vct-dividends-170524.png) **Outlook:** Victrex's outlook statement warns that management do not expect full-year pre-tax profit to improve this year. The main reason for this seems to be the inventory reduction programme, which is not expected to complete until next year. However, improving run-rates on volume are said to support the possibility of *"low-to-mid single digit volume growth"* this year with an improving outlook in FY25: > "If recent end-market improvement continues, growth prospects moving into FY 2025 look encouraging." My reading of the company's comments is that the underlying demand situation may be stabilising or improving. However, last year's capacity investment and excess inventory levels mean that any benefit from improving demand probably won't flow through to the accounts until at least next year. **Strategy update - 'Mega Programmes':** most of Victrex's PEEK is sold in the form of resin, for manufacturing by the company's clients. The company is by far the largest producer of PEEK globally, but it does have some competition from (mainly) Chinese rivals producing an alternative grade of PEEK. Perhaps partly to address the risk of commoditisation, Victrex launched an innovation programme in 2014 aimed at moving the business up the value chain. The company wanted to reduce its dependency on selling PEEK resin and start producing more of its own finished parts. In theory this should be a higher margin, more differentiated business. In 2014, Victrex launched five 'mega programmes' targeting specific product areas across its existing market segments. Perhaps inevitably, these have taken longer to approach commercialisation than expected. But the latest commentary from the company does seem to suggest that revenue could soon start to flow (click to enlarge): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/vct-1h24-presentation-mega.png) Source: Victrex H1 24 presentation (click to enlarge) #### My view Victrex is facing several headwinds at the moment. The combination of weaker demand and inventory reduction are causing a nasty dose of reverse operating leverage. Last year's capex and this year's commissioning costs for the new China factory are also weighing on performance. However, the business remains profitable and I think it's reasonable to expect that at some point, perhaps in FY25, Victrex may start to benefit from positive operating leverage. On the assumption that volumes will stabilise and gradually recover, then capacity utilisation should start to improve. When paired with lower energy costs and savings elsewhere, this could result in a strong recovery in margins and cash generation. Broker forecasts on SharePad suggest EBIT margins could return to 27% by FY26 – a level last seen in 2021/22\. Historically this business has generated double-digit returns on equity, highlighting the potential for shareholder value creation. The main risks I can see are that the company's volume business may have less pricing power than in the past, and that its mega programmes could still fail. I can't rule out these possibilities. But on balance, my feeling is that Victrex shares may well offer decent value at the moment, on a medium-term view. Chief executive Jakob Sigurdsson may also think so. According to Stockopedia data, Sigurdsson has spent £238k buying Victrex shares since the start of 2023. Victrex is another stock [for my watch list](https://www.rolandhead.com/dividend-notes/adding-to-my-watch-list-smwh-rec-hik-26-04-24/). --- ### BT Group (BT.A) > "new guidance \[...\] to more than double our normalised free cash flow over the next five years" [**Final results y/e 31 March 2024**](http://www.investegate.co.uk/announcement/rns/bt-group--bt.a/final-results/8200242?ref=rolandhead.com)/ Mkt cap: £13.2bn *FY25 forecast dividend yield: 6.0%* BT has a reputation as a dividend stalwart among UK investors. But when I look at the telecom incumbent's dividend and share price history, I find it slightly hard to understand why so many shareholders remain attached to the stock as an income play: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/bt-dividends-price-170524.png) Including dividends, BT shares have delivered a total return -37% over the last decade, according to SharePad data. Investors' long-running hope is that BT can leverage its dominant market share to help tame its burdensome debt load, capex bill and pension deficit. Newish chief executive Allison Kirkby appears to have given fresh momentum to this hope. Unveiling this week's full-year results, she issued confident new guidance for improved cash flow and a further £3bn of cost savings. This guidance was paired with a surprise dividend increase that was well received by investors, leaving BT shares up around 25% on the week: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/bt-1y-chart-170524.png) **FY24 results summary:** BT says it has now reached peak capex on its fibre rollout, which passed 1.0m premises during the final quarter of the year. The group's fibre footprint is now *"over 14m premises"* with a further 6m underway. Management say the group is on track to reach 26m premises by December 2026\. However, fibre take-up seems limited so far with retail FTTP customers totalling 2.6m at the end of March. BT's Openreach unit is also continuing to lose customers – broadband line losses totalled 491k last year, equivalent to a fall of 2% in the customer base (see slide below). Price rises helped to offset these losses. In consumer broadband, average revenue per user (ARPU) rose by 5% to £41.20 per month last year. This suggests the annualised revenue loss from last year's broadband line losses may have been £242m – just over 1% of group revenue. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/bt-a-fy24-consumer-rev.png) Source: BT FY24 presentation (click to enlarge) Post-paid consumer mobile ARPU rose by 9% to £19.40, again offsetting losses in customer numbers. Management say monthly consumer churn churn was stable at 1.1%. Overall, I think it's a mixed picture, which is reflected in the financial results. Group revenue rose by 1% to £20,797m last year. This finally arrests the run of annual declines seen since 2017, when BT's revenue peaked at £24,082m following the acquisition of mobile operator EE. However, BT's pre-tax profit fell by 31% to £1,186m last year, while the group's operating cash flow fell by 11% to £5,953m. BT's normalised free cash flow – a key adjusted measure – was 4% lower at £1,280m. My more comprehensive calculation of free cash flow suggests BT suffered an actual cash outflow of just over £900m last year. This is reflected in the group's net financial debt balance (exc. lease liabilities), which rose by £1bn to £14.5bn. The company says this was mostly due to £800m of scheduled pension scheme contributions. **Dividend:** the final dividend was increased to 5.69p per share, lifting the full-year payout by 3.9% to 8p per share. **Outlook & updated cash flow guidance:** BT's decision to increase its dividend seems bold to me, but does appear to be underpinned by Ms Kirkby's updated cash flow guidance for the remainder of this decade. Capex is said to have peaked at £4.9bn last year and should be *"less than £4.8bn"* from FY24-FY26. From FY27 onwards, the intensity of the fibre rollout should ease. The company expects capex to fall by c.£1bn per year from 2026/27 onwards. Together with further cost savings of £3bn, this is expected to support normalised free cash flow of £1.5bn in FY25, rising to £2.0bn in FY27, and c.£3.0bn by FY30. For context BT's net cash interest payments and dividend payout totalled c.£1.5bn last year. On this basis, I'd say the increased dividend is probably affordable, albeit without much slack to allow for any increase in debt servicing costs. **Pension:** I would be more relaxed about BT's debt levels if it didn't have a monster pension scheme with £40bn of liabilities and only £35bn of assets. These numbers moved in the wrong direction last year, expanding the company's pension deficit increased to £4.8bn (FY23: £3.1bn) during the period. This sounds ominous, but this IAS 19 accounting measure is mostly reflecting the impact of rising interest rates on the market value of the bonds held by BT's pension scheme. This is a quite different calculation from the triennial actuarial valuation, from which deficit reduction payments are calculated. The last triennial valuation was [in 2023](https://newsroom.bt.com/bt-group-announces-triennial-pension-valuation/?ref=rolandhead.com) and committed the group to annual payments of £600m through to 2030\. The impact of higher interest rates might mean that the 2026 triennial valuation reaches a different conclusion and payments can be reduced. For now, however, I think it's prudent to view these annual payments as a fixed commitment. #### My view BT's current strategy is largely built around ramping up its fibre rollout and cutting up to 55,000 jobs from its 130,000 workforce by 2030\. 10,000 jobs were cut last year and my understanding is that many of the cuts will be back-end loaded – engineers and service staff will be cut as the fibre rollout nears completion. Capital expenditure is running at over 20% of revenue as the group tries to address a historic lack of investment in UK fibre infrastructure. What we don't yet know is whether the group will be able to generate attractive returns on this massive capex. In a competitive market, does BT still have enough pricing power to generate returns above its cost of capital? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/bt-roce-reported-170524-1.png) Return on capital employed has plunged over the last decade. I calculate a figure of 5.3% for last year, or 7.6% using management's adjusted measure of operating profit. If BT can stem its market share losses and maintain the pricing power it needs to generate an economic return on its investment, then I think the shares could be reasonably priced at current levels. The dividend now offers a 6% yield and consensus forecasts for £1.5bn of free cash flow this year imply an 11% free cash flow yield. The trouble is that I have no idea how likely it is BT's profitability will improve. The added complications of BT's pension situation and political exposure are also discouraging, for me. As an investor who is heavily led by the numbers, BT shares don't really appeal to me at current levels. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Has Moneysupermarket.com really returned to growth? URL: https://www.rolandhead.com/dividend-shares/has-moneysupermarket-really-returned-to-growth/ Last updated: 2024-05-29T08:46:17.000Z FTSE 250 price comparison group **Moneysupermarket.com (LON:MONY)** reported record revenue in 2023, as its post-pandemic recovery continued. But profits – and its share price – remain well below all-time highs. The market seems inclined to value this stock as an ex-growth business. To be fair, that was my general view of this sector too, until recently. But MONY's apparent return to growth has persuaded me to take a closer look. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-shareprice-pat-080524.png) Shaded bars are consensus forecasts MONY's profits are still below their historic high watermark. But this remains a very profitable and cash-generative business. Last year's results showed a 22% operating margin, reduced debt levels, and a 34% return on equity. Against this backdrop, the stock's forecast P/E of 14 and a well-supported 5.4% dividend yield don't look expensive to me. My sums suggest that a sustainable growth rate of just under 5% might be enough to justify the current valuation, based on my target of a 10% annualised return. I'm wondering if MONY could be the kind of quality dividend growth stock I'd like to add to [my portfolio](https://www.rolandhead.com/dividend-portfolio/). In this in-depth share review, I'll take a closer look at Moneysupermarket.com's performance over the last decade and explain why it's caught my eye as a potential purchase. I'll also run this business through my [dividend scoring system](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/), to see how well it scores on core factors such as dividend culture, profitability and growth. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Table of contents - [**1999-2023**](#1999-2023-the-story-so-far)\- the story so far - [**Recent trading & outlook**](#recent-trading-outlook)\- insurance switching is boosting profits - [**Where is the growth coming from?**](#where-is-the-growth-coming-from) \- some segments are performing better than others - [**Crunching the numbers**](#moneysupermarketcom-crunching-the-numbers) \- how does MONY score in my dividend screen? - [**Dividend culture**](#dividend-culture-pretty-good) \- the payout has never been cut - [**Dividend safety**](#dividend-safety-recovering)\- improving after a difficult patch - [**Dividend growth**](#dividend-growth-returning-to-form) \- are we seeing a return to form? - [**Dividend yield**](#dividend-yield-above-average)\- an above-average income generator - [**Valuation**](#valuation-affordable)\- are the shares really cheap? - [**Profitability**](#profitability-very-good)\- this business generates high returns - [**Fundamental health**](#fundamental-health-strong) \- a reassuring picture - [**Conclusion**](#conclusion-i-could-be-tempted) \- would I consider buying MONY shares for my portfolio? --- ### 1999-2023: the story so far The MoneySuperMarket website was originally launched by an offline mortgage listing company in 1999, just as dot-com fever peaked. I'm not sure exactly what was on offer at first – mostly static listings of financial products, I think. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-history-snip-080424-1.png) Source: Moneysupermarket.com [website](https://corporate.moneysupermarket.com/about-us/our-history?ref=rolandhead.com) May 2024 Car insurer **Admiral** clearly also sensed an opportunity and launched Confused.com in 2002 – confusingly, it now [claims to be](https://www.confused.com/about-us?ref=rolandhead.com) the UK's *"first comparison site"*. In 2006, competition intensified with the launches of both [Go.Compare](https://www.comparethemarket.com/about-us/?ref=rolandhead.com) (now owned by **Future plc**) and privately-owned market leader, [Compare the Market](https://www.comparethemarket.com/about-us/?ref=rolandhead.com). #### Market share: lagging behind Unfortunately, being a first mover does not necessarily guarantee market leadership. According to this 2023 survey, MoneySuperMarket sits in fourth place for brand awareness among UK consumers, albeit by a narrow margin: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/statista-price-comparison-2023-survey.png) I haven't been able to find any conclusive data relating to market share, but [this piece](https://www.motorfinanceonline.com/news/compare-the-market-top-pcw-for-motor-insurance-in-uk-despite-most-expensive-quotes/?ref=rolandhead.com) in *Motor Finance Online* references a 2023 GlobalData report that places MoneySuperMarket second in the key car insurance segment, with a 14.8% share. However, it's a distant second. Compare The Market is said to have a 54.5% share of this lucrative sector of the market. Go.Compare and Confused.com are both close behind MONY. This does highlight a potential weakness of this business. In terms of user experience, there isn't much to divide the big market leaders. Branding and marketing are all-important, hence the tradition of wacky advertising that's a characteristic of all four of these businesses. Remember this classic, featuring Snoop Dogg? #### 2007 IPO + 12 years of growth Moneysupermarket.com Group floated on the London market in 2007 at 170p, just ahead of the financial crisis. The shares crashed in 2008, providing a wonderful opportunity to buy this business for less than 50p per share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-all-chart-080524.png-2.png) It took until 2013 for the shares to regain the 215p high first seen in 2007\. But the price then kept motoring until late 2019, when MONY hit an all-time high of just over 400p. MONY's profits soared too, rising tenfold from £9.4m in 2007 to almost £95m in 2019. #### Pandemic recovery I suspect that the current ad campaign featuring Dame Judi Dench has helped to deliver a much-needed recovery from the impact of the pandemic. COVID-19 triggered a series of headwinds for MONY, some of which are only just starting to ease: - Slump in motor insurance sales during lockdown - Travel bans - Tighter bank lending criteria affected credit card and loan sales - Near-total loss of energy switching activity - Cost inflation - Higher interest rates make loans and mortgages more expensive, reducing user conversion #### Quidco acquisition In 2021, profits were down by c.40% from their 2019 high. MONY then made a decisive (or possibly desperate) effort to return to growth by buying leading UK cashback site Quidco for a total consideration of up to £101m. However, while Quidco added volume and revenue, it diluted the group's overall profitability. This is because cashback is much lower margin than price comparison – with cashback, most of the margin is handed back to the users. This was highlighted in MONY's 2023 results. Cashback achieved an EBITDA margin of 13%, versus 58%-68% for the core insurance, money and home services segments. Buying Quidco also caused an unwelcome spike in debt, adding risk to a business whose balance sheet had previously been pristine: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-net-debt-080524.png) The Quidco acquisition was priced at £87m, plus £14m in deferred consideration, giving a maximum of £101m. As far as I can see from the accounts, Moneysupermarket.com ended up paying a total of £97m for the cashback site. Unfortunately, Quidco only generated £7m of EBITDA last year, down from £9.5m in 2022\. At this rate, the payback period on Quidco could be more than 10 years, even before making allowance for extra interest, tax and depreciation charges. For a long-lasting asset like property, such a long payback period might be acceptable. But the 2023 accounts revealed that MONY has now reduced the amortisation period on acquired *"brand and member relationship assets"* (principally Quidco) from 10 years to five years. This is said to reflect *"a change in the period of economic benefit that is expected to be generated by these assets".* I'm not convinced buying Quidco for £97m was a good idea. But as a seemingly isolated incident, it's not a dealbreaker for me. #### Current strategy Fortunately, CEO Peter Duffy has steered clear of any big deals since 2021\. Instead, he seems to be focusing on improving the company's technology and marketing execution, making better use of its data, and developing new incremental income streams with B2B clients. The business is also trying to build closer relationships with its core consumer users through initiatives such as the [SuperSaveClub](https://www.moneysupermarket.com/super-save-club/?ref=rolandhead.com) rewards scheme. Trying to 'own' customers who are ultimately only passing through is something of a holy grail for price comparison businesses, but it's not an easy challenge. Mr Duffy's current strategy seems sensible to me, although I think it's probably also a sign of the how mature the core business has now become. --- ### Recent trading & outlook **Q1 2024 update (16/04/24):** group revenue rose by 8% to £114.6m during the first quarter. Insurance was the standout performer, with revenue up 21% to £61.4m. The company says this was driven by continued high levels of switching in car insurance as drivers faced with big renewal hikes seek out better deals. Presumably this momentum will ease over time as price rises level out. Travel revenue rose by 10% to £6m in Q1 as the market continues to recover, but revenue from Money and Home Services fell by 3% and 8% respectively. Cashback revenue was flat. **Outlook:** full-year guidance was unchanged and confirmed the company expects to achieve adjusted EBITDA in line with consensus of £139.8m. That would represent a 6% increase on 2023. Consensus estimates suggest earnings of 17.1p per share and a dividend of 12.6p per share in 2024\. That's equivalent to a forecast P/E of 13.4 and a 5.4% yield, at the time of writing. **2023 full-year results:** MONY reported revenue up 11% to £432m and pre-tax profit up 4% to £72.3m in 2023\. Net debt fell to just £19.8m as strong cash generation allowed the company to repay borrowing used to buy Quidco. The dividend was lifted 3% to 12.1p per share, marking a return to growth after four years of flat payouts. I covered the 2023 results in more detail in [this Dividend Note](https://www.rolandhead.com/dividend-notes/buybacks-vs-dividends-mony-wil/). --- ### Where is the growth coming from? Last year's results and this year's Q1 update seem to suggest that MONY is returning to growth. However, this SharePad chart shows that neither operating profit nor free cash flow have yet returned to the peak levels seen in the past: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-opprofit-fcf-230224.png) If we look at the results from the last year at a segmental level, we can see why. Although revenue from the Insurance and Money verticals is now above 2019 levels, Travel and Home Services (which includes energy switching) remain depressed. The contribution from cashback has helped to lift total revenue to new highs, but the low-margin nature of this business means this hasn't yet offset the loss of higher-margin business elsewhere: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-10y-rev-breakdown-080524.png) MONY expects energy switching revenue to remain negligible in 2024\. My feeling is that this market may have changed for the foreseeable future. High prices and the failure of many smaller suppliers mean that the market is now effectively in the hands of six large suppliers. I suspect pricing will be less competitive and more rational than it was, so I'm not sure that switching opportunities will be so attractive. To sum up – I think MONY is exiting a difficult period in good shape. But some historic growth drivers have weakened and profits have not yet reached new highs. Broker forecasts suggest that revenue could set a new record high in 2024, while earnings will take until 2025\. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-rev-eps-fcasts-090524.png) Shaded bars are consensus forecasts as of May '24 As things stand now, I don't see any obvious reason to doubt these forecasts. With that in mind, let's take a look at how my screening system rates MONY's financials. Are the shares cheapand goodenough to make them a potential buy for my portfolio? --- ### Moneysupermarket.com: crunching the numbers **Description:* Moneysupermarket.com is one of the UK's leading price comparison businesses. MONY also operates a number of B2B services and owns the Money Saving Expert and Travelsupermarket.com businesses.* | **Moneysupermarket.comGroup(LON:MONY)** | **Quality Dividend score: 59/100** | **Forecast yield: 5.4%** | | --------------------------------------- | ---------------------------------- | ------------------------- | | Share price: 228p | Market cap: £1.3bn | *All data at 08 May 2024* | ***Latest accounts:*** [*2023 full-year results*](https://www.investegate.co.uk/announcement/rns/moneysupermarket-com-group--mony/preliminary-results/8043344?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think MONY could be a suitable addition to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). As a reminder, this is a scoring system I've developed to rank shares for the qualities that are important to me, from a quality dividend perspective. My choice of scoring factors is of course highly subjective. These scores are not intended to be used as a guide on when to buy or sell shares. They're simply one factor I use to assess a stock's potential attractions, in addition to broader, company-specific analysis. Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: pretty good MONY has not cut its dividend since its IPO in 2007 and has increased the payout in the majority of years. However, growth has been minimal since 2019, highlighting the profit slump and external headwinds suffered during this period: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-dps-110524.png) MONY doesn't have the longevity as a listed business to earn a top score in my screen, but its track record so far is good. I'm comfortable there's a strong culture of dividend payments. **MONY scores 3/5 for dividend culture in my screening system.** --- ### Dividend safety: recovering I score stocks for dividend safety based on a combination of earnings and free cash flow cover, plus leverage. I've excluded leverage from this chart as it's not really a concern for me here. But when we look at the dwindling level of free cash flow cover in recent years it's easy to see why payout growth has stalled since 2019. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-fcf-div-cover-110524.png) Fortunately, free cash and profit performance now appears to be on an improving trend. Incidentally, the similar height of the blue and red bars show us how wonderfully consistent MONY's cash conversion from earnings has been historically. That's something I always like to see. I suspect MONY's rather middling dividend safety score will improve over the next 12 months. **MONY scores 2.7/5 for dividend safety in my screening system.** --- ### Dividend growth: returning to form? My scoring system for dividend growth is designed to assess the *sustainability* of any increases to the payout. For this reason I compare the rate of dividend growth with that of free cash flow and net asset value (NAV) growth. Payouts that aren't backed by rising free cash flow ultimately tend to be unsustainable. Similarly, payout growth that isn't supported by any increase in capital employed tends to rely on improved profit margins. That's also typically a finite opportunity, in my experience. The chart below shows us how growing free cash flow provided solid support for the dividend until the pandemic struck. A couple of lean years have been followed by a recent recovery in cash generation. This gives me hope that the dividend can also now return to sustainable growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-dps-fcfps-navps-110524.png) The sharp decline in NAV per share between 2007 and 2013 relates to the financial structure of the group's flotation and was not a reflection of problematic trading. Steady NAVps growth since 2013 is more representative of the growth of this asset-light business, I think. My screen scores shares based primarily on data from the last five years. This hasn't been a good time for this business, hence the low score. Assuming trading remains stable, I expect a significant improvement to this score over the next 12-18 months. **MONY scores 0.3/5 for dividend growth in my screening system.** --- ### Dividend yield: above average The shares have generally offered a yield that's been in line with or above the FTSE 250 average. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-div-yield-110524.png) Although I'm not convinced that buying today will offer the same kind of returns investors who bought from 2008-2012 enjoyed, I think the current 5%+ income does look potentially attractive, for a business of this quality. **MONY scores 3.4/5 for dividend yield in my screening system.** --- ### Valuation: affordable I score stocks for valuation based on their EBIT/EV and free cash flow yields. MONY looks decent value on both of these metrics, in my opinion, with a trailing EBIT yield of 7.4% and a free cash flow yield of 6.7%: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-fcf-ebit-yield-110524.png) The obvious question to ask is whether there is a good reason for the business to be cheap. In other words, are current levels of profit sustainable – and is further growth possible? I can certainly see some possible risks: - Consumer demand will remain fickle - Changing market conditions will lead to a reduction in available comparison savings - Unexpected regulatory action will lead to a reduction in profitability or exceptional cash costs I can't rule out these possibilities entirely. But on balance, I think it's fair to say that the shares look affordable at current levels. **MONY scores 3.5/5 for valuation in my screening system.** --- ### Profitability: very good There's no escaping the fact that MONY isn't quite as profitable as it was a few years ago. Operating margins have fallen from a peak of almost 36% to under 25% today. Return on capital employed is also much lower. Even so, this is still a very profitable business: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-roce-opmargin-navps-110524.png) I've focused on just the last 10 years here to show the business as it's approached maturity and to avoid the distortion caused by the IPO financial restructuring. My dividend screen scores stocks for profitability based on ROCE and net asset value per share growth. I'm looking for companies that can continue to deploy new capital and generate attractive levels of return on that investment. In my view, ROCE and NAVps growth are two of the best indicators of a non-financial company's ability to deliver attractive long-term shareholder returns. My score doesn't use operating margin, but I included it in the chart above as I thought it provided useful additional context. **MONY scores 3.4/5 for profitability in my screening system.** --- ### Fundamental health: strong My fundamental health score is intended to measure whether dividend payments could be at risk from debt service costs. Beyond this, I also want to know whether the business has more debt than I'm comfortable with. I use two metrics to form a fundamental health score: - **Fixed charge cover** (compares operating profit with finance and lease costs) - **Net debt/5yr average net profit** – I prefer to use this measure to get an idea of how easily a company could repay its debt if needed, rather than just servicing it. This chart shows how MONY has performed on these measures over the last 10 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/mony-fixchgcvr-leverage-110524.png) One of my main concerns as an equity investor is to avoid debt-related dividend cuts or any other debt-related problems. While lenders may eventually be made whole in such scenarios, shareholders are much less likely to escape without a permanent loss. I don't think there's really a one-size-fits-all systematic way of measuring debt-related risks. What's appropriate varies across different companies and sectors. However, I find the method I've chosen to be a useful way of flagging up potential risks for further investigation, if needed. In this case, I don't see anything to be concerned about. Indeed, I'm hopeful the business will return to a net cash position over the next 12-18 months. **MONY scores 4.4/5 for fundamental health in my screening system.** --- ### Conclusion: I could be tempted **My quality dividend system awards Moneysupermarket.com an overall score of 59/100 at the time of writing (May 2024).** I started this write-up with a broadly favourable view of this business. While I can see some potential concerns, on balance I remain positive. Here's a summary of the main points, as I see them. **Pros:** - Price comparison is high margin, capital light and cash generative - MONY is one of four UK market leaders - Ownership of Quidco and MSE provide additional consumer reach - Balance sheet and valuation look potentially attractive to me, from an income perspective - Current management strategy of incremental gains and improvements looks sensible to me **Cons:** - Price comparison is starting to look like a fairly mature market, I don't expect rapid growth - Quidco acquisition was probably overpriced, in my view - Regulatory and competitive risks remain - Risk that some market sectors will no longer offer attractive opportunities for comparison - Little differentiation between market leaders except branding and advertising **My view:** I think MONY shares are probably reasonably priced at current levels. I would not be entirely surprised if the company attracted bid interest at some point, given its modest valuation and strong cash generation. Consensus forecasts on SharePad suggest that free cash flow could rise from £96.5m to £112.8m from 2024 to 2026\. Those estimates imply a free cash flow yield from 7.7% to 9.0%, based on the current £1.26bn market cap. On these numbers, the FY24 forecast yield of 5.4% looks well supported with room for further growth, in my view. However, these are only forecasts. Price comparison sites have attracted the regulator's attention before and could do so again. MONY might also fail to maintain its market share in a competitive marketplace. So has MONY returned to growth? And would I be interested in buying the shares for my portfolio? - I think the business probably has returned to (modest) growth. - I wouldn't be unhappy owning the shares at this level, but I do have some concerns about the long-term durability of earnings and the lack of competitive differentiation versus key rivals. As always, thank you for reading – and please share your views on MONY and the wider price comparison sector in the comments below. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - is Direct Line a recovery buy? DLG, MACF, RSW (10/05/24) URL: https://www.rolandhead.com/dividend-notes/is-direct-line-a-recovery-buy-dlg-macf-rsw/ Last updated: 2024-05-17T16:47:50.000Z I don't generally indulge in hindsight after I sell a stock. But this week I've been tempted to take a look at FTSE 250 share Direct Line Insurance, which was previously a member of my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). [I sold Direct Line](https://www.rolandhead.com/dividend-shares/should-i-sell-my-direct-line-insurance-shares/) after the company ran into problems at the end of 2022 and suspended its dividend. A recovery now seems to be underway and dividend payments have been restarted, albeit at a much lower level. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/dlg-5y-chart-100524.png) Should I have continued holding and taken more of an owner's approach? Perhaps. I sold in part because of the dividend suspension, but also because I felt management had lost credibility and I was starting to question the direct-to-consumer model in an era of price comparison. I've commented on some of these issues below in [my review](#direct-line-insurance-group-dlg) of the insurer's first-quarter update. But more broadly, the experience has prompted me to think more carefully about when to sell and whether it might make more sense to accept a dividend suspension for a limited period – perhaps 12 months. I'll comment more on this in the future. For now, let's move on and take a look at this week's dividend shares. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend shares that are of interest to me. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect my personal views and are not investment advice or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**Direct Line Insurance (LON:DLG)**](#direct-line-insurance-dlg)\- operating performance and margins appear to be stabilising, but there's still a worrying customer exodus from the core motor insurance brands. If this can be halted, I think there's value here. - [**Macfarlane Group (LON:MACF)**](#macfarlane-macf) \- the packaging group warns of a slow start to the year but leaves guidance unchanged. I think management expectations are credible and would consider the recent drop as a potential entry point. - [**Renishaw (LON:RSW)**](#renishaw-rsw)\- a nine-month update from this specialist engineer suggests full-year profits will be at the lower end of guidance, with some pressure on margins. However, a recovery seems likely to me and I continue to admire Renishaw's quality metrics and track record. My sums suggest the stock *could* still offer long-term value at £40\. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Direct Line Insurance (DLG) > "Claims trends and Motor margins continue to develop in line with our expectations" [**Q1 2024 trading update**](http://www.investegate.co.uk/announcement/rns/direct-line-insurance-group--dlg/trading-update-for-q1-2024/8180837?ref=rolandhead.com)/ Mkt cap: £2.6bn *FY24 forecast dividend yield: 7.2%* Direct Line was spun out of RBS (now **NatWest Group**) in 2012 and once appeared to have been a successful float. However, the shares dipped below their IPO price last year and are still only modestly higher today: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/dlg-all-chart-100524.png) Anyone who has held DLG since the float has done somewhat better than this, thanks to a generous stream of dividends. According to SharePad, the shares have delivered a total return since IPO of around 150%, or 8% annualised. Even so, Direct Line has been a disappointing performer relative to sector leader **Admiral**, which has delivered a 300% total return over the same period (an impressive 16%annualised). **Q1 trading summary:** the headline numbers from this week's update appear promising at first glance. - Gross written premium (GWP) up 10.7% to £892.2m - *Motor up 18.3% to £424.3m* - *Home up 14.2% to £147.3m* - *Commercial own brands up 14.9% to £71.7m* - *Rescue down 1.9% to £63.5m* The company says motor claims costs were in line with expectations during the period, with *"estimated written margins maintained above 10%"*. Unfortunately, Direct Line is continuing to lose customers. The number of in-force policies fell by 1.8% (174k) to 9.3m in Q1, relative to the same period last year. Most of these losses are coming in the core motor insurance business, as customers apparently find better renewal deals elsewhere. The number of individual customers taking Direct Line's own branded policies has fallen from 3.7m at the end of March 2023 to 3.2m at the end of Q1 this year. CEO Adam Winslow says this reflects *"the continued repricing of the Motor book"*. This has seen Direct Line's average motor premium rise from £401 to £541 over the last year, albeit increases seem to have levelled out since Q4 2023: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/dlg-1q24-avg-premiums.png) Source: Direct Line Q1 2024 trading update Interestingly, Direct Line's average motor premiums are still below the Associated of British Insurers (ABI) average Q4 2023 premium of £627 (cited in Admiral's 2023 results presentation). Direct Line's numbers are also below my estimate of £682 for Admiral's average 2023 motor premium (although this may not be accurate). I don't know much about Direct Line's customer mix versus that of Admiral, or the wider market. But I wonder if it's a concern that Direct Line is seemingly pricing below the market average, but still losing customers. One saving grace for the motor business was the addition of almost 700,000 Motability customers in September 2023\. These are said to be contributing around £700m of gross written premium – c.£1,000 per vehicle. The Motability contribution means that DLG's total motor customer numbers have risen from 3.7m to 4.1m over the last 12 months. But I'd still like to see evidence the performance of the group's core consumer brands is stabilising. **Outlook:** new CEO Adam Winslow is confident he can achieve £100m of annualised cost savings by the end of 2025\. With this leader cost structure in place, he expects to be able to deliver a net insurance margin (normalised for weather) of 13% in 2026. However, explicit 2024 guidance was limited to this comment: > "Claims trends and Motor margins continue to develop in line with our expectations" No mention is made of GWP, overall margins or indeed profit. But City analysts – who tend to be better informed than private investors – appear to have cut their full-year forecasts following this week's update. According to Stockopedia data, consensus earnings estimates for 2024 have fallen by 9.5% to 14.1p per share since Direct Line's Q1 update. In fairness, Winslow only started work on 21 March 2024 – seven weeks ago. He has scheduled a Capital Markets Day for 10 July 2024 that should provide more information on both performance and strategy. #### My view Adam Winslow has joined Direct Line from **Aviva**, where he ran the group's UK & Ireland general insurance business. The starting date of that appointment (May 2021) suggests to me he was one of Aviva CEO Amanda Blanc's appointments. Given the improvement in Aviva's performance since Ms Blanc took charge, I see this as a positive. Winslow has also not wasted time in revamping senior management and has already appointed a new CFO, Jane Poole. Her previous role was as Winslow's CFO in Aviva's UK business. So presumably the two already have a good working relationship. Would I consider buying back into Direct Line? Possibly. It remains one of the biggest players in the UK market and has several strong brands. Historically this business generated a return on equity in low double digits. The shares currently trade close to their net asset value, for the first time since Direct Line's IPO. If the business can generate a steady 10%-15% return on equity in the future, then buying the shares close to NAV (equity value) could deliver decent returns. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/dlg-price-navps-100524.png) Subject to any revised guidance issued later this year, earnings are expected to be markedly higher next year. A FY25 dividend yield of 6%-7% doesn't seem unrealistic to me based on the current valuation. Of course, past performance is no guarantee of future returns. Direct Line may now be structurally less profitable for reasons I don't understand. I'll continue to watch with interest and will look forward to this summer's half-year results and CMD. --- ### Macfarlane (MACF) > "the start of 2024 has been challenging with first quarter sales and profits below the same period in 2023" [**AGM trading update**](http://www.investegate.co.uk/announcement/rns/macfarlane-group--macf/agm-trading-update-/8177402?ref=rolandhead.com)/ Mkt cap: £203m *FY24 forecast dividend yield : 3.0%* I last looked at small-cap packaging group Macfarlane in an [in-depth share review](https://www.rolandhead.com/dividend-shares/is-macfarlane-a-good-dividend-share/) in November. I was impressed at the time and continue to like this business, which is also one of the highest-scoring shares in my [dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) results. This week's AGM update warned of a challenging start to 2024, but left full-year guidance unchanged, triggering a mild sell off: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/macf-5y-chart-100524.png) The company said that sales during the first quarter were 9.5% lower than the same period in 2023, due to *"continued weak customer demand and price deflation"*. First-quarter profits were also said to be lower, by an unspecified amount. However, the company said that benefits from *"strong gross margins"* and recent acquisitions had helped to dampen the impact of falling sales on profit. Trading is expected to improve during the second half of the year, thanks to a mix of new business and sales recovery from existing customers. Cost control will remain a key focus. Reassuringly, Macfarlane had a net cash position of £4.7m at the end of March, up from £0.5m at the end of December 2023. **Outlook:** to be fair, Macfarlane warned in its 2023 results that the outlook for 2024 was likely to remain challenging. This update didn't seem particularly surprising to me. I think the key thing is that full-year guidance was explicitly left unchanged. This appears to be supported by an updated note from house broker Shore Capital (available on Research Tree) showing **unchanged** 2024 forecast earnings of 12.4p per share. I emphasise this because we've seen a trend of smaller companies recently slipping out profit warnings through updated broker notes, without making them explicit in an RNS. This has **not** happened here. #### My view Packaging is a cyclical business and it's quite obvious that there will be variation in demand sometimes, due to external conditions. A second-half weighting to profits is often an early sign that a profit warning may be likely later in the year. I can't rule out that risk here – clearly no one can be sure when demand will start to improve. But the latest UK economic does not seem that bad to me and I think Macfarlane has credible management and good record of disciplined operations. On balance, I think Macfarlane shares look reasonably priced on 11 times earnings. The group has a solid track record of organic and bolt-on growth, with decent profitability. Cash generation is generally good and the net cash position is reassuring. I remain interested in this business and would consider buying at current levels if a vacancy arose in my portfolio. --- ### Renishaw (RSW) > "We have continued to deliver a solid performance in mixed market conditions" [**Trading statement for nine months ended 31 Mar 24**](http://www.investegate.co.uk/announcement/rns/renishaw--rsw/trading-statement/8180880?ref=rolandhead.com)/ Mkt cap: £2.9bn *FY24 forecast dividend yield: 1.9%* Specialist engineering group Renishaw is often talked about as a bid target, perhaps in part because [co-founders](https://www.renishaw.com/en/our-people--21969?ref=rolandhead.com) Sir David McMurty and John Deer actually put the company up for sale in 2021\. That came to nothing, but April saw more bid rumours making the rounds. These were followed by [a statement](http://www.investegate.co.uk/announcement/rns/renishaw--rsw/statement-regarding-renishaw-plc/8117055?ref=rolandhead.com) from German industrial giant **Siemens** confirming that it is not planning to make an offer for Renishaw. I suspect valuation is the sticking point with potential buyers, because the company's sensing and measurement technology is world class, as far as I can tell. Last week Renishaw issued a trading update for the nine months to 31 March, ahead of a Capital Markets Day on 18 June 2024 and full-year results sometime in September. **9-month trading summary:** Renishaw says that conditions in its end markets are *"mixed"* but figures for the most recent quarter seem to suggest some signs of recovery. - Q3 revenue of £172.4m was 4% higher than the average of Q1 and Q2 - Updated full-year guidance implies Q4 revenue could rise further to between £177m and £197m - The smaller analytical instruments and medical devices division has continued to deliver double-digit growth this year, with nine-month sales up 16% to £29.3m Management say that additive manufacturing (3D printing) continued to deliver strong growth in the third quarter, while co-ordinate measuring machine and gauging systems also performed well. There were also some *"early signs"* of recovery in demand for position encoders from semiconductor equipment builders. However, demand for metrology sensors used in consumer electronics was weaker in Q3 than in H1\. **Outlook:** I always find it reassuring when a company is able to narrow its full-year guidance as the year progresses. **Next** does this and so too has Renishaw. Management now expects to report revenue of £680m to £700m this year, with pre-tax profit of £122m to £135m. This compares to February's guidance for revenue of £675m to £715m, with pre-tax profit of £122m to £147m. Unfortunately this updated guidance does seem to imply that FY24 results may be at the bottom end of expectations. Taking the mid-point from both sets of revenue and pre-tax profit guidance also appears to suggest that Renishaw's adjusted pre-tax margin may now be slightly lower than previously expected, at 18.6%, versus 19.4% in February. I don't think this is really a profit warning, but this doesn't seem likely to be a standout year for Renishaw. Consensus estimates now price the stock on 28 times FY24 earnings, falling to 23x FY25 earnings. #### My view I keep coming back to this innovative British engineering business even though the dividend yield is too low for me, at under 2%. Renishaw is a stock I'd like to own, but at what price? More decisive investors than I were able to pick up the shares at £30 in October 2023\. On a long-term view, I suspect that could prove to have been a bargain price: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/rsw-10y-chart-100524.png) I'm less sure about buying at £40, which prices the stock with a FY24 forecast EBIT/EV yield of just 4.2% and a dividend yield of 1.9%. Based on my target rate of return of at least 10%, I estimate that a £40 share price implies a sustainable growth rate of just over 8%. That doesn't seem entirely unreasonable to me, as the disruption from the pandemic recedes. I suspect Renishaw *may* still be reasonably priced at current levels, but for now the shares will remain on my most-wanted list. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Apr '24 dividend portfolio update: mixed results URL: https://www.rolandhead.com/portfolio/apr-24-dividend-portfolio-update-mixed-results/ Last updated: 2024-05-14T05:39:10.000Z Welcome back to my monthly newsletter, in which I review results and trading updates issued by the UK dividend stocks in my portfolio over the last month. This month's edition has something of a consumer bias, but still covers a fairly diverse range of stocks: - 2 FTSE 100 shares - 2 FTSE 250 shares - 1 AIM dividend stock - 1 Main Market-listed small cap In terms of sector coverage, this sextet includes three defensive consumer stocks, one retailer, one asset manager and one technology stock. Four of these shares offer a forecast dividend yield of 5% or more. Four of them have founder or significant insider ownership (not the same four!). Finally, one of these six companies has just announced plans that could lead to significant asset sales, potentially benefiting shareholders. *Disclaimer: Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research or seek professional advice. Full disclaimer* [***here***](https://www.rolandhead.com/portfolio/feb-24-portfolio-update-steady-progress-special-dividend-problems/#disclaimer)***.*** --- ### In this month's report... These six updates highlight some macro headwinds and company-specific concerns. But they also reveal signs of progress, I think. On balance, I feel that the recent performance and current valuation of several of these companies highlights the value available in UK stocks right now. That's my personal view, anyway – I am pretty much fully invested at the moment. As always, please read on and form your own views. Feel free to drop a comment below or contact me directly with any thoughts. Click on the links or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### The Dividend Note - emerging value from these FTSE 100 stocks? WTB, SN. (03/05/24) URL: https://www.rolandhead.com/dividend-notes/the-dividend-note-emerging-value-from-these-ftse-100-stocks-wtb-sn/ Last updated: 2024-05-10T17:00:41.000Z Welcome back to The Dividend Note. This week I'm looking at two companies I think have the potential to provide reliable dividend growth and *could* be reasonably valued. Both are somewhat out of favour at the moment, but – in one case, at least – I think a buying opportunity could be emerging. --- ### Companies covered *These notes contain a review of my thoughts on recent results from UK dividend shares that are of interest to me. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**Whitbread (LON:WTB)**](#whitbread-wtb)\- a solid set of results showing strong cash conversion and a well-supported 31% dividend increase. I have some reservations about increased leverage but am broadly positive on valuation and outlook. - [**Smith & Nephew (LON:SN)**](#smith-nephew-sn)\- I feel like this *should* be the kind of business that is of interest to me, but I'm discouraged by heavily-adjusted profits, low margins and plenty of debt. Potentially cheap, but probably not something I'm interested in at the moment. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Whitbread (WTB) > "The Board is recommending a 26% increase in the final dividend per share" [**Results for 52 weeks to 29 Feb 2024**](https://www.investegate.co.uk/announcement/rns/whitbread--wtb/preliminary-results-announcement/8163316?ref=rolandhead.com)/ Mkt cap: £5.5bn *Current year forecast dividend yield: 3.3%* This week's full-year results from Premier Inn owner Whitbread revealed a 21% rise in pre-tax profit and a 26% increase in the final dividend. However, the outlook was dominated by plans to close 126 loss-making restaurants and convert a further 112 into hotel extensions. This is expected to lead to 1,500 job cuts. These extensions form part of a £500m plan to create 3,500 additional rooms in existing hotels. This is in addition to Whitbread's committed UK pipeline of 7,000 rooms in new hotels. Whitbread says it continues to see growth opportunities in the UK market. The company expects to increase room numbers from 85,000 to 97,000 by 2029, enroute to a *"long-term potential"* total of 125,000. I last covered Whitbread [in June 2023](https://www.rolandhead.com/dividend-notes/packaging-property-and-a-9-dividend-yield-wtb-smds-reci/) and remain a fan of this business, both as an investor and a customer. The shares have drifted lower since last summer and I'm starting to see some value here. But this week's results suggest increased capex could drag on results before starting to deliver additional profits. Let's take a look at the numbers. **FY24 results summary:** headline performance over the last year looks quite strong. Whitbread saw revenue rise by 13% to £2,960m, supporting a 21% increase in pre-tax profit to £452m. Improved profitability saw the group's pre-tax margin rise to 15.3% (FY23: 14.3%). Pre-tax profits include the impact of IFRS 16 lease interest costs, so I think this is a more useful measure of profitability than the usual choice of operating margin. Return on capital employed (ROCE) was 6.7% last year according to my statutory calculation, with return on equity of 8.9%. Whitbread's adjusted measure of ROCE was 13.1%, which was achieved using adjusted operating profit and an optimised (adjusted) measure of capital employed. These adjustments don't look too aggressive to me, but I prefer to take a holistic view that encompasses the whole balance sheet and is more easily comparable with other companies. On this basis, Whitbread doesn't look like a high-return business, although it has certainly created plenty of shareholder value in the past. This was particularly true during the low-interest period that followed the financial crisis, when capital was cheap: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/wtb-navps-roce-030524.png) Note that the spike in 2019 related to the sale of Costa Coffee to Coca Cola - WTB ended the year with £3.4bn of cash on its balance sheet. Much of this was subsequently returned to shareholders. **Earnings & dividend:** reported earnings rose by 16% to 161p last year, supporting a 31% increase in the total dividend to 97p per share. That gives a 3.2% yield at the last-seen price of £30. **Balance sheet & cash flow:** Whitbread says 52% of its property is freehold, with the remaining 48% leasehold. The balance sheet showed land and buildings worth £3.7bn at the end of FY24, supporting a net asset value of £3.5bn, or c.£19 per share. However, NAV fell by £0.6bn last year due to an increase in leverage. Whitbread moved from a net cash position of £171m to a net debt of £298m last year (both figures exclude c.£4bn of lease liabilities). In covenant terms, management says leverage rose to 2.9x EBITDAR last year (FY23: 2.6x), but remained below the 3.5x limit for an investment grade credit rating. Last year's £469m increase in net indebtedness was driven by £591m spent on share buybacks. Personally, I would have preferred the company to maintain a net cash position rather than buyback shares. With the stock trading c.50% above book value and generating a return on equity of less than 10%, I'm not sure how much value buybacks are creating. CEO Dominic Paul's previous role was at Domino's UK – a business that's also fond of buybacks and [which I feel](https://www.rolandhead.com/dividend-notes/super-returns-dom-nxt-05-05-23/) uses more debt than necessary. I hope Paul isn't going to apply this philosophy too assiduously at Whitbread. Fortunately, Whitbread's cash generation remained strong last year. My sums suggest FY24 **free cash flow** of £283m, giving 91% cash conversion from reported net profit of £312m. **Trading commentary - UK:** the pandemic has had a lasting impact on the UK hotel market. The total number of UK hotel rooms fell by 4% to 686k between 2019 and 2022\. Premier Inn says room supply is not expected to return to 2019 levels for *"at least the next four years".* The company sees this as an opportunity for Premier Inn to backfill the loss of (mostly) independent rooms which occurred during the pandemic: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/wtb-fy24-uk-supply.png) Source: Whitbread FY24 presentation Trading performance from the existing UK Premier Inn estate was good last year, with revenue up 10% and adjusted pre-tax profit up by 19%. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/wtb-fy24-uk.png) Source: Whitbread FY24 results The adjusted pre-tax margin of the UK business rose by 1.6% to 21.2%, while occupancy remained stable at 82.2% (FY23: 82.7%). **Trading commentary - Germany:** Whitbread is aiming to repeat the UK success of the Premier Inn concept in Germany. Germany's hotel market is 40% larger than in the UK, but Whitbread says it is highly fragmented with *"no clear market leader"* and an independent sector that's *"in long-term decline"*. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/wtb-fy24-uk-vs-de-hotels.png) Source: Whitebread FY24 presentation Whitbread thinks the Premier Inn model will work well in Germany, with some localisation, and is rolling out hotels steadily. The company has committed £1.1bn of capital to Germany and believes this should generate *"longer-term returns of 10%-14%"*. Revenue from Premier Inn Germany rose by 62% to £190m last year and losses were reduced. Management expect this business to reach breakeven during the current year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/wtb-fy24-germany.png) Source: Whitbread FY24 results **Outlook:** guidance for the 2024/25 financial year suggests that UK inflation will ease and the German business will break even on a run-rate basis later this year. Whitbread expects to open 750-1,250 rooms in the UK and c.400 rooms in Germany during FY25\. Capex of £550m-£600m should be partly offset by proceeds from property transactions of £175m-£225m. This is expected to includes sale and leasebacks, as well as disposals. I hope the balance sheet won't be hollowed out too much. Broker consensus forecasts suggest adjusted earnings could rise by 9% to 225p per share this year, supporting a near-flat dividend of 97.7p per share. These estimates price the stock on 13.3 times earnings, with a prospective yield of 3.3%. #### My view Last year's results price Whitbread shares with a free cash flow yield of 5.1% and a dividend yield of 3.1%. This is cheaper than normal for this business, although this may partly be explained by the expected near-term drag on profits as the UK growth plan ramps up: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/wtb-fy24-uk-growth-1.png) Source: Whitebread FY24 presentation I have some reservations about the company's newfound enthusiasm for buybacks and would not want to see leverage rise too much further. With Costa Coffee now gone, I think profitability is also likely to be capped by the relatively capital-intensive nature of the group's owned-and-operated business model. Even so, I think Premier Inn is fundamentally an above-average quality business. On balance, I suspect that Whitbread shares are probably quite reasonably priced at current levels. Although some patience may be needed, I think Whitbread would have to be unlucky or uncharacteristically inept to damage the UK Premier Inn business. I think there's also a reasonable chance that the company will be able to achieve similar success in Germany, over time. With the stock trading at c.£30, I might consider Whitbread shares as an income buy for [my portfolio](https://www.rolandhead.com/dividend-portfolio/). --- ### Smith & Nephew (SN) > "Full year 2024 guidance unchanged" [**Q1 2024 trading update**](https://www.investegate.co.uk/announcement/rns/smith-nephew--sn./q1-2024-trading-update/8165848?ref=rolandhead.com)/ Mkt cap: £8.6bn *Current year forecast dividend yield: 3.1%* I've covered a few pharmaceutical stocks recently ([GSK](https://www.rolandhead.com/dividend-notes/decades-of-dividends-gsk-nwf-wyn-jhd-02-02-24/), [AZN](https://www.rolandhead.com/dividend-notes/emerging-opportunities-azn-iom-chh-12-04-24/), [HIK](https://www.rolandhead.com/dividend-notes/adding-to-my-watch-list-smwh-rec-hik-26-04-24/)) but have not looked at medical devices group Smith & Nephew before. This business can trace its roots back to 1856 and originally made its name with surgical dressings. It was also the investor of *Elastoplast*. Smith & Nephew has expanded through acquisitions and today sells a range of joint replacement, sports medicine, and wound management products. This group is a FTSE 100 firm and *feels* like it should be a high-margin, good quality business. Unfortunately for shareholders, the reality has been different in recent years. Smith & Nephew's share price has fallen by 50% from the £20 high seen in 2019: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/sn-chart-10y-030524.png) This decline has reflected the group's reported operating margin which has halved over this period and is now under 10%: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/sn-opmargin-030524.png) This decline has left the shares trading on a forward P/E of 13, with a 3.1% dividend yield. If management can rebuild margins and deliver a return to consistent growth, I reckon a higher rating could be justified. Potentially, much higher. I've been meaning to take a look at this business for a while to see if it could become the kind of good, cheap stock I like to buy. This week's first-quarter trading update provided a good opportunity, so I've noted down some thoughts below. **Q1 2024 trading summary:** Smith & Nephew's progress during the first three months of 2024 appears to be mostly positive, if unspectacular: - Q1 revenue up 2.2% to $1,386m, said to be in line with expected 2024 phasing - Orthopaedics revenue +3.6% to $567m - Sports Medicine & ENT +4.5% to $441m - Advanced Wound Management -2.3% to $378m One problem seems to be that the group's core US market is flat (or else S&N is losing share): - US revenue: -0.6% to $733m (53% of group revenue) The culprit seems to be *"continued weakness"* in US hip and knee implants. These accounted for 28% of total revenue in Q1, but this figure was only 1% higher than the same period last year. Sales in other established markets rose by 4% to $420m, while emerging market sales rose by 8.5% to $233m. **Profitability:** I wonder if some parts of this business are more profitable than others. I've scrolled back to last year's result to try and find out. Smith & Nephew prefers to use a heavily adjusted version of operating profit called trading profit. While I'm not a fan, it's all we have for the group's operating segments. **2023 segmental trading profits:** - Orthopaedics: $398m (17.9% margin) - Sports Medicine & ENT: $503m (29.0% margin) - Advanced Wound Management: $472m (29.4% margin) The results show similar performance in 2022, so it seems that the orthopaedics business is dragging on group margins. The company says it has a 12-point plan to improve performance in orthopaedics and expects to benefit from improved product supply and commercial execution in the US market. It's worth noting that other areas of orthopaedics appear to be performing better. The Q1 figures showed "*Trauma & Extremeties"* revenue up 7.3% to $146m. New robotics-based services used in joint reconstruction are also showing promising growth, with revenue up 17% to $27m. **Outlook:** full-year guidance for 2024 was left unchanged, with management guiding for underlying revenue growth of 5%-6%, or 4.3%-5.3% at current exchange rates. Trading profit margin is expected to be *"at least 18.0%* in 2024\. For contrast, this heavily adjusted figure was 17.5% in 2023\. However, Smith & Nephew's reported operating margin was just 7.7% last year, highlighting the massive scale of adjustments used here. I am not a fan of such heavily adjusted measures: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/05/sn-fy23-profit-reconcile.png) Source: Smith & Nephew 2023 results In this case, I note that the company's return on equity was just 5% last year and that free cash flow conversion was also quite poor. In my view, the lower, reported operating margin is probably a more reasonable guide to shareholder returns at the moment. However, broker forecasts are generally aligned with company-adjusted measures. In this case I can see that adjusted earnings are expected to rise by 18% to 98.2 cents per share this year. A relatively modest dividend increase of 2.7% to 38.3 cents per share is expected, perhaps implying continued high capex and poor free cash flow conversion. #### My view I think Smith & Nephew is *probably* quite affordably priced at current levels. Only a modest improvement in margins and cash generation would be needed to support a re-rating, in my view. However, net debt of $2.7bn seems a little high to me relative to last year's pre-tax profit of $290m. I'm also discouraged by the company's dependence on heavily-adjusted profit metrics. If I was going to continue researching this, I'd probably take a look at some of the company's competitors to get a better understanding of Smith & Nephew's position in its key markets. I would also want to look a little further back to understand why margins have collapsed since 2018. I should stress that I have only taken a cursory look at this business and I may be missing something. Aside from the real possibility of improved performance, I can also imagine that a larger trade buyer might be interested in acquiring this business at current levels in order to gain access to its market share and intellectual property. I'll probably take another look at Smith & Nephew at some point. But I think there are probably more attractive options for me elsewhere right now. As always, thanks for reading – and please feel free to share your thoughts in the comments below. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) *Disclosure: Roland owned GSK shares at the time of publication.* --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Investor's Round Table: SDRY, DOCS, CTO, MONY, RFX, POLR, ASHM, PMI (21/04/24) URL: https://www.rolandhead.com/podcasts/investors-round-table-sdry-docs-cto-mony-rfx-polr-ashm-pmi-21-04-24/ Last updated: 2024-04-27T11:16:28.000Z I've been back in the studio with my podcast co-hosts and fellow private investors Graham Neary and Mark Simpson. In the latest episode of the Investor's Round Table, we took a look at the recent setbacks at fashion firms **Superdry (SDRY)** and **Dr Martens (DOCS)** and discussed whether we could see value in either stock at current levels. In our regular slots on featured stocks, we covered the investment case for **Moneysupermarket.com Group (MONY)** and **Ramsdens Holdings (RFX)**. Graham also provided a review of recent updates from fund managers **Polar Capital (POLR)**, **Ashmore (ASHM)** and **Premier Miton (PMI)**. With AUM starting to rise at many UK asset managers, we considered the case for investing in this sector and discussed a couple of possible approaches we might use to gain exposure. *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research or seek professional advice. Full disclaimer* [***here***](https://www.rolandhead.com/podcasts/investors-round-table-hl-cbg-plus-jet2/#disclaimer)***.*** **As always, thank you for listening. Please do get in touch if you have any comments or questions you'd like us to answer in a future episode.** Roland Head #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - adding to my watch list - SMWH, REC, HIK (26/04/24) URL: https://www.rolandhead.com/dividend-notes/adding-to-my-watch-list-smwh-rec-hik-26-04-24/ Last updated: 2024-05-03T16:18:43.000Z Welcome back to The Dividend Note. This week I've take a careful look at the latest accounts from travel-focused retailer **WH Smith**. Has recent weakness created a buying opportunity? I've also reviewed trading updates from small cap currency management specialist **Record** and FTSE 100 dividend share **Hikma Pharmaceuticals**, which specialises in producing generic medicines. Sidetracking briefly, I also see that Google owner **Alphabet** has just declared its first ever dividend. The tech giant (market cap $2tn!) now intends to make quarterly cash payouts. Facebook owner **Meta** has also introduced dividend payments recently. Perhaps we'll soon look back and wonder at a period when it became unfashionable for company owners to expect to receive a share of profits in cash each year... --- ### Companies covered *These notes contain a review of my thoughts on recent results from UK dividend shares that are of interest to me. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**WH Smith (LON:SMWH)**](#wh-smith-smwh) \- aggressive growth plans in North America aren't without risk and are putting pressure on margins and cash generation. But my overall impression is positive. I think the pre-pandemic qualities of this business remain largely intact and the valuation could be attractive. - [**Record (LON:REC)**](#record-rec) \- the full-year update from this currency management specialist reads positively to me, except it fails to confirm whether results for the year just ended will be in line with forecasts. Record goes onto my watch list ahead of June's full-year results. - [**Hikma Pharmaceuticals (LON:HIK)**](#hikma-pharmaceuticals-hik)\- this Q1 update strikes a positive tone, but broker forecasts suggest earnings may fall slightly this year. I admire Hikma's long-term record of value creation and think the shares could be reasonably priced at current levels. --- ### WH Smith (SMWH) > "The second half of the financial year has started well, and we are on track to deliver full year expectations." [**Half-year results**](http://www.investegate.co.uk/announcement/rns/wh-smith--smwh/interim-results-announcement/8155659?ref=rolandhead.com)/ Mkt cap: £1.6bn *FY24 forecast dividend yield: 3.0%* **The story so far:** prior to the Covid pandemic, WH Smith was priced as a company that could do no wrong. To a large extent, the group's results supported this view. Shareholders enjoyed a total return of more than 600% between 2006 and the start of the pandemic – equivalent to 13.6% annualised: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/smwh-chart-all-260424.png) WH Smith total return (share price + dividends) 2006-2024 The group's business model is based on combining a fast-growing international travel retail business with a declining UK high street business that's run for cash. Historically, this combination delivered strong free cash flow and high returns on capital employed: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/smwh-roce-fcfps-260424-1.png) Dividends and buybacks were used assiduously to reward shareholders. Then it all went wrong: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/smwh-ebit-eps-sharecount-260424.png) **A buying opportunity?** One of the hallmarks of a good business is its ability to overcome problems and maintain its strategy. WH Smith appears to have done this. As the chart above shows, operating profit growth is now back in line with the pre-pandemic trend. Earnings per share haven't yet caught up with headline profits, due to the dilution from an equity placing in 2020 and the impact of higher interest costs on increased debt levels. This week's interim results drew an unfavourable response from the market and the shares are now trading at 2020 levels. The share price recovery in 2021 has completely reversed. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/smwh-chart-5y-260424.png) This has left WH Smith shares trading on 13 times forecast earnings and offering a c.3% yield. I would have been very happy to buy the stock at this level prior to the pandemic, so I thought it would be interesting to take a closer look now to see if the company's historic appeal is still intact. Is the current slump a buying opportunity? **H1 2023/24 results summary:** WH Smith's half-year results cover the six months to 29 February 2024\. The company says it saw strong momentum across all of its market, particularly in travel. UK Travel was the strongest performer, delivering a 19% increase in trading profit during the period. North America also generated a positive result, with the InMotion business now fully integrated and further store openings planned in H2. The group's expansion into other countries is continuing, with revenue up by 24% to £121m on a constant currency basis. These operations remain loss-making in aggregate (trading profit: -£1m in H1) but are expected to become profitable in due course. The UK high street business continued to limp on, with sales down 4% at £256m and a reduced trading profit of £22m (H1 '23: £24m). WH Smith's headline (adjusted) financial numbers show progress from last year, albeit with lower margins than the comparable period: - Group revenue up 8% to £926m, with travel revenue up 13% - Headline pre-tax profit up 2.2% to £46m - Travel trading profit up 6.4% to £50m - High street trading profit down 8.3% to £22m - Headline earnings per share up 5% to 24.4p - Interim dividend of 11p per share (H1 '23: 8.1p) Of course, these headline numbers exclude a number of adjustments. These totalled £16m during the first half of the current year, resulting in a sharp drop in reported profits. Higher finance costs also had an impact: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/smwh-1h24-income-1.png) WH Smith H1 2023/24 results **Non-underlying items:** the largest adjusting item was a £9m impairment charge on *"the store and online portfolio"*. This was made up as follows: - £4m to property, plant and equipment - no detail provided - £2m to intangible assets - *"primarily software"* - £3m to right-of-use assets - i.e. store leases There was also a £2m charge relating to *"onerous contracts"*. This appears to imply the company is locked into a loss-making contract of some kind: > "the unavoidable costs of continuing to service a non-cancellable contract." The other adjusting items relate to the pension scheme and to amortisation charges and do not look a particular concern to me. **Profitability:** using statutory profits, as is my habit, WH Smith generated an operating margin of 5.6% and a return on capital employed of 12.2%, calculated on a trailing 12-month basis. Both figures are well below the levels achieved in the past, in part because goodwill on the balance sheet has risen from £41m in 2018 to £437m today. This largely reflects two sizeable acquisition in North America, MRG and InMotion. For illustration, stripping out the goodwill gives a return on capital employed of just under 20%. This suggests two things to me: 1. WH Smith probably paid a full price for its acquisitions 2. The economics of this business probably remain attractive if it can generate organic growth (i.e. not just expanding through acquisitions) Growth remains a core focus of the business, with *"80 new stores won and yet to open in Travel"*. CEO Carl Cowling expects to open c.110 new stores in total during the current financial year, which ends on 31 August. However, the company also expects to close 60 stores as it focuses on better quality space. I would imagine these closures may have contributed to some of the impairment charges listed above. **Free cash flow:** WH Smith's travel growth plans are having an impact on free cash flow as it invests in new stores and supporting infrastructure such as warehousing. Interest payments are also sucking cash out of the business. Borrowing costs rarely troubled the company prior to the pandemic, when it tended to maintain a net cash position. One final factor impacting cash flows is the seasonality of the travel business, which led to a working capital outflow of £68m during the first half of the year. Fortunately, management provides a breakdown of growth capex and maintenance capex. This is useful because it allows us to take a view on steady-state cash performance, excluding spending on new stores that may not yet be contributing free cash flow. In order to get a more meaningful picture of WH Smith's cash performance, I've calculated the following **free cash flow figures on a trailing 12-month basis** for the period to 29 February 2024: - Total free cash flow: £16m - Free cash flow excluding spending on new stores: £78m - Free cash flow excluding new stores and working capital movements: £116m Of these three, I would say that free cash flow excluding new store capex is the most useful measure of the underlying cash performance of the business. At £78m, this compares well with trailing 12-month net profit of £73m, implying excellent underlying cash conversion of 107%. Free cash flow of £78m gives an underlying free cash flow yield of 5%, based on the current £1.55bn market cap. While WH Smith is currently opting to allocate a sizeable proportion of this surplus cash to fund new store openings, these can be slowed or even stopped if necessary. **Debt:** one factor that would improve WH Smith's profitability and cash generation would be a reduction in debt levels. Interest payments on debt rose to £26m last year (FY22: £23m) and totalled £13m during the first half of this year. These payments relate to headline net debt (excluding lease liabilities), which rose to £437m at the end of February, from £330m at the end of the last financial year. The company says this represents a multiple of 1.8x EBITDA on a covenant basis. Leverage is expected to fall to between 0.75x and 1.25x EBITDA by the end of the current financial year. Based on broker forecasts, this guidance implies headline net debt of between £270m and £450m at the end of the current financial year. That seems quite a wide range to me. I'm not sure if this reflects a lack of visibility on costs and earnings or spending decisions that haven't yet been made. However, broker forecasts for a FY24 net profit of £118m suggest to me that the company's leverage should fall below my preferred limit of four times net profit by the end of August. I don't see WH Smith's debt as a concern that would prevent me investing. #### My view WH Smith sees a significant growth opportunity in North America and is investing heavily with a view to achieving a 20% market share in travel: > "our focus for this division is and has been centred on winning and opening new stores with a target of building market share to 20% over the next four years. The new space opportunities are substantial. Our analysis of the North American market shows that there is a total of approximately 2,000 news and gift and specialty retail stores across the top 70 airports, of which we currently operate or have won over 260 stores" A 20% market share of 2,000 stores would be 400, implying a further 50% increase in the company's current North American store estate. Scaling up the group's US logistics infrastructure and maintaining a relatively high rate of new store openings is putting pressure on margins. It also carries the risk that future returns on this spending will be lower than expected. However, the long-running success of the group's UK travel business – where margins topped 10% in H1 – gives me some confidence that the company's targets are credible and that is has the capacity to deliver on them. If WH Smith can replicate the profitability of its UK travel business in North America, then I think the combined business could be worth significantly more in the future. As things stand today, I think WH Smith looks reasonably valued based on its *current* business. Looking ahead, I think the shares could *potentially* be cheap, if the company can maintain financial discipline and deliver on its growth targets. WH Smith goes on my watch list, for now. --- ### Record (REC) > "AUME increased by 17% to US$102.2 billion" [**FY24 trading update**](http://www.investegate.co.uk/announcement/rns/record--rec/fourth-quarter-trading-update/8158225?ref=rolandhead.com)(y/e 31 Mar)/ Mkt cap: £122m *FY24 forecast dividend yield: 8.1%* Asset manager Record's niche is providing services to manage its clients' currency exposures. The group serves mainly institutional clients and currently provides hedging for more than $100bn of client assets. Record's core services are passive hedging and dynamic hedging. The passive service aims to neutralise the economic impact of a client's currency exposure. The more expensive dynamic service is designed to allow for FX gains while providing protection from losses. Record is notable for its strong profitability and excellent cash generation. These currently support an 8% dividend yield. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/rec-roe-fcfps-dps-260424.png) I last commented on this business [in June 2023](https://www.rolandhead.com/dividend-notes/farms-fashion-forex-abf-rec/), when I voiced doubts about the company's diversification plans. My concern was that Record might be entering into markets where it had no obvious competitive strengths. Since then, CEO Leslie Hill – who devised this diversification strategy – has retired and been replaced by Dr Jan Witte, who took charge on 1 April, the start of Record's new financial year. **FY24 trading summary:** Record uses the measure Assets Under Management Equivalent (AUME) to measure business flows. This figure represents the value of client assets the company's hedging strategies are protecting. This week's update covered the year ended 31 March 2024. **AUME:** AUME rose by 17% ($14.5bn) to $102.2bn last year. This increase included net inflows of $6.8bn, in addition to positive currency movements. Dr Witte says the inflows are being driven by a mix of new clients and increased demand from existing clients. **Asset management:** The company also offers currency for return products and is targeting growth in asset management. Management say that two new funds launched last year delivered net inflows of $0.3bn. **Profit guidance:** one glaring omission from this update was any indication of whether profits for the year just ended would be in line with expectations. All we were told was that average fee rates *"remained broadly unchanged"* and that performance fees for the year were flat at £5.8m. It's disappointing not to get clear guidance on profits for a period that has ended. **Strategy & outlook:** understandably, Dr Witte has not yet completed a full review of the company's strategy. His comments in this year-end update are perhaps open to interpretation, but my reading of them is that he may take a more focused and targeted approach to diversification than his predecessor: > "Building on our existing proposition and the demand we observe for our services as a specialist asset manager, we are now refining our product range to focus on a select number of best-in-class products which present attractive and meaningful opportunities for us, making Record a stronger, less concentrated, and more robust business." A full update on strategy and outlook is promised with the full-year results in June. #### My view I'm encouraged by Record's return to AUME growth. This has been lacklustre in recent years but now seems to be establishing a more positive trend. Although I would like a little more clarity on profitability and Dr Witte's strategy plans, I'm now more interested in this business than I have been previously. Record is currently one of the highest-scoring financial shares in my [dividend screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). The shares go on my watch list for now ahead of June's full-year results. But this is a company I might consider adding to my dividend portfolio at some point. --- ### Hikma Pharmaceuticals (HIK) > "Full year guidance reiterated" [**Q1 trading statement**](http://www.investegate.co.uk/announcement/rns/hikma-pharmaceuticals--hik/trading-statement/8155621?ref=rolandhead.com)/ Mkt cap: £4.1bn *FY24 forecast dividend yield: 3.1%* As I've [commented](https://www.rolandhead.com/dividend-notes/emerging-opportunities-azn-iom-chh-12-04-24/) [recently](https://www.rolandhead.com/dividend-notes/decades-of-dividends-gsk-nwf-wyn-jhd-02-02-24/), the difficulty of understanding pharmaceutical companies' future growth prospects discourages me from investing in this sector. Even so, Hikma is a stock I've owned previously and might have some interest in owning again. Hikma does develop some of its own drugs but its main business is in producing generics. These are products whose patent protection has expired and which are typically in wide general use. The business was [founded](https://www.hikma.com/who-we-are/history/?ref=rolandhead.com) in Jordan in 1978 and remains under the control of the founding Darwazah family. They currently occupy the [board roles](https://www.hikma.com/who-we-are/leadership/?ref=rolandhead.com) of executive chairman and vice chairman and control a 27% shareholding through their Darhold Ltd vehicle. Since its IPO in 2005, Hikma has outperformed AstraZeneca and GlaxoSmithKline by a comfortable margin. This chart shows the total return to shareholders from each stock since Hikma's flotation: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/hik-azn-gsk-total-return-260424.png) Total return: HIK (black), AZN (blue), GSK (red) This progress has been supported by consistent high returns on equity, free cash flow expansion and 20 years of (almost) unbroken dividend growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/hik-fcfps-roe-dps-260424.png) **Q1 trading:** the company's first-quarter trading update covers the three months to 31 March. CEO Riad Mishlawi reiterated guidance for full-year revenue growth of 4%-6% and adjusted "core" operating profit of $660m-$700m (FY23: $707m). This is clearly an in-line update, albeit one that's guiding for lower profits this year. Mr Mishlawi strikes a positive tone: > "Our three businesses are performing well, underpinned by our strong commercial and operational capabilities. We are launching new products and expanding our manufacturing capacity, which will drive sustainable future growth." Hikma's operations are divided into three operating divisions. I've included 2023 revenue and adjusted margins by each one to give an idea of scale. **Injectables** (FY23: $1,203m / 36.9%):this business operates globally, including in the US where it has growing manufacturing capacity. Revenue growth is expected to be 6%-8% this year, with a core operating margin of 36%-37%. **Branded** (FY23: $714m / 23.8%):this business sells generic and licensed medicines under various brand names. Key therapeutic areas include type two diabetes, multiple sclerosis and oncology. The branded business is said to have had a strong start to the year but, currency headwinds are expected to reduce reported sales growth to *"low-single digits"*. Guidance for *"slight growth"* in core operating profit suggests margins will be fairly flat this year, but no explicit guidance was provided. **Generics** ($937m / 20.5%): this business is said to be performing well and benefits from a *"broad product portfolio and recent launches"*. Hikma has just appointed a new president for the generics business, Hafrun Fridriksdottir. She is said to have 25 years of *"deep pharmaceutical industry experience"*, with an emphasis on R&D and product launches. Generics revenue is expected to rise by 3%-5% this year, but core operating margin is expected to fall to *"mid-teens"* due to an increase in certain royalty payments. **Dividend:** Hikma's growing size and maturity appears to have prompted management to increase the payout ratio. The total dividend rose by 29% to $0.72 per share last year, representing a 32% payout ratio. Going forward, the target payout ratio will be increased from 20%-30% to 30%-40%. I reckon this should support a dividend yield that's comparable to those of GSK and AstraZeneca. **Broker forecasts:** I don't have access to any updated broker notes for Hikma, but consensus forecasts I can see suggest earnings will fall slightly to around $2.05 per share this year (2023: $2.23 per share). The dividend is expected to remain flat. These estimates price the stock on around 12 times forecast earnings, with a 3.1% yield. #### My view Hikma's growth hasn't always been consistent and the company has had a few problems over the years. However, the group's strategy has remained consistent and this business has created a lot of value for long-term shareholders. Last year's results give the stock an EBIT/EV yield of just under 6%, by my calculations. That's not expensive, in my view. Although reported profit margins dipped last year due to various factors, I think it's reasonable to expect some recovery over the next couple of years. Historically, the best time to buy these shares has been when the share price has dropped close to NAV. But the current valuation doesn't look excessive to me, on a long-term view. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/hik-price-navps-divps-260424.png) I'm interested in Hikma and have added this share to my watch list. That's three out of three this week, which is unusual! As always, please let me know what you think of the stocks I've covered, or indeed any that I chose not to cover. Thanks for reading! Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - turning point? Asset managers, RTO, LTG (19/04/24) URL: https://www.rolandhead.com/dividend-notes/turning-point-asset-managers-rto-ltg-19-04-24/ Last updated: 2024-04-26T17:00:10.000Z Welcome back to The Dividend Note. This week I start with a look at the asset management landscape in the UK and explain why I think we may be nearing a turning point. I then take a look at two fallen high flyers that are starting to look interesting to me. ### Are asset managers returning to growth? This week's updates from investment platforms **AJ Bell (AJB)** and **IntegraFin (IHP)** seemed broadly reassuring, with both reporting record assets under management at the end of March 2024\. Net inflows to both firms remained positive, too and both companies left full-year guidance unchanged. I last discussed these companies [here in December](https://www.rolandhead.com/dividend-notes/investment-platforms-get-cash-boost-ajb-ihp-14-12-23/) and my favourable view also remains unchanged. Perhaps more interesting are the recent quarterly updates from some of the UK's smaller asset managers, which I've listed below with their forecast dividend yields: | **Ticker** | **Company** | **Div yield (FY24 fc)** | | ---------- | ------------------- | ----------------------- | | LIO | Liontrust Asset Mgt | 10.4% | | PMI | Premier Miton | 9.8% | | POLR | Polar Capital | 8.7% | | IPX | Impax Asset Mgt | 5.7% | All four reported an increase in assets under management during the first quarter of this year, thanks to positive market and investment performance. While Liontrust, Premier, and Impax continued to see net outflows, Polar Capital broke the trend by reporting [a small net inflow](https://www.investegate.co.uk/announcement/rns/polar-capital-holdings--polr/aum-update/8131724?ref=rolandhead.com) for the 12 months to 31 March 2024. It's easy to see turning points where none exist. But I wonder if this combination of slowing outflows and positive investment performance could be a sign that asset managers (and the UK market) have reached a turning point. From a dividend perspective, my view is that these firms' high yields are still largely supported by a combination of net cash and earnings. If market performance remains positive, these managers could see a return to net inflows, boosting fee income. In this scenario, I can imagine these stocks re-rating. Given the high yields on offer, this could be an interesting total return opportunity. Of course, inflows and earnings may not recover. Even if they do, some of these companies may underperform. It's possible that some of these dividends may still be cut, so please DYOR before considering any trades in this sector. For previous comment, I last covered [Liontrust here](https://www.rolandhead.com/dividend-notes/12-yield-from-this-unloved-financial-av-lio-csn-16-11-23/) (Nov '23) and [Impax and Premier Miton here](https://www.rolandhead.com/dividend-notes/the-same-but-different-ipx-pmi/) (Jun '23). --- ### Companies covered *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**Rentokil Initial (LON:RTO)**](#rentokil-initial-rto)\- the pest control market leader is suffering integration pains after the acquisition of Terminix. But the stock has de-rated and I'm starting to get interested in the long-term potential here. One to watch. - [**Learning Technologies Group (LON:LTG)**](#learning-technologies-group-ltg) \- this AIM-listed software group specialises in training and employee development. Revenue is under pressure from slower customer spending, but cash generation is good and I think the shares could be cheap. Unfortunately, management commentary suggests to me that the dividend yield is likely to remain too low to be of interest to me. --- ### Rentokil Initial (RTO) > North America growth performance has stabilised with Organic Revenue up 1.5% [**Q1 trading update**](https://www.investegate.co.uk/announcement/rns/rentokil-initial--rto/q1-trading-update/8143590?ref=rolandhead.com)/ Mkt cap: £10.4bn *FY24 forecast dividend yield: 2.2%* This business describes itself as a global leader in pest control and hygiene and wellbeing services. It seems like just the kind of business that should be well positioned to generate plenty of cash and pay reliable, rising dividends. Pest control cannot easily be deferred and is often carried out on a contract basis, especially for corporate customers. More broadly, longer, hotter summers are expected to result in an increase in pest problems. Historically, I've always felt priced out of Rentokil shares, which traded as high as 30 times earnings until 2021\. However, a sharp de-rating since last year has brough the stock down to a level where I could be interested. **About the business:** Rentokil was founded in the 1920s and is said to be the global market leader in pest control. The group has grown through many bolt-on acquisitions over the years, a model I like. However, there have also been a few much larger deals. The Initial business was acquired in 1996, adding washrooms and workwear. More recently, Rentokil paid £4.5bn [to acquire](https://www.investegate.co.uk/announcement/rns/rentokil-initial--rto/acquisition-of-terminix-by-rentokil-initial-plc/6829818?ref=rolandhead.com) US residential pest control group Terminix. This transaction completed in October 2022 and has increased the group's US pest control exposure to more than 60% of group revenue. Unfortunately, this acquisition (priced at 26x Terminix profits) was completed just before a period of softer demand in the North American pest control market. October's third-quarter update included a rare profit warning, sending the stock tumbling. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/rto-10y-chart-190424.png) Alongside this, Rentokil is having to spend significant amounts to integrate Terminix into its business – last year's results included £81m of integration costs, from an expected total of $250m. Interest costs have also surged higher, as rising interest rates have coincided with a sharp increase in debt levels. Rentokil's interest costs trebled to £141m in 2023, on net debt of £3.2bn. Synergies from combining the two businesses are expected to total $325m. I estimate this should effectively double the profitability of Terminix, based on the profits reported when it was acquired. However, Rentokil has now pushed back the completion date for the integration from 2025 to 2026. Integration activities so far seem to have concentrated on IT and accounting systems. The unification of the two companies' physical branches is scheduled to start later this year. Management say that this process will include wage harmonisation. This is expected to help address current high levels of staff turnover, especially among Terminix staff. March's full-year results seemed to be in line with October's revised guidance. But this week's first-quarter update has put renewed further pressure on Rentokil's share price. **Q1 trading update:** Rentokil claimed a *"positive overall start"* to the year, but first-quarter revenue growth of 4.9% (3.1% organic) looked relatively weak to me. Drilling down, North American revenue rose by just 1.5% on an organic basis, compared to the same period last year. This suggests a decline in volumes to me, given the general level of cost and wage inflation seen over the last 12 months. Performance in regions not directly affected by the Terminix acquisition was stronger: > "Good momentum in Organic Revenue growth was sustained in all other regions: +6.2% in Europe inc. LATAM, the Group's second largest region; +4.1% in UK & Sub Saharan Africa; +4.3% in Asia & MENAT; and +7.3% in Pacific." Further bolt-on acquisitions were made, with eight deals during the period delivering annualised revenue of £45m. **Outlook:** full-year expectations were unchanged, with guidance for 2-4% organic revenue growth in North America and *"modest margin progression"*, albeit weighted towards the second half of the year. Such H2 weightings are often a sign that further disappointment is possible, in my experience. #### My view My core thesis for this business is that it should be able to generate reliable free cash flow and attractive profit margins. To try and get a view of underlying performance and valuation, I've taken a look at the 2023 accounts. My sums suggest free cash flow excluding acquisitions of £406m. While this figure is lower than the company's adjusted FCF figure of £500m, my estimate is much closer to Rentokil's reported net profit of £381m for last year. Free cash flow of £406m gives the stock a free cash flow yield of 4%, which seems quite full to me. What about profitability? This business generally has reasonable margins. Even with the acquisition spend on Terminix, statutory operating margin last year was 11.6%. On a company-adjusted basis this figure rises to 16.7%. However, the lofty price tag paid for Terminix (and the impact of past acquisitions) means that Rentokil's balance sheet carries more than £7bn of goodwill and other intangibles. My sums suggest a return on capital employed of 7.3% for 2023, or 10.5% if we use company-adjusted operating profit. Free cash flow return on capital employed was just 4.8%. Looking ahead, consensus forecasts on SharePad suggest that Rentokil's free cash flow will rise to £463m in 2024 and to £628m in 2025\. Those figures give an FY24e FCF yield of 4.4%, rising to 6.0% in 2025\. That could be attractive, I think, based on my assumption that this business is relatively defensive and has can grow steadily over the long term. Net debt is expected to start falling from this year. Forecasts suggest it will drop below my preferred level of 4x net profits in 2025. It's worth pointing out that Rentokil appears to have debt-related problems before. According to SharePad, net debt accounted for more than 60% of enterprise value at the height of the 2009 financial crisis, prompting a suspension of the dividend: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/rto-dps-netdebt-ev-190424.png) I don't think we're heading for a repeat of this wilderness period. But I do suspect that the Terminix acquisition will drag on the group's performance for a little longer yet. As with **Diageo**, which I wrote about [here](https://www.rolandhead.com/dividend-shares/after-falling-30-are-diageo-shares-too-cheap-to-ignore/), my feeling is that Rentokil's valuation may now be coming down to a level where it could be attractive. Rentokil shares currently trade on around 17.5 times 2024 forecast earnings, falling to 15.4 for FY25\. The stock's forecast yield of 2.2% is still below the level I'd look for, but not necessarily a million miles away for a business I view as a possible long-term compounder. I plan to keep an eye on Rentokil and will take a look at the interim result in July. --- ### Learning Technologies Group (LTG) > *"Continued margin progression and record operating cash flow generation"* [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/learning-technologies-group--ltg/full-year-results-2023/8138816?ref=rolandhead.com)/ Mkt cap: £612m *FY24 forecast dividend yield: 2.0%* This AIM-listed software firm is an Andrew Brode stock – the 82-year-old serial entrepreneur remains chairman and has a near-15% shareholding. *(Mr Brode is also the largest shareholder in *RWS Holdings (RWS)*, which I hold in my* [*dividend portfolio*](https://www.rolandhead.com/dividend-portfolio/)*. However, he recently stood down as chairman at RWS.)* Learning Technologies is a *"global market leader in digital learning and talent management"*. As far as I understand it, the company offers a [portfolio of software products](https://ltgplc.com/portfolio/?ref=rolandhead.com) to manage digital training and employee development. The business has grown by acquisitions and has previously attracted a tech-style rating. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/ltg-10y-chart-190424.png) The stock has de-rated sharply since 2021, but the business now appears to be consolidating into a more cohesive and cash-generative unit. Although the current dividend yield of 2% is too low for me to consider, the group's 2023 results suggest to me that a more generous payout could be affordable. **2023 results summary:** LTG saw revenue fall by 4% to £562.3m last year. The company describes this as *"resilient in the context of the macroeconomic climate".* Management says that 73% of revenue is now underpinned by service-based or long-term contracts. The company's customer base includes a large number of consumer facing and cyclical businesses, so blaming a slowdown on external pressures seem plausible, in my view. This revenue breakdown shows the pullback last year and highlights the group's increased dependence on the US market, presumably since the acquisition of GP Strategies: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/ltg-fy23-revenue-breakdown.png) Source: LTG FY23 presentation Profit performance last year was broadly flat, with adjusted operating profit down by 1.4% to £98.5m. LTG's adjusted operating margin rose by 0.5% to 17.5%. Adjusted earnings fell by 2.5% to 7.8p per share and the full-year dividend was increased by 4% to 1.66p per share. Despite the fall in profits, strong cash generation supported continued debt reduction: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/ltg-fy23fin-highlights.png) Source: LTG FY23 presentation **Free cash flow & debt:** Net interest costs for the year rose from £4.3m to £15.7m, despite the reduction in net debt from £119.8m to £78.6m. This increase in finance charges put pressure on free cash flow, which fell to £44.4m last year, according to my sums (2022: £51.1m). Although the reduction in free cash flow is disappointing, £44.4m gives the stock a free cash flow yield of 7.3% – potentially decent value. With debt now under control, LTG's cash generation suggests to me that a larger dividend might be affordable, given the current yield of 2.0%. **Trading commentary:** the company says it renewed *"all major client contracts"* over $10m last year and grew revenue in Latin America and the Middle East. Profits at from the flagship GP Strategies business are now said to have doubled since its 2021 acquisition for £284m. At the time, we were told that GP Strategies was expected to generate an adjusted operating profit of $26m in 2021, so the purchase price was pretty punchy. The slide pack accompany the results reveals that GP Strategies generated $418m of revenue last year, with an adjusted EBIT margin of 13.5%. That implies adjusted EBIT of $56m, or around £45m. The purchase price is starting to look more reasonable, I think. However, it's worth noting that GP Strategies revenue fell slightly last year. The company blames this on macro conditions and integration challenges, but surely integration should largely have been accomplished by now? **Outlook:** 2024 revenue is expected to be in line with 2023, excluding the impact of disposals. The company says it's targeting an increase in adjusted operating profit this year, as margins continue to improve. Broker forecasts suggest adjusted earnings of 8.3p per share. This prices the stock on less than 10 times earnings and would represent an increase of 6.4% on last year's figure of 7.8p per share. However, more generous dividend payouts seem unlikely – chief executive Jonathan Satchell says the company will resume acquisition activity from this year, now that debt levels have been reduced. #### My view After a period of major acquisitions, LTG is consolidating and working to include margins and cash generation. On balance, I think it's reasonable to expect a return to top line growth when economic conditions improve. However, I have a couple of concerns around this business as a potential investment. First of all, I can't completely ignore the possibility that revenue is flat because some of the companies LTG has previously acquired are simply not performing as well as expected. Secondly, I would rather see a focus on organic growth than the planned resumption of acquisitions from this year. This would provide clearer evidence of the underlying quality of the business and allow for more generous dividend payments, funded by free cash flow. For these reasons, I don't think Learning Technologies is likely to end up in my portfolio in the near future. **As always, please let me know what you think of the topics and companies I've covered in this note. Drop a comment below, or** [**contact me directly**](https://www.rolandhead.com/contact/)**.** Roland Head *Disclosure: Roland owned shares in RWS Holdings at the time of publication.* 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - emerging opportunities? AZN, IOM, CHH (12/04/24) URL: https://www.rolandhead.com/dividend-notes/emerging-opportunities-azn-iom-chh-12-04-24/ Last updated: 2024-04-19T19:41:11.000Z Welcome back to The Dividend Note, my weekly review of news and updates from UK dividend shares. I'm back after a week's hiatus for the Easter break and an exceptionally quiet week for corporate results here in the UK. FTSE 100 pharmaceutical giant AstraZeneca has been in the news this week after announcing a 7% dividend increase for 2024 in a surprise standalone [RNS update](http://www.investegate.co.uk/announcement/rns/astrazeneca--azn/astrazeneca-increases-2024-dividend-by-7-/8131804?ref=rolandhead.com). Perhaps by chance, this news was issued just ahead of Thursday's shareholder vote on whether to increase CEO Pascal Soriot's pay by £1.8m to £18.7m this year. Mr Soriot is apparently *"massively underpaid"*, [according to one shareholder](https://www.ft.com/content/c7226781-b45b-4502-ba38-129dea5e960e?ref=rolandhead.com) (£), although [this FT comparison](https://www.ft.com/content/5b88670f-1e29-45f5-b6d7-6c0157bcd427?ref=rolandhead.com) (£) suggests that he's only really outpaid by the bosses of **Eli Lilly** and **AbbVie**. Mr Soriot's remuneration appears to have been similar to or greater than all the other big pharma CEOs last year. I tend not to lose sleep about boardroom remuneration at big caps. Although it often seems excessive, it's generally pretty insignificant relative to profits. This isn't always true at some small caps, where I generally look for stronger management alignment with shareholder interests. From a shareholder perspective, Soriot's time at AstraZeneca has certainly delivered results. The share price has risen by around 280% since he took charge in October 2012\. Including dividends, shareholders have received a total return of around 360%, or around 11% annualised: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/azn-oct2023-120424-soriot-chart.png) AstraZeneca has not cut its dividend for 30 years, as far as I can see, but the shareholder return has been pretty much flat for most of the last decade. The current payout offers a yield of just 2.3%, so an increase is likely to be popular with shareholders. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/azn-dividends-stocko-120424.png) Source: Stockopedia I commented on AstraZeneca's results [here](https://www.rolandhead.com/dividend-notes/good-operators-azn-reci-rsw-09-02-24/) and found that last year's dividend was not quite covered by free cash flow, at least not by my calculations. However, consensus estimates on SharePad suggest free cash flow could strengthen markedly over the next couple of years, so perhaps there might be an opportunity here for a return to sustainable dividend growth. I'm not really sure – pharmaceuticals are a little outside my comfort zone, as I struggle to understand their growth prospects. As things stand, I would personally probably be more interested in GSK at the moment, as I discussed [in February](https://rolandhead.com/dividend-notes/decades-of-dividends-gsk-nwf-wyn-jhd-02-02-24/?ref=rolandhead.com). In the remainder of this note, I've taken a look at updates from two small-cap UK dividends shares that issued updates – and in one case a possible profit warning – last week. Both companies are on my radar as businesses I'd like to learn more about and might consider owning at some point. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**Churchill China (LON:CHH)**](#churchill-china-chh)\- a solid set of results show the benefit of a strong balance sheet and experienced management. While volumes fell by 12% last year, revenue was flat and profits rose. The valuation looks reasonable to me and Churchill stays on my watch list. - [**Iomart (LON:IOM)**](#iomart-iom) **\-** this week's full-year trading update looks like a profit warning to me, but I do think an opportunity may be emerging here. I'm looking forward to seeing the full-year results when I plan a more detailed assessment of the situation. ### Churchill China (CHH) > "Improved profitability" [**Results for the year ended 31 December 2023**](http://www.investegate.co.uk/announcement/rns/churchill-china--chh/final-results/8129420?ref=rolandhead.com)/ Mkt cap: £126m *FY24 forecast dividend yield: 3.3%* This 200-year old [pottery business](https://www.churchill1795.com/our-history?ref=rolandhead.com) is one a UK market leader in supplying crockery to the catering trade. It's had a tough time since the pandemic. Reopening was followed by a period of surging costs and recruitment problems that affected the company directly, but also had a big impact on its customers in the hospitality trade: > "Our end customer, the hospitality market, has been undergoing major upheaval, with significant input cost increases in labour, energy and food, leading to a reduction in capital expenditure by the major pub and restaurant groups." However, my reading of this week's results – which I discuss below – suggests that good quality products, experienced management and a solid balance sheet have enabled Churchill to emerge from a difficult period in decent shape. Churchill's (almost) unbroken 30-year dividend record has also caught my eye. I'm starting to wonder if this company might be a useful addition to my dividend portfolio. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/chh-dividends-120424.png) **2023 final results:** Churchill says it achieved *"flat revenues in a challenging environment"* last year, with revenue down just 0.2% to £82.3m. However, sales volumes fell by 12%, reflecting the slowdown in UK hospitality. Fortunately, *"strong improvement in yields and productivity"* helped to support a 12.4% increase in pre-tax profit to £10.8m. Adjusted earnings were 4.9% higher at 70.2p. The company says this improvement in profitability was achieved by reducing use of expensive and less-skilled agency staff in its factories. This cut wastage and improved output. To give an idea of the scale of the shift, the number of staff working in the factory fell by 136 last year, even though Churchill's full-time headcount increased. Alongside this, the company has now completed the price rises needed to pass cost inflation through to its customers. Churchill's 2023 results show an operating margin of 12.5% (FY22: 11.7%) and a return on capital employed of 15.5% (FY22: 15.7%), which seem respectable to me. Net cash from operating activities doubled to £8.5m, but increased inventories and capex meant that cash free cash flow for the year was unusually weak at £2.8m, or just 36% of operating profit. Fortunately, Churchill can afford to invest to meet future demand. The company had no bank debt and net cash of £13.9m at the end of 2023, (FY22: £14.7m), equivalent to around 10% of the market cap. **Dividend:** Churchill's payout has rapidly been rebuilt since the pandemic and rose by 14.3% to a new high of 36p last year, giving a trailing yield of 3.2%. **Outlook:** Churchill delivered a credible improvement in profits and margins last year, despite a sharp reduction in volumes. Volumes are expected to remain soft in the first half of 2024, with Q1 demand said to have been *"as expected"*. However, management believes the company will be in a strong position to take advantage of a market recovery, which is expected to start in the second half of 2024\. Consensus forecasts suggest earnings could rise by 13% to 79.6p per share this year, before levelling out somewhat in 2025\. Dividend growth is expected to return to a more normal level of c.5% per year. These estimates price Churchill on around 14 times FY24 forecast earnings, with a 3.3% yield. That seems reasonable value to me, if not absolutely cheap. #### My view Watching UK-listed companies negotiate the last few years has convinced me further of the benefits of long-term management paired with a strong balance sheet. Companies with these benefit have both the skills and the resources they need to adapt to unexpected headwinds, while still investing in order to maintain or extend their competitive position. Perhaps not coincidentally, Churchill still has significant family ownership and board representation by the Roper family, who have been involved in the business [since 1922](https://www.churchill1795.com/our-history?ref=rolandhead.com). Although the shares have often looked expensive to me in the past, they look more reasonably priced to me today. Last year's results give an EBIT/EV yield of 9.1% and I'm encouraged by the 15% return on capital employed. Perhaps one concern is that the UK hospitality sector will take a little longer to recover than expected. This might delay the recovery in volumes that I suspect may be needed to support any further improvement in margins. On balance though, I can see plenty to like here. Churchill will stay on my watch list. --- ### Iomart (IOM) > "Recurring revenue remains high, at c.91% (FY23: 92%) of Group revenue." [**Pre-close trading update y/e 31 March 2024**](https://www.investegate.co.uk/announcement/rns/iomart-group--iom/pre-close-trading-update-and-notice-of-results-/8131769?ref=rolandhead.com)/ Mkt cap: £153m *FY24 forecast dividend yield: 3.9%* Iomart owns 12 data centres around the UK and a provides a range of IT and hosting services to its (mostly) corporate clients. This business has been listed in London since 2000, but has struggled somewhat in recent years. Profitability has been in decline, and the share price is now back at levels first seen a decade ago: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/iom-price-opmargin-roce-120424.png) Despite this weakness, I've started to pay closer attention to this business recently. I think Iomart could be approaching an inflection point, where the stock offers an attractive combination of value, improving quality and growth. With over 90% recurring revenue and a dividend yield approaching 4%, this is a business I could imagine owning in the right circumstances. Unfortunately, this week's full-year trading update looks like it may have been a profit warning. Let's take a look. **Pre-close update:** Here's a summary of the results Iomart expects to report for the year ended 31 March 2024: - Revenue +10% to £127.0m - Adjusted EBITDA +4% to c.£37.5m - Adjusted pre-tax profit broadly flat at c.£15.0m (FY23: £14.8m) - *Recurring revenue at c.91% of group revenue (FY23: 92%)* - *The company says interest expense rose to £4.3m last year (FY23: £2.9m), contributing to the margin weakness indicated above* No direct mention is made of whether these results are in line with expectations, but the company does include a set of sell-side analyst estimates in the footnotes: - Revenue of £128m-£131m - Adjusted EBITDA of £37.4m-£38.7m - Adjusted pre-tax profit of £14.3m-£16m. Based on these estimates, my feeling is that results for the year just ended were a slight miss. A note from broker Cavendish available on Research Tree supports this view. Cavendish analysts have cut their earnings per share forecasts by 6% to 10.5p for FY24, and by 23% to 10.6p for FY25\. **Trading commentary:** Newish CEO Lucy Dimes says that the company's acquisition strategy is continuing to expand Iomart's capabilities. Acquisitions last year added additional Microsoft capabilities ([*Extrinsica, June 2023*](http://www.investegate.co.uk/announcement/rns/iomart-group--iom/acquisition-of-extrinsica/7558426?ref=rolandhead.com)) and deepened Iomart's footprint in the legal sector ([*Accesspoint Technologies, Dec 2023*](http://www.investegate.co.uk/announcement/rns/iomart-group--iom/acquisition-of-accesspoint-technologies/7921585?ref=rolandhead.com)). Customers are also said to be responding well to the company's focus on managed services, with *"good growth in order bookings"* from existing customers and prospects. However, Dimes notes that some smaller customers are not renewing, which resulted in H2 renewal rates that were lower than expected. According to Iomart, these smaller customers have proved to be more sensitive to price rises pushed through at the end of last year to reflect higher energy prices. I'm not sure if this means the company is deliberately pricing out lower-value customers in order to focus on larger customers, or if Iomart's more small-scale service offerings have become less competitive. However, given that IT is pretty much a non-negotiable requirement for most companies, I assume that these smaller customers are now finding cheaper ways to meet their hosting requirements elsewhere. My own experience is that the market for small-business hosting and IT services is very competitive, and is dominated by a handful of large players. I can imagine that Iomart might struggle to compete on price in this market. Focusing on customers who are willing to pay for higher levels of service (and better customer service) may be sensible. No updated outlook was provided for the current financial year, which started on 1 April. #### My view Iomart shares do not look particularly expensive to me at the moment, assuming the company can stabilise its margins and avoid any further downgrades. The latest consensus estimates I can see price the stock on a P/E of 13 and suggest a dividend yield of c.4%. I'd like to know more about cash generation and debt levels and plan to wait for the full-year results in June before forming a stronger view. But I remain interested in Iomart. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Exchange on Vox Markets with Paul Hill (12/04/24) URL: https://www.rolandhead.com/podcasts/the-exchange-on-vox-markets-with-paul-hill-12-04-24/ Last updated: 2024-04-19T08:58:51.000Z It was great to chat live with Paul Hill of Vox Markets on The Exchange show on 12 April 2024. As usual we covered lots of stocks and did our best to answer live questions from the audience – many thanks to all who contributed. You can watch the full show on You Tube or below - the following UK shares were discussed: #RMV #MONY #HTG #RIO #RWS #SDY #TIFS #PAY #MER #IOM #SUS #CHG #TCAP #IGG #AVCT #SUPR #VLG #OCN #LLAI *Disclosure: at the time of the recording Roland owned shares in Hunting, RWS Holdings, PayPoint, TP ICAP, IG Group Holdings and Ocean Wilsons.* I hope you enjoyed the show - thanks for watching! Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Q1 2024 quality dividend portfolio review: income growth URL: https://www.rolandhead.com/portfolio/q1-2024-quality-dividend-portfolio-review-rising-growth/ Last updated: 2024-05-29T08:46:10.000Z I ended last year on [an optimistic note](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2023-review/) about the outlook for UK equities in 2024\. So far this year, the reality has been more nuanced. At least, it has been for my model dividend portfolio. Although the results from my portfolio companies have mostly been in line with expectations, two new problems did emerge, prompting sharp share price drops. Fortunately the picture has been much stronger in terms of dividend income. Cash payouts from the companies in the model portfolio rose by 26% during the first quarter, compared to the same period last year. My portfolio stocks continue to offer an average forecast dividend yield of more than 5% – comfortably ahead of the FTSE 100 average of 3.8%. While don't expect the rate of growth seen during the first quarter to be extended to the whole year, I am reasonably confident that the income generated by the portfolio should increase this year. - [Q1 2024 portfolio performance](#q1-2024-portfolio-performance) - [Dividend income: rising payouts](#dividend-income-rising-payouts) - [Portfolio changes](#portfolio-changes-in-q1-2024) - [Position weightings](#position-weightings) - [Portfolio: key financial metrics](#model-dividend-portfolio-key-financial-metrics) - [Final thoughts](#final-thoughts) ### Q1 2024 portfolio performance The portfolio I'm discussing here is my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/), which is run using my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). This model portfolio was launched on 1 December 2021\. It contains largely the same shares as my personal portfolio, which has been run on a similar basis for a number of years. Although this is a dividend portfolio, no income is withdrawn and all dividends are reinvested. For this reason, my main metric for measuring progress against the wider market is total return (share price change + dividends). #### Q1 '24 performance: - **RH model portfolio total return: -1.2%** - **FTSE 100 Total Return index: +4%** This chart shows the performance of the portfolio against the FTSE 100 Total Return index since the model portfolio's inception on 1 December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/qdmp-vs-ftse100tr-010424.png) The portfolio's slight loss in Q1 was largely the result of sharp falls suffered by two of the portfolio's FTSE 250 companies. These cancelled out more positive performances elsewhere, leading to an average share price fall of 2.3%: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/qdmp-1q24-price-changes-2.png) I think this chart is also a useful reminder of the volatility that's normal in equities. Movements of up to 20% or so are not uncommon and do not necessarily signify all that much. After all, a majority of the companies in the portfolio reported trading results in line with expectations during the quarter – or did not report at all. ### Dividend income: rising payouts For me, one attraction of dividend investing is the greater stability of returns provided by this approach. Especially as these returns take the form of real cash receipts in my share dealing accounts. Despite the wide range of share price movements shown above, the total income received from the portfolio remained stable and is currently on track to surpass last year's dividend income (although it's too soon to be sure). Dividend payouts received in the model portfolio during the first quarter totalled almost £1,200, a 26% increase on the same period last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/qdmp-income-1q24-1.png) ****Based on a £100k model (virtual) portfolio created in Dec 2021** ### Portfolio changes in Q1 2024 My [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/) allows me to make up to two changes to the model dividend portfolio at the end of each quarter. So far this year, I have sold one share and bought a replacement stock. I did not top up any positions in Q1. #### Stocks sold in Q1 **March 2024:** I sold the model portfolio's holding in [Close Brothers Group (LON:CBG)](https://www.rolandhead.com/dividend-portfolio/#close-brothers) following the company's decision to suspend its dividend for (at least) its current financial year. Close's board has suspended the payout in order to help build a target war chest of £400m. This will be used if needed to address the *"potential financial impact"* of the FCA's investigation into historic motor finance commission payments. Motor finance is a big part of Close's loan book and the company has recently confirmed that it does have historic exposure to the type of product being investigated by the FCA. This sale resulted in a total loss of 47%. I estimate it had a -2.4% impact on the total return from the portfolio during the quarter. That's a relatively big hit in a 20-stock portfolio. #### New stocks in Q1 **March 2024:** I added a new share to the portfolio to replace Close Brothers. - [New stock: a business with a 35-year dividend history and a 5% yield](https://www.rolandhead.com/dividend-shares/a-uk-business-with-a-35-year-dividend-history-and-5-yield/) *Both trades were made on 28 March 2024, the final trading day in the quarter.* ### Position weightings I don't currently have a maximum limit on position weighting in the portfolio, but this is something I may review as the portfolio continues to evolve. Here's how the model portfolio looked at the end of the first quarter of 2024, following last year's share price movements and the transactions listed above. **Subscribers can see this chart with ticker codes included on my** [**portfolio page**](https://www.rolandhead.com/dividend-portfolio/)**:** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/04/qdmp-1q24-weightings-anon-3.png) 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). --- ### Model dividend portfolio: key financial metrics I find researching and investing in individual shares to be fascinating and it can certainly be very rewarding. But for an investor like me whose main aim is to generate market-beating returns, the only test that really matters is the performance of the portfolio as a whole. With this in mind, I like to monitor the average financial profile of my portfolio, as if it was a single business. While individual companies may have strengths and weaknesses, my aim is for my portfolio to approximate the ideal business – highly profitable, cash generative, and with a strong balance sheet. As I'm still in accumulation mode, paying in regularly to my real-world portfolio, I'd also like my shares to look be affordably valued. Here's how the model portfolio looked at the end of March 2024: | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield** | **5yr avgdiv grth** | **F'cast divyield** | **No. yrsdiv paid** | | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ---------------- | ------------------- | ------------------- | ------------------- | | £2.5bn | 20.9% | 10.0% | 8.0% | \-0.1x | 5.2% | 6.7% | 5.1% | 24 | *Scroll L-R (Data source: SharePad/author analysis 04/04/2024\. Some adjustments were needed; please don't take this as gospel.)* [**Here's how these statistics looked at the end of 2023**](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2023-review/#model-dividend-portfolio-financial-metrics). What can I learn from these numbers? The biggest change is that the median market cap has risen from £1.7bn to £2.5bn since the end of last year. Five of the portfolio's six top risers during Q1 were mid-large cap stocks, which I think explains this shift. With the exception of market cap, the metrics in the table above have not changed very much since the end of last year. Average **return on capital employed (ROCE)** is almost unchanged at 20.9% (2023: 21%). The portfolio also continues to have a broadly neutral **net cash/debt** position. Broadly speaking, most of the smaller companies in the portfolio have net cash, while a fewer of the larger ones carry some debt and more substantial lease liabilities. Although 13 out of 20 companies in the portfolio issued interim or full-year results during the quarter, the portfolio's **trailing 12-month EBIT and free cash flow yields** are within c.1% of those I reported at the [end of 2023](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2023-review/). This suggests to me that in aggregate, the portfolio's valuation hasn't changed much in relation to the profitability and cash generation of my companies. All else being equal, I see a free cash flow yield of 8% as very attractive indeed. While the portfolio's **five-year average dividend growth rate** of 6.7% is higher than at the end of 2023 (6.3%), the **forecast yield** of 5.1% is slightly lower than the **trailing dividend yield** of 5.2%. If an individual stock's forecast yield is lower than its trailing yield, the implication is that dividend payouts are going to fall this year. In the case of the model portfolio, I think the main reason for the lower forecast yield is the sale of Close Brothers. Prior to the suspension of its payout, this financial group had a higher dividend yield than the stock I've replaced it with. Despite this, I'm still hopeful that actual income received from the portfolio will increase in 2024, after the strong start to the year I discussed [earlier](#dividend-income-rising-payouts). ### Final thoughts It's been a mixed start to the year. The benefit of rising dividend income has to been offset by a big capital loss on the sale of the portfolio's holding in Close Brothers. More broadly, I am slightly frustrated by the portfolio's continued underperformance relative to the wider market. A look at the performance of companies in the main indices explains why this has happened. Over the last 12 months, 28 **FTSE 100** stocks have risen by 20% or more. Of these, only two are in my portfolio. Unfortunately, I do own one of the top five fallers in this period – stocks down by at least 30%. In the **FTSE 250**, 70 shares have risen by at least 20% over the last year, but I only own three of them. Sadly however, my portfolio did contain two of the top 15 FTSE 250 fallers of the last 12 months – Close Brothers and one other. Periods of underperformance are inevitable with any strategy and all equity investments carry risk. These are real businesses operating in the real world. Progress isn't delivered in a straight line and problems will sometimes occur. Short-term market movements can also be driven by momentum and sentiment. While I have some localised concerns about some of the companies in my portfolio, I remain confident that they have solid financial foundations and the capacity to deliver attractive returns. I also believe there's plenty of value across the portfolio, given the average free cash flow yield of 8%. If valuations remain at current levels, I plan to use accumulated dividend income to top up selected holdings over the course of this year. Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Investor's Round Table: BRBY, NXT, NWOR & AIEA URL: https://www.rolandhead.com/podcasts/investors-round-table-brby-nxt-nwor-aiea/ Last updated: 2024-04-03T08:33:09.000Z I recently recorded another UK shares podcast with my good friends and fellow private investors Graham Neary and Mark Simpson. This time we discussed the investment merits (or otherwise!) of unloved FTSE 100 luxury fashion firm **Burberry (BRBY)** and consider the more popular fashion retailer **Next (NXT)**, whose shares recently hit all-time highs. In small caps, we discuss recent results from **Airea (AIEA)** – which we discussed previously [here](https://www.rolandhead.com/podcasts/investors-round-table-h-t-henry-boot-airea-analysing-company-accounts/) – and explore the investment case for newspaper group **National World (NWOR)**, which is the latest investment vehicle of press baron David Montgomery. *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research or seek professional advice. Full disclaimer* [***here***](https://www.rolandhead.com/podcasts/investors-round-table-hl-cbg-plus-jet2/#disclaimer)***.*** **As always, thank you for listening. Please do get in touch if you have any comments or questions you'd like us to answer in a future episode.** Roland Head *Disclosure: Roland owned shares in Burberry at the time of this recording (26 March 2024).* --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Mar '24 dividend portfolio update: 10 results + one new stock URL: https://www.rolandhead.com/portfolio/mar-24-portfolio-update-10-results-one-new-stock/ Last updated: 2024-05-03T16:46:32.000Z Welcome back to my monthly newsletter, in which I review results and trading updates issued by the UK dividend stocks in my portfolio over the last month. This month's edition includes my thoughts on updates from no fewer than 10 companies, due to March's busy reporting schedule. I've also reiterated details of the **stock sale and new purchase** I discussed in my recent update for subscribers, *"*[*New stock: a UK business with a 35-year dividend history and 5% yield*](https://www.rolandhead.com/dividend-shares/a-uk-business-with-a-35-year-dividend-history-and-5-yield/)*"*. --- ### In this month's report March was a bumper month for results, so I apologise for the length of this report. As always, I've included a short summary of my thoughts on each company's results at the top of this section. *Disclaimer: Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research or seek professional advice. Full disclaimer* [***here***](https://www.rolandhead.com/portfolio/feb-24-portfolio-update-steady-progress-special-dividend-problems/#disclaimer)***.*** Click on the links or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### The Dividend Note - should I invest with family shareholders? BOOT, LTHM, JHD, JIM, MBH (29/03/24) URL: https://www.rolandhead.com/dividend-notes/should-i-invest-with-family-shareholders-boot-lthm-jhd-jim-mbh/ Last updated: 2024-04-12T17:23:11.000Z Welcome back to The Dividend Note. To round out a busy month for corporate earnings I've decided to take a look at results issued this week by dividend-paying UK small caps with family ownership. I tend to believe that such companies are likely to place a higher priority than usual on reliable dividends, given that many of their most influential shareholders may depend on these payouts to help fund their living expenses. However, stocks such as these can also be illiquid and require patience when buying and selling. Reporting is not always as transparent or detailed as with larger firms. For these reasons, I think that timing and prior research are even more important than usual with such businesses – but the rewards can be considerable. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**Henry Boot (LON:BOOT)**](#henry-boot-boot)\- this small-cap land and property group is a quality operator in my view, but appears to suffer from limited bargaining power with its much larger customers. Despite this, I see value with the stock at a 40% discount to NAV. - [**James Latham (LON:LTHM)**](#james-latham-lthm)\- shares in this well-run and cash-rich timber merchant look cheap to me on many metrics, although the low dividend yield is a downside. I remain interested, though. - [**Jarvis Securities (LON:JIM)**](#jarvis-securities-jim)\- this founder-led small-cap stockbroker currently offers a forecast dividend yield of 13.9%, but is also involved in a long-running FCA enquiry. The main regulatory risk, for me, is Jarvis's heavy dependence on interest earned from client cash. - [**Michelmersh Brick Holdings (LON:MBH)**](#michelmersh-brick-holdings-mbh)\- this week's full-year results reinforced my positive view of this business, but the outlook does seem to carry a measure of uncertainty – perhaps a little more than usual. - **James Halstead (LON:JHD)** \- no comment below, but this week's interim results from this family-run flooring group show profits up and confirm [my excellent opinion of the business](https://www.rolandhead.com/dividend-notes/decades-of-dividends-gsk-nwf-wyn-jhd-02-02-24/), which looks fairly valued to me and remains on my watch list as a possible buy. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Henry Boot (BOOT) > "we remain confident in achieving our medium term growth and return targets, as reflected in the 10% dividend increase we have announced today." [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/henry-boot--boot/results-for-year-ended-31-dec-2023/8103659?ref=rolandhead.com)/ Mkt cap: £241m *FY24 forecast dividend yield: 4.4%* I've looked at this land promotion, property development and construction group a few times previously, most recently in [January](https://www.rolandhead.com/dividend-notes/small-cap-dividends-boot-fnx-pgh-26-01-24/), but also [in September](https://www.rolandhead.com/dividend-notes/buying-1-for-70p-boot-19-09-23/) last year. I also discussed Henry Boot with fellow private investors Graham Neary and Mark Simpson in [this podcast](https://www.rolandhead.com/podcasts/investors-round-table-h-t-henry-boot-airea-analysing-company-accounts/). My view is that this family-owned business is likely to offer good value if purchased at the current discount to NAV, given its disciplined long-term strategy and large portfolio of land and investment property. **2023 results summary:** the group's 2023 results show progress on sales, but the company was unable to offset the impact of cost inflation and labour shortages during the year: - Revenue up 5.3% to £359.4m - Pre-tax profit down 18.2% to £37.3m - Net asset value up 3.4% to 300p (excluding pension surplus) - Net debt up 29% to £77.8m - **Full-year dividend up 10% to 7.33p per share** **Is BOOT providing free credit for housebuilders?** A 10% dividend increase against a backdrop of falling profits and rising debt suggests to me that management are confident future returns will recover. Looking at the accounts, the increase in debt seems to relate to working capital outflows of £31m into land and ongoing developments: > "additional investment in housebuilder inventories, strategic land sales on deferred terms and the ongoing development of schemes in progress." Elsewhere in the report, the company notes that land sales to housebuilders are being structured with deferred completions, to support housebuilders pared-back building schedules. I am confident this increased working capital will turn into cash. But my feeling is that Henry Boot is being forced to borrow money in order to provide free credit to its housebuilder customers. The company confirmed as much in its January update (my **bold**): > "Due to extended payment profiles with major housebuilders on strategic land sales, we anticipate gearing to remain towards the upper end of our optimum range of 10-20% through 2024, and given the higher interest rate environment, we **anticipate this will also impact profit for the year ahead.**" BOOT's net interest payments rose from £676k in 2022 to £3.6m last year – a material increase. **Profitability:** To its credit, Henry Boot features return on capital employed (ROCE) and net asset value prominently in its reporting and corporate financial targets. In 2023, the company reported ROCE of 9.9% and said that the capital employed in the business rose by 4.5% to £417m. I like the clarity of this reporting. ROCE of 9.9% is nothing to write home about, but the company says that it's rolling 10-year average is 12.7%, within its target range of 10%-15%. I think this is high enough to be potentially attractive, given the stock's current deep discount to book value. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/boot-fy23-returns.png) Source: Henry Boot FY23 presentation **Trading commentary:** while BOOT's construction and plant hire businesses suffered last year, headline operating metrics from the group's two largest divisions do not seem too bad to me. **Land promotion (2023 op profit: £21.4m)**:plots sold fell to 1,944 (2022: 3,869), but average profit per plot rose to £15.5k due to a high-value sale of land at Tonbridge Wells. Using the company's planning average of £7k per plot, management estimate the current portfolio of 100,972 plots could deliver gross profit of c.£710m over time. Planning delays contributed to a fall in the number of plots with planning permission to 8,501 (2022: 9,431). **Property development (2023 op profit: £22.2m):** this division includes commerical property (mostly industrial) and housebuilding, through a JV called Stonebridge Homes. Stonebridge – which is an upmarket offering – appears to have performed surprisingly well last year, increased the number of homes sold by 43% to 251\. A more measured 10% increase to 275 is expected this year, en route to a medium-term target of 600. The group's commercial development business (HBD), completed £111m of developments last year (sold/pre-let) and has a committed pipeline worth £159m for 2024 (50% sold/pre-let). HBD's overall pipeline has a development value of £1.3bn, up from £1.25bn at the end of 2022. **Outlook:** I don't think there was much change in the outlook guidance compared to BOOT's statement in January. While the company believes that the housing market may be *"turning a corner"*, 2024 profits are expected to be weighted to the second half. Management do not seem to expect a material recovery in housing until 2025. Broker consensus forecasts suggest earnings could fall by a further 20% to c.15p per share this year. However, net asset value is expected to improve slightly and the dividend is expected to rise by c.7% to 7.8p per share, giving a prospective yield of 4.4%. #### My view My feeling is that Henry Boot's 40% discount to book value is likely to represent at attractive entry point. Past performance is no guide to future returns, but historically, buying BOOT shares at a discount to net asset value has worked well. However, anyone holding through the cycles has had to stomach some sharp drawdowns: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/boot-sp-navps-290324.png) Looking ahead, I wonder if higher debt costs could continue to put pressure on profits for a while, slowing any recovery. On balance I remain positive about the outlook here and would be comfortable buying BOOT at current levels. I think it's a well-run business with a strong franchise. However, a caveat to this would be that I suspect the company's dependence on larger customers and the capital-intensive nature of its activities means that profitability will always remain relatively average. For this reason, I'd only want to consider buying when the shares are depressed, as I believe they are at the moment. --- ### James Latham (LTHM) > "We anticipate that our profit before tax will be in line with market expectations." [**Trading update for y/e 31 March 2024**](https://www.investegate.co.uk/announcement/rns/latham-james---lthm/trading-statement/8110995?ref=rolandhead.com)/ Mkt cap £226m *FY24 forecast dividend yield: 2.5%* Latham's full-year update was brief but reassuring, suggesting that this timber merchant group will report results that value its shares on around 11.5x FY24 forecast earnings. For a cash-rich business that typically generates a mid-teens return on equity, I think this *should* be cheap. I guess we'll have to wait for the full-year accounts to be published in June for any guidance on the outlook for the year ahead. But this statement did confirm that Latham's balance sheet and cash balances *"remain strong"*. This is potentially something of an understatement. Latham's half-year results showed net cash of £65m excluding lease liabilities. Holding plenty of cash allows the company to take advantage of early settlement discounts with suppliers and flex it's stock levels when needed. But the half-year results show net cash almost equal to the value of Latham's entire inventory! Cash levels have never been this high, so I have to wonder at what point the group's family management will decide to deploy some of this cash or return it to shareholders. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/lthm-divps-netdebt-290324.png) Special dividends have been paid in the past, while the company's dividend cover of more than three times earnings should also provide scope for an increase. #### My view On many metrics, James Latham looks very cheap to me at the moment. In addition to the P/E of 11.5, the stock's 2024 forecast EBIT/EV yield of 14% also looks very attractive. The main risks I can see are that sales will be weaker than expected this year – or that the company will face greater price pressure than in the past, perhaps driven by some recent consolidation in this sector. The low dividend yield of 2.5% is a little offputting for me, given that this looks like a fairly mature and slow-growing business. But a long record of strong profitability and steady dividend growth is tempting. Historically, buying Latham shares when they've traded close to net asset value has been a good trade. We're not quite there at the moment, but this stock scores highly in my dividend screen and remains on my watch list. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/lthm-sp-navps-290324.png) --- ### Jarvis Securities (JIM) > "Overall, we have traded in line with current expectations for the year." [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/jarvis-securities--jim/results-for-the-year-ended-31-december-2023/8106086?ref=rolandhead.com)/ Mkt cap £27m *FY24 forecast dividend yield: 13.9%* This small-cap stockbroker was a long-term favourite among AIM dividend investors, but has come unstuck somewhat over the last couple of years after attracting the attention of the FCA. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/jim-sp-divps-290324.png) After a pause at the end of last year, dividends have now been resumed. And if the 2024 forecast payout of 8.4p per share is delivered and proves sustainable, Jarvis shares **could offer a dividend yield of 13.9%**. Founder Andrew Grant remains both chairman and a 37% shareholder, satisfying my family-friendly dividend requirement. **FCA update:** the FCA skilled person review into Jarvis initially led to the company accepting some voluntary restrictions on its Model B Corporate Client service. However, the company says a lot of work has now been done to remediate any concerns and improve compliance. The FCA skilled person is due to begin a review of the company's remediation following the (delayed) publication of its draft report into the first stage of its enquiry. However, my impression is that any impact from higher costs and/or lost clients is probably in the numbers already. I'm a little more concerned about the current phase of the enquiry, which the company says includes: > "uninvested client cash, interest retention and term deposits." This has become a hot topic generally among stockbrokers in recent months, but my impression is that Jarvis relies more heavily than most on interest from uninvested client cash. On this topic, the company says: > "Any potential impact on those income streams from reductions in funds held should become clearer in the coming months." I think there's a lack of transparency here in the company's reporting, compared to big players such as **Hargreaves Lansdown** and **AJ Bell**. As far as I can see, Jarvis doesn't report assets under management, the amount of uninvested client cash, or the proportion of interest earned on this cash that's retained by the company. For contrast, Hargreaves reports all of these measures and [said recently](https://www.investegate.co.uk/announcement/rns/hargreaves-lansdown--hl./half-year-report/8050058?ref=rolandhead.com) that it retained 41% of interest earned on client cash during the first half of its current financial year. **2023 results summary:** Jarvis's 2023 results were in line with forecasts. Broadly speaking, the benefit of higher interest rates helped to offset lower stock market trading voluumes and the loss of some clients as an indirect result of the FCA enquiry. Revenue for the year rose by 3.8% to £13.1m, while pre-tax profit fell 15.1% to £5.2m. This fall reflected modest cost inflation, but the main reason for the decline was a £1.3m charge for exceptional costs relating to the FCA enquiry. Despite this, cash generation was positive and the group's year-end net cash balance rose by 28% to £5.5m. **Profitability:** despite the impact of the FCA-related costs, this remains an extremely profitable business. Jarvis's 2023 results imply an operating margin of 40% and a reported return on equity of 79%. **Dividend:** Jarvis pays quarterly dividends. The company paid three interim dividends totalling 8.75p per share in 2023, but skipped its fourth-quarter payout. In February, the company declared a Q1 dividend of 1.75p per share and broker forecasts suggest a full-year payout of 8.4p for 2024, giving the prospective 13.9% yield I mentioned earlier. **Interest earned:** Jarvis reported gross interest earned of £7.6m last year, representing 58% of its total revenue of £13.3m (2022: 43%). I assume that substantially all of this interest was generated from uninvested client cash, highlighting the significance of this income stream. Fees and trading commissions made up the remaining £5.5m of revenue, split fairly equally. **Outlook:** no real comment on the outlook for 2024 was provided in the results, perhaps understandably. House broker WH Ireland is forecasting adjusted earnings of 11.4p per share (2023: 11.9p) for the year, after excluding expected FCA-related costs. That estimate prices Jarvis stock on five times earnings, with the previously-mentioned dividend yield of 13.9%. #### My view The valuation here is clearly intriguing, for a company with a long record of strong profitability and reliable shareholder returns. For me, the downside is that the FCA Consumer Duty regime appears to have prompted the regulator to take a much closer look at how brokers are managing and profiting from uninvested client cash. Although a pick-up in stock market volumes could help offset the impact of any reduction in retained interest income, I think it's fair to assume there's some downside risk here. The question is whether it's severe enough to derail the investment case. I'm not sure. But in general, my experience is that a 14% yield is rarely sustainable. --- ### Michelmersh Brick Holdings (MBH) > "Positive financial performance in 2023, with earnings for the year ahead of market expectations" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/michelmersh-brick-holdings--mbh/final-results/8106060?ref=rolandhead.com)/ Mkt cap £95m *FY24 forecast dividend yield: 4.6%* Co-founders Martin Warner and Eric Gadsden continue to control around 28% of the shares in this premium brickmaker. I covered Michelmersh's interim results [in September](https://www.rolandhead.com/dividend-notes/safe-as-houses-bkg-mbh/) and was impressed by the quality and attractive valuation of the business, as I saw it. Fast-forward six months and results for 2023 appear to be pretty sound, with earnings *"slightly ahead"* of expectations. **2023 results summary:** Michelmersh's revenue rose by 13% to to £77.3m last year, including the benefit of an acquisition. On an organic basis, revenue rose by 1.3%, reflecting higher prices and lower volumes. Gross margin was broadly stable at 38.9% (2022: 39.4%) suggesting the company was able to successfully pass through higher costs to customers. Pre-tax profit for the year rose by 8.8% to £12.5m, supporting earnings of 10.44p per share. **The full-year dividend was increased by 5.9% to 4.5p per share**, giving a yield of 4.5%. Michelmersh's balance sheet continues to look very strong to me. Good cash generation meant that net cash rose to £11m (2022: £10.6m). The company also has an undrawn £20m debt facility. **Trading commentary:** management says that its diverse customer base and differentiated product lines supported demand in 2023, and that full production capacity was maintained. However, the company also commented that stock levels across the brick sector in the UK are now well above five-year average levels, while 25% of UK production capacity has now been mothballed. Depending on the timing of a recovery, this seems to suggest the next 12 months could see either a supply glut or a supply crunch. However, as I've [discussed before](https://www.rolandhead.com/dividend-notes/safe-as-houses-bkg-mbh/), Michelmersh offers product choices not supplied by the volume UK brickmakers. This may provide some protection in an oversupplied market. **Outlook:** Michelmersh says its focus for 2024 is on providing pricing stability and a balanced order book. The company expects to see *"resilient order intake"* from its diverse customer base. In a change from last year, only 70% of energy costs have been hedged for 2024, reflecting management's hope that more favourable forward prices will become available. The group's differentiated and premium products are a key element of its attraction for me. But I can't help feeling that the outlook for the year remains more uncertain than usual. House broker Canaccord Genuity also seems to sense some uncertainty and has made modest cuts to its revenue forecasts for both 2024 and 2025, according to a note available on Research Tree. However, Canaccord's analysts expect margins to strengthen and has left their earnings forecast for this year unchanged at 10.7p per share (2023: 11.5p), pricing the stock on 9.5 times forecast earnings. #### My view Michelmersh shares are trading close to book value and the group's net cash covers more than 10% of its market cap. Although I'm unsure about the near-term outlook, I think that the shares are probably attractive at under 100p on a long-term view. I don't see too much risk to the 4.5% dividend yield, either. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - what are the risks? NXT, MIDW, PGH, MPE (22/03/24) URL: https://www.rolandhead.com/dividend-notes/what-are-the-risks-nxt-midw-pgh-mpe/ Last updated: 2024-03-29T16:08:08.000Z This week's [full-year results](https://www.investegate.co.uk/announcement/rns/next--nxt/next-plc-results-for-the-year-ended-january-2024/8098917?ref=rolandhead.com) from FTSE 100 retailer **Next** propelled the stock to an all-time high and provided the usual masterclass in corporate reporting. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/nxt-all-chart-220324-1.png) I always find that writing about investments help to clarify my thinking and highlight possible flaws. So it was interesting to see **Next** chief executive Simon Wolfson make a similar comment about the challenge of writing up these results: > "As is so often the case, the requirement to explain ourselves has been instructive" Lord Wolfson's explanation of the evolution of the group's business model and its current startegy and operations made for a fascinating and educational read. The company's accounts weren't bad, either, with revenue up 9% to £5.5bn and underlying pre-tax profit up by 5% to £918m. Guidance for the current year is similar, with group sales expected to rise by 6% and pre-tax profit by 5%. However, I was struck by one chart in the results which I don't think I've seen any other company use: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/nxt-fy24-pre-tax-eps.png) Source: Next FY24 results This shows *pre-tax* earnings per share and demonstrates the extent to which buybacks have supported earnings growth over the last 20 years. Next's earnings would be broadly unchanged from 2016 levels, except that buybacks have reduced the group's sharecount by about 15% since 2016. However, I thought the most remarkable aspect of this chart was the way that the company had modelled the impact of reinvesting dividends. In my view, it's certainly a compelling illustration of why it's important to reinvest dividends if they're not needed for income. Of course, the beauty of receiving dividends (rather than buybacks) is that you can choose which company you want to reinvest them in. They don't have to be reinvested at unattractive valuations, for example. I don't hold Next, in part because I hold another high quality retailer in [my dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) that pays more generous dividends. But I would consider Next, at the right price. *(Type NXT into the search box at the top to see my previous coverage of Next.)* Moving on, in the remainder of this week's [Dividend Note](https://www.rolandhead.com/tag/dividend-notes/), I'm going to take a look at a mix of companies that I think offer quite different opportunities (and risks) for UK income investors. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)*.* - [**Midwich Group (LON:MIDW)**](#midwich-group-midw)\- results from this distribution group look fairly good to me despite tough market conditions. I quite like the business model and I think the shares look reasonable value at current levels. - [**Personal Group Holdings (LON:PGH)**](#personal-group-holdings-pgh)\- this small-cap financial services group delivered a (mostly) strong performance in 2023, but I'm a little concerned about the seemingly high profitability and low payout ratio of its core insurance product. The shares could be cheap, but probably aren't for me. - [**MP Evans (LON:MPE)**](#mp-evans-mpe)\- this palm oil producer does carry some commodity-type risks, but boasts a 30-year dividend record and could be attractively valued, I think. This review has left me interested to learn more. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Midwich Group (MIDW) > "Record financial performance and market share gains in FY23" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/midwich-group--midw/unaudited-full-year-results/8094032?ref=rolandhead.com)/ Mkt cap: £436m *FY24 forecast dividend yield: 4.1%* Last week I looked at a [crop of 2017 IPOs](https://www.rolandhead.com/dividend-notes/40-bagger-8-yields-2017-ipos-tifs-alfa-four-fsfl-supr/) that are starting to look appealing to me. This week I'm starting with a look at Midwich Group. This AIM-listed firm is a leading distributor of specialist audio-visual equipment. The group floated in 2016 and operates in 22 countries, including the US. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/midw-all-chart-220324.png) One initial attraction here is that Midwich retains founder ownership, despite having been listed for eight years now. Managing Director Stephen Fenby holds 16.8% of the stock, according to Stockopedia: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/midw-shareholdings-220324.png) Source: Stockopedia Interestingly, Fenby has been a fairly active trader of the firm's stock since the IPO. According to Stockopedia's director dealing data, he's has been a steady buyer at times when the shares have been between 350p and c.500p. When Midwich's stock has topped 600p, Fenby has been a big seller. I guess this may give us some idea of his view of fair value. **2023 results summary:** Midwich reports another record year with *"strong technical product growth"* and *"increasing specialisation in the audio market"*. The group also entered the Canadian market through the acquisition of S.F. Marketing Inc and completed a total of seven acquisitions during the year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/midw-fy23-acquisitions.png) Source: MIDW 2023 presentation This is something of a roll-up business, I think – Midwich has made 27 acquisitions since its 2016 IPO. This is a model that can work well, in my view, when it's well managed. Group revenue rose by 7% go £1,289m in 2023, which the company says reflects *"good organic growth"* and a contribution from acquisitions. However, the numbers show revenue growth of 6.8% at constant exchange rates, with just +0.8% organic growth. Given general levels of inflation last year, I would not describe this as strong organic growth. The company says that margins were supported by greater specialisation, but seems to suggest that overall volumes may have fallen: > "Despite lower demand for mainstream products, stronger technical product sales led to our highest ever gross margin percentage." The accounts show gross margin improving from 15.3% to 16.8% last year, while operating profit climbed 19% to £41.6m. Gross margin has improved steadily over the years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/midw-fy23-gross-margin.png) Source: MIDW 2023 presentation **Free cash flow:** stripping out some big working capital movements gives me an underlying free cash flow estimate of £32m for 2023\. This represents excellent cash conversion from a net profit of £28.9m. **Profitability:** although last year's operating profit is only equivalent to a 3.2% operating margin, my sums suggest the business delivered a return on capital employed of 14% in 2023\. This is slightly below pre-pandemic levels, but the trend is favourable: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/midw-opmargin-roce-220324.png) In my experience, well-run distributors are often able to generate attractive ROCE. From what I understand, the main reason for this is that they typically benefit from generous supplier credit terms (reflected in trade payables) that allow them to turnover stock before it needs to be paid for. This is effectively free leverage and serves to reduce the overall level of capital required in the business, supporting attractive ROCE despite low margins. In this case Midwich's 2023 accounts show payables (money owed by the firm to suppliers) equivalent to almost 22% of cost of sales, suggesting c.90-day trading terms. In contrast, receivables are c.17% of annual revenue, suggesting c.60-day payment terms for Midwich customers. The main risk with this model comes if the company suffers an unexpected shortfall in orders, or a change in trading terms. Either can result in a sudden need for additional cash as working capital unwinds. **Debt/placing/M&A:** given the working capital risk, I would not want to see too much balance sheet debt in a business of this kind. Midwich's 2023 balance sheet shows net debt excluding leases of £82.6m at the end of 2023, reduced from £96m at the end of 2022\. Based on last year's profits, I would say this is probably high enough. Management may agree with me. Midwich raised £50m in a placing last year to fund a £26.7m acquisition, with the remainder used for debt reduction and M&A activity. Given that net debt only fell by £13.4m last year, we can infer that there would have been a substantial increase in net debt without last year's placing. The cash flow statement for 2023 shows £42.3m of acquisition spending, plus £9.3m of deferred consideration for past acquisitions, totalling £51.6m. **Dividend:** the full-year dividend has been increased by 10% to 16.5p per share, giving a yield of 3.9%. This £17m payout is covered comfortably by last year's free cash flow, if I exclude acquisition spend. **Outlook:** the company says that challenging market conditions from 2023 have continued into 2024\. Management don't expect an improvement in mainstream product sales, but say that demand for technical products has remained strong so far this year. Broker forecasts suggest adjusted earnings could rise by around 5% to 39.4p per share this year, supporting a 17.3p per share dividend. That would price Midwich shares on a price-to-earnings ratio of about 11, with a 4.1% yield. #### My view I quite like this business and am inclined to think the shares are probably reasonably valued at current levels. However, I already have two distribution specialists in [my portfolio](https://www.rolandhead.com/dividend-portfolio/) that I like even more. I'm not inclined to add a third distributor at this time, but this is a business I'll continue to follow. --- ### Personal Group Holdings (PGH) > "This has been a year of positive change for Personal Group." [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/personal-group-holdings--pgh/replacement-preliminary-results-and-final-dividend/8097488?ref=rolandhead.com)/ Mkt cap: £55m *FY24 forecast dividend yield: 7.0%* This small cap is a specialist provider of workplace benefits schemes and certain type of health/life insurance. The group's clients are generally corporates and other large employers - e.g. Royal Mail. I last covered Personal Group [here](https://www.rolandhead.com/dividend-notes/small-cap-dividends-boot-fnx-pgh-26-01-24/) in January and promised to take another look when the full-year results were published. This business has historically been cash-generative and quite profitable, offering attractive yields. With the shares trading at levels last seen 20 years ago and a turnaround seemingly underway, I've been wondering if there could be an opportunity here. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/pgh-all-chart-220324.png) Personal Group's full-year numbers for 2023 seem positive at first glance, with revenue flat at £49.7m and operating profit up by 41% to £5.3m. The group declared a full-year dividend of 11.7p per share, giving a useful 6.8% yield. The £3.7m cost of this payout appears to be covered by last year's free cash flow. A net profit of £4.3m on net assets of £32.0m give a respectable return on equity of 13.5% for the full year. However, these figures mask some interesting changes and trends across PGH's various operations. **Insurance**: revenue rose by 13% to £28.7m. This supported segmental adjusted EBITDA of £11.3m, giving a useful 39% margin. These profits effectively support the majority of group earnings and appear to be driven by a (remarkably low?) reported claims ratio of 27% – this reflects the amount paid out to policy holders from total premium income received. If I've understood this correctly, this claims ratio means that PGH kept 73% of the insurance premium payments it received last year. For contrast, private healthcare provider BUPA reported a loss ratio (an equivalent measure) of c.70% in 2021 and 2022. **Benefits**: PGH sells its digital benefits platform direct to customers but also offers it through accountancy software group **Sage** (disc: I hold). External revenue rose by a healthy 28% to £6.7m last year, generating £3.8m of EBITDA at an impressive 57% margin (2022: 37%). This division appears to be benefiting from operating leverage as it scales up. **Pay & Reward**: this seems to be an HR consultancy service, relating to remuneration. Revenue rose by 11.8% to £2.3m in 2023, generating £493k of adjusted EBITDA at a margin of 22%. **Let's Connect**:this is a technology purchasing scheme employers can offer employees. This business appears to have lost (possibly) its largest client last year, causing revenue to fall by 34% to £11.1m. Adjusted EBITDA fell by 44% to £369k – a margin of just 3.3%. **Outlook:** apart from Let's Connect, all of PGH's business lines seemed to perform reasonably well last year. The company's outlook statement for 2024 suggests management remain confident: > "... the Group is well-placed to deliver further growth with an increasing proportion of recurring revenue and a strong balance sheet." Broker forecasts suggest earnings could rise by 12% to 16p per share in 2024, supporting a 12.3p dividend that gives the stock a potential yield of 7%. #### My view I'm attracted by the high-yield and potential growth on offer here, but I'm not sure I'm comfortable with the insurance business model. I appreciate that this business has been around quite a long time, but I have to wonder whether PGH's insurance product may not offer very good value for money for its end users. If I'm right, then my concern would be that it might a) attract tougher competition or b) earn the attention of the FCA at some point. On balance, I think there could be an opportunity here. But it's probably not one I will pursue. --- ### MP Evans (MPE) > "Results affected by lower CPO price environment when compared to exceptionally high prices during 2022" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/m-p-evans-group--mpe/final-results/8093962?ref=rolandhead.com)/ Mkt cap: £398m *FY24 forecast dividend yield: 6.0%* This AIM-listed palm oil business can trace its roots back to the 1870s and has been listed since 1986\. It's always been a SE Asia-based plantation business, but has evolved through various crops, including tea and rubber. Today, the business is focused solely on Indonesian palm oil plantations. There's owner-management here, too. Executive chairman Peter Hadsley-Chaplin and a related family trust appear to control around 6.5% of the stock between them. Palm oil attracts controversary because demand for new plantation space has led to deforestation of virgin rainforest in Asia and elsewhere. The problem is that palm oil itself is an excellent product – the fruits produce a high yield of oil and the oil itself is versatile and widely used. I should point out that MP Evans' plantations are all described as sustainable and operate on land leased from the Indonesian government. This is a universal framework for agricultural land in the country that's been in place since the 1960s. This business has proved a decent investment for investors who have bought at opportune times and does not appear to have cut its dividend for at least 30 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/mpe-dps-shareprice-220324.png) **2023 results summary:** last year's results showed an inevitable decline from 2022, when the group benefited from *"exceptionally high prices"* following Russia's invasion of Ukraine. This SharePad chart showing Crude Palm Oil prices shows the magnitude of the change. Prices are down c.40% from their 2022 peaks, but remain substantially above pre-pandemic levels. I don't know if there's a structural reason for this or not: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/cpo-all-220324.png) MP Evans' revenue fell by 6% to $307.4m, while the group's operating profit slid 26% to $75.3m, giving a margin of 24.5%. That seems to be broadly in line with the average in recent years, although margins (and ROCE) vary widely, depending on prices and crop yields : ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/mpe-opmargin-roce-220324.png) **Earnings/dividend:** earnings per share of 96.2 cents (78.1p) provided solid cover for an increased dividend of 45p per share, which was a 6% increase from 2022.This payout gives the stock a yield of 5.8% at current levels. **Outlook:** MP Evans aims to continuously expand its operations as opportunities arise. The company opened a sixth mill last year, allowing it to process substantially all of its crop in house. A further 10,000 hectares of planted land was also acquired during the year. This is expected to support future growth, while further acquisitions are possible: > "We have secured a substantial increase in planted hectarage during the year, which will support our continuing growth, and we remain focused on opportunities for further sustainable development, both at our existing estates and as we continue to review additional acquisition prospects." At this early stage in the year, it's hard to forecast palm oil prices and other factors that might affect the result. An updated note from broker Cavendish on Research Tree leaves mill-gate price assumptions unchanged and estimates that earnings could rise by 9% to 107.6 cents per share this year. These estimates would price MP Evans on around nine times earnings, with a prospective dividend yield of c.6%. #### My view My initial impression of MP Evans is favourable, not least because of its very long and stable dividend history. This suggests it has been run with financial discipline and fairly consistent profitability. However, I'd want to understand a litle more about the cyclicality of this business before considering an investment. Profits seem to have gone through periods of feast and famine in the past, although the trend has always been upwards: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/mpe-ebit-netdebt-220324.png) In addition to palm oil pricing and market conditions for this commodity, one area I'd look at is the company's history of replanting cycles. Palm trees are said to have a productive life of around 25 years, with productivity peaking at about 10 years old. The company's website describes its palms as *"relatively young"* on average. Does this mean crop yields could enter a multi-year period of decline at some point in the next five years or so? I don't know. MP Evans scores highly in my [dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) results at the moment. Although I'd view this business as slightly riskier than some others I consider, the 6% yield and strong track record mean this is a business I might look at in more depth. Roland Head 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). *Disclosure: At the time of publication, Roland owned shares in Sage.* --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### New stock: a UK business with a 35-year dividend history and 5% yield URL: https://www.rolandhead.com/dividend-shares/a-uk-business-with-a-35-year-dividend-history-and-5-yield/ Last updated: 2024-04-06T09:19:51.000Z I will be selling one of my portfolio shares at the end of March, due to a dividend suspension. While this isn't an automatic reason for sale, in this case I think there's a risk the recovery process could be slower and most difficult than expected. I could be wrong, of course. But my hope is that the company I've chosen to to replace the departing share will be able to provide a reliable and attractive dividend yield, with the potential for long-term capital gains. The company I'm adding to the portfolio hasn't cut its dividend for more than 30 years, during which time its annual shareholder payout has risen by an average of 6% per year. It's a relatively capital-intensive industrial business and does not have the exceptional profitability of some of my companies. However, I think the current valuation is attractive and could potentially support a total return of 8%-10% per year. I'll be adding this share to my dividend portfolio at the start of April, in line with my usual quarterly trading schedule. _This post is for paying subscribers only._ ### The Dividend Note - 40-bagger | 8% yields | 2017 IPOs | TIFS, ALFA, FOUR , FSFL, SUPR (15/03/24) URL: https://www.rolandhead.com/dividend-notes/40-bagger-8-yields-2017-ipos-tifs-alfa-four-fsfl-supr/ Last updated: 2024-03-22T20:38:13.000Z In this edition of [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/), I've taken a look at five shares that issued results last week but which I haven't really looked at before. Three of these companies floated on the London market in 2017\. I avoided these IPOs at the time, but can see some potential attractions now. Elsewhere, I've looked at a classy, market-leading business that's been a 40-bagger over the last 20 years – and a renewable energy play with an 8% dividend yield. Let's take a closer look. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**TI Fluid Systems (LON:TIFS)**](#ti-fluid-systems-tifs)\- this automotive parts specialist appears to be undergoing a successful turnaround. While risks remain, I think it could offer value and attractive cash generation. - [**Alfa Financial Sofware Holdings (LON:ALFA)**](#alfa-financial-software-holdings-alfa)\- a financial software business with wonderful margins and cash generation, but growth seems lacking. Although regular special dividends boost the yield, I wonder if the valuation is up with events. - [**4imprint Group (LON:FOUR)**](#4imprint-group-four) \- selling promotional products to US business clients has made this stock a 40-bagger. Scope for future growth suggests I should watch for a buying opportunity. - [**Foresight Solar Fund (LON:FSFL)**](#foresight-solar-fund-fsfl)\- I'm not an expert on renewable energy funds, but these results look solid to me and suggest that FSFL shares could offer value and maintain an attractive 8%+ dividend yield. - [**Supermarket Income REIT (LON:SUPR)**](#supermarket-income-reit-supr)\- it does what it says on the tin... SUPR shares curently trade at a discount to book value, with a tempting 8% dividend yield. I don't see any serious risks. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### TI Fluid Systems (TIFS) > "Double-digit revenue growth and Adjusted EPS up 57%" [**2023 full-year results**](http://www.investegate.co.uk/announcement/rns/ti-fluid-systems--tifs/full-year-results-2023/8082218?ref=rolandhead.com)/ Mkt cap: £786m *FY24 forecast dividend yield: 4.5%* TI Fluid Systems is an automotive parts company specialising in *"thermal management and fluid handling solutions"* for automotive companies. The company's [products](https://tifluidsystems.com/products/?ref=rolandhead.com) include brake lines and connectors, coolant and refrigerant assemblies and fuel tanks and related items. TIFS' [history](https://tifluidsystems.com/about/?ref=rolandhead.com) stretches back to 1922 but the business has been through various guises and ownerships since then. Most recently, it was owned by private equity group Bain Capital before being floated in London in 2017\. As often happens, investors who bought shares in a private equity float have suffered from the experience. TIFS' share price is still well below its IPO level: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/tifs-all-chart-140324.png) TIFS' financial performance was badly derailed during the pandemic but may now be getting back on track, following the appointment of CEO Hans Dieltjens in late 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/tifs-revenue-eps-dps-140324.png) I haven't looked into the company's past performance in any detail, but my feeling is that it may have been suffering other problems in addition to the disruption caused by the pandemic. **2023 results summary:** the last couple of years have seen significant restructuring costs and headcount reductions, but things now seem to be moving in the right direction: - Revenue up 7.6% to €3,516.2m (11.1% constant currency) - Adjusted EBIT up 44% to €259.6m - *Adjusted EBIT margin 7.4% (2022: 5.5%)* - Reported net profit: €83.6m (2022: loss of €279m) - Free cash flow of €91.1m (2022: €18.0m) - **Dividend per share: 6.83 euro cents (2022: 2.54 euro cents)** Part of CEO Dieltjens' strategy involves increasing the company's focus on opportunities in electric vehicles, to begin the process of evolving away from ICE components such as fuel tanks. This new focus appears to be gaining momentum. New bookings (orders) last year totalled €3.0bn, of which €1.3bn related to battery electric vehicles (BEV). New products are being developed to complete the company's product set for EVs. However, at present, fuel systems (FTDS below) continue to generate around half the group's profits, at slightly higher margins than fluid control systems (FCS), which includes EV products: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/tifs-fy23-seg-profits.png) Source: TIFS FY23 results While cash generation improved last year, debt levels remain a little high for me. Net debt excluding lease liabilities fell by €30m to €595m in 2023\. While this equates to a comfortable-sounding 1.5x EBITDA (2022: 1.9x EBITDA), it's still nearly five times TIFS' net profit. That's a little higher than I'd like to see. However, profits and cash generation could improve significantly if TIFS can achieve targeted improvements in profit margins. **Outlook:** management expectations for the year ahead suggests self-help measures will be the main driver of progress: - Planning assumptions based on *"a modest year-on-year industry volume decline"* - Flat-to-low single digit revenue growth, at constant currency - Adjusted EBIT margin to rise above 7.3%, thanks to *"productivity and efficiency initiatives"* - Targeting adjusted free cash flow of 30% of EBITDA – consensus figures suggest a FCF figure of around €125m, implying a c.15% forecast FCF yield. #### My view TIFS shares currently trading on 6.6 times 2024 forecast earnings and offer a dividend yield over 4%. Last year's free cash flow of €91m (my calculation) gives an attractive trailing free cash flow yield of over 11%. Debt levels and the cyclicality of the automotive industry mean this isn't without risk. But if TIFS can continue to make progress with its strategy, I think the shares could be cheap at this level. --- ### Alfa Financial Software Holdings (ALFA) > "Record year for software delivery with seven customer go-lives in the year along with 28 other deliveries" [**2023 full-year results**](http://www.investegate.co.uk/announcement/rns/alfa-financial-software-holdings--alfa/full-year-report-for-year-ended-31-december-2023/8086787?ref=rolandhead.com)/ Mkt cap: £500m *FY24 forecast dividend yield: 1.1% (+regular special dividends)* This financial software business is also a member of the IPO class of 2017\. Like TI Fluid Systems ([above](#ti-fluid-systems-tif)), Alfa has also disappointed shareholders who bought into the float: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/alfa-all-chart-140324.png) However, I think there are signs that a more attractive opportunity may be emerging. Alfa describes itself as *"a leading developer of software for the asset finance industry"*. Its two main customer markets appear to be automotive finance and equipment finance – for example, construction plant. Alfa's sofware appears to support the complete lifecycle of lending on such assets: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/alfa-lifecycle-components-mar24.png) Source: ALFA website March 2024 Customers include some blue chip institutions, such as Lloyds Bank and Santander. Alfa is effectively controlled by CHP Software and Consulting, which controls c.60% of the stock. CHP is the investment vehicle of chairman Andrew Page and CEO Andrew Dalton. Both men apparently receive minimum wage salaries only, in order to align their interests with shareholders and reflect their significant shareholdings. **The story so far:** Alfa appears to have all the desirable characteristics of a good quality software business – high margins, recurring revenue and strong cash generation. However, progress stumbled in 2019\. At the time, the company said this was due to *"delays in implementation projects and reduced discretionary spend by customers"*. Profits are only now returning to 2017 levels: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/alfa-turnover-pat-140324.png) With that introduction, let's take a look at the 2023 results. **2023 results summary:** the company claims record software deliveries last year, with seven customers going live. This supported 16% growth in subscription revenue and a 28% increase in total contract value, to £165.3m (2022: £143m). However, management says that investment in product development put pressure on profit margins in 2023: - Revenue up 9% to £102m, with subscription revenue up 16% - Operating profit up 2% to £30.1m - *Operating margin: 29.5% (2022: 31.7%)* - Diluted earnings down 2% to 7.9p per share - Net cash up 17% to £21.8m **Profitability:** although margins fell last year, profitability remained excellent. My sums suggest areturn on capital employed of 60.8% (2022: 58.2%). **Free cash flow:** cash generation was also impeccable. My sums suggest free cash flow of £27.8m, representing 119% conversion from net profit of £23.3m. **Dividends:** Alfa declared two dividends with its 2023 results: - Ordinary dividend of 1.3p per share - Special dividend of 2p per share Together, these give a payout of 3.3p, equivalent to a 1.9% yield at 171p per share. However, the company's comments indicate that special dividends are its preferred method of returning surplus capital. My reading of the results suggests Alfa has the capacity for further payouts in calendar 2024. This view seems to be supported by performance over the last couple of years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/alfa-cash-specials-fy23.png) Source: ALFA FY23 results If I've read this correctly, in calendar 2023, shareholders will have received a 1.2p ordinary dividend and 5.5p per share of specials, giving a total of 6.7p per share. That's equivalent to a yield of 3.9% at the last-seen share price of 171p. In my view, that's potentially attractive, for a high-margin, cash-generative business – assuming a return to sustainable earnings growth. **Outlook:** market conditions are expected to remain broadly stable, with continued revenue growth. However, there's no guidance on expected profits: > "We expect 2024 revenue growth to be mid to high single digits driven by continuing strong growth in subscription. Within this performance, we anticipate a greater weighting in the second half of the year as new sales come fully on stream." Turning to broker forecasts, consensus estimates prior to the 2023 results suggested that Alfa's 2024 earnings could fall slightly to c.7.5p per share. That would value the stock on around 23 times FY24 forecast earnings. If I assume that at least 5p of this can be returned to shareholders, I get a possible dividend yield of just under 3%. #### My view I haven't research Alfa's past performance in any detail. But my inference from the 2023 results commentary is that customer concentration may have contributed to the 2019 slump, but is less likely today: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/alfa-fy23-diversification-comment.png) Source: ALFA 2023 results In terms of valuation and outlook, Alfa's 2023 operating profit of £30m implies an EBIT/EV yield of just over 6%. That's not outrageously expensive, for me, but I'd probably want to see a slightly stronger outlook for growth, too. I hope some updated broker guidance will become visible to private investors like me over the coming days. I think Alfa Financial has some attractive qualities, but feel the shares may be up with events at current levels. --- ### 4imprint Group (FOUR) > "Continued market share gains driving very strong financial results" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/4imprint-group--four/final-results/8084688?ref=rolandhead.com)/ Mkt cap: £1.7bn *FY24 forecast dividend yield: 2.9%* This business describes itself as a *"direct marketer of promotional products"*. In other words, it makes [branded items](https://www.4imprint.com/?ref=rolandhead.com) that companies give away to their customers. For a cynic like me, it might be tempting to view this as a low-quality business making products that are often carelessly discarded or unused. But the reality seems otherwise. 4imprint's customers clearly value its services. They spent $1.3bn with the company last year, extending a fantastic record of growth and profitability: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/four-shareprice-eps-140324.png) With the shares trading at a record high of £60, shareholders who picked up the stock at its pre-pandemic peak of £32 in January 2020 have now almost doubled their money. It's an impressive result, but are the shares now up with events? **2023 results summary:** 4imprint says it gained market share last year, with order numbers up by 12% to 2,090,000\. This translated into a strong financial performance: - Revenue up 16% to $1,326.5m - Operating profit up 32% to $136.2m - *Operating margin: 10.3% (2022: 9.0%)* - Earnings up 32% to 377.9 cents per share - Dividend up 34% to 215 cent per share - Net cash up 20% to $104.5m 4imprint is technically a UK business, but generates 98% of its revenue in North America, so it makes sense to report results in US dollars. **Profitability:** operating margins topped 10% last year, thanks to a 2% improvement in gross margins and more stable supply chain conditions. My sums suggest the capital-light business model generated an impressive 93% return on capital employed. One other reason for this increase in profitability is the improved productivity of the company's marketing activities since the pandemic. 4imprint generated $8.30 of revenue for each $1 spent on marketing last year, compared to less than $6 in 2019. However, last year's result was lower than the $8.86/$1 achieved in 2022\. To me, this suggests that the benefits of the changes made to 4imprint's marketing strategy may now have been fully realised. I suspect margins may now level out. **Free cash flow:** unsurprisingly, this business is highly cash generative. My sums suggest net profit of $106.2m was converted into free cash flow of $125.9m in 2023. **Dividend:** the 2023 dividend of 215 cents per share is equivalent to a payout of around $61m, representing about half last year's free cash flow. The company says that its capital return policy is under review, given the strength of the balance sheet. A special dividend looks potentially affordable to me. **Outlook:** Chairman Paul Moody says that trading results so far in 2024 have been in line with internal expectations and consensus forecasts. > "We are confident that we will continue to take market share." Broker estimates suggest profit growth will level out this year. Consensus numbers suggest a 5% increase in earnings to 396 cents per share, with a matching dividend increase to 226 cents per share. These numbers imply a forecast P/E of 19, with a 2.9% yield. #### My view 4imprint appears to be a good quality, cash-generative business. Market share in the US is said to be around 5%, according to a note available on Research Tree from broker WH Ireland. In a market that's said to be quite fragmented, I think it's reasonable to think that a strong player could gain a 10% share. That could mean that 4imprint's business has the potential to double in size again. 4imprint shares don't necessarily seem too expensive to me at current levels, given the group's strong profitability and cash generation. However, forecasts for slowing growth give me hope that a better buying opportunity may emerge. For now, 4imprint goes on my watch list. --- ### Foresight Solar Fund (FSFL) > "Record cash distribution from the underlying assets of£120 million" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/foresight-solar-fund-limited--fsfl/annual-results-to-31-december-2023/8082245?ref=rolandhead.com)/ Mkt cap: £521m *FY24 forecast dividend yield: 8.8%* The last 10 years have seen something of a boom in REITs and listed infrastructure investment trusts. However, the return of more normal interest rates over the last couple of years has triggered a sell-off across the sector. Having allowed some time for the dust to settle, my feeling is that several high-yield opportunities are now emerging. I think Foresight Solar Fund could be an example of this. As its name suggests, FSFL owns a portfolio of solar farms and battery assets, primarily in the UK, but also in Australia and Spain. It's managed by well-regarded alternative asset specialist **Foresight Group (LON:FSG)**. FSFL floated in 2013, making it one of the older listed contenders in this sector. Unlike some newer funds, it has delivered a positive total return (share price + dividends) to shareholders since its listing, despite the challenge of adapting to higher interest rates: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/fsfl-all-tr-chart-150324.png) FSFL total return since listing (SharePad data) My sums suggest this rate of total return only equates to an annualised figure of around 4.3%. However, I think that the current discounted valuation and 8%+ dividend yield could mean that future returns will be higher than this. **2023 results summary:** the main risks for investors in FSFL and other renewable energy investment trusts seem to relate to future power prices and the impact of higher interest rates on valuations (i.e. assets will be worth less/cost more to finance). Ultimately, there's a risk that future cash flows might not support the current level of dividend income. FSFL's 2023 results reflect these risks: - Net asset value down 9.5% to £697.9m (118.4p per share) - 2023 dividend cover of 1.61x is expected to fall to 1.5x in 2024, and 1.35x in 2025, based on current revenue (i.e. power price) forecasts It's worth noting that in general, a growing proportion of renewable assets are taking market prices for electricity, rather than being protected by subsidy regimes. FSFL says that average UK wholesale electricity prices fell from around £200/MWh at the start of 2023 to £90/MWh in the fourth quarter. Management describe this as prices returning to more normal levels. That seems fair, based on this Ofgem price chart: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/ofgem-wholesale-elec-150324.png) Source: [OFGEM](https://www.ofgem.gov.uk/energy-data-and-research/data-portal/wholesale-market-indicators?ref=rolandhead.com) Fortunately, results from asset sales during the year suggest to me that FSFL's valuation methodology has remained sound and relatively conservative through this period of disruption: - Sale of 50% of Lorca subsidy-free portfolio in Spain, priced at a 21% premium to Q3 holding value - Recent sale of *"several large ROC-backed solar portfolios in the UK"* at a 15% premium to the UK portfolio valuation, which is based on a power price benchmark of £1.17m/MW. Of course, these may be cherry-picked examples chosen because they were easier to sell – it's hard to be sure. **Gearing** fell to 38.8% last year (2022: 40.5%), expressed as a percentage of gross asset value. This seems reasonable to me and I'm reassured by the recent focus on debt reduction. The majority of FSFL's debt appears to be hedged and long-term. I don't think there's much near-term refinancing risk. **Dividends:** FSFL has declared a total 2023 dividend of 7.55p per share, in line with its target for the year. The 2024 dividend target has been set at 8p per share. This is expected to be covered 1.5x by 2024 operating cash flow. **Outlook/growth opportunities:** FSFL bought the rights to six development-stage solar projects in Spain last year, totalling over 460MW. This has the potential to add around 50% to the existing portfolio capacity of 969MW. The expected average life of the UK portfolio at the end of 2023 was 31 years, with an average of just over 22 years remaining. Management are pursuing lease extensions covering 260MW of installed capacity in the UK portfolio, which has the potential to support higher asset valuations (based on expected future cashflows). #### My view I'm not an expert on this sector, which relies on complex modelling involving power prices, financing costs and inflation estimates. On balance though, my initial impression of FSFL is fairly favourable. The shares currently trade nearly 25% below their book value and offer a forecast dividend yield of 8.8% for this year. This looks achievable to me, based on current information. If I was investing for maximum dividend yield, I would be tempted to learn more about this sector and take a closer look at FSFL. --- ### Supermarket Income REIT (SUPR) > "On track to deliver full-year 2024 dividend target of 6.06p" [**2023/24 half-year results**](Record cash distribution from the underlying assets of £120 million, the highest in Foresight Solar's 10-year history.)/ Mkt cap: £925m *FY24 forecast dividend yield: 8.2%* This is another property/infrastructure investment trust that looks potentially attractive to me at the moment. As its name suggests, Supermarket Income REIT owns a portfolio of 55 UK supermarkets. In total, 77% of rental income comes from Sainsbury's and Tesco, suggesting very minimal tenant credit risk. SUPR floated in 2017 and traded at a premium to NAV for much of its early life. However, rising interest rates triggered a sharp sell off that's left the stock trading at a discount to NAV: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/supr-navps-shareprice-150324.png) As with [TI Fluid Systems](#ti-fluid-systems-tifs) and [Alfa Financial](#alfa-financial-software-holdings-alfa) above, SUPR is another example of a 2017 IPO that has delivered poorly for early shareholders. However, the market is in a different place now. I think there could be some value and income opportunity here. **2023/24 half-year results summary:** SUPR's half-year results cover the six months to 31 December 2023\. They show an improvement in earnings, driven by rent increases and acquisitions. Much of SUPR's rental income is inflation linked. At the same time, net asset value fell, reflecting broader market trends and the impact of higher interest rates on valuations. Overall, the headline numbers look fairly reassuring to me, given the stock's current discount to NAV: - Annualised passing rent up 10% to £104.7m - EPRA net asset value down 5% to £1,094m (88p per share) - Operating profit up 18% to £45.0m - H1 adjusted earnings of 2.9p per share (unchanged) - **H1 dividend of 3.0p per share** (unchanged) A mix of acquisitions and disposals supported some debt reduction and improved the overall portfolio yield: - Net loan to value 33%: (H1 23: 37%) - Portfolio net initial yield: 5.8% (H1 23: 5.6%) On this initial review, the main risk I can see is that SUPR is effectively borrowing short to lend long. In other words, its lease lengths are much longer than its loan maturities. This creates some refinancing risk, at least in theory: - Weighted average unexpired lease term (WAULT): 13 years - Average debt maturity: 4.1 years The weighted average cost of debt has risen from 2.6% to 3.1% over the last year. While drawn debt is all hedged, further refinancing will be needed over the next few years. Average debt costs may still have further to rise. I suspect that inflation-linked rental income will be sufficient to support higher finance costs. But in a negative scenario, higher interest rates could put pressure on the dividend. **Outlook:** management see continued opportunities to add to the portfolio at attractive valuations and say that SUPR has enough debt capacity to fund this. Chair Nick Hewson says the sector attracted a record £2.1bn of investment last year, supporting a positive outlook for valuations. SUPR is maintaining its FY24 dividend target of 6.06p per share, giving a prospective 8.1% yield at the last-seen price of 75p. #### My view A 15% discount to book value and 8% dividend yield seem a more attractive basis for a REIT investment than the valuations that prevailed prior to 2022. While I can see some risks, this initial review doesn't leave me with any serious concerns. As with FSFL, if I was investing to maximise my dividend income, SUPR is certainly a stock I would look at more closely. **Please let me know what you think about the stocks I've covered here, or anything else relating to UK dividends. You can drop a comment below, or reach me on Twitter/X** [**@rolandhead**](https://twitter.com/rolandhead?ref=rolandhead.com)**.** 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) Roland Head --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - unloved value opportunities? - SPT, RWA, INCH, NICL (08/03/24) URL: https://www.rolandhead.com/dividend-notes/unloved-value-opportuities-spt-rwa-inch-nicl-08-03-24/ Last updated: 2024-03-15T15:42:35.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/). This is a weekly review of results from dividend stocks that look potentially interesting to me. This week's theme is dividend stocks that are unloved and look potentially cheap to me. I'll start with a quick mention for FTSE 250 telecoms equipment firm **Spirent Communications (LON:SPT)**, which received [a takeover offer](https://www.investegate.co.uk/announcement/rns/spirent-communications--spt/recommended-cash-acquisition-of-spirent-by-viavi/8070242?ref=rolandhead.com) from US peer **Viavi** this week. I've covered Spirent a number of times over the last year, including [this in-depth review](https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/) and January's full-year trading update, when [I thought](https://www.rolandhead.com/dividend-notes/what-price-for-quality-expn-spt-dplm-ajb-ihp-cwk-19-01-24/) Spirent *"probably offers value"*. *(N.B. to search for company content, type the relevant ticker into the search tool at the top of the page.)* Spirent shares have scored highly in my dividend screen in recent months, but I've resisted the temptation to add them to the portfolio because I wasn't completely convinced by the company's long-term track record or quality pedigree. As it turns out, this was a case where it would have been more profitable to focus on the short-term cyclical opportunity. Even without a bid, I think Spirent would probably have staged a reasonable recovery. This week was a bumper week for corporate news and there's no way I can cover everything of interest. To narrow down the selection, I've focused on companies that interest me **and** also currently appear in the results of [my dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/#disclaimer)***.*** - [**Robert Walters (LON:RWA)**](#robert-walters-rwa)\- 2023 is expected to be a low point for profits from this recruiter. The latest numbers highlight the strength of its balance sheet and the appeal of its 5.5% dividend yield, in my view. The company is maintaining bench strength and I expect a solid recovery at some point. - [**Inchcape (LON:INCH)**](#inchcape-inch)\- final results from this automotive distributor look fine to me, albeit debt is a little high. A weaker outlook for 2024 is a concern, but on balance I think the shares could offer value at this level. The 5% yield looks safe enough to me, barring an unexpected slump in trading. - [**Nichols (LON:NICL)**](#nichols-nicl)\- the soft drinks group has issued a much-improved set of 2023 results. Its quality credentials appear intact after a difficult few years and I'm tempted by the value – and cash – that's potentially on offer. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Robert Walters (RWA) > "Our collective experience trading through previous market cycles tells us that when conditions do improve, the inflection can be rapid" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/robert-walters--rwa/fy23-results/8075148?ref=rolandhead.com) / Mkt cap: £305m *FY24 forecast dividend yield: 5.9%* I last covered specialist recruiter Robert Walters [in August](https://www.rolandhead.com/dividend-notes/cyclical-opportunities-bbox-bp-rwa-tw-08-08-23/) last year, when I also suggested this stock could be a cyclical opportunity... Timing any kind of cycle exactly is nigh-on impossible. But I thought Robert Walters looked interesting in August and continue to think so today, following the group's latest annual results. Although the shares have risen by around 15% from the lows seen in the autumn, the stock is still close to the long-term trend line that has previously provided support. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/rwa-chart-all-080324.png) Of course, past performance is no guarantee of future returns. However, I think that Robert Walters also looks in good shape on a fundamental view, as I'll discuss below. **2023 results summary:** Robert Walters' main focus is accounting and financial services, although the company also covers areas such as HR and law. Last year's results highlighted the operating leverage that's inherent in this business model, with profits dropping much further than fee income: - Revenue down 3% to £1,064.1m - Group net fee income (gross profit) down 8% to £386.8m (this is the key top-line metric as it excludes pay for temporary positions and other pass-through costs) - Operating profit down 55% to £26.3m - Earnings per share down 64% to 20.1p - **Dividend unchanged at 23.5p per share** - Net cash exc. lease liabilities down 18% to £79.9m The company's decision to maintain the dividend appears to be well-supported by the balance sheet and maintains its attractive record in this department: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/rwa-dps-080324.png) The big drop in operating profit compared to fee income tells me that Robert Walters' operating costs have not fallen very much despite the slowdown in business. This is a deliberate decision by the business. Robert Walters has only cut headcount by 9% over the last year, in order to *"maintain core consultant capacity in most resilient markets"*. CEO Toby Fowlston – who has been with the business 25 years and recently took over from founder Robert Walters – gave the following explanation for this decision: > "Our collective experience trading through previous market cycles tells us that when conditions do improve, the inflection can be rapid, and we therefore have strong conviction in our decision to maintain our core consultant capacity, whilst sensibly managing our cost base." Given the strength of Robert Walters' balance sheet, which had a robust £80m net cash position at the end of last year, this seems logical to me. Having teams of experienced and well-networked employees in place should logically lead to a stronger recovery when conditions improve. **Geographic performance:** the group's largest and most profitable business last year was in the Asia Pacific region, where net fee income of £168m (-13% vs 2022) converted into operating profit of £19.3m (-48% vs 2022). Europe also performed well, but the group's UK and RoW businesses (mainly USA) reported operating losses for the year. Net fee income fell by 40% in North America as the pandemic tech hiring boom was reversed. **Cash flow & profitability:** despite the slump in profits, a reduction in working capital supported free cash flow of £14.0m last year, covering the majority of the c.£17m cost of the dividend. Profitability also remained respectable, with a return on average capital employed of 11%. This figure has reached more than 30% in the past, highlighting the profitability of this business model during strong markets. **Outlook:** the company says trading conditions have remained *"muted"* in the early weeks of 2024, *"albeit with some isolated pockets of growth"*. Unspecified initiatives are now underway to strengthen the business over the medium termn. These will be discussed at a Capital Markets Day in the autumn. For now, broker consensus estimates suggest that earnings could start to recover in 2024\. SharePad forecasts suggest earnings could rise by 27% to around 26p per share this year, restoring dividend cover. #### My view Robert Walters' 2023 results value the business with an EBIT yield of around 8%, by my calculations. This looks potentially attractive to me, given the group's strong cash position and the expectation that 2023 may have been a low point for profits. I'm also interested to note RWA's price-to-book value is currently lower than at any time since 2008\. The 5.5% dividend yield – which looks sustainable to me – is also the highest (i.e. cheapest) since 2008: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/rwa-pnav-divyield-080324.png) A very cyclical business like this is not necessarily best-suited as a buy-and-hold investment and may require trading to maximise returns. By way of comparison, this SharePad chart compares the total returns from an investment in Robert Walters with those from **Unilever** over the last 23 years or so. A buy-and-hold investment in RWA would have delivered half the shareholder return generated by staid old Unilever over the same period, including dividends: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/rwa-vs-ulvr-all-chart-080324.png) Despite this caveat, I continue to think that Robert Walters looks attractive at the moment. I'd consider buying the shares for my portfolio at this level. --- ### Inchcape (INCH) > "Outlook for FY 2024 - another year of growth, albeit moderated" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/inchcape--inch/fy-2023-preliminary-results/8070205?ref=rolandhead.com)/ Mkt cap: £2.7bn *FY24 forecast dividend yield: 5.5%* Inchcape is an automotive distribution group that generates the majority of its profits from providing distribution services to car manufacturers in markets they don't choose to serve directly themselves. In essence, I see Inchcape as an outsourcing service that allows car manufacturers to delegate activities such as localisation, pricing, management of dealership networks and much more. I last looked at Inchcape [in October](https://www.rolandhead.com/dividend-notes/markets-shrug-despite-unchanged-outlooks-inch-bmy-26-10-23/), when I provided a slightly longer introduction to the business and expressed some concern about the lack of 2024 guidance in the otherwise in-line Q3 update: > "My main concern is the lack of guidance for 2024\. I think there's a risk that as the supply chain backlog unwinds, underlying demand for new cars might be weaker next year. This could hit Inchcape's earnings." Fast-forward five months and here is the 2024 outlook statement (my **bold**): > "FY 2024 is expected to be another year of growth, **albeit moderated**, with the Group maintaining prudent expectations for recovery in FY 2024 in certain markets, which are **weaker than previous years**." The market didn't warm to this update and Inchcape shares are now trading at levels seen 10 years ago. While I don't think this is a business that deserves a premium rating, I do think Inchcape shares may offer some value at this level: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/inch-10y-chart-080324.png) **2023 results summary:** Inchcape's results were in line with forecasts and looked fairly reassuring to me: - Revenue up 41% to £11.4bn, including the acquisition of Derco (see below) - *Organic revenue up 12%* - *Operating margin of 5.4% (2022: 4.9%)* - Pre-tax profit up 24% to £413m - Earnings from continuing operations up 7% to 65.6p per share - **Dividend per share up 18% to 33.9p** - Net debt exc. lease liabilities up 59% to £601m, due to acquisitions **Derco:** this was a large (£1.3bn) acquisition of a Latin American distribution group that completed in January 2023\. The deal was funded with a mix of cash and shares and contributed £267m to Inchcape's net debt last year. Integration progress so far seems to be positive. The company says that cost savings of £21m were achieved last year, en route to total annualised savings of £50m. Cash integration costs are expected to be £70m over three years, so significant savings are needed to justify this investment. Derco is said to have contributed an operating margin *"towards the top end of 5%-7% range"* last year. Inchcape's management were also able to free up some working capital with a *"c.£200m excess inventory reduction"*. **Cash flow/debt/profitability:** distributors are generally low margin businesses, but when well managed they can generate attractive returns on capital employed and strong cash flow. My [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) includes two such companies. In this case, my calculations suggest Inchcape generated a 19% return on capital employed last year. This strong result suggests to me that the debt and equity issuance required to fund last year's acquisition spree has provided a decent return on investment, at least, initially. Cash flow is a little harder to unpick. Excluding acquisition-related payments, I estimate 2023 free cash flow of around £448m. However, this result benefited from a one-off £200m inventory reduction related to Derco. Stripping this out gives an underlying figure of £248m, which would represent 88% conversion from net profit of £283m – not a bad result, in my view. Net debt exc. leases of £601m looks a little high to me, for this business. Net interest costs rose from £30m to £151m last year, suggesting to me that peak borrowing may have been significantly higher than year-end net debt. The company says that its capital allocation decisions will prioritise deleveraging this year and I think this is should be possible, assuming end markets aren't weaker than expected. One possible solution to deleveraging might be the potential sale of the group's UK retail operations, which was [reported in January](https://www.investegate.co.uk/announcement/rns/inchcape--inch/response-to-media-reports-/8011323?ref=rolandhead.com). An updated note from broker Zeus available on Research Tree suggests such a sale could generate proceeds of £180m-£252m. **Outlook:** I've already shared the company's outlook statement above – in short, growth is expected to moderate this year and some markets could be weaker. Consensus forecasts suggest adjusted earnings could rise by 3% to 87.4p per share this year, with a dividend of 36p per share. That would put Inchcape on a 2024 P/E of 7.5, with a 5.5% dividend yield. #### My view Inchcape generated more than 40% of its distribution revenue in the Americas last year, with a further 31% from Asia-Pacific countries. Europe and Africa made up the remainder. In my view, Inchcape shares have become a play on the economies of Latin America and Asia. China is also a factor – the company has a growing number of partnerships with Chinese car manufacturers who are starting to export more actively than in the past. I don't have a crystal ball for 2024, but on balance I think Inchcape looks like a decent contrarian choice at current levels. A reduction in debt and continued earnings growth could justify a higher rating, in my view, while the dividend looks reasonably safe to me. --- ### Nichols (NICL) > "Identification of surplus cash in order to return to shareholders during 2024" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/nichols--nicl/2023-preliminary-results/8072692?ref=rolandhead.com)/ Mkt cap: £377m *FY24 forecast dividend yield: 2.9%* This soft drinks group's main brand is *Vimto*. It's not cyclical and isn't really a value share, but I think this stock could offer *relative* value at the moment, given its defensive quality credentials. Nichols is still recovering from the impact of the pandemic and some other issues, but I think the business is making decent progress with its stated strategy. **2023 results summary:** the appeal of this type of business is its potential for delivering steady, incremental growth and strong profitability. Prior to the pandemic, Nichols hadn't cut its dividend since its flotation in 1986, according to Stockopedia data: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/nicl-dividends-080324.png) Source: Stockopedia **Correction:** The section below was corrected to reflect that family John Nichols retired as chairman last year after 51 years with the business. Following John Nichols' retirement as chairman last year, there is no longer a family member at the helm of this business. However, the Nichols family remain significant shareholders. I would imagine they are hoping for a return to the steady performance of the past. I think that Nichols' 2023 results provide some confidence this might be possible: - Revenue up 3.5% to £170.7m - *Operating margin: 13.1%* - Adjusted pre-tax profit up 8.7% to £27.2m - Adjusted earnings up 1.9% to 56.4p per share - Reported earnings up 58% to 50.3p per share - **Dividend up 1.8% to 28.2p per share** - Net cash up 19% to £67m I've included adjusted earnings, as last year featured a hefty £11m of adjusting items. Hence the adjusted figure gives a more realistic measure of underlying progress over the last year, in my view. Last year's sales growth was given a particular boost by strong growth in the group's international sales, which rose by almost 17%. *Vimto* is popular in Muslim countries during Ramadan, but the company is aiming to expand this reach. **Net cash:** one thing that isn't adjusted is the net cash position of £67m. Nichols reports no debt and benefited from £2m of interest income on its cash last year – adding nearly 10% to its operating profits. **Surplus cash?** Management say that work is being done to assess forward cash requirements and identify whether surplus cash can be returned to shareholders in 2024. **Cash flow/profitability:** Nichols reports the following performance metrics prominently in its results: - Free cash flow up 43% to £20.9m - Return on capital employed of 23.3% I am encouraged by the company's prominent use of return on capital employed (ROCE) and free cash flow as performance metrics. I'm even happier that both of the figures specified in the results match my own calculations exactly. In my experience, management often succumbs to the temptation to include some favourable adjustments. It's to Nichols' credit that it doesn't, in my view. **Outlook:** management commentary sounds cautiously optimistic to me. 2024 is said to have *"started well"*, with performance in line with expectations. The company is confident it can deliver *"further strategic progress accross its business in 2024"*. There's also the potential of an additional cash return, if management identify surplus cash within the company's large net cash position. Broker consensus forecasts suggest adjusted earnings could rise by 6% to around 60p per share this year, supporting a 7% increase in the dividend of 30p per share. That prices the stock on 17 times forward earnings, with a 2.9% yield. #### My view Nichols' valuation doesn't look excessive to me, if the company can maintain last year's improved profitability and return to steady, incremental growth. Last year's free cash flow gives the stock a free cash flow yield of 5.5%, covering the dividend twice. Stripping out net cash from the market cap gives the stock a cash-adjusted P/E of 14, which also doesn't look expensive. I would want to research the company's brands, market share and future strategy more closely before considering an investment. But my view on Nichols is positive and I might consider buying at this level. Roland Head *Disclosure: at the time of publication, Roland owned shares in Unilever.* 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Vox Markets Hot Stocks Live with Paul Hill (01/03/24) URL: https://www.rolandhead.com/podcasts/vox-markets-hot-stocks-live-with-paul-hill-01-03-24/ Last updated: 2024-03-03T15:24:57.000Z I recently got together with Paul Hill of Vox Markets to do a live show discussing interesting UK shares on our radar right now, mixed in with live questions from listeners! I think the live format worked quite well and we covered a lot of ground, including our thoughts on market conditions and the following stocks: AVCT DLG RSW AVG RNO COST VP. RWA PZC ANCR ANP IGG ULTP TEP MEGP IPX JUP PMI KWS *Disclosure: at the time of the recording Roland Head owned shares in IG Group Holdings, PZ Cussons and Ultimate Products.* Paul and I are planning another live chat in April – I'll post further details in my Twitter feed nearer the time. --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Feb '24 portfolio update: steady progress | special dividend | problems URL: https://www.rolandhead.com/portfolio/feb-24-portfolio-update-steady-progress-special-dividend-problems/ Last updated: 2024-05-02T12:35:00.000Z Welcome back to my monthly newsletter, in which I review results and trading updates issued by eight of the stocks in my dividend portfolio over the last month. On the whole, I would say that these companies are making steady if unspectacular progress, against a midly unfavourable backdrop. One of them has even declared a special dividend in its half-year results. But there are a couple of problems, too, including one possible sale decision. --- ### In this month's report This is a lengthy report, but as always I've started with a short summary of my thoughts on each company. *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research or seek professional advice. Full disclaimer* [***here***](#disclaimer)***.*** Click on the links or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### The Dividend Note - 30+ years of dividend growth - CRDA, BNZL, SXS, MACF (01/03/24) URL: https://www.rolandhead.com/dividend-notes/30-years-of-dividend-growth-crda-bnzl-sxs-macf/ Last updated: 2024-03-08T18:22:05.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/). This is a weekly review of results from dividend stocks that look potentially interesting to me. The companies covered this week could all loosely be described as industrials. Three out of four of them boast dividend growth records of at least 30 years or more. The fourth company, small-cap Macfarlane, could be well on the way to building such a record, in my opinion. Many UK manufacturing and industrial stocks have suffered from customer destocking, supply chain disruption and cost inflation over the last couple of years. However, the best operators are still delivering fairly stable results and continue to offer long-term growth potential. I reckon all four of these companies could fall into this category – they are all on my watch list as possible future [portfolio](https://www.rolandhead.com/dividend-portfolio/) purchases. --- ### Companies covered: *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research and seek professional advice if needed. Full disclaimer* [***here***](#disclaimer)***.*** - [**Croda International (LON:CRDA)**](#croda-international-crda)\- 2023 results were poor, as expected, but this chemicals group looks in reasonable health and positioned for a return to growth. The valuation looks a little full to me, but Croda stays on my watch list. - [**Macfarlane (LON:MACF)**](#macfarlane-macf)\- a solid set of results from this small-cap packaging group, despite more difficult market conditions in 2023\. The shares aren't quite as cheap as they were, but I remain a fan. - [**Bunzl (LON:BNZL)**](#bunzl-bnzl)\- solid results in a challenging year. This distribution business is a classy operator, in my view. I explain how the business has consistently created value for shareholders over many years. - [**Spectris (LON:SXS)**](#spectris-sxs)\- solid results from this precision measurement specialist for 2023, against a more difficult backdrop. But the outlook for 2024 seems a little more subdued. I like the business but continue to hope for a better buying opportunity. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Croda International (CRDA) > "1p increase in full year dividend with 32 years of unbroken dividend progression" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/croda-international--crda/results-for-the-year-ended-31-december-2023/8057196?ref=rolandhead.com) **/** Mkt Cap: £6.4bn *FY24 forecast dividend yield: 2.4%* Long-term shareholders in chemicals group Croda International have seen their shares halve since hitting an all time record of more than £100 in late 2021\. Two years of record profits during the pandemic were driven by a contract to supply "*lipid-based drug delivery technologies"* used in the Pfizer-BioNTech Covid-19 vaccine. This tailwind has now dropped out of the numbers, [as expected](https://www.rolandhead.com/dividend-notes/navigating-uncertain-markets-crda-hwdn-ajb-25-07-23/). But the impact of this profit reset was made worse by customer destocking last year, prompting Croda to [cut its profit guidance](https://www.rolandhead.com/dividend-notes/warnings-upgrades-and-a-6-yield-vct-crda-bnzl-vp/) in June. The chart tells an interesting picture, showing both profits and the share price back at pre-pandemic levels: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/crda-shareprice-pat-290224-1.png) I'm interested to see if this could be a good time for me to consider buying the shares for my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). After all, Croda was founded in 1925 and has increased its dividend every year for the last 32 years. If the business can now pick up where it left off prior to the pandemic, I reckon now might be an interesting time to buy. Let's take a look at the numbers to find out more. **Results summary:** Croda's headline numbers for 2023 do not make for pleasant reading: - Revenue fell by 19% to £1,694.5m - Operating profit fell by 44% to £247.5m - *Operating margin fell to 14.6% (2022: 21.2%)* - Adjusted free cash flow rose by 5.1% to £165.5m - Net debt increased by 82% to £537.6m due to an acquisition in July 2023 - **Dividend up 0.9% to 109p per share** Some of these figures were influenced by the divestment of the PTIC business in 2022\. But even allowing for this, the trend was not Croda's friend last year. Croda reports three operating segments, Consumer Care (beauty/personal care), Life Sciences (pharma/agriculture) and Industrial Specialities (coatings/additives). This segmental breakdown shows a decline in all three, but the industrial business was particularly hard hit, with adjusted profits down 88% to just £9.4m: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/crda-fy23-segmental.png) Source: CRDA 2023 results **Profitability:** operating margins fell sharply last year and I estimate the group generates a return on capital employed of around 8%. According to SharePad data that's the worst ROCE result for 30 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/croda-roce-opmargin-290224.png) **Free cash flow:** the company's adjusted measure of free cash flow improved by 5% to £165.5m last year. This represents excellent cash conversion from 2023 net profit of £172.1m. Checking the free cash flow statement, my sums give a slightly more conservative figure of c.£125m, albeit still excluding acquisition activity. Even using the company's own measure, my sums suggest the shares are trading with a free cash flow yield of just 2.6%. That's enough to cover the 2.4% dividend yield, but doesn't seem compellingly cheap. **Outlook:** much will depend from here on whether Croda can return to the double-digit profitability and steady growth shareholders have enjoyed in the past: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/crda-eps-dps-fcast-290224.png) Forecasts shown in pale colours The company's guidance suggests 2024 may be difficult, but is more bullish on a return to significant growth in 2025\. This seems to be partly a verdict on macro conditions, but also a reflection on new products that are expected to enter the market from 2025 (my **bold**): > "With our strong balance sheet, improving cash flow and consistent **investment in our refocused portfolio**, Croda is well positioned to take advantage of the demand recovery when it occurs. We expect the Group's **performance to accelerate from 2025**, generating continued increasing returns for our shareholders." Broker forecasts suggest earnings of 151p per share in 2024, rising by 22% to 185p per share in 2025\. Those numbers put the stock on a 2024 P/E of 30, falling to a P/E of 25 in 2025. #### My view I have some respect for Croda's near-100 year history and 32-year track record of dividend growth. The balance sheet looks fine to me and the business model appears to be focused on areas where I would expect growth to continue over the coming years. On a long-term view, I think Croda shares could prove to be reasonably priced if the business can deliver the kind of growth its achieved in the past. However, an EBIT yield of 3.5% and sub-3% free cash flow yield do not leave much room for disappointment. For now, I'm staying on the sidelines, but Croda is a stock I will continue to watch and would consider owning. --- ### Macfarlane (MACF) > "Group profit before tax ahead of previous year" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/macfarlane-group--macf/annual-results-2023-/8062230?ref=rolandhead.com)/ Mkt cap: £195m *FY24 forecast yield: 3.1%* I covered this small-cap packaging group in [an in-depth review in November 2023](https://www.rolandhead.com/dividend-shares/is-macfarlane-a-good-dividend-share/) and was broadly impressed. While I noted some risks, I did not see too much to be concerned about. This week's half-year results don't alter that view. The group's bolt-on acquisition strategy continued to tick over last year and its high-margin manufacturing division helped to offset some weakness in the distribution business. **Results summary:** Macfarlane managed to eke out an increase in pre-tax profit last year, a drop in sales and a higher corporate tax rate hitting earnings: - Revenue down 3% to £280.7m - Operating profit up 3% to £22.1m - *Operating margin: 7.9% (2022: 7.4%)* - Earnings per share down 5% to 9.44p - **Dividend up 5% to 3.59p per share** Free cash generation for the year benefited from some favourable moves in working capital. Impressively, I think, the business ended the year with net cash at bank of £0.5m, despite £16.6m of acquisition and capex spend last year. **Divisional highlights:** Macfarlane's business is divided into two segments for reporting: - **Packaging Distribution:** sales fell by 6% to £244.9m last year, while operating profit fell 3% to £16.5m, giving an operating margin of 6.7%. *"Good sales momentum in Europe"* helped to offset *"weak demand"* from customers in the UK and Ireland. Recent acquisitions PackMann and Gottlieb are said to be performing well. - **Manufacturing operations:** this is a niche business manufacturing packaging for higher value industrial applications. Sales rose by 16% to £35.8m in 2023, while operating profit rose by 26% to £5.6m. This implies a margin of 15.6% and highlights the value of this business, despite its relatively small scale. **Profitability:** my sums suggest Macfarlane generated an overall return on capital employed of 14.8% last year, which is consistent with the average performance over the last five years. **Outlook:** management expect the year to be challenging due to uncertainty over customer demand. But the board is confident of continued progress in 2024 with the benefit of new business momentum, further acquisitions and *"effective management"*. House broker Shore Capital has left 2024 estimates unchanged at 12.4p per share, pricing the stock on a forecast P/E of 10. #### My view On the basis that 2023 is likely to be a low point for volumes, I think Macfarlane continues to look reasonably priced at current levels. My sums give a trailing EBIT yield of 9.4%, supported by good cash conversion. A forecast dividend yield of 3.1% is fairly average but looks well supported to me. If the dividend growth rate of 5% per year is maintained in line with forecasts, then the current share price implies an expected return (dividend yield plus growth) of just over 8% this year. Macfarlane may not be obviously cheap in the way I thought it was in November, but I would still be comfortable buying the shares at current levels. --- ### Bunzl (BNZL) > "**31st consecutive year of annual dividend growth**; total dividend per share growth of 8.9%" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/bunzl--bnzl/final-results/8054801?ref=rolandhead.com)/ Mkt cap: £10.6bn *FY24 forecast dividend yield: 2.3%* Back in August last year, [I wrote](https://www.rolandhead.com/dividend-notes/sleeper-stocks-bnzl-macf-qlt-30-08-23/) about Bunzl's half-year results and said I thought shares in this distribution specialist looked fairly priced. Fast-forward six months and Bunzl's share price has risen by a further 10% or so, even though profit guidance during this period remained pretty much unchanged. For the uninitiated, Bunzl is a distribution group that supplies a huge range of goods-not-for-resale and consumables to business customers all over the world. Examples include catering consumables, cleaning supplies, healthcare equipment, safety gear and much, much more. A consistent strategy built around organic growth and bolt-on acquisitions has delivered an enviably long run of dividend and earnings growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/bnzl-eps-dps-290224.png) Bunzl is the kind of stock I would be interested in owning in my dividend portfolio at the right price, so I like to keep an eye on its trading performance. **Results summary:** 2023 saw a rare fall in revenue, but a recovery in margins meant that there was still an improvement at the bottom line. - Revenue down 2% to £11,797.1m - Operating profit up 12.5% to £789.1m - *Operating margin: 6.7% (2022: 5.8%)* - Pre-tax profit up 10.1% to £698.6m - Basic earnings per share up 10.9% to 157.1p - **Dividend up 8.9% to 68.3p per share** Bunzl's statutory profits were boosted by gains from the disposal of its UK healthcare business last year, but I've used them anyway as I feel the company's adjusted profits exclude too many items that I would prefer to include. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/bnzl-fy23-adj-profit-reconcil.png) Source: BNZL 2023 results For comparison, last year's adjusted earnings per share were 191.1p, 21% above its basic earnings per share. **Free cash flow:** I like to include amortisation charges in the measure of profit I use to calculate return on capital employed. This is because amortisation often reflects past capital expenditure decisions – real cash outflows. This is especially true with an acquisitive business such as Bunzl. However, the counter-argument for excluding amortisation is that it does not reflect the cash generated by the ongoing business, once acquired. This certainly seems to be true here. Bunzl's cash conversion is generally excellent and results for both 2022 and 2023 show free cash flow that is much closer to adjusted profit than it is to statutory profits: | **Metric/Year** | **2023** | **2022** | | ------------------- | -------- | -------- | | Free cash flow\* | £628m | £598.9m | | Adjusted net profit | £640.3m | £616.8m | | Reported net profit | £526.2m | £474.4m | *\*my calculation* My 2023 free cash flow estimate of £628m gives Bunzl a free cash flow yield of 5.1% – not necessarily too expensive, in my view. **Profitability:** profit margins are always fairly low in distribution businesses. But decent returns on capital employed are possible through efficient use of working capital, good scale, and skilled management. Bunzl has these qualities, in my view, and has consistently generated ROCE of around 14% in recent years. Modest use of debt means that returns on equity are around 20%. This wonderful chart shows how Bunzl has created lasting shareholder value over the last 30 years by compounding reinvested capital to drive sustainable growth in free cash flow and dividends: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/bnzl-navps-fcfps-dps-290224.png) **Outlook:** there was no new outlook statement for 2024 in these results. Instead, the company simply reiterated the 2024 profit guidance provided with its pre-close statement in December. > "the Group expects some revenue growth in 2024, at constant exchange rates, driven by announced acquisitions and slightly positive organic growth. Group operating margin is expected to be broadly in-line with 2023, and to remain substantially higher compared to pre-pandemic levels, driven by the higher margin acquisitions acquired since then, as well as an underlying margin increase" Broker consensus forecasts suggest adjusted earnings of 185p per share for 2024, which would represent a slight drop from last year's adjusted figure of 191p. However, a forward P/E of 17 is slightly below the level the stock has traded at in recent years and does not look entirely unreasonable to me. #### My view My number crunching suggests Bunzl is trading with an EBIT/EV yield of 6.4% and a free cash flow yield in excess of 5%. Given the strength of the Bunzl's track record, I am tempted to believe that this could be a reasonable entry point for my portfolio. Bunzl is another stock that remains on my watch list. --- ### Spectris (SXS) > "Dividend per share increase of 5%; **34 years of continuous dividend growth**" I'll wrap up with a quick look at the 2023 results from Spectris. This FTSE 250 group a precision measurement specialist. It provides software, high-tech instruments, and test equipment for industrial clients, who benefit from the insight and analysis Spectris products provide. 34 years of continuous dividend growth is an impressive record, I think. These 2023 numbers display the kind of consistency that's needed to produce such a strong result. As [I've pointed out before](https://www.rolandhead.com/dividend-notes/this-8-yield-looks-safe-to-me-sxs-tcap-31-10-23/), Spectris does make somewhat generous use of adjusted profits. I have reported the main statutory figures here, which I generally prefer to use: - Revenue up 9% to £1,449.2m - Operating profit up 9% to £188.6m - *Operating margin flat at 13.0%* - Earnings per share up 31% to 140.3p - **Dividend per share up 5% to 79.2p** - Net cash of £138m (2022: £228m) **Trading commentary:** CEO Andrew Heath says like-for-like sales rose by 10%, while adjusted operating profit was 18% higher on a LFL basis. At a divisional level, both sales and adjusted margins improved: - **Scientific**: LFL sales up 12%, adj operating margin up 0.7% to 22% - **Dynamics**: LFL sales up 6%, adj operating margin up 2.2% to 17.2% Looking across different customer sectors, LFL growth was positive across the board except for life sciences/pharmaceutical. The company says this reflects normalisation of demand after strong growth during 2021 and 2022: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/03/sxs-fy23-industry-results.png) Source: SXS FY23 results **Cash flow/debt/buybacks:** underlying free cash flow in 2023 benefited from a normalisation of working capital, after extra outflows in 2022 to support higher stock levels and extended receivables. Even so, the business ended the year with a reduced net cash position of £138m (2022: £228m). This seems to be due to the £115m spent on share buybacks during the year. It's a reasonable choice to buyback shares with genuine surplus cash, but personally I'd prefer a special dividend – existing shareholders get no tangible benefit from buybacks unless they sell. **Outlook:** CEO Heath sounds positive about the year ahead, but with a caveat (my **bold**): > "We expect to deliver another year of further progress in 2024, including margin expansion, **after taking into account the impact of the Red Lion disposal**" This $345m disposal was agreed in December and is expected to complete shortly. Red Lion generated £21.9m of adjusted operating profit in 2023, around 8.3% of the total (this was reported in the "other" segment in the table above"). The loss of Red Lion means that overall results are expected to be a little flatter than Heath's bullish comment might suggest. Broker consensus forecasts have been trimmed following these results and suggest adjusted earnings could rise by just 1.2% to 202p per share in 2024. Dividend growth is expected to be stronger, with an expected payout of 85p, up 7%. Those numbers price the stock on 17 times earnings with a 2.4% dividend yield – not necessarily too expensive for this business, in my view. #### My view I prefer to use EBIT yield (EBIT/EV) rather than P/E as a measure of valuation. Crunching the numnbers gives an EBIT yield of 5.5% for Spectris, based on last year's reported operating profit. That's a little lower than I would like to pay, but I don't think it's really expensive. If Spectris shares were to drift closer to £30 this year – or even below – without a significant change to expectations, I might be tempted to buy some. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Investor's Round Table: HL, CBG, PLUS & JET2 URL: https://www.rolandhead.com/podcasts/investors-round-table-hl-cbg-plus-jet2/ Last updated: 2024-02-27T15:38:15.000Z I enjoyed getting back round the Investor's Round Table this month to talk about UK shares and investing with respected private investors Graham Neary and Mark Simpson. In this episode, we managed to (mostly!) agree as we discussed problems at **Close Brothers**,the latest results from **Hargreaves Lansdown** and **Plus500** and the prospects for travel group **Jet2**. *Please note that my comments reflect *my personal views* and are *not investment advice* or recommendations. Please do your own research or seek professional advice. Full disclaimer* [***here***](#disclaimer)***.*** **As always, thank you for listening. Please do get in touch if you have any comments or questions you'd like us to answer in a future episode.** Roland Head *Disclosure: at the time of the recording, Roland owned shares in Close Brothers Group.* --- #### Disclaimer This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - buybacks vs dividends + MONY, WIL (23/02/24) URL: https://www.rolandhead.com/dividend-notes/buybacks-vs-dividends-mony-wil/ Last updated: 2024-03-01T18:52:21.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/). This is a weekly review of results from dividend stocks that look potentially interesting to me. My eye was caught this week by the number of companies declaring sizeable share buybacks with their full-year results. This trend was especially noticeable among FTSE 100 firms, especially the big banks. The list from this week alone included **Barclays** (£1bn), **BAE Systems** (£1.5bn), **HSBC Holdings** ($2bn), **Intercontinental Hotels** ($800m), **Lloyds Banking Group** (£2bn), **Standard Chartered** ($1bn) and **Plus500** ($100m). In fairness, it can make sense for banks trading below net asset value to buyback their own stock. Assuming asset values remain stable and no higher-return opportunities are available, buying back shares at a discount to their book value should create value for shareholders. Even so, I was surprised by Barclays' statement that it intends to keep the total dividend flat, going forwards. Dividend *per share* growth will come from *"increased buybacks"* reducing the bank's sharecount. This seems a remarkable choice to me. I could only imagine taking this decision if I felt that the medium-term profit outlook for my business was flat or declining. #### Have we reached peak buyback? In the right circumstances, I accept that buybacks can create value for shareholders. Albeit, investors must sell shares to realise any of that value. What buybacks can't do is to provide an income for the owners of the business. That's the role of the dividend. Dividend investing has fallen out of fashion in recent decades, especially in the US. US fund manager Daniel Peris, of Federated Hermes, believes this could be about to change – and with good reason, in my view. In [an interview with the Investor's Chronicle](https://www.investorschronicle.co.uk/podcasts/2024/02/20/dividends-are-a-good-way-to-check-if-ceos-are-too-optimistic-daniel-peris-of-federated-hermes/?ref=rolandhead.com) this week, Peris – who was [a history professor](https://www.linkedin.com/in/daniel-peris/?ref=rolandhead.com) before becoming a fund manager – makes the point that throughout history, business owners have expected their assets to provide a cash income. The idea of suggesting to a business owner (or a buy-to-let landlord) that they should sell fractions of their business or borrow against their assets each year simply to provide an income would be laughable in most circumstances. But this is exactly the stance that's been adopted by many investors in recent years. Peris argues that the trend towards focusing on capital gains (and buybacks) can be seen as a recent anomaly, in historical terms. He links this change to a 40-year downtrend in interest rates and suggests that with this period now seemingly at an end, dividends could regain their former importance to stock market investors. The interview also covers some specific dividend stocks, including **Shell**, and is well worth a listen in my view, even if you disagree with the premise. To me, many buyback decisions seem to me to be driven by the need to engineer earnings per share growth, thus supporting a higher valuation. Few companies follow **Next**'s example in providing a costed explanation of why buybacks are the optimum use of surplus capital. With the interest rates now higher than they've been for more than a decade, I think companies' capital allocation between debt, buybacks, and dividends may need to evolve. Obviously I'm talking my own book here (as is Peris, I imagine). But I'm a big believer in the value of historical context for investors. I think it's a good way to understand events and to identify both opportunities and risks. Let's move on and take a look at some company results. --- ### Companies covered: - [**Moneysupermarket.com Group (LON:MONY)**](#moneysupermarketcom-group-mony)\- a solid set of results from this extremely profitable business, but management warn of tougher comparisons this year. On balance, the shares look fair value to me. - [**Wilmington (LON:WIL)**](#wilmington-wil)\- I'm impressed by my initial review of this training and information services business and have added it to my watch list to follow more closely in the future. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* ***As always, my comments represent my personal view and are provided solely for information and education purposes. They are not advice or recommendations.*** 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Moneysupermarket.com Group (MONY) > "Record revenue at £432m, despite no material revenue from energy switching" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/moneysupermarket-com-group--mony/preliminary-results/8043344?ref=rolandhead.com)**/** Mkt cap: £1.4bn *FY24 forecast dividend yield: 5.0%* One company that has not made any mention of buybacks in its latest results is Moneysupermarket.com Group. I haven't covered this FTSE 250-listed price comparison group here before, but it's a business I've followed in recent years thanks to its strong brand, high margins and good cash generation. Concerns around the maturity of the market and the level of competition between the top players have stopped me owning the stock, but it's a business I've considered buying on more than one occasion. One characteristic of Moneysupermarket's business that has become more obvious to me over the last few years is the extent to which it's at the mercy of external events. Even if we ignore the pandemic, rising interest rates and changes in the insurance and energy markets have had a sizeable impact. So too has the resurgence in inflation. Let's move on and take a look at Moneysupermarket's 2023 results. **Results summary:** 2023 seems to have been a fairly good year for the business, driven by a particularly strong performance in insurance. At a group level, revenue rose by 11% to a record of £432.1m, while pre-tax profit was 4% higher, at £72.3m. A net profit of £72.3m was converted into free cash flow of £73.3m, including £10m of acquisition spend. This supported a reduction in net debt to £19.8m (FY22: £39.0m) and gives the stock a free cash flow yield of 5.4%. **Dividend:** the full-year dividend for 2023 was increased by 3% to 12.1p per share, giving a yield of 4.9%. This increase ends a run of flat payouts, with a welcome recovery in free cash flow per share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/mony-dps-fcfps-230224.png) **Segmental results:** I mentioned earlier the influence of external events on customer behaviour. The company singles out *"exceptional trading in insurance"* as the main driver of last year's results. Looking at the segmental breakdown of revenue, we can see clearly that insurance (home/motor) did all the heavy lifting: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/mony-fy23-segment-revenue.png) Source: MONY FY23 results Management says the business gained market share in insurance, but admits that the growth was primarily driven by a surge in the number of customers looking for cheaper deals. There were two main reasons for this: - **Inflation** has led to significant increases in motor insurance costs - **Regulatory changes** at the start of 2022 meant that insurers were no longer allowed to charge new customers lower prices than renewal customers I wonder whether insurance switching may now moderate to more normal historical levels. Inflation is easing and we've now had a full renewal cycle since the regulatory changes at the start of 2022\. Travel insurance made a strong recovery last year, for obvious reasons, but remains a small part of the business. Home services (broadband, mobile, energy) remained soft, in part due the absence of energy switching. This market has pretty much disappeared since energy prices surged in 2022\. Theoretically, competition (and switching opportunities) may return if/when energy prices fall below the energy price cap once more. However, the energy market shakeout has seen many of the lowest-priced domestic energy suppliers fail and disappear from the market. The domestic energy supply market is now controlled by a smaller number of larger and stronger suppliers. My suspicion is that energy switching opportunities will be less compelling in the future than they were prior to 2022. Moneysupermarket says it does not expect any recovery in energy switching in 2024. **Profitability:** my calculations suggest Moneysupermarket achieved an operating margin of 22.5% in 2023, with a return on capital employed of 36.4%. While both of these numbers are clearly above average, I think it's worth remembering that profit margins have declined steadily over the last decade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/mony-opmargin-roce-230224.png) Looking across the busines, margins appear to vary widely across different market verticals: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/mony-fy23-segment-margins-1.png) Source: MONY FY23 results Assuming the £100.7m in shared costs are distributed in proportion to revenue across the business, the numbers show that insurance generated more than half the group's profits last year. At the other end of the spectrum, cashback is notably low margin. Although the 2021 acquisition of Quidco has provided a decent boost to revenue, it hasn't contributed much to profits. Moneysupermarket bought this cashback site for cash payments of between £87m and £101m, depending on performance. Based on last year's cashback EBITDA of £7.7m (excluding shared costs), my sums suggest Quidco may only be generating a single-digit return on capital employed. At face value this does not seem like very impressive capital allocation. However, Quidco's userbase was given as "around one million transacting users" at the time of the acquisition. I would hope that having these additional users within the Moneysupermarket ecosystem might also generate higher-margin revenue elsewhere in the business, especially as Moneysupermarket is now incorporating some of its services into Quidco's own comparison tool. **Outlook:** Moneysupermarket's outlook statement for 2024 sounds broadly positive to me, although management does flag up the risk that insurance growth will level out (my bold): > In the first few weeks of 2024, we have had similar trends to those seen at the end of Q4 2023 continue. We don't expect any increase in energy switching revenue in 2024\. **We expect the comparatives in Insurance will become tougher,** particularly as we move into the second half. However, our trading performance and momentum in our strategic execution, gives the Board confidence that Group EBITDA will be within the current market consensus range. Broker consensus forecasts I can see in SharePad suggest 2024 EBITDA of £140.4m, 6% above the 2023 figure of £131.9m. Earnings per share are expected rise by 8% to 17.3p per share, supporting a 4% increase in the dividend to 12.6p. These estimates put the stock on a forecast P/E of 14.6, with a 5% yield. #### My view I think that Moneysupermarket's brand and its ownership of Money Saving Expert (420k active monthly users) may provide a small competitive advantage over rivals such as Go Compare and Compare the Market. However I don't think the differentiation is all that strong – all three sites essentially offer quite similar services to the majority of users. Hence the ever-sillier television advertising campaigns employed by all three. Mortgage comparison was touted as an exciting growth opportunity for Moneysupermarket a few years ago, but still appears to be a work in progress. However, a new partnership with **Rightmove** suggests the company's offering is credible and I think mortgages could still be an interesting area. The last two times I have remortgaged (with my existing lender) I have simply gone to its website and selected a new deal. If my experience is representative, then the barriers to online-only mortgage lending have come down significantly over the last decade or so. I feel more confident in the future potential of this business than I did a couple of years ago. As far as I can see, CEO Peter Duffy is doing a decent job. However, I continue to wonder about the maturity of the core business. For me, the dividend yield and payout ratio often tell a story. In this case, Moneysupermarket's dividend yield of c.5% is attractive, but the company is now paying out a fairly large proportion of earnings and free cash flow and is only guiding for dividend growth of 3% this year. Adding the dividend yield and growth rate together suggests an expected return of 8% this year. That's similar to the long-term average total return from the UK market. I still think this is a good business, but increasingly mature and perhaps without the tailwinds of the last couple of years. On balance, Moneysupermarket shares look fairly priced to me at current levels. --- ### Wilmington (WIL) > "strong sustainable organic growth, both for revenue and profits" [**2023/24 half-year report**](https://www.investegate.co.uk/announcement/rns/wilmington--wil/half-year-report/8043327?ref=rolandhead.com)/Mkt Cap: £326m *FY24 forecast dividend yield: 3.0%* Wilmington specialises in providing training and information services to professionals in the governance, risk and compliance markets. Key market segments are law and financial services. This isn't a business I looked at very much before, but Wilmington is now one of the highest-ranking shares in my [dividend screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). The company's score of 77/100 suggests to me that I should know a little more about it, so I've been taking a look at this week's results. **Results summary:** Wilmington sold its healthcare business and made another acquisition late last year, so I've focused on the numbers provided for continuing operations. These numbers cover the six months to 31 December 2023: - Revenue from continuing operations +7% to £41.4m - *Recurring revenue rose by 11%, total repeat revenues now account for 73% of total revenue* - Adjusted pre-tax profit up 23% to £8.1m - Net cash: £28.0m - *H1 adjusted operating margin: 22%* - *TTM return on capital emplouyed (ROCE) of c.22%* - Interim dividend +11% to 3.0p per share **Segmental commentary:** looking at the segmental results, we can see that while Training & Education drives the majority of revenue, the Intelligence division earns significantly higher margins. This is now surprise - data-driven insight for professional services markets is a high margin area, as I highlighted with **Relx** in [last week's dividend note](https://www.rolandhead.com/dividend-notes/defensive-quality-cch-rel-16-02-24/). - **Training & Education:** growth was said to be broadbased. Revenue from continuing operations rose by 8% to £30.8m, generating a profit contribution of £6.5m (H1 FY23: £6.2m). - **Intelligence:** growth was said to be particularly strong in financial services, driven by insurance customers. Revenue for the half year fell by 5.5% to £13.0m, but profit contribution rose by nearly 9% to £4.3m, implying a margin of more than 30%. **Outlook:** trading is said to be in line with expectations, suggesting full-year adjusted earnings of 22.5p per share and a dividend of 10.8p. Those numbers price the stock on 16 times earnings, with a well-covered 3% dividend yield. #### My view My initial impression of this business is that it's better than I've previously realised. I don't see any obvious concerns, with a cash-rich balance sheet, ongoing growth and strong profitability. Strategically, law and financial services seem likely to remain perennially strong markets for governance, compliance and risk management services. Focusing on these markets makes sense to me and the combination of data-driven subscription services and training/education also seems logical. In valuation terms, my sums suggest a trailing 12-month EBIT yield of around 7%. SharePad data suggest that profit conversion to free cash flow is generally strong, too. The shares don't look too expensive to me, for a high-margin, growing business and I'm less concerned about valuation here than with Moneysupermarket (above). However, I wonder if it might be worth noting the decidedly cyclical shape of the company's share price chart: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/wil-chart-all-230224.png) I'm going to keep a closer eye on Wilmington and will look forward to reviewing its full-year results in the summer. For now, it's one for my watch list. Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### After falling 30%, are Diageo shares too cheap to ignore? URL: https://www.rolandhead.com/dividend-shares/after-falling-30-are-diageo-shares-too-cheap-to-ignore/ Last updated: 2024-03-31T08:07:30.000Z FTSE 100 drinks group **Diageo (LON:DGE)** was formed when Guinness merged with Grand Metropolitan in 1997\. The combination created a group with [heritage](https://www.diageo.com/en/our-business/our-history?ref=rolandhead.com) stretching back to the 17th century – some of the group's oldest brands are Haig whisky (1627), Guinness (1759) and Johnnie Walker (1820). Over the years following the merger, Diageo divested non-core food and hospitality businesses such as Burger King and Pillsbury. This created a pure-play drinks business that was primarily focused on spirits, although Guinness has always remained an important part of the mix. Today, the company now has a world-leading portfolio of 200 of mass-market and premium brands that are sold in nearly 180 countries. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-brands-120224.png) A selection of Diageo's leading brands - source: Diageo plc For investors who spotted the opportunity and got in early, Diageo shares have been a solid long-term investment that's delivered impressive income growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-price-dps-120224.png) According to SharePad total return data, £1,000 invested in 2004 – following the divestment of the food businesses – would be worth about £5,500 today, including dividends. That's equivalent to an annualised total return of just under 9% over 20 years. A 9% annualised return may not sound spectacular, but I think it's a decent record over such a long period. Of course, these total return numbers would have been higher in early 2022\. Diageo's share price has fallen by around 30% from the record highs of £41 seen in January 2022\. The stock is now trading in line with the pre-pandemic levels of five years ago: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-chart-5y-120224.png) #### A buying opportunity? I've always viewed Diageo as a quality compounder, with some attractive defensive characteristics. In principle, I think it's a stock I'd like to hold in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). In recent years, I have generally ruled out investing on valuation grounds, but the company's recent share price weakness has prompted me to take a fresh look. - Are Diageo shares cheap enough to offer an attractive entry point? - Can I see any warning signs in the numbers to suggest the company's long-held advantages are weakening? To find out more, I've run Diageo through my dividend scoring system and taken a closer look at its financials. Here's what I found. 💡 Don't miss any of my dividend share coverage – [****subscribe to my free weekly email now!**](https://www.rolandhead.com/#/portal/signup) --- ### Table of contents - [**Recent trading & outlook**](#recent-trading-outlook) \- falling volumes and a surprise profit warning - [**Crunching the numbers**](#diageo-crunching-the-numbers)\- how does Diageo score in my screening system? - [**Dividend culture**](#dividend-culture-very-strong) \- 26 years of continuous payouts - [**Dividend safety**](#dividend-safety-fairly-good) \- pretty good, could do slightly better - [**Dividend growth**](#dividend-growth-lacking-support) \- lacking support, but long-term record inspires confidence - [**Dividend yield**](#dividend-yield-a-little-low)\- below average - [**Valuation**](#valuation-cheap-enough) \- are the shares cheap enough for me after recent falls? - [**Profitability**](#profitability-very-good) \- an impressive record of high returns - [**Fundamental health**](#fundamental-health-too-much-debt)\- borrowings are slightly high, for me - [**Conclusion**](#conclusion-a-contrarian-opportunity)\- would I consider buying Diageo for my dividend portfolio? --- ### Recent trading & outlook Diageo surprised the market in November with a profit warning, blaming a slump in sales in Latin America. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-1y-chart-170224-1.png) Chief executive Debra Crew said that weaker consumer demand, downtrading and associated destocking meant that half-year sales in its Latin America and Caribbeann region would be around 20% lower than the same period last year. [At the time](https://www.rolandhead.com/dividend-notes/contrasting-fortunes-dge-rdw-tw-10-11-23/), I wondered whether other regions were also seeing weaker sales, despite the company's claim that *"momentum was continuing"* elsewhere. January's interim results do indeed suggest to me that Diageo has seen a broader slump in demand. In addition to the expected slump in LAC, volumes fell in all regions on an organic (comparable) basis, including North America: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-1h24-organic-growth-geo.png) Source: Diageo H1 FY24 results Price rises appear to have offset some of the fall in volumes. But net sales still fell by 1% to $10,962m during the half year, compared to the same period last year. Net profit was 18% lower, at $2,342m. Conversely, free cash flow for the period rose by $518m to $1,426m, which the company says was due to careful working capital management and the timing of one-off tax payments last year. A look at the accounts shows that Diageo's working capital requirements still absorbed a further $719m during H1, but this looks largely like a seasonal movement to me (reflecting the peak Christmas period). I'd expect some improvement over the full year. Excluding the working capital outflow, my sums suggest free cash conversion of 92% during the half year, showing good underlying cash performance. **Dividend:** Diageo's interim dividend was increased by 5%, to 40.5 cents per share. **FY24 outlook:** despite the negative performance during the first half – notably the weakness in North America – guidance for the full year appears to have been left broadly unchanged. Consensus forecasts have only moved slightly lower since these results were published at the end of January, suggesting analysts remain confident in Ms Crew's H2 guidance for an *"improvement in organic net sales and organic operating profit growth at the group level, compared to the first half."* Diageo has changed its reporting currency from the UK pound to the US dollar this year, as the dollar reflects a greater part of its trading activity. This complicates comparisons between years, but the company has provided [recast financials](http://www.investegate.co.uk/announcement/rns/diageo--dge/diageo-plc-publishes-recast-usd-financials-/8013094?ref=rolandhead.com) for the last three years. According to these numbers, FY23 earnings would have dropped out at $1.96 per share. Current broker estimates are for a figure of $1.91 per share this year, according to Stockopedia. This prices Diageo shares on about 19 times forecast earnings, based on current exchange rates. This appears to be the stock's lowest P/E multiple since 2014/15, according to SharePad. The stock's EV/EBIT ratio – a more important metric for me – is also similarly reduced: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-pe-ev-ebit-140224.png) I don't see the current headwinds as a lasting setback for Diageo. I expect trading to recover over time. On this basis, the current valuation dip makes this a logical time for me to take a look at the business as a possible investment. Let's take a look at how my screening system rates Diageo's financials. --- ### Diageo: crunching the numbers **Description:* Diageo is a global drinks business with a portfolio of brands including Johnnie Walker, Smirnoff, Tanqueray and Guinness.* | **Diageo(LON:DGE)** | **Quality Dividend score: 48/100** | **Forecast yield: 2.8%** | | ------------------- | ---------------------------------- | ------------------------- | | Share price: 2,899p | Market cap: £64.8bn | *All data at 12 Feb 2024* | ***Latest accounts:*** [*half-year results for the six months to 31 December 2023*](https://www.investegate.co.uk/announcement/rns/diageo--dge/interim-results/8011679?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [**dividend screening system**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think Diageo could be a suitable addition to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). As a reminder, this is a scoring system I've developed to rank shares for the qualities that are important to me, from a quality dividend perspective. My choice of scoring factors is of course highly subjective. These scores are not intended to be used as a guide on when to buy or sell shares. They're simply one factor I use to assess a stock's potential attractions, in addition to broader, company-specific analysis. Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: very strong Diageo has paid an ordinary dividend every year since 1998 and has increased its payout in almost all of these years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-divps-140224.png) The company clearly has a strong and consistent commitment to the shareholder payout. Unsurprisingly, my screen awards Diageo a perfect score for dividend culture. **Diageo scores 5/5 for dividend culture in my screening system.** --- ### Dividend safety: fairly good My dividend safety score looks at three factors: - dividend cover by earnings - dividend cover by free cash flow - leverage (which I define here as net debt/5yr average net profit) My aim is to gauge the safety and affordability of the dividend. I want to know if the payout might be vulnerable to a cut during a period of difficult trading. In this case, we can see that Diageo has generally maintained earnings and free cash flow cover for its dividend, although free cash flow conversion has become slightly less consistent since 2011: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-div-fcf-cover-leverage-140224.png) Using SharePad data, I estimate that dividends have consumed about 75% of free cash flow over the last 10 years. Where additional cash has been needed, particularly to fund acquisitions, Diageo has made relatively generous use of debt, in my view. I'll comment on my views on the group's debt and profitability shortly. For now, I would say Diageo's dividend is probably safer than the score below suggests. But I do think there is room for improvement. **Diageo scores 2.6/5 for dividend safety in my screening system.** --- ### Dividend growth: lacking support? As with dividend safety, my main concern with a company's dividend growth is over its sustainability. In my view, two of the main drivers of sustainable dividend growth are a company's net asset value and its free cash flow. Over the long term, I believe both of these need to increase to deliver sustainable dividend growth. Without growth in net asset value, a company may need to increase its profitability to support a dividend growth. While companies can increase their profitability, in my experience this process tends to reach a limit at some point. Similarly, without free cash flow growth, companies run the risk of relying on debt or cash reserves to support dividend growth – ultimately, this may also become unsustainable. With these factors in mind, my dividend growth score compares the five-year growth rates for NAV and free cash flow with the five-year dividend growth rate. This is quite hard to show in a chart, so I tend to just plot the values of these metrics in order to visualise whether they have grown in step with each other: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-divps-fcfps-navps-140224-1.png) This chart provides a nice visual representation of the way that Diageo's free cash flow has kept pace with its dividend growth over the last 25 years. Free cash flow and net asset value growth have both slowed over the last few years, depressing my five-year growth rate estimates. However, performance is expected to improve over the coming year and the group's long-term growth trend looks very reassuring to me. Rescoring this stock on a 10-year view would give a stronger result. On balance, I think Diageo's long-term track record suggests that the score below is probably too harsh. **Diageo scores 0.3/5 for dividend growth in my screening system.** --- ### Dividend yield: a little low Diageo shares have rarely offered a dividend yield of more than 3% over the last decade or so: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-div-yield-140224.png) The stock's five-year average dividend growth rate is about 4%. If I add this to the current yield of 2.8%, I get an expected return of 6.8%. What this tells me is that if the stock's dividend growth rate and P/E rating remain stable, then an investment might deliver an annual total return of just under 7% over the next few years. That certainly wouldn't be a disaster. It would be in line with the long-term average return from the UK market. However, in general I tend to target an expected return figure of at least 10%, in the hope of gaining a greater margin of safety and improving my chances of beating the market. **Diageo scores 2/5 for dividend yield in my screening system.** --- ### Valuation: cheap enough? I don't normally buy stocks in the hope of benefiting from a re-rating unless they look exceptionally cheap to me. Let's see if that's the case here. The two main metrics I use for scoring stocks on valuation are EBIT yield (EBIT/EV) and free cash flow yield. I prefer these over the P/E ratio as they – respectively – include debt and reflect surplus cash generation. Both are important factors in the quality of a dividend, in my view. Here's how Diageo's valuation stacks up on my metrics: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-ebit-fcf-yield-140224.png) Consensus forecasts for the year ending 30 June 2024 suggest Diageo shares are trading on an EBIT yield of 6%, with a free cash flow yield of around 4%. In terms of valuation, that's at the upper end of what I might want to consider. I would be more tempted with an EBIT yield of 8% and a free cash flow yield of 6%. However, I don't think Diageo's current valuation looks too unreasonable for a good quality, high-margin defensive with a long track record. Interestingly, Diageo's forecast dividend yield of 2.8% suggests that the 75% average free cash flow payout ratio I mentioned remains representative of what to expect from the business. Although I would like to pay a little less for Diageo shares, I wouldn't rule them out on valuation grounds alone at this level. **Diageo scores 2.5/5 for valuation in my screening system.** --- ### Profitability: very good As I mentioned earlier, I see net asset value per share (NAVps) growth as a key indicator of sustainable growth. If a non-financial company's net assets aren't growing, then it may be relying on increased profitability or greater leverage to achieve higher profits and dividend payments. That's not ideal, from my perspective. Ultimately, profitability is driven by the returns on a company's assets. So my preferred measure of profitability for non-financials is return on capital employed (ROCE), rather than operating margin (although both are useful). To score stocks for profitability, I look at ROCE and NAVps growth. What I hope to see is consistent or improving ROCE, alongside steady NAVps growth. If we exclude the impact of the pandemic, then I think that Diageo has delivered this quite reliably over the last 25 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-roce-navps-170224.png) Once again, Diageo's five-year average ROCE (the measure used in my score) has dropped somewhat due to the pandemic. However, the company's long-term track record of high operating margins and above-average ROCE looks very reassuring to me. I don't have any serious concerns about the profitability of this business: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-opmargin-roce-140224.png) Overall, I think it's fair to say that Diageo has delivered consistently strong profitability for a long time. Once again, I think it might be reasonable to score the business slightly higher than my system suggests. **Diageo scores 2.8/5 for profitability in my screening system.** --- ### Fundamental health: too much debt? Together with valuation, my only other real reservation about Diageo is that it uses slightly too much debt for my liking. The group's net borrowing has risen from $17.6bn to $20.9bn since 2021\. Diageo's net debt/EBITDA leverage multiple returned to its previous high of 2.9x at the end of December. That's above my preferred limit for this measure of 2.0x-2.5x. To be clear, I don't think the group's debt is likely to be problematic. But with interest rates rising, I think that switching capital allocation from share buybacks to debt repayment might be prudent and could result in a modest reduction in finance costs. Looking at the numbers, Diageo's FY23 results indicated that the group's effective interest rate was expected to be *"just above 4%"* in FY24\. The half-year results revealed that the actual H1 result was 4.4%, but management expect the full-year result for FY24 to *"reduce slightly"*. If I assume a full-year figure of 4.2%, I estimate that interest costs might reduce to around 3.2%, after tax. Even so, this is still more costly than the 2.8% cost of the dividend at current levels. Diageo bought back $500m of shares during the first half of the year and paid net interest of $352m. So the numbers involved are not necessarily trivial. I suspect that repaying debt instead of buying back shares could result in a net saving to the business. It would also have the added benefit of strengthening Diageo's balance sheet and improving its financial flexibility, perhaps to support future growth investments. My fundamental health score combines my own measure of leverage (net debt/5yr average net profit) with fixed charge cover (the ratio of EBIT to rent and lease costs): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/dge-fixcvr-leverage-140224.png) Diageo's fixed charge cover looks comfortable enough, but leverage appears to be at the upper end of the group's historic range, based on my measure. Consensus forecasts do suggest a reduction in net debt over the next couple of years, so perhaps my cautious view on share buybacks is unecessary. Even so, if I added Diageo to my dividend portfolio today, it would be the most highly-geared company in the portfolio. That's not something that fills me with enthusiasm. **Diageo scores 1.7/5 for fundamental health in my screening system.** --- ### Conclusion: a contrarian opportunity? **My quality dividend system awards Diageo an overall score of 48/100 at the time of writing (February 2024).** **My view:** on balance, my view remains that Diageo is a good quality business that is starting to look reasonably priced. Although my dividend screen score of 48/100 seems uninspiring and is below the current [portfolio average](https://www.rolandhead.com/dividend-portfolio/) of 69, I can see scope for this to improve over the next 12-18 months. Here's a summary of the main points, as I see them. **Pros:** - Global market leader with an enviable portfolio of brands, many of which have proved extremely durable - Consistently high margin, high ROCE business - Good cash generation - Long and consistent record of prioritising dividend returns - The current valuation is not completely unreasonable and *might* represent a decent buying opportunity **Cons:** - Diageo is currently going through a difficult patch; there's a risk that a recovery will take longer than expected, which could further depress the valuation and create better, safer buying opportunities. - Debt levels and leverage are a little higher than I'd like - I feel that debt reduction might be a better use of cash than share buybacks at the moment - Although I accept the arguments for paying a premium for quality, the shares are not as cheap as I'd like for a new purchase I would still want to do some additional research before deciding to add Diageo to my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). But on balance, I expect this business to continue generating fairly consistent and attractive returns for the foreseeable future. I do not have any serious concerns about Diageo and would be happy to own its shares. 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - defensive quality - CCH, REL (16/02/24) URL: https://www.rolandhead.com/dividend-notes/defensive-quality-cch-rel-16-02-24/ Last updated: 2024-02-23T20:12:52.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/). This is a weekly review of results from dividend stocks that look potentially interesting to me. In this note I've covered two companies that score highly as quality defensives, in my view. One of them benefits from an exclusive regional licence to supply some of the best-known consumer brands in the world. The other company has many of the attributes of a true quality compounder. ### Companies covered: - [**Coca Cola HBC (LON:CCH)**](#coca-cola-hbc-cch) \- a solid set of numbers from this soft drinks group, which is a regional bottling agent for the Coca-Cola Co. I remain a fan and might consider buying the shares at current levels. - [**Relx (LON:REL)**](#relx-rel)\- this high-quality business extended its track record of growth last year and boasts enviable profit margins and excellent cash generation. The shares look more expensive than ever to me, though. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) --- ### Coca Cola HBC (CCH) > "We delivered volume growth, share gains, improved margins and record levels of free cash flow." [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/coca-cola-hbc-ag-cdi---cch/strong-execution-powers-a-year-of-growth/8036648?ref=rolandhead.com) / Mkt cap: £9.0bn *FY24 forecast dividend yield: 3.4%* Switzerland-based Coca Cola HBC is one of the Coca-Cola Company's regional bottling agents. It has the exclusive right to supply Coca-Cola brands in its territories. These include parts of western, central, and eastern Europe, as well as some African markets: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/cch-countries-fy23.png) Source: CCH FY23 presentation I've written about this drinks business positively before (most recently [here](https://www.rolandhead.com/dividend-notes/in-a-sweet-spot-cch-ror-hils/)). I see it as a classic defensive stock that I could see myself owning at some point. The main downside, I guess, is that CCH doesn't own any of its main brands. However, given that regional bottling companies like CCH are a core part of Coca-Cola's operating model, I'm not sure this is a major concern. 💡 **I'm publishing a longer* [**dividend share review*](https://www.rolandhead.com/tag/dividend-shares/) *looking at another FTSE 350 drinks business this weekend – it's free to read and should land in your inbox on Sunday morning.* Let's take a look at Coca Cola HBC's 2023 numbers. **2023 results summary:** Net sales revenue rose by 16.9% to €10,184m last year on an organic basis, which excludes the impact of currency rates, acquisitions and disposals. This strong revenue growth was driven by an average price increase of 15% per unit case (5.678 litres), paired with a more modest 1.7% increase in organic volumes. Excluding last year's €127m exceptional charge relating to the Ukraine-Russia war (CCH operates in both countries), operating profit for the year rose by 15% to €954m. Operating highlights last year included the €180m acquisition of *Finlandia Vodka* from Jack Daniel's owner Brown-Forman, and the launch of *Jack Daniel's & Coca-Cola* in Poland, Ireland and Hungary. Growth performance was not split evenly across the business, though. As this graphic shows, the core sparkling drinks category delivered a relatively staid performance, while energy and coffee performed delivered strong volume growth as these markets continue to expand: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/cch-fy23-categories.png) Souce: CCH FY23 presentation CCH's **profitability** remained good, if not exceptional. My sums suggest an operating margin of 9.4% and a return on capital employed of 15.8%. Both are comparable to other soft drinks groups listed on the London market. Excellent **cash generation** is another attraction of this business, for me. CCH converted an after-tax profit of €635.7m into free cash flow of €694.1m last year, by my calculations. Net debt remained stable at around €1.6bn, which looks reasonable to me against annual profits of over €600m. **Dividend:** a dividend of €0.93 per share has been proposed for the year, representing a 19.2% increase on the prior year. This gives a yield of 3.3%. I estimate the cost of the payout to be around €341m, leaving it covered twice by free cash flow of €694m. That looks very sustainable to me. **Outlook:** management warn of challenges from macro uncertainty in 2024, but expect to be able to deliver organic revenue growth of 6%-7% and comparable operating profit growth of 3%-9%, presumably depending on cost inflation and currency impacts. Consensus forecasts suggest adjusted earnings may only rise by 2% to €2.12 per share this year, putting CCH on a forecast P/E of 13. #### My view I remain impressed with the strong cash generation and profitability of this business. I suspect it should be a reliable, defensive performer over time. Possible downsides include lack of brand ownership and geographic exposure to troubled markets – Nigeria, Russia and Ukraine might be examples of this. My sums suggest the stock is currently trading with an EBIT yield (EBIT/EV) of almost 8%, which looks reasonable value to me. Although I would ideally like to buy CCH a little cheaper, I would not be totally against the idea of buying the shares at current levels. --- ### Relx (REL) > "we expect another year of strong underlying growth in revenue and adjusted operating profit" [**2023 full-year results**](https://www.investegate.co.uk/announcement/rns/relx-plc--rel/relx-2023-results/8038821?ref=rolandhead.com)/ Mkt cap: £62.4bn *FY24 forecast dividend yield: 1.9%* I've not looked at Relx before on this site, but as a quality dividend investor, I probably should have done. This FTSE 100 group is the business formerly known as Reed Elsevier. Historically it was an exhibition and specialist publishing group. Today the group has evolved into a more technology-driven business and divides its operations in [four main segments](https://www.relx.com/our-business/our-business-overview?ref=rolandhead.com): - **Risk** (34% of revenue) - analytics and decision tools for financial services and government, primarily aimed at insurance and financial crime prevention, such as identity fraud. - **Scientific, technical & medical** (33% of revenue) - academic journals, research databases, data analytics tools - **Legal** (20% of revenue) - databases and research tools used by legal firms, academia and government - **Exhibitions** (12% of revenue) - trade shows and supporting digital services to help companies reach new customers and suppliers, runs events in more than 20 countries Relx's 2023 results showed decent progress. Revenue rose by 7% to £9,161m, while operating profit climbed 15% to £2,682m, supporting an impressive 29% operating margin and a return on capital employed (ROCE) of 28%. The company reported a net profit attributable to shareholders of £1,781m and converted this into free cash flow of £1,940m before acquisitions (£130m), by my calculations. This looks like an excellent performance to me, although the stock's free cash flow yield of 3.1% suggests to me that much of the good news is already in the price. **Dividend & share buyback:** the full-year dividend has been lifted 8% to 58.8p per share and the company has launched a £1bn buyback for 2024, following last year's £800m share repurchase. This dividend will cost about £1.1bn and gives Relx shares a yield of around 1.8%. The stock's low dividend yield and free cash flow yield suggest to me that any investment here needs to be based on the assumption that growth will remain strong. **Segmental results:** looking at Relx's segmental results for last year, it seems clear to me that the main drivers of profit growth are the Risk and Scientific, Technical & Medical divisions. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/rel-fy23-segmental-profits.png) Source: Relx FY23 results Risk and Scientific, Technical & Medicalgenerated 76% of group operating profit last year at margins of 37% and 38% respectively. This is an outstanding level of profitability that suggests to me these operations have significant market share and competitive advantages. In Risk, Relx singled out Financial Crime Compliance and digital Fraud & Identity solutions as key drivers of growth last year. In Scientific, Technical & Medical, the company said that volume growth in academic publishing and the development of new value-add analytics tools were helping to support growth. Margins in Legal were 21%, while exhibitions achieved 29%. While these are both respectable figures, these smaller, lower-margin divisions are not going to move the needle on group results as easily as the larger parts of the business. **Outlook:** chief executive Eric Engstrom expects another year of strong underlying growth in revenue and operating profit. Consensus forecasts suggest adjusted earnings could climb 7% to 122p per share this year, putting the stock on forward P/E of 27. #### My view Relx certainly has an impressive track record of growth over the last 20 years, in my view. Operating profit has trebled over the period, equivalent to about 6.5% per year annualised: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/rel-turnover-ebit-160224.png) The profitability of the business has also trended higher over this time: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/rel-opmargin-roce-160224.png) However, Relx's success is no secret. Based on my preferred metrics of free cash flow yield and EBIT yield, the shares are more expensive than at pretty much any time in their history: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/rel-ebit-fcf-yield-160224.png) What's a reasonable price to pay for a high-quality compounder, such as Relx appears to be? For me, the price is a little too high and the dividend yield too low. But I think this could well be a case where paying a premium for quality delivers decent results over time. I'm staying on the sidelines for now, but Relx is certainly a business I would be interested in owning if an opportunity arose. For what it's worth, Relx scores a respectable 65/100 in my [dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at the time of writing, despite its low yield and strong valuation. I don't make decisions based on my screen scores alone. But this result also tends to support my feeling that buying Relx shares at a full price could still give me more of the qualities I want in [my dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). *As always, please let me know what you think about the companies I've covered here in the comments below or my contacting me directly.* 💡 Don't miss any of my dividend share coverage – [subscribe to my ****free** weekly email now!](https://www.rolandhead.com/#/portal/signup) Roland Head --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - good operators? AZN, RECI, RSW (09/02/24) URL: https://www.rolandhead.com/dividend-notes/good-operators-azn-reci-rsw-09-02-24/ Last updated: 2024-02-17T07:01:41.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/). This is a weekly review of results from dividend stocks that look potentially interesting to me. Try as I might, I'm not sure there's a common theme between this week's companies – except perhaps that all three of them seem to be quite good at what they do. ### Companies covered: - [**AstraZeneca (LON:AZN)**](#astrazeneca-azn) \- rising costs and capex appear to have put pressure on free cash flow last year, despite impressive growth in headline profits. There's not enough value here for me, but I could be wrong. - [**Real Estate Credit Investments (LON:RECI)**](#real-estate-credit-investments-reci) (disc: I hold)\- this specialist lender impaired the fair value of some loans in Q3, but I think the underlying quality of the loan book remains good. With the shares trading at a discount to NAV and offering a 10% yield, I remain positive. - [**Renishaw (LON:RSW)**](#renishaw-rsw)\- half-year results show a drop in profits and continued high cash burn, but Renishaw is investing for the future and appears to be positioned for a gradual recovery. I remain interested. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* ***As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.*** --- ### AstraZeneca (AZN) > "we are pleased to report another year of strong financial performance and scientific progress" [**2023 final results**](https://www.investegate.co.uk/announcement/rns/astrazeneca--azn/final-results/8027592?ref=rolandhead.com) / Market cap: £152bn *FY24 forecast dividend yield: 2.6%* I looked at FTSE 100 pharma **GSK** [last week](https://www.rolandhead.com/dividend-notes/decades-of-dividends-gsk-nwf-wyn-jhd-02-02-24/) and concluded that there could still be some value on offer, if current momentum can be maintained. This week it was the turn of **AstraZeneca** to report its 2023 results. When I covered the Anglo-Swedish group's half-year results in August last year, I noted improved cash generation but commented that the valuation seemed relatively full. AstraZeneca's share price has dropped about 10% since then, in part because of a sell-off that followed this week's results, which showed earnings slightly below expectations: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/azn-1y-chart-090224.png) I don't think the wheels are coming off here. But as I commented last week, developing major new drugs is an expensive and seems to be a somewhat hit-and-miss business. I don't claim any knowledge of this sector, so I tend to restrict my focus to the financial performance of the big pharma firms. As a dividend investor, I want to know if these businesses are able to produce reliable supplies of surplus cash to support an appealing dividend. AstraZeneca applies a mind-boggling level of adjustments to its profits. Last year's core earnings were $7.26 per share, while reported earnings were just $3.84 per share. **Cash flow:** I prefer to focus on free cash flow. In [November](https://www.rolandhead.com/dividend-notes/profit-upgrades-x3-hils-azn-bme-14-11-23/), I noted that AstraZeneca's third-quarter results showed an improvement in cash generation over the first nine months of the year, compared to 2022. However, this increase doesn't seem to have been maintained over the full year. Based on the way that I've calculated free cash flow, the amount of surplus cash generated by the business fell by nearly 9% last year: - 2022 FCF: $5.7bn - 2023 FCF: $5.2bn This gives AstraZeneca a trailing free cash flow yield of about 2.7%, which seems quite full to me. *For clarity, I've included various acquisiton-related payments in my calculation as these have become a regular part of AstraZeneca's business model and were comparable across both years.* The fall in free cash flow appears to have been driven by an increase in capital expenditure. Cash outflows on investing activities rose by around a third to $4.1bn last year (2022: $3.0bn). This was mirrored by an increase in operating expenses – combined expenditure on R&D and general overheads rose by 7% to $30.2bn last year (2022: $28.2bn). For me, this serves as a reminder that developing new medicines is a costly business. **Profitability:** AstraZeneca's 2023 results do show a useful improvement in statutory profitability: - Operating margin: 17.9% (2022: 8.5%) - ROCE: 11.6% (2022: 5.4%) However, both of these figures are lower than those achieved by GSK last year (22.2% and 17.8%, respectively). **Dividend:** total dividends declared for the year were $2.90 per share. While this was comfortably covered by reported earnings of $3.84 per share, my sums suggest the shareholder payout wasn't quite covered by free cash flow of c.$2.65 per share. I don't see this as a major problem, but it's a little disappointing all the same. #### My view AstraZeneca does have a long and fairly respectable dividend history, hence my interest here: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/azn-dividends-090224.png) Sales and profit growth have been strong in recent years and consensus forecasts suggest this will continue. It's possible that the stock will grow into its current valuation, but for me, the price is still a little too steep. Based on 2023 results, I estimate AstraZeneca shares trade on an EBIT yield of 3.8% and a free cash flow yield of 2.7%. These numbers don't offer me the kind of safety margin I'd like. I could be wrong – if profit growth is backed by stronger cash generation this year, AstraZeneca's valuation could become more attractive. But we all have to make our own choices on value, and I prefer not to pay too much upfront for growth. --- ### Real Estate Credit Investments (RECI) > "The opportunity to provide senior loans at low risk points, for higher margins, is increasingly evident" [**Q3 presentation**](https://www.investegate.co.uk/announcement/rns/real-estate-credit-investments-ltd--reci/investment-manager-s-q3-investor-presentation/8020741?ref=rolandhead.com) / Mkt cap: £275m *FY24 forecast dividend yield: 10%* **Disclosure**: I hold shares in RECI. RECI is a closed-end investment company that originates and invests in commercial real estate debt in Western Europe. It's managed by alternatives specialist [Cheyne Capital](https://www.cheynecapital.com/?ref=rolandhead.com). The company's core activity is providing senior loans directly to property developers, with the aim of funding the dividend from interest income. It's a somewhat niche and specialist business, but RECI has been listed since 2005\. In my view, this business has established a fairly solid record since 2011, after it had recovered from the 2008 financial crisis. The stock currently pays a quarterly dividend of 3p per share. That gives a generous yield of 10%, at the last-seen share price of 121p. **Q3 update:** RECI says that its total NAV return for the three months ended 31 December 2023 was -0.6%. This was due to impairments on its loan portfolio. More on that shortly. One UK loan was repaid during the quarter, realising net proceeds of £9.4m and providing improved headroom for new lending. Cash reserves do appear to have run a little low – cash stood at £12.1m or 3.7% of NAV at the end of December, below the target range of 5%-10%. However, the January factsheet (also released this week) shows that cash recovered to £22.7m by the end of January, or 6.8% of NAV. **Profits:** total income for the quarter was £7.3m or 3.2p per share. However, expenses and fair value adjustments reduced this to a net loss of £1.3m (-0.6p per share) for the quarter. RECI's goal is for the dividend to be fully covered by net interest income, but this wasn't quite achieved during the quarter. As we can see from the table below, interest income less finance costs and expenses dropped out at 2.5p per share (before fair value adjustments): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/reci-3q24-earnings-reconcile-1.png) Source: RECI Q3 FY24 presentation **Loan-to-value & leverage ratios:** the weighted average loan-to-value (LTV) of the company's portfolio was 60.7% on 31 December 2023 (Sept '23: 60.9%). The weighted average maturity of RECI's loans was unchanged at 1.5 years. With a REIT, LTV serves as an indicator of the level of borrowing the REIT has undertaken to fund its assets. However, that's not true in this case. RECI's 60% LTV represents the value of its loans as a proportion of the value of the properties on which they are secured. It's equivalent to the LTV on a residential mortgage. RECI's own balance sheet leverage is much lower. Borrowings stood at £55.1m at the end of December, versus a net asset value of £330.6m. This gives a debt-to-equity ratio of 16.7%. That looks comfortable to me and is well below the company's limit of 40%. **Discount to NAV:** the 121p share price at the time of writing represents a 16% discount to RECI's 31 January NAV of 145.5p per share. I think this could offer value, but the risk of loan losses also appears to be increasing. **Are loan losses likely?** RECI's loans are marked to fair value each month when NAV is calculated. The company's policy is to adjust the value of its loans based on the credit quality of the borrower and the market value of the underlying property. This fair value policy gives an expected recovery figure from the loan, which may be below the original commitment. Clearly, that's useful information to have for a realistic NAV. I assume this approach is also in line with how RECI's auditors want the company to record loan values. However, it seems to me that one side effect of this fair value policy is that it becomes harder for investors to gauge the true equity cushion on a loan that has been impaired. In effect, the fair value adjustment appears to ensure that LTV remains broadly unchanged from entry LTV, even when the value of the property collateral may have fallen. This seems relevant to me because my understanding is that in situations where RECI is the senior lender (87% of loans), the company will still hope to achieve a recovery of the original amount loaned, even if it has impaired the fair value of the loan. This conclusion is based on my reading of the company's commentary on the Paris office loan whose fair value was impaired in Q3: > Cheyne’s loan basis is low in the asset, and hence, we can > afford to take a longer time to lease up the asset, which we > will do. > In the interim, Cheyne’s valuation policy is to reflect the > lower asset valuation. > Cheyne will continue to work actively with the borrower > and a selected asset manager to expedite leasing the > asset, to secure early repayment of the principal as well as > all accrued interest. Apologies for this digression. I've been thinking about this because RECI's third-quarter update highlighted some expected (unrealised) loan losses that were not apparent when the company's half-year results were published in November: > "Following careful analysis of market conditions, RECI has in instances conservatively taken unrealised mark downs to its portfolio" Loans that have defaulted now account for 4% of NAV, representing five positions ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/reci-pf-riskrating-311223.png) Source: RECI Q3 FY24 presentation In total, these loans represented original lending commitments of £32.0m, but have now been marked down to a fair value of £13.0m. This is a non-cash impairment (so far), but the £13.0m represents the expected recovery value from these loans. In fairness, I think the situation is not as bad as these figures might suggest. **Paris office property:** The only loan issued under the company's current lending policy that has been impaired is a Paris office property which is struggling to let due to post-COVID demand changes. RECI's loan has been written down from £14.5m to £10.3m to reflect its policy of valuing loans based on the credit quality of the borrower and the market value of the property. But as the senior, secured lender, RECI says it can remain patient and is working towards securing *"early repayment of the principal and all accrued interest"*. **Legacy loans:** the remaining four defaulted loans are described as legacy and are a mix of [CMBS](https://www.investopedia.com/terms/c/cmbs.asp?ref=rolandhead.com) and junior (mezzanine) debt. I don't think RECI would consider either of these today. At least some of these defaulted loans date back to 2006/7! Original commitments of £17.5m are now expected to yield a recovery of £2.7m. £10m of this shortfall is expected to come from a total loss on a loan relating to a UK retail property. I have to admit that I didn't know these lower-quality legacy loans still existed on RECI's balance sheet, prior to the publication of the Q3 presentation. I don't know if there are any others, but if so I would hope that they are nearing redemption. **Are further impairments likely?** I don't know. But the company's commentary about the increasing frequency of forced sales suggests to me that there is still some risk that property values could continue to fall: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/image.png) Source: RECI Q3 FY24 presentation **Outlook:** management says that RECI has *"a strong pipeline of floating rate senior loans"*, derived from Cheyne's pipeline of deals, said to stand at £1.1bn. #### My view I find RECI's monthly factsheets and quarterly reporting to be relatively transparent and informative for shareholders. I don't see any reason to doubt management's view that ongoing constraints in bank lending and an increase in forced sales are contributing to *"a compelling emerging opportunity set in senior loans"* seems reasonable to me. But I wonder if the flipside of this market dynamic might be that further impairments are likely, even if RECI may eventually be able to achieve a full recovery. In the meantime, I would like to see dividend cover restored. However, I'm reassured that January's factsheet did not highlight any further loan impairments. RECI shares currently trade c.15% below net asset value and offer a 10% dividend yield. While they're not without risk, on balance I think there's probably some value here. I remain happy to hold. --- ### Renishaw (RSW) > "We expect an improvement in our trading performance in the second half of the financial year as market conditions improve" [**2023/24 half-year report**](https://www.investegate.co.uk/announcement/rns/renishaw--rsw/half-year-report/8022988?ref=rolandhead.com) / Mkt cap: £3.0bn *Forecast dividend yield: 1.9%* Renishaw specialises in precision measurement and process control products for manufacturers. I reviewed last year's results from this specialist engineer [here](https://www.rolandhead.com/dividend-notes/quality-dividends-for-my-watch-list-rsw-chh-20-09-23/). This year's H1 results triggered a sharp share price rise, despite a big drop in profit compared to H1 last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/rsw-1y-chart-090124.png) Is this new optimism justified? I'm not entirely sure. Let's take a look at the numbers. **H1 results summary:** Renishaw says that weak demand from semiconductor manufacturers offset strength in healthcare and industrial metrology. The net result was a 5% reduction in H1 revenue, which fell to £330.5m. Pre-tax profit for the half-year fell by 27% to £56.5m, while earnings were down 26% to 62.1p per share. Reductions in inventory contributed to a significant increase in cash flow from operating activities, which rose to £55.6m (H1 FY23: £21.6m). However, my sums suggest free cash flow for the half year was just £13.1m, reflecting £40.4m of capex and £4.5m of capitalised development costs during the period. The capex relates to the expansion of the company's factory in Wales. Full-year spend is expected to be similar to last year's figure of £74m. Renishaw ended the half year with net cash of £164m, down from £193m at the end of June 2023. The interim dividend was left unchanged at 16.8p per share. **Profitability:** Renishaw's operating margin for the half year fell to 14.3%, giving a trailing 12-month figure of 16.4%. That's down from 19.5% in the prior year and slightly below the long-term average for this business: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/rsw-opmargin-roce-090224.png) However, I don't see too much to dislike here – this still appears to be an above-averagely profitable business with a very strong balance sheet. **Outlook:** management expects a stronger performance during the second half of the year. Updated guidance is for an adjusted pre-tax profit of between £122m and £147m for the full year. Last year's adjusted PBT figure was £141m, so Renishaw will need to hit the top end of this range in order to make any progress this year. Consensus forecasts suggest FY24 earnings of 145p per share (FY23: 155.1p), putting the stock on a forecast P/E of 28\. A stronger showing in FY25 is expected to reduce the forward P/E to 24. The full-year dividend is expected to rise by 2.6% to 78.2p per share, giving a prospective yield of 1.9%. #### My view When I looked at Renishaw last year, I liked the business and commented that the valuation look *"far more reasonable than it's been for a number of years".* These half-year results give me an EBIT yield of 6.2%, which is within the range I'd consider for a quality business. While free cash flow and the dividend yield are both lower than I'd like to see, I can see a case for suggesting that Renishaw is fairly valued on a long-term view. The company has a 29-year track record of (almost) unbroken dividend growth. I think it's also interesting to note that the stock's current P/NAV of c.3x has historically been at the bottom end of its valuation range: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/rsw-divps-pnav-090224.png) Renishaw remains on my watch list as a possible buy. I'm not quite on board with the valuation, but I can see that if the company can resume its past record of growth and profitability, then the shares might be reasonably valued at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe today!](https://www.rolandhead.com/#/portal/signup) *Disclosure: at the time of publication, Roland owned shares in Real Estate Credit Investments.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Investor's Round Table: SUP, HAT, BOOT, AIEA + analysing company accounts URL: https://www.rolandhead.com/podcasts/investors-round-table-h-t-henry-boot-airea-analysing-company-accounts/ Last updated: 2024-02-08T12:26:32.000Z I really enjoyed getting back around the Investor's Round Table recently with my friends and fellow private investors [Graham Neary](https://twitter.com/GrahamNeary?ref=rolandhead.com) and [Mark Simpson](https://twitter.com/DangerCapital?ref=rolandhead.com). In this free-to-listen podcast we discussed four different companies covering sectors as diverse as flooring and vaping... We then wrapped up by answering a listener question about the core things we look at when we review a set of company accounts. Here's a summary of the topics we covered. I think it's fair to say that we had contrasting views on some of these businesses! - **1m30**: discussing recently-announced government plans to ban disposable vapes and our views on how this might affect **Supreme** (SUP) - **11m45**: pawnbroker **H&T Group** (HAT): is this a good business and are the shares attractively priced at current levels? - **21m20**: micro-cap flooring company **Airea** (AIEA) - what's the attraction? - **33m45**: property developer **Henry Boot**: do asset-backed value and a long pedigree make this the right time to invest? - **45m30**: we each explain how we approach a new set of company accounts; where do we start and what are the main things we always look for? **As always, thank you for listening. Please do get in touch if you have any comments or questions you'd like us to answer in a future episode.** Roland Head --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Jan '24 dividend portfolio update: (mostly) good news URL: https://www.rolandhead.com/portfolio/jan-24-dividend-portfolio-update-mostly-good-news/ Last updated: 2024-02-27T13:52:47.000Z January has been a busy month for company news. No fewer than eight of my stocks have issued updates since the New Year. The majority of these seem positive to me, or at least broadly as expected. However, one company issued a profit warning, while results from a second triggered an earnings downgrade. I cover all eight of these in this month's report. I've also taken a look at a ninth company whose shares have fallen sharply on fears of regulatory action. I've received several questions about this business from subscribers, so have provided a summary of my view and any action I plan to take. *As always, please note that my comments reflect my views only as they relate to my personal investments. They are not intended as advice or recommendations – please do your own research or seek professional advice if unsure.* --- ### In this month's report This is a lengthy report, but as always I've started with a short summary of my thoughts on each company. Click on the links or scroll down to read the full review for each company: _This post is for paying subscribers only._ ### The Dividend Note - decades of dividends - GSK, NWF, WYN, JHD (02/02/24) URL: https://www.rolandhead.com/dividend-notes/decades-of-dividends-gsk-nwf-wyn-jhd-02-02-24/ Last updated: 2024-02-09T19:01:44.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/), my weekly review of results from dividend stocks that look interesting to me. Today's note covers companies that have issued results or updates over the last week *and* which boast **at least 20 years** of unbroken dividend payouts. ### Companies covered: - [**GSK (LON:GSK)**](#gsk-gsk)\- stronger free cash flow, falling debt, and a well-supported dividend that's returning to growth (after a cut). I don't understand much about pharma, but GSK's financials look much improved to me. - [**NWF Group (LON:NWF)**](#nwf-group-nwf)\- profits were down after a more challenging H1\. I remain positive about the medium-term outlook and valuation, with the caveat that I think there is still some risk that H2 might also disappoint. - [**Wynnstay Group (LON:WYN)**](#wynnstay-group-wyn)\- a tough year that appears to have been made worse by the reversal of exceptional fertiliser profits in 2022\. The shares trade at an sizeable discount to book value and now look good value to me. - [**James Halstead (LON:JHD)**](#james-halstead-jhd)\- a brief but positive update from this flooring group, guiding for H1 profits to be 15%-20% above last year. Not cheap, but high quality with a 30-year dividend record and 4% yield.[](#nwf-group-nwf) *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* ***As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.*** --- ### GSK (GSK) > "Broad-based performance drives sales, profits and earnings growth" [**Final results**](https://www.investegate.co.uk/announcement/rns/gsk--gsk/final-results/8013825?ref=rolandhead.com) / Mkt cap: £65bn *Forecast dividend yield: 3.8%* I don't really follow the pharmaceutical sector, as even the largest companies appear to be dependent on a regular supply of blockbuster drugs to support their profits. Developing new medicines appears to be an expensive and somewhat hit-and-miss business, and I don't feel that I have the ability to understand or grade different companies' prospects. Having said that, the largest companies in the market do appear to be sufficiently diversified to be plausible investments for me, as a non-expert. In the UK, the companies I keep an eye on are **AstraZeneca**, **GSK** and generic specialist **Hikma Pharmaceuticals**, which has lower drug development risk (I think!). This week it was GSK's turn to report. I don't intend to dig very deep here, but I do want to highlight the group's improving financial performance and cash generation. If this continues – and GSK hits forecasts – I think the shares could still be quite reasonably valued at current levels. **2023 results summary:** GSK's headline results look strong to me and suggest the group may still be benefiting from the post-pandemic normalisation of vaccination programmes (many of which were paused). Vaccine sales rose by 25% last year, including a 17% increase to £3.4bn in sales of *Shingrix*, its shingles vaccine. The new *Arexvy* RSV vaccine generated £1.2bn of sales, making it the group's newest blockbuster (sales >£1bn). Sales of HIV medicines rose by 13%, with general medicine sales up by 5%. One bugbear of mine with GSK and AstraZeneca is the very high level of adjustment both companies like to apply to their profit calculations. GSK's 2023 results show reveunue rising by 3% to £30.3bn last year. The company then applies £2.1bn of adjustments to £6.1bn of reported pre-tax profit to arrive at an adjusted PBT figure of £8.1bn! I prefer to stick with the statutory figures. Last year's pre-tax profit of £6.1bn represented a useful 7.7% increase on the £5.6bn reported in 2022. Where it gets more interesting, for me at least, is the **cash flow statement**. My sums suggest 2023 free cash flow of about £3.8bn last year, excluding new acquisitions and the sale of equity investments. Net profit attributable to shareholders was £4.9bn, so this represents free cash conversion of around 78%. Not a terrible result. **Net debt** has also fallen further and was £15.0bn at the end of 2023 (FY22: £17.2bn). That's within my comfort zone, based on a net profit of c.£5bn. **Dividend:** GSK cut its payout following the spinout of its consumer goods business, **Haleon**. The 2023 payout of 58p is expected to be a low point. Management are guiding for a dividend of 60p in 2024, giving a prospective yield of 3.8%. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/gsk-dividend-020224-1.png) GSK's dividend was flat for nearly a decade before the Haleon spinout and often looked under pressure to me. But the company has not skipped a payout for 32 years, according to SharePad data, earning it inclusion in this decades of dividends newsletter! **Outlook:** broker forecasts suggest GSK's growing sales of new products will continue to support stronger cash generation. Consensus forecasts in SharePad suggest free cash flow could rise to £6.5bn in 2024 and might reach £7.4bn in 2025. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/gsk-fcf-020224.png) Based on the current market cap of £65bn, these estimates suggest GSK shares could offer a free cash flow yield of c.10% if forecasts are met. I'm not sure how likely this is, but I think it could potentially be an attractive valuation for a leading FTSE 100 business. #### My view After a long period of fairly lacklustre performance, GSK seems to be turning a corner. I don't know if this will be sustainable, or if the company's pipeline will continue to deliver more blockbuster vaccines. However, with the shares trading on 10 times FY24 earnings and offering a 3.8% dividend yield supported by free cash flow, the shares look more interesting to me than they have done for a while. --- ### NWF Group (NWF) > "We have experienced a more challenging first half than in recent years, but our underlying expectations for the full year remain unchanged" [**Half-year results**](https://www.investegate.co.uk/announcement/rns/nwf-group--nwf/half-year-results/8013830?ref=rolandhead.com)/ Mkt cap: £99m *Forecast dividend yield: 4.1%* NWF is a distribution group operating in three sectors – fuel, agricultural feed and ambient groceries. There's (much) more detail about this business in the in-depth share review [I published in December last year](https://www.rolandhead.com/dividend-shares/is-nwf-a-dividend-share-to-buy-now/). January's half-year results revealed an (expected) slump in profits and were not well received by investors. However, the company says full-year expectations are unchanged and these results do not flag up any major concerns for me. **Half-year summary:** NWF's headline numbers may look bad at first sight, but I think we need to remember that the comparative period was May-November 2022, when energy markets were disrupted significantly by the Ukraine war. This led to opportunities for larger-than-normal margins for companies such as NWF. Here are some key H1 numbers: - Revenue down 12.7% to £472.9m - Pre-tax profit down 35.6% to £3.8m - Diluted earnings per share down 40.9% to 5.5p - Net cash (exc. lease liabilities): £13.3m (H1 2022: £1.2m) I don't think there's much value in calculating profitability metrics from these half-year results. NWF's profitability is seasonal, with the majority generated in H2 (winter heating/farm feed season). However, I think it is worth taking a look at each of the group's three operating divisions. **Fuels:** the main products sold by this business are road fuels and heating oil. It's very much a consolidator, regularly acquiring small local suppliers. Revenue fell by 14.2% to £344.8m in H1, while operating profit dropped 73% to just £0.7m. > "Expected normalisation of margins as supply conditions remained stable throughout the period" NWF says that stronger commercial demand and the benefit of acquisitions offset weaker demand for heating oil. Overall, H1 volumes rose by 9.3% to 328m litres. However, this remains well below the 347m litres sold in H1 2021, when NWF Fuels generated an operating profit of £3.6m. Scrolling back to check, NWF says that there were UK fuel shortages in autumn 2021 and the company was able to benefit from this by maintaining supplies for its customers. I see that oil and fuel prices also rose during H1 2021, potentially supporting bumper margins for companies such as NWF, who were able to sell into a rising market. I don't want to draw too many conclusions without seeing the full-year results. But I wonder if the profitability of the fuels division is suffering a reset after the unusual events of recent years. If I'm right, then any weakness in volumes could become more significant again. **Food:** in contrast to fuel, volumes are surging in the Food business. The company is currently using overflow storage facilities, in addition to its two permanent warehouses in Crewe and Wardle. To address this, NWF's Food business, Boughey Distribution, has recently [leased a new warehouse](http://www.investegate.co.uk/announcement/rns/nwf-group--nwf/acquisition-of-lease-notice-of-half-year-results/7982295?ref=rolandhead.com) in Newcastle-under-Lyme. The new warehouse will add storage for a further 52,000 pallets, taking the group's total storage capacity to 187,000 pallets. > "The work on the fit out of Lymedale has already commenced and the site is expected to be fully operational by early autumn of this year. This is in line with our stated strategy for the Food business of targeting warehouse expansion, where it is backed by customer and retailer demand..." The new property is expected to result in an annualised increase in headline pre-tax profit of c.£1.2m in the 2025/26 financial year. Reading further down the notes reveals that pre-tax profit will be hit by £1.7m of set-up costs this year, but this seems a sensible investment to me. The financial performance of the Food business was significantly stronger in H1, in contrast to Fuels. Revenue rose by 9.7% to £39.5m, supporting a 38% increase in operating profit to £2.9m. The number of pallets stored rose by 10.7% to 135,000 in H1, and management say the business benefited from an 8.8% increase in throughput. They also confirm that NWF was able to pass through inflationary cost increases – essential to protect margins in a business of this kind. The company reports a *"high level of demand from both existing and new customers"*. **Feeds:** revenue in the feeds business fell by 14.8% to £88.6m during the half year, resulting in a sharp fall in operating profit to just £0.4m (H1 2022: £2.1m). Last year, NWF Feeds benefited from volatile commodity prices and a *"record high milk price"*. These supported higher margins and stronger demand, respectively. However, mild weather during the autumn last year meant that animals could graze outside for longer, reducing feed demand. NWF's feed volumes fell by 5.5% to 225,000 tonnes in H1, seemingly underperforming the wider ruminant feed market, which DEFRA figures suggest fell by 1.4%. The company says it also chose to forego some lower-margin merchant business and is focusing on higher margin direct-to-farm sales. This volume drop seems to suggest a slight loss of market share, but peer Wynnstay (see below) reported a near-identical drop in feed volumes. So perhaps the DEFRA figure isn't a useful guide. Milk production is also said to have fallen by 1% compared the prior half year, with the average milk price down by 22%. NWF says average feed costs fell by 20%, *"maintaining farmers' margins"*, but I would imagine dairy farmers might be slightly more cautious about spending in the face of falling milk prices. **Dividend:** the interim dividend has been left unchanged at 1.0p per share, in line with policy. NWF pays the bulk of its dividend via the final payout each year. This is set when the cash-generative second half of the year has completed. This chart from SharePad shows how NWF's payout has grown without a break for 28 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/nwf-dividends-020224.png) Source: SharePad Consensus forecasts suggest a payout of 8.1p per share this year, maintaining the c.4% growth rate seen in recent years. This gives NWF shares a prospective yield of 4.1%. #### Outlook The company says its full-year expectations are unchanged, on an underlying basis: > "We have experienced a more challenging first half than in recent years, but our underlying expectations for the full year remain unchanged" However, ramping up the new warehouse will result in a £1.7m hit to pre-tax profit and a cash outflow of approximately £8.5m. When taking together with the weaker H1 performance of the Fuel and Feeds divisions, I'm not entirely convinced this constitutes an unchanged outlook. Analysts covering the stock seem to agree; consensus earnings forecasts for 2023/24 have been cut by 2.6p to 19.4p per share since the warehouse acquisition was announced. This leaves NWF shares trading on 10 times forecast earnings, with a 4.1% dividend yield. #### My view I don't see any serious concerns in these H1 results, but I think much will depend on how strong the company's second-half performance is. I think there's still some scope for disappointment. I can't help feeling that long-time CEO Richard Whiting may have chosen the perfect time to retire (in March 2024), after 15 years in the role. Despite this, I think the broader picture remains attractive. Based on current broker forecasts, NWF's profits are simply returning to the growth trend that was in place prior to 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/nwf-eps-020224.png) While long-term demand for road fuel and heating oil usage may trend lower, I'm not sure this will be a quick process. Home owners don't change boilers that often, and there are not yet any mass-market alternatives to diesel for lorries and other heavy vehicles. I think the company's consolidation model should be able to offset this structural decline for some time yet to come. If NWF can hit operating profit forecasts of £14.6m for the current year, then the shares could be trading on a tempting EBIT yield of nearly 15%. The balance sheet looks fine to me and I don't see any obvious risk to the dividend. I probably won't buy NWF for my portfolio, because it overlaps too heavily with another stock that I already own. But if it wasn't for this factor, NWF would probably remain on my watch list as a possible purchase. --- ### Wynnstay Group (WYN) > "Much softer trading conditions compared to FY22" [***Final results***](https://www.investegate.co.uk/announcement/rns/wynnstay-group--wyn/final-results/8011684?ref=rolandhead.com)*/ Mkt cap: £80m* *Forecast dividend yield: 4.8%* [Wynnstay](https://www.wynnstay.co.uk/about-us-wynnstay-agriculture?ref=rolandhead.com) is an agricultural group with sizeable businesses in feeds, seeds, fertiliser and agronomy and agricultural merchanting. In this sense, it competes in some of the same markets as NWF (see above), albeit the group's sole focus is agriculture and it has a broader presence in this sector than NWF. I almost titled today's note *"the great normalisation"*. Both NWF and Wynnstay appear to be in the middle of a return to normal levels of margin and earnings. This is taking place after a couple of years of exceptional performance, driven by external conditions in commodity markets and supply chains. Shareholders have subjected the stock to a fairly brutal sell off – Wynnstay's share price is down by more than 40% from the highs seen at the end of 2022\. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/wyn-all-chart-020224.png) After such a big fall, the company's latest results suggest to me that this AIM-listed business could offer an attractive mix of income and value at current levels. Let's take a look. **Full-year results summary:** Wynnstay's latest accounts cover the year to 31 October 2023. Group revenue rose by 3% to £735.9m last year, thanks to record grain volumes and a contribution from two acquisitions. However, pre-tax profit fell by 59% to £8.7m as margins on products – fertiliser, in particular – returned to more normal levels. My sums suggest the group's operating margin fell from 2.9% to 1.2% last year. This translated into a return on capital employed of 5.8%, down from 14.6% in the prior year. As with NWF, the trajectory of Wynnstay's profit growth seems to be returning to its past level: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/wyn-eps-020224.png) **Balance sheet/cash flow:** a reduction in working capital last year provided a tailwind for Wynnstay's cash flow, leading to a net inflow of £4.3m. This broadly maps onto my estimate of free cash flow of £4.6m, suggesting that the underlying business did not generate much additional surplus cash last year. Despite this, the balance sheet looks strong to me, with a net cash position of £23.7m excluding lease liabilities (FY22: £21.5m). Wynnstay ended the year with a net asset value of £135m, or 588p per share. If I strip out intangibles, I still get a NTAV of 521p per share. £55m of Wynnstay's NAV is held in inventories, the value of which is linked to commodity prices. Even so, the current share price of 374p reflects a 28% discount to tangible book value. That seems likely to offer value, in my view. **Dividend:** prudent payouts over the last couple of years mean that Wynnstay has been able to maintain its record of dividend growth (just). The company increased its full-year payout by 1.5% to 17.25p per share, marking its **20th consecutive year** of growth. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/02/wyn-dividend-020224.png) **Agriculture division:** Wynnstay's core agriculture division generated revenue of £584.3m last year, down from £564.3m one year earlier. Segmental profit dropped to £3.7m, from £14.7m in 2022\. This swing appears to have been exaggerated by large movements the value of fertiliser inventories: > "segmental profit contribution of £3.7m, including one-off adverse Glasson fertiliser stock realisations (2022: £14.7m including significant Glasson fertiliser stock gains)" My reading of this is that the company made a lot of money in 2022 when fertiliser prices surged, but was forced to sell some of its stock at a loss last year as fertiliser prices fell to more normal levels. Interestingly, the company says that like-for-like feed volumes fell by 5.3% last year, reflecting lower demand from dairy and poultry farmers. NWF also reported a 5% fall in feed volumes, so perhaps this is a truer reflection of the underlying market than the DEFRA figure of -1.4% cited by NWF. Grain and fertiliser volumes were said to be strong, but a return to more normal pricing meant that margins were reduced. **Agricultural merchanting division:** this smaller business provided a more stable performance. Revenue rose by 1.8% to £151.5m, while segmental profit fell 14% to £6.1m. Management say that *"lower farmer sentiment affected spending patterns"*, with a reduction in higher-margin sales. #### **Outlook** > "Market conditions expected to remain challenging in the short-term" Consensus forecasts in SharePad and Stockopedia suggest that earnings could rise by 15% to 35.5p per share this year. However, the management commentary above seems to be slightly at odds with this relatively positive view. Last year's minimal dividend increase also suggests to me that management are taking a cautious view of the near-term outlook. However, the medium view appears to be stronger: > "Strong balance sheet and good cash generation leaves Group well-placed to continue with its strategic growth plans and to consider suitable acquisition opportunities" #### My view Wynnstay looks to be trading on around 10 times forecast earnings, with a twice-covered 4.8% yield. Its business is well established and I would guess it enjoys good market share in its main geographical territories. Given the strength of the balance sheet and the discount to book value, the risk/reward balance looks favourable to me at current levels. --- ### James Halstead (JHD) > "The Board's expectations for the full year remain positive and for continued progress on dividend distributions." [**AGM trading update**](https://www.investegate.co.uk/announcement/rns/james-halstead--jhd/trading-update/8013785?ref=rolandhead.com) **/** Mkt cap: £859m *Forecast dividend yield: 4.1%* This family-controlled flooring group is one of AIM's larger companies. Its main product is the Polyflor brand of vinyl flooring. James Halstead's January AGM update was very short but made for positive reading. Half-year profits for the period to 31 December are expected to be *"in the region of 15-20% ahead"* of the same period last year. This positive result is expected despite *"strong competition"* and *"softening of sales in some European markets"*. My sums suggest this guidance is equivalent to pre-tax profit of at least £26.7m, which would be above the previous H1 high of £26.0m achieved in 2020/21. The board expects to report *"a robust cash balance"*, presumably as inventory levels return to more normal levels, freeing up cash. It's worth noting that cash levels were already pretty robust – the company reported net cash of £63m at the end of June 2023. #### My view When I [reviewed James Halstead's results in October](https://www.rolandhead.com/dividend-notes/patience-could-be-rewarded-bag-mab1-jhd-27-10-23/), I said the share was on my watch list. This remains true. The share price is currently at levels first seen eight years ago. My sums suggest an EBIT/EV yield of around 6.5% at current levels. For a business that generates c.30% returns on capital and has a 30-year dividend growth record, I don't think that's too expensive. I would consider buying the shares for [my portfolio](https://www.rolandhead.com/dividend-portfolio/) at this level. 💡 Don't miss any of my dividend share coverage – [subscribe today!](https://www.rolandhead.com/#/portal/signup) --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - quality small-cap dividends? BOOT, FNX, PGH (26/01/24) URL: https://www.rolandhead.com/dividend-notes/small-cap-dividends-boot-fnx-pgh-26-01-24/ Last updated: 2024-03-29T10:48:12.000Z Welcome back to [The Dividend Note](https://www.rolandhead.com/tag/dividend-notes/), my weekly review of results from dividend stocks that look interesting to me. This week's note has a small-cap theme, as I consider the latest updates from a property business, a mobile payments operator, and a company that sells insurance. These smaller companies are all very different. I've selected them because I think they may all have the potential to provide a good quality income. ### Companies covered: - [**Henry Boot (LON:BOOT)**](#henry-boot-boot) \- 2023 results are expected to be in line with expectations, but this property group has issued a profit warning for 2024\. That's a slight disappointment, in my view, but I still think there's probably value (and income) on offer here for patient investors. - [**Fonix Mobile (LON:FNX)**](#fonix-mobile-fnx)\- a strong half-year update includes a further upgrade to guidance for the full year. I admire Fonix's cash conversion and growth and suggest the business could remain reasonably valued, albeit slightly above my target price range. - [**Personal Group (LON:PGH)**](#personal-group-pgh)\- I think this workplace benefits group might be turning the corner after a difficult few years. This week's 2023 trading update shows improved margins and a double-digit increase in recurring revenue. There's also a 6% yield. 💡 Don't miss any of my dividend share coverage – [subscribe today!](https://www.rolandhead.com/#/portal/signup) *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Henry Boot (BOOT) > "the Board now expects profitability for 2024 to be significantly below current market consensus" [**Full-year trading update**](https://www.investegate.co.uk/announcement/rns/henry-boot--boot/trading-update/8000963?ref=rolandhead.com) **/ Mkt cap: £250m** This week's trading update from small-cap property Henry Boot included a profit warning for 2024\. Despite this setback, I remain interested in this venerable business, which has been trading for over 100 years. I think there's a good chance that BOOT shares offer value at current levels. Let's take a look. **Previous coverage:* I last covered Henry Boot* [*in September*](https://www.rolandhead.com/dividend-notes/buying-1-for-70p-boot-19-09-23/)*, when the company's interim results were published and full-year guidance was left unchanged.* The company says that *"robust sales"* in its property development and land management business have helped to support profits, offsetting weaker conditions in housebuilding and construction. Chief executive Tim Roberts reassures investors that 2023 results should be in line with forecasts: > *"Despite challenging market conditions for our three key markets, our ongoing focus on high quality land and development in prime locations resulted in a resilient performance in 2023\. We therefore expect profit before tax for the year to be in line with current market consensus."* Consensus estimates are helpfully included in the footnotes and indicate expectations for a 2023 pre-tax profit of £37.2m. That's in line with estimates I can see in SharePad which show earnings per share of 18.8p, pricing the shares on 10 times earnings. At this level, the expected **dividend** of 7.3p per share looks safe enough to me, giving a prospective yield of 3.9%. Henry Boot has a fairly decent dividend history in my view, for a property business: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/boot-dps-navps-240124.png) The segmental results demonstrate that *some* parts of the UK property market continued to function well last year. **Hallam Land Management:** the group's land development arm *"traded well"* in 2023, selling 1,944 plots to housebuilders (2022: 3,869). Average gross profit per plot is said to have increased, due to a significant freehold sale in Kent. HLM also continued to replenish its pipeline last year, acquiring 18 new sites with the potential to deliver 7,212 plots. This increased the land portfolio to 100,972 plots (2022: 95,740 plots), of which 8,501 plots have planning permission. **Henry Boot Developments:** the group's property development business is said to have performed ahead of expectations, completing schemes with a gross development value (HBD share) of £111m (2022: £83m). The committed development pipeline is now valued at £299m (HBD share: £159m). HBD *"has optionality"* on a significant number of other schemes that could start within 12 months, subject to market conditions. **Stonebridge Homes:** Boot's premium housebuilder managed to *increase* the number of homes sold last year by 43% to 251\. Management say that Stonebridge's premium focus has helped protect it from the slump in new home sales reported by most larger housebuilders. That seems quite positive to me, given that other housebuilders at similar price points such as Redrow and Bellway (I hold) have reported lower volumes. **Henry Boot Construction:** trading conditions were difficult and overall results were below expectations, albeit still profitable. At this early stage in the year, 46% of the 2024 order book has been secured and the business is seeing *"an encouraging number of new opportunities"*. #### Outlook Problems start to emerge when Henry Boot talks about the outlook for 2024\. The main issues seem to relate to the housing market: **Land sales to housebuilders** have been agreed on *"extended payment profiles"*. These are now expected to take longer than expected to complete. As a result, net debt is likely to remain at the top end of the group's target range. This will mean that interest charges are higher than expected, impacting profits. Flipping this situation around, these sales show up in housebuilders' accounts as land creditor liabilities. We might wonder why they now appear to be taking longer than expected to be settled. Apparently (e.g. [here](https://www.insidehousing.co.uk/comment/could-ious-help-the-sector-deliver-more-affordable-homes-79538?ref=rolandhead.com) and [here](https://gateleyplc.com/insight/article/deferring-land-payments-are-there-valid-ways-to-do-it/?ref=rolandhead.com)), it's quite common for land payments to be linked to development milestones, such as planning permission or site infrastructure completion. I *suspect* that what may be happening is that housebuilders are slowing down their progress towards these payment milestones in order to preserve cash flow until housing market conditions improve. I should stress this is only guesswork on my part, and may not be correct. But it might explain why Henry Boot is now having to accept longer payment timeframes than originally expected – the company is hugely experienced in this market, after all. **The other factor contributing to the cut to 2024 guidance is Stonebridge Homes**. Although this builderseems to have performed well last year, management has now become *"more conservative"* in estimating likely completions for 2024 and 2025\. As a result, a further recovery in sales is now expected to *"be more weighted to 2025"*. **2024 profit *"significantly"* below expectations:** Henry Boot's management say that 2024 pre-tax profit is now expected to be lower than previously expected. Helpfully management specify previous consensus of £37.2m, so we know that the new figure will be lower than this. From what I can see, consensus forecasts for 2024 have been cut by c.20%, giving a 2024 earnings estimate of 14.9p per share. Analysts appear to expect the dividend to remain safe and are pencilling in a 7% increase to 7.8p. At the time of writing, these forecasts imply a P/E of 13 and a dividend yield of 4.1%. #### My view Mr Roberts says that he believes the *"the \[UK\] economy and our markets have turned a corner"*. Unfortunately, Henry Boot hasn't quite made it round the bend yet. Joking aside, I don't think this is a major disaster. Although I'm a little disappointed that these headwinds weren't evident to management in September, I think the value case here remains intact. One reason for my optimism is the long-term focus of the group's core land development business. This week's update highlights an example of this. *"Over 20 years ago"*, Henry Boot secured an option to acquire land in Swindon, in partnership with housebuider **Taylor Wimpey**. In August 2021, outline planning consent was secured for 2,380 plots. In December 2023, Henry Boot agreed to acquire the land and also agreed to sell 759 plots to housebuilder **Vistry**. This deal is expected to generate an *annualised* internal rate of return of 10% – after more than 20 years. This may be an exceptional case, I don't know. But I feel confident that the group's land assets will remain valuable in the future and will generate further profits when market conditions improve. Henry Boot reported a net asset value of 303p per share in its interim results. As I write, the shares are trading under 200p, leaving the stock trading at a 35% discount to its book value. Historically, this is unusual. And although past performance is no guarantee of future returns, similar discounts have previously provided buying opportunities: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/boot-navps-shareprice-240124.png) As such, the opportunity to buy the shares significantly below book value – and with a 4% dividend yield – looks interesting to me. --- ### Fonix Mobile (FNX) > "Fonix continues to generate strong underlying cash flows and intends to pay an increased interim dividend in March 2024" [**Half-year trading update**](https://www.investegate.co.uk/announcement/rns/fonix-mobile--fnx/trading-update/8003155?ref=rolandhead.com) **/ Mkt cap: £235m** Fonix is a mobile payments specialist that allows clients in sectors such as television, gaming and charity to take payments from consumers via text messages. These are then charged to the consumer's mobile phone bill. Usage cases include donations, competitions, ticketing and cash deposits. Clients include **ITV** (I hold), Comic Relief and Children in Need. When this business appeared on the market in 2020 I initially discounted as a growth business that didn't fit into my quality dividend universe. So far, that has poved to be a mistake – Fonix shares have more than doubled since then and the business has proved to be highly profitable and cash-generative, with an attractive dividend record: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/fnx-divps-shareprice-250124.png) Of course, Fonix's record as a listed business is still a little too short to score well in my [screening system](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). But I can certainly see some attractions. This week's trading update covered the six months to 31 December 2023\. Gross profit for the period rose by 17.9% to £9.2m, while adjusted EBITDA for the half year was 17.7% higher, at £7.3m. These figures were ahead of expectations. H2 performance is expected to be relatively weaker, as H1 included some one-off catch-up trading relating to the Queen's death in 2022. Even so, management now expects Fonix's **full-year adjusted EBITDA to be *"marginally"* ahead of previous expectations.** Adjusted EBITDA isn't my favourite measure of profit. But in fairness, past years' results have shown at least 75% conversion from adjusted EBITDA to underlying free cash flow (excluding movements in client cash): - FY23: Adj. EBITDA £11.6m / Underlying FCF: £9.4m - FY22: Adj. EBITDA £10.3m / Underlying FCF: £7.8m Given this record, I'm going to assume a similar rate of conversion in FY24\. With thanks to Research Tree, an updated note from broker **Cavendish Financial** is available, upgrading FY24 adjusted EBITDA forecasts to £13.1m. Assuming a 75% conversion from EBITDA to underlying free cash flow gives a figure of £9.8m, leaving Fonix trading with a forecast free cash flow yield of 4.2%. That's equivalent to a P/FCF multiple of 24, which is also the stock's forecast P/E ratio. Not cheap, but not necessarily expensive for a growing business that generated a 100% return on equity last year. **Dividend:** a dividend of around £7.8m (7.8p per share) is expected to be paid from this free cash flow, in line with the company's progressive dividend policy. This gives Fonix shares a possible **dividend yield of 3.3%** at 235p. **Trading commentary:** Fonix reports a 15.3% increase in total payment volumes to £158m during the half year, with a record month in December. The company has released a new Subscription Manager product for charity customers and says it achieved 100% platform uptime during the period – important when many payments are timely and take place in surges (e.g. live TV voting and charity donations). Management also report significant gross profit growth in Ireland. Key client relationships in this growth market have been strengthened by Fonix's decision to coordinate industry discussion on a proposed new Gambling Regulations Bill. Apparently, this regulation could affect some of the services offered by Fonix's clients – so there's a degree of regulatory risk implied here. I don't know what proportion of Fonix's revenue might be exposed to gambling regulation in Ireland or indeed the UK. It is something I would try to find out if I was considering an investment. **Outlook:** chief executive Rob Weisz sounds confident and believes the growth outlook for the UK and Ireland *"remains strong"*. Weisz also says that Fonix is making *"good progress on further international expansion"* and hopes to make announcements on this later this year. #### My view I don't see too much to dislike here, except perhaps the potential exposure to gambling regulation. Fonix's capital-light model supports very high returns on equity and strong cash generation. If the business can enter new markets successfully and continue to expand, then I think it could be worth significantly more in the future. For me personally, the combination of a recent flotation and 4% free cash flow yield means that I'm going to stay on the sidelines for now. However, barring any bad news, I might consider any pullback as a possible buying opportunity. --- ### Personal Group (PGH) > "Continued growth in recurring revenues and a record year for new insurance sales" [**FY23 trading update**](https://www.investegate.co.uk/announcement/rns/personal-group-holdings--pgh/trading-update-and-notice-of-results/8005402?ref=rolandhead.com) **/ Mkt cap: £56m** Personal Group Holdings provides workforce benefits and services for employers. Its main services are affordable health insurance and a benefits platform that provides discounts on third-party services. This is the first time I've written about this AIM-listed business here, but I've kept an eye on it in recent years. Historically, Personal Group has been strongly cash generative and paid generous and reliable dividends. The last few years have been a little more difficult. But my initial impression is that this business may now be regaining momentum under new CEO Paula Constant, who took up the role in August 2023. I'm going to take a quick look at the 2023 highlights here, but I'm planning to take a more detailed look at the business when its final results are published in March. **2023 trading summary:** Personal Group reported flat underlying revenue, but saw improved margins and continued growth in recurring revenue. - **Total revenue** rose by 18.8% to £103m, but this included £54m of pass-through revenue related to voucher resales (2022: £37.4m). I guess there may have been some inflationary increase in voucher values, in addition to any volume growth. - **Underying revenue** was flat at £49m (2022: £49.3m) - **Adjusted EBITDA** rose by 33% to £8m, lifting EBITDA margin from c.12% to c.16% - This performance is said to be in line with expectations; consensus forecasts indicate 2023 adjusted earnings of 14.3p per share, pricing the shares on a **2023 P/E of 12.7**. Initial efforts by the new CEO to improve profitability by focusing on insurance and the benefits platform appear to be paying off. Last year saw double-digit growth in recurring revenue streams: - **Total recurring revenue** up 14% to £38.3m – 78% of underlying revenue (excluding voucher sales) - **Affordable insurance** *(employee-paid health insurance)*: annualised insurance premium income rose by 13% to £31.6m, with new annualised insuance sales up 24% to £11.8m - a record year. - **Benefits platform ('Hapi'):** annual recurring revenue up by 22% to £6.1m; a big part of this comes through white-label sales, most significantly through a partnership with Sage Employee Benefits. This is providing Personal Group with an effective way to target the UK's large, fragmented SME market (disc: I hold **Sage** in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/)) - **Pay & Reward** (remuneration consulting): annualised recurring revenue up by 6% to £0.57m Personal Group has historically reported net cash at the end of each financial year and this appears to remain the case. The company says it had more than £20m in cash and no debt at the end of the year. **Outlook:** further detail on expectations for 2024 will be provided with the full-year results in March. This will also include the outcome of the new CEO's strategy review. For now, the commentary sounds confident: > "Trading in the first few weeks of 2024 has been positive, reinforcing confidence in ongoing delivery moving forward." > "Confidence across the Company is high for 2024 and the Group is well-placed to deliver ongoing growth acceleration." Current consensus forecasts on Stockopedia price the stock on 12 times 2024 forecast earnings, with a 6.8% dividend yield. That seems undemanding to me, if the recent momentum continues. #### My view Historically, Personal Group has delivered the high returns on equity and consistent NAV growth that I look for in financial business: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/pgh-navps-roe-260124.png) Dividend payments have also been generous in the past: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/pgh-dps-eps-260124.png) My initial impression is that the group's 2023 results look positive and suggest that it may be regaining momentum. The shares don't look too expensive to me at current levels. I plan to take a closer look when the full-year results are published in March. 💡 Don't miss any of my dividend share coverage – [subscribe today!](https://www.rolandhead.com/#/portal/signup) *Disclosure: At the time of publication, Roland owned shares of ITV, Sage, and Bellway.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - what price for quality? EXPN, SPT, DPLM, AJB, IHP, CWK (19/01/24) URL: https://www.rolandhead.com/dividend-notes/what-price-for-quality-expn-spt-dplm-ajb-ihp-cwk-19-01-24/ Last updated: 2024-01-26T17:10:11.000Z Welcome back to The Dividend Note. This week saw markets ease a little as a slight rise in inflation led investors to question whether interest rates will fall as soon as expected. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/ukx-mcx-chart-5d-190124.png) Source: Google Finance I don't think this is too significant in the scheme of things. Markets don't move up or down in straight lines. Nor is inflation likely to, in my view. As this chart from SharePad shows, inflation has dipped twice over the last year before rising again. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/uk-inf-1y-chart-190124.png) I continue to believe that the worst of inflation is probably over, especially as UK unemployment has started to rise and is now above pre-pandemic levels: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/uk-unem-5y-chart-190124.png) Macro uncertainty is seems to be having varying levels of impact on the companies I follow. Most are performing reasonably well – and of course, many generate much of their revenue outside the UK. This week's note has a quality theme as I look at updates from six companies on my quality dividend radar. --- ### **Companies covered:** [**Spirent Communications (LON:SPT)**](#spirent-communications-spt)\- this network testing specialist has suffered a series of profit warnings over the last year and its shares have de-rated sharply. Although I have some reservations about the company's long-term track record, I think the worst is probably over for this cycle. I'm inclined to think the shares could be worth considering at current levels. [**Experian (LON:EXPN)**](#experian-expn)\- a solid Q3 update provides a useful reminder of why I'd like to own this FTSE 100 information services business. Experian scores highly on all my quality metrics. But a decade-long re-rating has left me priced out of the stock, for now at least. [**Diploma (LON:DPLM)**](diploma-dplm)\- a strong Q1 update from this specialist distributor suggests that Diploma remains on track for another decent years. However, the shares look more expensive to me than at almost any time in history and I remain sceptical about buying in at this price. [**AJ Bell (LON:AJB) vs Integrafin (LON:IHP)**](#aj-bell-ajb-vs-integrafin-ihp) \- I rate both of these investment platforms highly, as I've discussed before. Both issued Q1 updates last week - in this short section I compare and contrast some key metrics. My tentative conclusion is that UK investor sentiment may have bottomed out and be starting to recover. [**Cranswick (LON:CWK)**](#cranswick-cwk)\- this FTSE 250 food producer may not seem an obvious choice for a quality dividend stock. But Cranswick has a 30-year dividend record, generates double-digit ROCE and has a decent balance sheet. Management has just upgraded profit guidance for the current year, too. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Spirent Communications (SPT) > "Accelerating our focus on non-telco segments where market dynamics are currently more positive." [Full-year trading update](https://www.investegate.co.uk/announcement/rns/spirent-communications--spt/trading-update-full-year-2023/7990477?ref=rolandhead.com) Spirent makes equipment and software that's used for network testing and quality assurance. The company is suffering from a spending slump in the telecoms sector at the moment, which is historically its main market segment. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/spt-5y-chart-190124.png) I've covered this FTSE 250 network testing and assurance specialist in several updates last year ([May](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/), [July](https://www.rolandhead.com/dividend-notes/quality-shines-through-cto-spt-dplm-13-07-23/) & [August](https://www.rolandhead.com/dividend-notes/value-at-the-right-price-bats-azn-spt-02-08-23/) 2023). I also took a broader look at the business in [an in-depth dividend share review](https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/) in May 2023. After a series of profit warnings and downbeat statements, Spirent's full-year update for 2023 suggests to me that the worst may be past and the business could be worth considering as a turnaround. Last week's update confirms that full-year results should be in line with revised expectations: - Revenue down 22% at $474m, slightly below consensus figures I can see - Adjusted operating profit *"in line with the market consensus"* – SharePad forecasts suggest a figure of $48.1m, down c.60% versus 2022. - Cash balance closed at $103m, versus $148m at the end of H1 – it looks like Spirent still has a strong net cash position, albeit much reduced from earlier in the year **Market commentary:** Management say telecoms remains *"very challenging"* but that efforts to diversify are paying off. Chief executive Eric Updyke cites positioning, hyperscalers (cloud data centres) and financial services as areas where sales and order pipelines are improving. **Outlook:** Spirent says it's started the new year with a growing order book and expects to continue expanding into new markets, while remaing well positioned to benefit when its core telecoms market recovers. CEO Updyke says that technologies such as 5G, ORAN and 400G/800G high-speed Ethernet (for hyperscale data centres) will continue to drive demand for Spirent's services. The tone of the outlook is positive, so I assume that existing consensus forecasts for 2024 remain unchanged for now. These suggest we could see a partial recovery in earnings this year and price the stock on a P/E of 19, with a 4% dividend yield. #### My view Although I have some reservations about the company's historic strategy shifts, the business as it stands today appears to benefit from attractive margins, good cash generation and continued growth opportunities. The shares aren't quite as cheap as they were in October. But on balance, I think Spirent probably offers value at current levels and could prove a decent turnaround choice. I'll aim to revisit Spirent when its 2023 results are published in March. --- ### Experian (EXPN) > "We delivered good growth in Q3, at the upper end of our expectations." [Third-quarter trading update](https://www.investegate.co.uk/announcement/rns/experian--expn/experian-q3-fy24-trading-update/7990444?ref=rolandhead.com) I like to keep an eye on this credit rating and information services business, as it's the kind of high-quality compounder I would like to own, at the right price. This update covers the three months to 31 December 2023, which is Experian's fiscal third quarter (y/e 31 March). Revenue from continuing operations rose by 7% at constant exchange rates, with organic revenue growth of 6%. Performance was positive in all regions, but appears to have been boost by a particularly strong performance in Latin America. The UK was notably the weakest: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/expn-3q24-segments.png) Source: Experian Q3 FY24 trading update **Outlook:** Chief executive Brian Cassin expects to report full-year organic revenue growth of between 5%-6%, with *"modest margin accretion"* at constant exchange rates. #### My view Experian ticks many of the boxes as a stock I'd like to hold in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Its services are widely used and scalable and generate an attractive level of repeat and subscription revenue. The business itself is high margin and cash generative, with a consistent history of growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/expn-eps-roce-opmargin-190124.png) However, despite earnings growth and profitability remaining broadly stable over the last decade, the business has become consistently more expensive by the measures I use: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/expn-fcf-ebit-yield-190124.png) This multiple expansion has been great for shareholders. While earnings have risen by about 2.5x since 2005, the share price has risen by more than six times. This has left the stock with a free cash flow yield under 3% and a dividend yield of just 1.5%. Both are well below the level I'd look for to buy and leave the stock looking more expensive than it has been for at least 20 years. This re-rating may have made sense during the zero interest rate era, but it doesn't add up for me now – especially as Experian has around $4bn of net debt. I remain priced out, for now. But I'll keep watching and hope for an opportunity to add this business to my portfolio. --- ### Diploma (DPLM) > "we remain confident in our unchanged full year guidance" [Q1 trading update](https://www.investegate.co.uk/announcement/rns/diploma--dplm/q1-trading-update-/7992384?ref=rolandhead.com) Many of the comments I made about Experian above also apply to Diploma, in my view. This business is a specialist distributor with a track record of high margins and bolt-on acquisitions for growth. I covered Diploma's full-year results [in November](https://www.rolandhead.com/dividend-notes/quality-choices-bvic-dplm-cwk-24-11-23/). Last week's update confirms progress in line with expectations. First-quarter organic revenue rose by 6%, with total revenue up 10% thanks to a contribution from acquisitions. Three bolt-on acquisitions were made for a total of £9.5m in Q1, at average multiples of around 4x EBIT. This appears to be a nice example of the valuation arbitrage that's possible by buying cheaper earnings privately and adding them to a highly-rated listed business – Diploma currently trades at around 25x trailing EBIT! #### My view Unfortunately, Diploma shares look more expensive to me now than at virtually any point in the last 30 years, except during the 2020 crash: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/dplm-ebit-fcf-yield-price-190124.png) Is there still value on offer? Perhaps, but it's not enough for me. Diploma's sub-2% dividend yield and 3.5% free cash flow yield suggest to me that much of the good news is already in the price, especially given the company's comments about the *"uncertain economic outlook"*. As I commented last week [with regard to Games Workshop](https://www.rolandhead.com/dividend-notes/three-market-leaders-tsco-svs-gaw-13-01-24/), I may be wrong to resist paying up for quality. But as investors, we all have to make our own decisions regarding risk and reward. Diploma isn't cheap enough for me. I could be interested if Diploma shares revisit the mid-£20s levels seen in 2022\. For now, I remain on the sidelines. --- ### AJ Bell (AJB) vs IntegraFin (IHP) > "net inflows" [AJ Bell Q1 FY24 update](http://www.investegate.co.uk/announcement/rns/aj-bell--ajb/q1-trading-update/7994738?ref=rolandhead.com) / [IntegraFin Q1 FY24 update](https://www.investegate.co.uk/announcement/rns/integrafin-holding--ihp/1st-quarter-results/7990452?ref=rolandhead.com) I've written about these two investment platforms several times before, most recently in December, when I covered [both companies' full-year results](https://www.rolandhead.com/dividend-notes/investment-platforms-get-cash-boost-ajb-ihp-14-12-23/). IntegraFin and AJ Bell both issued Q1 updates last week, so rather than reviewing them in depth again so soon after my last comment, I thought I'd just compare some key operating metrics to see if any signs of life are emerging in the UK retail investor segment. As a quick reminder, AJ Bell serves both DIY investors (D2C) and advised clients. IntegraFin only serves advised clients. | **Q1 24 performance** | **AJ Bell** | **IntegraFin** | | --------------------------- | ----------------------------------- | ---------------------- | | AUM (% chg) | £76.2bn (+7%) | £58.0bn (+6%) | | Gross inflows | £2.7bn (Q4 23: £2.5bn) | £1.7bn (Q4 23: £1.6bn) | | Net inflows | £1.3bn (Q4 23: £1.1bn) | £0.3bn (Q4 23: £0.4bn | | \# platform clients (% chg) | 484k (+2%) (161k advised, 323k D2C) | 231.4k (+0.5%) | | Assets/client | £317k (advised) / £78k (D2C) | £251k | *Source: AJB and IHP Q1 FY24 updates* Broadly, both companies saw a modest uptake in gross inflows during the quarter, compared to the previous three months (Jun-Sept 2023). This suggests clients are becoming slightly more keen to add new cash. Net inflows also improved for AJ Bell, but worsened slightly for IntegraFin. This suggests that IntegraFin's clients may have been slightly more keen to withdraw money during the period than those of AJ Bell. AJ Bell also saw stronger growth in client numbers than IntegraFin. For better comparability, AJ Bell's advised client base grew by 1.3%, versus 0.5% for IntegraFin. #### My view Overall, I would say that AJ Bell's figures looked slightly stronger than those of IntegraFin, with the caveat that one quarter is too short to be really meaningful. The main takeaways for me are that: - we may be past the worst in terms of private investor sentiment in the UK. - both of these companies remain in fairly good shape According to consensus forecasts, AJ Bell currently trades on 19x FY24 forecasts, with a 4.3% dividend yield. For IntegraFin, the FY24e P/E is 20, with a 3.5% dividend yield. I continue to favour AJ Bell slightly over IntegraFin, but I think both remain potentially attractive, given their high margins and proven cash generation. --- ### Cranswick (CWK) > "Adjusted Profit Before Tax for the year ending 30 March 2024 is now expected to be ahead of the Board's previous expectations." [Third-quarter trading statement](https://www.investegate.co.uk/announcement/rns/cranswick--cwk/third-quarter-trading-statement/7994787?ref=rolandhead.com) This business is one of the UK's largest food producers, with an emphasis on supplying fresh pork and chicken and cooked meat products. In addition to its own factories, Cranswick has a policy of vertical integration and also operates farms to produce its own 'raw materials'. Notably, Cranswick produces 50% of its own pigs. According to a recent broker note from Shore Capital (available on Resarch Tree), this equates to 750k pigs *"on the ground"* at any time. Cranswick is also said to have 10m chickens and some arable farming/milling capacity for feed production. This model appears to work quite well, because it has supported a 30-year record of dividend growth and a 10-bagger share price performance over the same period. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/cwk-dividends-190124.png) **Q3 trading summary:** after a good start to the year, strong trading is said to have continued into fiscal Q3, which was Sept-December: > "Trading throughout quarter three and particularly during the key Christmas trading period was stronger than anticipated." Cranswick says it saw volume growth across all four core UK food categories (Fresh Pork, Convenience, Gourmet Products & Poultry). As a result, the company now expects adjusted pre-tax profit for the year ending 30 June to be higher than previously guided. **Outlook:** consensus earnings forecasts have edged up by around 3% over the last month, suggesting that analysts are not expecting a massive earnings upgrade. These estimates put the stock on a forecast P/E of 17, with a dividend yield of 2.2%. #### My view This business has expanded steadily over the years through a mix of organic and acquisitive growth. The business now employs nearly 15,000 people across 22 UK sites. Cranswick now supplies all the major supermarkets, plus discounters, food-to-go chains and export markets. I note that Cranswick's balance sheet shows almost £500m of fixed assets, c.£225m of intangible assets and £90m of biological assets (presumably live animals and crops). From all of this, the business is able to generate c.£125m of net profit each year, supporting an average return on capital employed of c.15% in recent years. Despite being quite capital intensive, Cranswick is able to generate quite attractive returns from its capital investments. This level of profitability and the company's long history of growth suggest to me that it could be a good quality business. I'm also encouraged by the relatively strong balance sheet – the half-year results showed net debt of just £51m, excluding lease liabilities. This looks modest compared to forecast net profit of £122m for FY24. Meat production is not necessarily a sector I want to invest in, but I can't help admiring Cranswick's long-running success and quality metrics. The shares look fully valued to me at current levels, but perhaps not wildly expensive. At a lower valuation, I might be tempted to take a closer look. 💡 Don't miss any of my dividend share coverage – [subscribe today!](https://www.rolandhead.com/#/portal/signup) Roland Head --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### The Dividend Note - three market leaders - GAW, TSCO, SVS (13/01/24) URL: https://www.rolandhead.com/dividend-notes/three-market-leaders-tsco-svs-gaw-13-01-24/ Last updated: 2024-01-19T16:32:46.000Z Welcome back to my dividend notes, which will be taking on a slightly altered format for 2024. I'll now be publishing a weekly piece on Friday afternoons, covering a selection of the most interesting UK dividend share news from the previous five days. Content relating to my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) *will be unchanged*, but will now be published on **Sunday morning**. This will include: - Monthly [portfolio stock reviews](https://www.rolandhead.com/dividend-newsletters/) for subscribers - [Quarterly portfolio reviews](https://www.rolandhead.com/dividend-newsletters/) - Occasional [in-depth reviews of dividend shares](https://www.rolandhead.com/tag/dividend-shares/) I might be interested in buying These changes are aimed at creating a more sustainable publishing schedule that's focused on finding my ideas for the best UK dividend shares, without trying to cover everything. I hope this will provide an improved experience for readers – but as always, please let me know what you think. Last week saw the early stirrings of earnings season, with several big names publishing trading updates. I've picked out three contrasting and – I think – interesting businesses to look at below. ### Companies covered: [**Games Workshop (LON:GAW)**](#games-workshop-gaw)\- the appeal of this fantasy miniature gaming business remains an enigma to me, but its financial performance is outstanding and improved during the first half of its current financial year. I share my views on this business and flag up a couple of possible risks. I also explain why I'm not a shareholder, but possibly should be. [**Tesco (LON:TSCO)**](#tesco-tsco)\- a strong trading update for Q3/Christmas from the UK's largest supermarket. Management have nudged profit guidance higher and report strong cash generation. I'm positive on Tesco as an investment and explain why I prefer this business to **J Sainsbury**, which also updated last week. [**Savills (LON:SVS)**](#savills-svs)\- interesting market commentary from this leading global real estate business suggests that the dust is beginning to settle in commercial property sectors. Profits will be down sharply for 2023 but should start to recover in 2024, I think. Savills is not as cheap as it was a few months ago, but this FTSE 250 share still looks reasonably valued to me. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Games Workshop (GAW) > "We continue to perform well during challenging economic times, delivering record group revenue, profit and dividends in the period." [Half-yearly report](https://www.investegate.co.uk/announcement/rns/games-workshop-group--gaw/half-yearly-report/7980178?ref=rolandhead.com) I have hesitated to write about fantasy miniature business Games Workshop previously because it is so widely covered elsewhere in the private investor community, often by writers who are far more knowledgeable about the company and its products than I am. It's also fair to say that I'm not a target customer for this business. However, Games Workshop scores highly in [my dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) and has become a hard business to ignore for an investor like me, who favours firms with excellent cash generation, strong quality metrics and clean accounts. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/gaw-dividend-roce-20y-120124.png) The last few years have seen strong growth from the core business, which operates through a network of shops and online. This has been supplemented by growing licensing revenue, as Games Workshop has started to monetise its intellectual property through gaming and television deals. Most recently, the company [confirmed](https://www.investegate.co.uk/announcement/rns/games-workshop-group--gaw/agreement-to-develop-films-and-television-series/7947337?ref=rolandhead.com) an agreement to grant exclusive rights to **Amazon** to create films and television series set within the *Warhammer 40,000* universe. This was first announced in December 2022, but has evidently taken a while to finalise. The two companies now plan a further 12-month period of work to *"agree creative guidelines"*. Only then will the agreement proceed. No financial terms have been revealed, but I would imagine the licensing revenue could be lucrative for Games Workshop and the exposure could drive additional interest in the core retail business. However, this potentially large project looks like it will be a slow burner, at least to start with. **Half-year results:** with this backdrop in mind, I've taken a look at the company's latest half-year figures, which cover the 26 weeks to 26 November 2023. - **Revenue** up 9.3% to £247.7m - **Operating profit** up 13% to £94.5m, *comprising:* - *Core operating profit up 18% to £83.4m* - *Licensing operating profit down 14% to £11.1m* - H1 **earnings per share** up 7.2% to 216.9p - **Dividends** declared and paid in the period up 18.2% to 195p per share Trading performance during the first half of the current year appears to have been fairly strong. Revenue from the core retail business is said to have grown *"in all channels and in all major countries"*. Profitability improved during the period, primarily because of a reduction in shipping costs and inventory provisions. Games Workshop's gross margin rose from 64.2% to 69.4% in H1, while operating margin for the half year improved from 39.4% to 40.1%. My sums suggest a trailing 12-month return on capital employed of over 60%; an exceptional figure that supports strong cash generation. Dividends of £64.2m (195p/share) paid during the half year were covered comfortably by free cash flow of £82.9m (251p/share). This illustrates the company's policy of only using *"truly surplus cash"* to fund dividends. Games Workshop's balance sheet also remained strong, with statutory net cash position of £62.7m at the end of November. CEO Kevin Rountree say this reflects a prudent policy towards rainy days: > "It's worth noting that we have increased our cash buffer in the period to £75 million in line with the current three month cash cost of running Games Workshop - on a *rainy day* we'd prefer to be able to look after ourselves. Our job is to run the business under all scenarios." **Personnel changes:** one section that caught my eye was on personnel changes. Two long-serving and senior people are leaving the business: - Art Director John Blanche has retired after nearly 40 years. CEO Rountree describes him as *"a creative genius"* but is keen to emphasise that Blanche leaves behind him *"a well invested and talented Warhammer Studio"*. - CFO Rachel Tongue plans to step down at the AGM in September 2024\. Tongue has been CFO for nine years but has been at Games Workshop since 1996, two years prior to Rountree joining. She was promoted to CFO when Rountree moved from that role to become CEO in 2008. I am sure that succession will be handled successfully in both cases, but it does seem like Kevin Rountree is losing two trusted lieutenants and senior leaders within a short space of time. **Outlook:** Games Workshop doesn't provide conventional outlook guidance, but Rountree does sign off with a positive statement: > "We continue to perform well during challenging economic times, delivering record group revenue, profit and dividends in the period. Morale is good at Games Workshop and our hobbyists are having fun too." Consensus forecasts suggest earnings will rise by about 10% to 440p per share this year, with a possible dividend payout of 423p per share. That gives a forecast P/E of 22, with a prospective yield of 4.3%. #### My view Like many UK investors in recent years, I've admired Games Workshop's progress without managing to buy the shares! I can't see anything serious to dislike about this business, except perhaps a degree of key person risk (Kevin Rountree), especially given the departure of the two key personnel discussed above. My other reservation is that I have no idea if this will still be a popular hobby in 10 years or more. History suggests that it could be, though. The original *Warhammer* was released in 1983 and the game's appeal appears to have successfully survived the transition to *Warhammer Age of Sigmar*, which was launched by Games Workshop as a replacement in 2015. For a cash-rich business that's generating 50%+ returns on equity, I don't think Games Workshop's current valuation is necessarily excessive. On the other hand, it may be worth remembering that the share price has gone through long periods of stagnation before – a high of £8 was first seen in 1998 but not surpassed until 2016: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/gaw-all-chart-120124-1.png) Games Workshop share price (using a log scale) There are times in my investing career when I would have made more money if I'd been willing to pay up for high-quality businesses instead of looking for value. This may be one of them, but I can't bring myself to take the plunge at c.£100\. If Games Workshop's share price should fall back closer to the sub-£60 level seen in 2022, I could be tempted. For now, I'll continue to follow this distinctive business with interest. --- ### Tesco (TSCO) > "we are upgrading our guidance for the current financial year" [Q3 and Christmas Trading Statement 2023/24](https://www.investegate.co.uk/announcement/rns/tesco--tsco/q3-and-christmas-trading-statement-2023-24-/7984398?ref=rolandhead.com) Tesco has upgraded its profit guidance for the second time in six months, following a strong Christmas and third quarter. The UK's largest supermarket said that like-for-like (LFL) sales in its core UK business rose by 6.8% over the six week Christmas period. Group sales for the third quarter, which covered the 13 weeks to 25 November, rose by 6.4% on a LFL basis. Management say that the supermarket remains the cheapest of the the full-line supermarkets, offering a Christmas dinner for £2.09 per head. Sainsbury's quoted a figure of *"under £3"*. More broadly, the company says it saw consistent volume growth through the third quarter and gained an additional 0.15% of market share in the run-up to Christmas, taking its total share to 27.9%. Playing with the timeframes on [Kantar's grocery market share tool](https://www.kantarworldpanel.com/grocery-market-share/great-britain?ref=rolandhead.com) suggests that Tesco and Sainsbury took market share from Aldi, Asda and the Co-Op during the second half of last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/kantar-grocery-share-110623-241223.png) Source: [Kantar World Panel](https://www.kantarworldpanel.com/grocery-market-share/great-britain?ref=rolandhead.com) **Outlook:** Tesco now expects retail adjusted operating profit of £2.75bn for the year ending Februaruy 2024, up from previous guidance of £2.6bn - £2.7bn. Guidance for retail free cash flow, which reflects cash generated by the retail business and excludes Tesco bank, has also been nudged higher. Management now expect retail free cash flow to be *"around £2.0bn"*, up from previous guidance of *"between £1.8bn and £2.0bn"*. This implies an underlying free cash flow yield of 6.5%. That seems a reasonably attractive valuation to me, and covers the 4% dividend yield 1.5 times. One slight caveat is that this level of free cash flow is somewhat above the company's medium-term guidance range of £1.4bn-£1.8bn, so perhaps isn't entirely sustainable? #### My view From an investment perspective, I think Tesco continues to look well run and reasonably priced. Cash generation is good and the group's market-leading scale is a particular attraction for me in this sector, where margins are low and economies of scale are key. In my view, Tesco looks a better investment than **J Sainsbury**, whose shares fell last week after its Christmas statement revealed a slump in sales at the ultra-low margin Argos business. Sainsbury's grocery business seems to be performing well, but as a group it has consistently been (even) less profitable than Tesco in recent years. I don't see this changing. Having said that, the two companies' relative performance over the last 20 years suggests that there may be less differentiation than I'm imagining: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/tsco-sbry-chart-20y-120124.png) Share prices: Tesco (black) vs Sainsbury (blue) --- ### Savills (SVS) > "underlying market improvements ... should lead to substantive overall improvement in performance in 2024" [Year-end trading update](https://www.investegate.co.uk/announcement/rns/savills--svs/year-end-trading-update/7984375?ref=rolandhead.com) Savills is a global real estate business that offers transactional (estate agency) services and a range of less transactional services, such as consultancy, property management and investment management. The company's market reach and long history means that its market updates are often an interesting source of commentary on commercial property market conditions. 2023 was a difficult year due to the impact of rising interest rates and the continued uncertainty about future demand for office property in major western markets. This led to sharp drop in transactions and uncertainty over valuations. This continued for *"longer than originally anticipated at the start of 2023"* and led to a *"significant reduction in profits"* from the group's transactional business. However, Savills' latest commentary suggests that the dust is beginning to settle on both issues. Management say that while market liquidity remains poor, lenders are now starting to force borrowers to crystallise reduced valuations by refinancing (or selling) their properties. This is expected to be the first step towards a normalisation of market conditions: > "we are now starting to see lenders beginning to exercise their security rights. This began to have a positive effect on market activity towards the year end and should be a catalyst for improved volumes in H1 2024." Geographically, Savills says that the UK has recalibrated relatively quickly and now *"represents value"*. There is said to be *"significant occupier demand"* for properties with strong sustainability credentials. North America, France, and Germany are said to have been slower to adjust. Interestingly, there seems to be some read-across from Savills' comments to [a statement](https://www.investegate.co.uk/announcement/rns/real-estate-credit-investments-ltd--reci/fact-sheet-announcement/7986524?ref=rolandhead.com) this week from **Real Estate Credit Investments (LON:RECI)**, in which I have a long position. RECI says it has impaired the value of a recently developed office property in France and is now acting to expedite leasing the asset and achieve early repayment of the loan. **Outlook:** Savills' less transactional business are said provided *"a resilient earnings stream"* in 2023, underpinning the group's profits. Full-year results are expected to be in line *"with the expected range of outcomes"*. This wording suggests to me that numbers could be at the low end of forecasts. Consensus estimates on SharePad are for earnings of 52.8p per share in 2023, down 44% from an underlying eps figure of 94.9p per share in 2022. Forecasts for 2024 suggest a recovery in earnings to c.70p per share. Those numbers give a 2023 forecast P/E of 19, falling to 14x for 2024. **Dividend:** Savills' dividend policy is complicated slightly by the company's practice of paying an interim and final ordinary dividend *and* an additional supplemental interim dividend that's based on the performance of its transactional business. In 2022, the interim and final payouts totalled 20p per share. The company also paid a 15.6p per share supplemental dividend. So the total ordinary dividend for 2022 was 35.6p (2021: 34.35p). Consensus numbers suggest a total payout of 30.5p per share for 2023, which I would guess reflects expectations of a much smaller supplemental dividend from the transactional business. This gives a prospective yield of 3.1%. #### My view Savills has generated an average return on equity of c.20% over the last 30 years, according to SharePad. During that time, its dividend has grown steadily, if we exclude the boom years of 2005-2007. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/svs-dividend-roe-120124.png) I've covered Savills several times before and have also written up the shares in an [in-depth stock review](https://www.rolandhead.com/dividend-shares/savills-is-this-property-firm-a-good-dividend-share/) at the end of 2022, in which I explained its history. My view is that this 168-year-old firm is a good play on the long-term growth of the global property sector, with a bias towards commercial and prime residential. It remains to be seen just how long it will really take the commercial property sector to recover from the impact of higher interest rates. As with housebuilders, the main threat to a business of this kind is a lack of liquidity, rather than falling prices per se. Savills' commentary seems to suggest that this threat is now seems gradually receding, or at least no longer worsening. Consensus forecasts for 2023 imply an EBIT yield of 6.1%, rising to 8% in 2024\. A return to positive free cash flow is also expected in 2024, after an outflow last year. Savills looked very cheap to me when the shares were close to 800p a few months ago. At c.1,000p as I write, I think the shares remain reasonably priced and likely to deliver decent long-term returns. 💡 Don't miss any of my dividend share coverage – [subscribe today!](https://www.rolandhead.com/#/portal/signup) *Disclosure: at the time of publication, Roland owned shares of Real Estate Credit Investment.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Quality dividend portfolio: 2023 review URL: https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2023-review/ Last updated: 2024-04-04T16:06:46.000Z A belated Happy New Year – and welcome back to my latest portfolio review, which will look at the performance of my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) in 2023. This update will focus on the portfolio as a whole, along with changes made to the portfolio during the year. I cover individual company results in my more [detailed monthly reviews](https://www.rolandhead.com/dividend-newsletters/) for subscribers. 2023 was a relatively active period for the portfolio, with three sales and three new additions. One of these was forced on me through a takeover, the other two were voluntary changes, which I discuss below. In addition to this, I used the portfolio's accumulated dividend income to top 10 portfolio holdings at various points in the year. --- ### 2023 model portfolio performance The portfolio I'm discussing here is my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/), which is run using my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). This model portfolio was launched on 1 December 2021\. It contains largely the same shares as my personal portfolio, which has been run on a similar basis for a number of years. Although this is a dividend portfolio, no income is withdrawn and all dividends are reinvested. For this reason, my main metric for measuring progress against the wider market is total return (share price change + dividends). **2023 performance:** - **RH model portfolio total return: 3.0%** - **FTSE 100 Total Return index: 8.4%** This chart shows the performance of the portfolio against the FTSE 100 Total Return index since the model portfolio's inception on 1 December 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/rh-vs-ukx-tr-all-010124-1.png) There's no escaping the fact that in the two years since its inception, I would have made more money by investing in a FTSE 100 tracker fund. At the end of 2023, my efforts had produced a total return of just 6.2% since inception, compared to 16.6% for the FTSE 100 TR. However, two years is a short time in equity investing and I'm encouraged by the portfolio's stronger performance in recent months. I continue to believe that it's possible for me to beat the FTSE over longer periods by focusing on owning a selection of companies with above-average quality metrics, strong cash generation, and reasonable valuations. I take some encouragement from the increase in dividends last year. Income generated by the model portfolio rose by nearly 5%: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/2023-dividend-income-1.png) Based on a £100k model (virtual) portfolio created in Dec 2021 The stability of dividend income is one of its attractions for me. Compare the chart above to the wide range of share price movements seen within the portfolio last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/2023-share-price-moves.png) ### Portfolio changes in 2023 My [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/) allows me to make up to two changes to the model dividend portfolio each quarter. I made changes in Q1 and Q3, but did not make any changes (except top ups) in Q2 or Q4. #### **Stocks sold in 2023** I sold three shares during the year. In each case, the (virtual) transaction took place on the final day of the quarter. My own real-money trades were similarly timed. **March 2023:** [Direct Line Insurance (LON:DLG)](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance) ran up big losses in 2022 and cancelled its final dividend. After a detailed review of the insurer's 2022 results and outlook, [I decided to sell](https://www.rolandhead.com/dividend-shares/should-i-sell-my-direct-line-insurance-shares/). **September 2023:** I sold [EMIS Group (LON:EMIS)](https://www.rolandhead.com/dividend-portfolio/#emis-group) when its takeover by a subsidiary of US healthcare group **UnitedHealth** was [finally approved by the UK regulator](https://www.rolandhead.com/email/7aac6922-8543-4527-9e76-e6c924a644cd/). I also [decided to sell](https://www.rolandhead.com/newsletter/new-stock-2-another-new-share-for-my-dividend-portfolio/) small-cap engineering group [Concurrent Technologies (LON:CNC)](https://www.rolandhead.com/dividend-portfolio/#concurrent-technologies). I felt that the firm's more aggressive growth strategy and reduced free cash generation meant the shares may no longer offer the income potential I was looking for. Notwithstanding this, I think Concurrent probably remains a decent business with reasonable prospects. #### Stocks bought in 2023 To replace Direct Line, EMIS and Concurrent, I added three new shares to the model portfolio and my own holdings. Ahead of each purchase, I published a buy report for subscribers on each company: - June 2023: [*A high-yield stock to replace Direct Line*](https://www.rolandhead.com/dividend-shares/a-high-yield-stock-to-replace-direct-line/) - September 2023: [*A FTSE 250 share I'm buying for dividends and growth*](https://www.rolandhead.com/dividend-shares/a-ftse-250-share-im-buying-for-dividends-and-growth/) - September 2023: [*Another new share for my dividend portfolio*](https://www.rolandhead.com/newsletter/new-stock-2-another-new-share-for-my-dividend-portfolio/) In addition to these purchases, I also reinvested some of the model portfolio's accumulated dividend income by topping up a number of existing positions: - June 2023: [I topped up five positions - full list here](https://www.rolandhead.com/email/a7cb4a49-7179-4605-935e-bf25d3d814d9/) - December 2023: [I topped up a further five positions - full list here](https://www.rolandhead.com/email/9d515e6b-f46d-479c-95d7-3363e5af1a9f/) #### Portfolio weightings Here's how my portfolio looked at the end of 2023, following last year's share price movements and the transactions listed above. *Subscribers can see this chart with ticker codes included on my* [*portfolio page*](https://www.rolandhead.com/dividend-portfolio/): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2024/01/position-weightings-010124.png) 💡 Subscribe today for full access to my model dividend portfolio. Paid subscribers also receive full coverage of portfolio company results and details of all my portfolio trades. [Click here to sign up now](https://www.rolandhead.com/#/portal/signup). --- ### Model dividend portfolio: financial metrics Stock picking is fascinating and potentially rewarding, but ultimately the only result that matters is the performance of the portfolio. This is one reason why I like to monitor the financial profile of my whole portfolio, as if it was a single company. Here's how the model portfolio looked at the end of December 2023: | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield** | **5yr avgdiv grth** | **F'cast divyield** | **No. yrsdiv paid** | | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ---------------- | ------------------- | ------------------- | ------------------- | | £1.7bn | 21.0% | 11.3% | 7.1% | 0.2x | 5.3% | 6.3% | 5.2% | 24 | *Scroll L-R (Data source: SharePad/author analysis 04/01/2024\. Some adjustments were needed; please don't take this as gospel.)* Pleasingly, these numbers are largely unchanged from those I reported at the [end of the third quarter](https://www.rolandhead.com/portfolio/q3-2023-review-buying-shares-and-looking-ahead/). I think they are an attractive set of figures, with the obvious caveat that averages can be used to mask ugly underlying figures. However, I think there are a few points that are worth highlighting (good and bad). **Dividend yield:** the portfolio's **forecast dividend yield** of 5.2% remains within my target range, but is down from 5.5% at the end of the third quarter. I think this is mainly due to share price gains, which I can live with. Perhaps more significantly, this forecast yield is now slightly *lower* than the portfolio's **trailing yield** of 5.3%. This implies that the overall payout from the portfolio might shrink slightly this year. I think this reflects some company-specific expectations: - one cyclical company in the portfolio is expected to pay a reduced dividend this year, due to its earnings-linked dividend policy - two of the companies in the portfolio seem unlikely to repeat last year's generous special dividends **Actual dividend yield:** the yield figures above assume an equally weighted portfolio. In reality, position weightings vary and this may affect the actual cash yield received. Buying and selling shares can also affect income received, as trading often results in missed dividends. **Other metrics:** the portfolio's **median market cap** of £1.7bn is unchanged, while **trailing return on capital employed** of 21% is down slightly from 22.3% at the end of Q3\. I think this reflects profit drops at one or two of the portfolio's more cyclical businesses. Happily, aggregate leverage remains low, with net debt representing an average of just 0.3x five-year average net profit. In terms of valuation, the **TTM EBIT yield** of 11.3% and **TTM FCF yield** of 7.1% are both slightly below the level reported at the end of [Q3](https://www.rolandhead.com/portfolio/q3-2023-review-buying-shares-and-looking-ahead/) (11.9% / 8.5%). I think this is probably due to recent share price gains. However, both of these these metrics still represent good value, in my view. More importantly, the **free cash flow yield** of 7.1% covers the portfolio's **trailing dividend yield** of 5.3%. This implies that in aggregate, last year's payouts were covered by free cash flow – suggesting they remain affordable. **Dividend history:** the companies in the portfolio have **paid dividends** for an average of **24 consecutive years**, according to SharePad data. Although this period may have included some cuts, I think it's still a useful indicator of their commitment to maintaining the shareholder payout. --- ### Final thoughts Given that stock markets tend to look ahead of the real economy, I'm cautiously optimistic that 2024 might be a slightly better year for investors than 2022 and 2023\. I could be wrong though. Although inflation now appears to be easing, the impact of higher interest rates is still feeding through to borrowing costs and company profits (and consumers). I expect interest rates to remain roughly at current levels, so I'll continue to focus on companies with minimal net debt or net cash positions. I may also take a more critical view of those few companies in the portfolio which are more heavily reliant on debt. Whatever happens, I'm going to continue following the same process in 2024 – using valuation, quality and cash flow metrics to try and identify high-quality dividends. As always, thank you for reading and supporting this project. Please feel free to get in touch with any questions or feedback – you can reach me by [email](https://www.rolandhead.com/contact/) or [on X / Twitter](https://twitter.com/rolandhead?ref=rolandhead.com). Roland Head --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dec '23 dividend portfolio update: changing landscape + top ups URL: https://www.rolandhead.com/portfolio/dec-23-dividend-portfolio-update-changing-landscape-top-ups/ Last updated: 2024-02-02T09:18:13.000Z Welcome to my final monthly portfolio results review of 2023\. I hope you had a good break over the festive season, however you chose to spend it. This update will be followed next weekend by my annual portfolio performance review. Just two companies from my portfolio issued results in December, so I took the opportunity to spend a little more time than usual looking at each of these businesses. I think it's fair to say both of these companies fall into the contrarian camp at the moment. But I'm cautiously optimistic that they each offer value and growth potential over the longer term. In the meantime, I hope that net cash balance sheets and robust free cash flow will continue to support both companies' 20+ year dividend records and attractive yields. --- ### Portfolio top ups As a quick reminder, in a scheduled (virtual) trade, I topped up five of the model portfolio's positions at their closing prices on 29 December 2023\. Subscribers can read about the shareholdings I decided to add to [here](https://www.rolandhead.com/email/9d515e6b-f46d-479c-95d7-3363e5af1a9f/). Updated positions and purchase prices are listed on my [portfolio page](https://www.rolandhead.com/dividend-portfolio/). Let's move on and take a look at December's results. --- ### In this month's report Here's a summary of the company results covered in this report, with a link to each section: _This post is for paying subscribers only._ ### Dividend notes: investment platforms get cash boost - AJB, IHP (14/12/23) URL: https://www.rolandhead.com/dividend-notes/investment-platforms-get-cash-boost-ajb-ihp-14-12-23/ Last updated: 2024-01-06T08:05:30.000Z Welcome back to my dividend notes. Today I'm looking at two quite different investment platform companies, AJ Bell and IntegraFin Holdings. Both of these firms are on my radar as dividend shares I might be interested in owning at the right price. The UK investment platform sector is expected to continue growing over the coming years, as more people choose or need to take responsibility for their own retirement savings. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/ihp-fy23-adviser-platform-growth.png) Source: IHP FY23 presentation If the growth projections in this chart are vaguely correct, then I think there should be scope for leading platform advisor operators such as IntegraFin and AJ Bell to expand and gain market share over the coming years, despite growing competition. Here are my thoughts on each company's recent full-year results. --- ### Companies covered: - [**AJ Bell (LON:AJB)**](#aj-bell-ajb)\- results from this FTSE 250 investment platform look solid to me and the company is taking proactive steps to forestall regulatory pressure on cash interest and fees. I think the shares could still be reasonably valued at current levels. - [**IntegraFin Holdings (LON:IHP)**](#integrafin-ihp) \- this adviser-only platform provides a truly independent service that allows IFAs to provide a whole-market offering to their clients. I like the business, although the competitive landscape seems to be getting tougher. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### AJ Bell (AJB) > "Record financial performance" [Final results y/e 30 September 2023](https://www.investegate.co.uk/announcement/rns/aj-bell--ajb/final-results/7926802?ref=rolandhead.com) & [pricing changes](https://www.investegate.co.uk/announcement/rns/aj-bell--ajb/statement-re-pricing-changes/7937520?ref=rolandhead.com) Recent results from investment platform AJ Bell look broadly reassuring to me and showcase the excellent profitability and continued growth of this business. **Results highlights:** AJ Bell's revenue rose by 33% to £218.2m last year, supporting a 50% rise in pre-tax profit to £87.7m. This translated into a pre-tax margin of 40.2% (FY22: 35.6%), reflecting an increased revenue margin of 0.298% (FY22: 0.226%). This growth was driven in part by a 10% increase in assets under administration and a 12% increase in customer numbers to 476,532\. Net inflows of £4.2bn (FY22: £5.8bn) plus positive favourable market movements of £2.6bn lifted total assets under administration by 11% to £70.9bn. Despite this positive performance, the elephant in the room was the increase in interest earned on clients' cash balances. **Interest on cash balances:** AJ Bell says that *"recurring ad valorem"* fees (those based on account value) rose by 58% to £161.2m last year. This increase includes some retained interest income from customer cash balances – the company didn't disclose the exact amount of retained interest income. Interest earned on customer cash has been a hot topic for a while. As largely expected, the FCA has now weighted in with a [Dear CEO letter](https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-retention-interest-earned-customers-cash-balances.pdf?ref=rolandhead.com) to platform bosses that was issued shortly after AJ Bell's results were published. The main points in the letter seem to be that companies should be transparent about interest rates and the amount retained, and that interest retained should be proportionate to the costs of cash management. The FCA also suggests that companies engaged in the 'double dipping' – retaining interest *and c*harging their clients cash management fees – should cease this practice promptly. Fortunately, neither AJ Bell or **Hargreaves Lansdown** double dip, as far as I can see. *(According to an informative Liberum note on this subject that's available on Research Tree, the only sizeable platform engaged in double dipping is *Quilter*, which is now expected to change this practice. I've previously looked at Quilter* [*here*](https://www.rolandhead.com/dividend-notes/sleeper-stocks-bnzl-macf-qlt-30-08-23/)*.)* I don't know if any regulatory changes will emerge from the FCA's interest in this area. But I don't think that AJ Bell is likely to suffer a serious impact. The company has already improved its disclosure relating to interest rates ([here](https://www.ajbell.co.uk/charges-and-rates/interest-rates?ref=rolandhead.com)) and now pays more competitive rates than historically. In addition to this, AJ Bell has already committed to a package of pricing changes. These were announced on the same day as the FCA letter was published. The pricing changes will take effect from 1 April 2024 and will include a reduction in the standard share dealing fee, from £9.95 to £5.00, and an increase in the interest rates paid on large cash balances. **Profitability:** notwithstanding my comments above, I think it's clear that retained interest on client cash played a significant role in boosting AJ Bell's profitability last year. Despite a 26% increase in operating costs to £132m (FY22: £104.9m) – due to staff pay rises, recruitment and technology investment – AJ Bell's operating margin rose to 39.5% (FY22: 36.0%) last year. My sums suggests a return on equity of 45.6% (FY22: 35.4%). Management point out, rightly in my view, that if cash levels or interest rates fall, the group will be likely to see increased activity elsewhere. Even so, I suspect that this may be a peak level of profitability, at least for the near term. **Dividend:** the total dividend for the year was increased by 46% to 10.75p per share. That represents 1.6x cover by earnings and gives the shares a 3.5% yield at the time of writing. AJ Bell says this is the 19th consecutive year of dividend growth for the business. The company only floated in 2018, so slightly unusually this appears to include its time as a privately held business. **Outlook:** chief executive Michael Summersgill expects short-term macroeconomic headwinds, but says he's confident of the longer-term opportunity for the business: > "our versatile platform offering enables us to continue delivering robust growth in these conditions and the long-term structural drivers of growth in the UK platform market remain strong." Brokers appear to be taking a cautious view about the 2023/24 financial year. Consensus forecasts suggest earnings will be broadly flat this year. These estimates price AJB shares on a forecast P/E of 18 with a prospective dividend yield of 4.4% (another big increase to the payout is expected this year). #### My view As I've [commented before](https://www.rolandhead.com/dividend-notes/navigating-uncertain-markets-crda-hwdn-ajb-25-07-23/), I think this is a good quality business. I don't see anything in AJ Bell's full-year results to change this view. Although the shares aren't quite as cheap as they were a few weeks ago, the current share price still gives an EBIT yield of 7.9% and a prospective dividend yield of 4.4%. AJ Bell's growth seems likely to slow, at least in the near term. Even so, I think the shares could offer value at current levels, given the strong profitability of this business. --- ### IntegraFin (IHP) > "Record year end Transact investment platform funds under direction ('FUD') of £55.0bn." [Final results y/e 30 September 2023](https://www.investegate.co.uk/announcement/rns/integrafin-holding--ihp/final-results/7941136?ref=rolandhead.com) IntegraFin shareholders (and clients) do not need to worry about interest on client cash balances. The platform has a longstanding policy of passing all interest earned on client cash directly through to its clients. I should point out that this platform business serves financial advisers only – unlike AJ Bell, it does not have a direct-to-consumer offering. Even so, I like IntegraFin's interest rate policy for its simplicity and transparency. Although it may be true that AJ Bell and Hargreaves Lansdown use retained interest income to subsidise some of their fees, the nature of such arrangements means that some clients are likely to benefit more than others from such subsidies. They also lack transparency. As we'll see shortly, IntegraFin's interest policy does not seem to impact the overall profitability of the business. This suggests to me that clients (or their advisers) are happy to pay fees *and* receive offsetting interest income. **Results highlights:** IntegraFin's funds under direction ended the year at a record level of £55.0bn (FY22: £50.1bn). This represents net inflows of £2.7bn during the year and positive market movements of £2.3bn. Client numbers rose by 2.5% to 230,294, while the number of advisers registered on the platform climbed 1.9% to 7,683\. Remember that these advisers do not typically have all of their client assets on IntegraFin's Transact platform – so funds under direction can potentially rise faster than client/adviser numbers, if advisers are impressed with IntegraFin's service. Despite the growth in funds under direction, price cuts during the year meant that IntegraFin's revenue was broadly flat at £134.9m (FY22: £133.6m). The group's underlying pre-tax profit fell by 4.3% to £63m, while underlying earnings fell by 6.7% to 15.2p. I've used underlying profits rather than statutory profits here because IntegraFin's accounts have some unusual insurance-related items that cause big swings in reported profits. I'm comfortable these can be ignored for my purposes. **Profitability:** IntegraFin's planned price cuts last year saw its revenue yield (the revenue earned as a proportion of client assets) fall to 0.243%. This continues a long-running downward trend: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/ihp-fy23-revenue-yield-1.png) Source: IHP FY23 presentation I guess we might wonder how much further IntegraFin's pricing power is likely to be eroded by competitive pressures. For contrast, AJ Bell's revenue margin on its advised platform was 0.182% last year – but AJ Bell retained a significant portion of interest earned on client cash, whereas IntegraFin passed it through in full. For this reason, I'm not sure it's possible to make a direct comparison on fee levels without modelling various account scenarios. Notwithstanding IntegraFin's falling revenue yield, the business remained extremely profitable last year, with an underlying pre-tax margin of 46.7%. **Dividend:** the total dividend for the year was held flat at 10.2p per share, giving a yield of 3.5% at the time of writing. IntegraFin is highly cash generative. The group's corporate cash balance was broadly flat at £178m at the end of last year, despite the £34m cost of the dividend. I don't see too much risk to this payout, even if earnings are subdued this year. **Outlook:** some further reduction in profitability does seem to be a risk to me. The company's FY24 guidance suggests staff costs and regulatory/professional fees are expected to rise by around 12% over the coming year. This seems to be largely driven by inflationary increases and investment in *"platform digitalisation"* – perhaps mirroring the technology spend and headcount increase AJ Bell reported for FY23. As with AJ Bell, broker consensus forecasts for IntegraFin suggest earnings will be largely flat this year at 13.2p per share. That prices the stock on around 20 times forecast earnings with a c.3.5% dividend yield. #### My view IntegraFin may not seem immediately cheap, but I think this remains an interesting and potentially attractive business. Like AJ Bell, it should continue to benefit from structural growth in the wealth management market. IntegraFin's more focused and transparent business model also appeals to me, although it's not clear to me whether it will be more or less vulnerable to competitive price pressure than AJ Bell. My feeling is that IntegraFin's focus on providing a truly independent platform on its own proprietary software is an attraction. The company says net inflows to Transact last year ranked it second in the top five adviser platforms: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/ihp-fy23-platform-flows-1.png) Source: IntegraFin FY23 presentation However, I couldn't help noticing that the company at the top of the leaderboard above – True Potential – is the only other major adviser platform with its own proprietary technology: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/ihp-1h23-adviser-platform-share.png) Source: IntegraFin FY23 presentation Although True Potential's has less than half the FUD of IntegraFin, I wonder if this faster-growing business could become a serious competitior. For now, IntegraFin is a business I'll continue to watch with interest. But I do have a favourable impression of this company – and like AJ Bell, this is a stock I could imagine owning. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: quality in specialist niches - PAG, RNWH (13/12/23) URL: https://www.rolandhead.com/dividend-notes/quality-in-specialist-niches-pag-rnwh-13-12-23/ Last updated: 2023-12-14T22:17:25.000Z Welcome back to my dividend notes. This time I'm looking at two sets of company results that caught have caught my eye recently, thanks to positive performances and apparently reassuring outlooks. --- ### Companies covered: - [**Paragon Banking (LON:PAG)**](#paragon-banking-pag)\- this buy-to-let lender specialises in professional landlords and appears to be performing well, with only a limited rise in arrears. I think the shares could be reasonably priced. - [**Renew Holdings (LON:RNWH)**](#renew-holdings-rnwh)\- another solid set of results. This infrastructure specialist continues to justify its claims of differentiation and superior quality, but I think the share price may be up with events. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Paragon Banking (PAG) > "The Group’s performance for 2023 again demonstrates the strength of our business model" [Final results y/e 30 September 2023](http://www.investegate.co.uk/announcement/rns/paragon-banking-group--pag/final-results-/7924095?ref=rolandhead.com) Paragon Banking specialises in lending to professional buy-to-let landlords and SME businesses. The group's UK banking licence gives it access to retail deposits, meaning that it isn't dependent on wholesale markets for funding. I covered this FTSE 250 dividend share [earlier this year](https://www.rolandhead.com/dividend-notes/reassuring-updates-pag-ghh/) and was left with a favourable view. Paragon's latest results cover the financial year to 30 September and also look fairly positive to me. Underlying pre-tax profit for the full year rose by 25.4% to £277.6m, with underlying earnings per share up 34.8% to 94.2p. Both figures exclude non-cash fair value gains, which I think is reasonable in this context. Paragon agreed £3.01bn of new loans last year, down slightly from £3.21bn in 2022\. Of this, £1.88bn was for mortgage lending, with the remaining £1.13bn offered as commercial lending. Net lending increased by 4.7% to £14.9bn and the bank says it achieved a customer retention rate of 80% at loan maturity. In mortgage lending, this represents an increase from 70% in 2022 – the bank says this improvement has been helped by a new web portal allowing for easier refinancing. A similar service has now been launched for SME borrowers. This high retention rate seems to suggest that the majority of borrowers retain both the appetite and the creditworthiness needed to secure Paragon loans. According to Paragon, professional landlords are not fleeing the market in the way that amateur landlords are: > While it is clear that the changing economic environment and regulatory landscape has caused some landlords to step away from the PRS, the Group’s experience is that this reaction is concentrated amongst some smaller non-specialist amateur landlords, while its specialist customers remain committed to the sector. Despite this, **bad debt levels** did rise during the year. Three-month plus arrears now represent 0.34% of the loan book, compared to 0.15% one year earlier. Actual impairments rose by 28.6% to £18m (FY22: £14m). Paragon says its arrears rate is still *"significantly below the industry average":* ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/pag-fy23-arrears-vs-mkt.png) Source: PAG FY23 presentation The bank also points out that the average loan-to-value ratio on its buy-to-let portfolio is 62.8%. Assuming house prices don't collapse, I think this should provide sufficient equity headroom in the event of loan defaults. For retail savers, rising interest rates have provided some attractive new opportunities. Paragon's cash savings products appear to have been well-positioned in this market; the bank's retail deposits rose by 24.3% to £13.3bn during the year. For a lender like Paragon, retail deposits are often cheaper than wholesale market funding, helping to support margins and competitive positioning. Paragon's financial situation looks robust to me at the end of the year. The bank's CET1 ratio fell to 15.5% last year (FY22: 16.3%), but this is still a quite high in a historic context and when compared to rivals. It's also significantly above regulatory requirements. Capital generation was aided by a 0.4% increase in net interest margin to 3.09%. Costs also fell as a proportion of income, with a cost:income ratio of 36.6% (FY22: 39.4%). Improved profitability helped to deliver increated returns, with the bank's measure of underlying return on tangible equity rising to 20.2% (FY22: 16.0%). Paragon ended the year with tangible net asset value of 579p per share (FY22: 533p). These results seem to have given the market a renewed confidence in the quality of the bank's loan assets – Paragon shares have now re-rated to trade in line with book value, after trading at a discount for much of the autumn. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/pag-1y-chart-131223.png) **Dividend:** the total dividend was increased by 30.8% to 37.4p per share for the year, in line with the bank's policy of distributing 40% of underlying earnings to shareholders. This gives a dividend cover ratio of c.2.5x, which should be safe as long as earnings remain relatively stable. This payout has grown steadily since 2008 and currently offers a 6.5% yield. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/pag-dividends-131223.png) **Outlook:** Paragon believes that its specialist focus on professional landlords in particular should continue to support its performance, even given broader market weakness: > "In this environment the Group’s focus on specialist products, a robust credit approach, high levels of customer retention and margin maintenance has delivered strong results in 2023 and these strategies will continue into 2024 and beyond." Broker forecasts suggest underlying earnings per share will be broadly flat in 2023/24, pricing the shares on six times forecast earnings, with the 6.5% dividend yield unchanged. #### My view Investors sometimes find themselves fighting the last battle and missing good opportunities. I think that Paragon might fall into this category. I don't see too much to worry about in these results. The obvious caveat to this view is that it is still too soon to be sure of the magnitude of the housing market slowdown. Paragon suffered badly in the 2008 crash because as a (then) non-bank lender, it was locked out of the wholesale funding market. Bank balance sheets were also much weaker back then. In my view, the situation is different today. Paragon obtained a banking licence in 2014, allowing it to diversify its funding with retail deposits. Its balance sheet also looks sufficiently strong to me for any reasonably likely scenario. I would have preferred to buy Paragon shares when they were trading below book value. But on balance I think the shares are probably still quite reasonably valued today. There's too much overlap with [one of my portfolio stocks](https://www.rolandhead.com/dividend-shares/a-high-yield-stock-to-replace-direct-line/) for me to consider investing, but I do continue to have a positive impression of this business. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Renew Holdings (RNWH) > "Record financial performance demonstrates the differentiated qualities and resilient nature of the Group" [Final results y/e 30 September 2023](http://www.investegate.co.uk/announcement/rns/renew-holdings--rnwh/final-results/7906258?ref=rolandhead.com) Renew Holdings is a construction and engineering group that specialises in infrastructure work, including nuclear, rail, water and highways. The overriding attraction of these markets for me is that they're generally far less cyclical than conventional construction. Projects are also often underwritten by long-term government-backed spending commitments. Renew's long-term share price history certainly seems to suggest that it has skilled management and some kind of competitive advantage: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/rnwh-all-chart-131223.png) I last covered this business [in May](https://www.rolandhead.com/dividend-notes/reliable-performers-rnwh-bvic/). I reckon Renew's latest results continue to support my (reluctant) view that this is a rare quality company in a sector that's known for being accident prone and low margin. Revenue rose by 13% to £960.9m last year, while Renew's operating profit was 18% higher, at £59m. Although the resultant 6.1% operating margin is not high in absolute terms, it is high for this sector. The order book increased by 11% to £860m – a rate of growth that broadly matched the increase in revenue, which seems reassuring to me. One of Renew's attractions for me is that it generates high returns on capital employed. This is my preferred measure of 'real' profitability for non-financial businesses. Renew generated ROCE of just under 30% last year, consistent with the previous year and above the five-year average of c.27%. My sums suggest the group's reported net profit of £43.4m was converted into free cash flow of £42.3m excluding acquisitions (FY22: £47.2m). Net cash was £35.6m at the end of the year, excluding lease liabilities. Renew's free cash flow ticks another box for me – excellent cash conversion. FY22 free cash flow was boosted by more favourable working capital movements; the FY23 performance looks okay to me on an underlying basis. **Dividend:** the full-year dividend was increased by 5.8% to 18p per share, giving the stock a rather modest 2.2% yield at current levels. Renew's dividend has risen fairly steadily ever since 2006: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/rnwh-dividends-131223.png) **Outlook:** CEO Paul Scott says that the group is *"well placed"* to benefit from UK government spending on existing infrastructure and sees *"exciting growth prospects in Water"*. *"Trading momentum has continued"* into the new financial year and Scott is confident the group can build on its record of *"long-term value creation"*. Broker forecasts are slightly more measured and suggest adjusted earnings will be broadly flat this year, at about 64p per share. That puts Renew on 13x forecast earnings, with an expected 7% dividend increase giving a yield of 2.3%. #### My view Renew's dividend yield is low due to the company's prudent dividend cover of three times earnings. But my preferred measure of EBIT/EV gives an earnings yield of 9%, which I think could be decent value. A free cash flow yield of over 6% also looks reasonable to me. I'm not likely to buy Renew Holdings while the dividend yield is so low. But I remain impressed by this business and believe it probably does have some degree of competitive advantage in its specialist niches – notably nuclear energy. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Is NWF a dividend share to buy now? URL: https://www.rolandhead.com/dividend-shares/is-nwf-a-dividend-share-to-buy-now/ Last updated: 2024-01-06T08:05:40.000Z Following my recent look at [small-cap packaging group **Macfarlane**](https://www.rolandhead.com/dividend-shares/is-macfarlane-a-good-dividend-share/), I've been looking at another small cap dividend share that's been on my radar recently. Distribution specialist **NWF Group (LON:NWF)** is a £100m AIM-listed business that supplies fuels, ambient groceries, and agricultural feed to customers around the UK. Like Macfarlane, NWF belongs to a category of shares I describe as *stealth multibaggers* – seemingly dull companies that have actually delivered excellent results over many years. NWF shares have doubled over the last 10 years – and have seven-bagged for investors who bought into the lows around the turn of the century: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-chart-all-081223.png) Indeed, I wonder if NWF could be a business that might have attracted legendary fund manager Peter Lynch back in the day. In his classic investing guide *One Up on Wall Street*, Lynch listed the characteristics he looks for in a perfect stock. NWF ticks many of these boxes: - *"It sounds dull"* \- NWF Group sounds dull and tells you nothing. - *"It does something dull" -* delivering fuel, ambient groceries, and animal feed is not exciting, nor is it obviously a growth business - *"It does something disagreeable"* & *"there's something depressing about it"* \- diesel, heating oil, and *"ruminant animal feed"* are products most of us prefer to keep at arm's length, although they're not as offputting as – say – sewage or pest control. - *"It's a no-growth industry"* \- NWF's Fuels and Feeds businesses have seen volumes fall in recent years. In both cases, end markets seem mature, with growth likely to come from consolidation. - *"It's got a niche"* \- NWF's operations are not exactly niches as Lynch defined them – they do face some competitors. But NWF's operating segments are well defined and the company does have significant market share within them. - *"People have to keep buying it"* \- there may be seasonal variations in demand, but fundamentally, all of the products NWF supplies are routine, repeat purchases that cannot really be avoided. One further attraction for me is that NWF is currently one of the highest-scoring stocks in my dividend screening results, with a score of 80/100: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-screen-ranking-081223.png) NWF is under the radar for many investors, but it has performed well for shareholders and has an excellent dividend record. I've been wondering whether this business could be a suitable candidate for my quality [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). To find out more, I've run the stock through my dividend scoring system and taken a closer look at its operations. Here's what I found. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Table of contents - [**History**](#nwf-group-1871-present)\- 152 years of distribution - [**Recent trading & outlook**](#recent-trading-outlook)\- in line with expectations? - [**Crunching the numbers**](#nwf-group-crunching-the-numbers)\- how does NWF score in my screening system? - [**Dividend culture**](#dividend-culture-excellent)\- excellent - [**Dividend safety**](#dividend-safety-good)\- good - [**Dividend growth**](#dividend-growth-well-supported) \- well supported - [**Dividend yield**](#dividend-yield-average)[](#dividend-yield-average)\- average? - [**Valuation**](#valuation-could-be-cheap)\- could be cheap - [**Profitability**](#profitability-hidden-leverage)\- hidden leverage? - [**Fundamental health**](#fundamental-health-good)\- good - [**Conclusion**](#conclusion-a-good-business)\- would I consider NWF for my dividend portfolio? ### NWF Group: 1871-present Nantwich-based NWF can trace its history back to 1871, when the Cheshire Farmers Supply Association Ltd was formed to serve the needs of local farmers. The NWF moniker came into existence in 1958, when the firm changed its name to North Western Farmers Ltd following a double merger with two other regional farmers supply associations. In 1988, the business became a limited company, NWF Ltd, replacing the co-operative structure that had been in place since 1918\. In 1995, NWF floated on London's AIM market, where it remains today. Since then, the company has continued to expand through a focus on consolidation, bolt-on acquisitions and careful capital allocation. The group now has three established business lines, each with a clear identity and attractive scale: [**NWF Fuels**](https://www.nwf.co.uk/our-business/fuels/?ref=rolandhead.com):last year, this business supplied 636m litres of fuel from 27 depots to more than 100,000 customers across the UK. NWF Fuels' customer base is a mix of agricultural, commercial and residential (heating oil). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-fy23-fuel-depots.png) NWF Fuel depots (Source: NWF FY23 presentation) The fuels business has grown mainly by acting as a consolidator in a sector that remains very fragmented, with lots of small local operators. Today, NWF says it's the third-largest fuel distributor in the UK. Even so, this position is equivalent to a market share of just 2%. *"Over 150 smaller players"* remain, many of whom are presumably potential acquisition targets for NWF. Longer term, there's clearly some risk to this business from the energy transition. Over the coming decades, usage of oil-based fuels seems likely to decline, perhaps sharply. Indeed, I wonder if this process has already started – NWF's volumes have fallen by around 10% over the last three years, despite some bolt-on acquisitions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-fy23-fuel-volumes.png) Source: NWF FY23 presentation (fuel volumes) For now, I suspect NWF may be able to offset some declines through its role as a consolidator, which increases market share. In addition, I would imagine that lorries and farm equipment are likely to remain fuelled by diesel for the foreseeable future. This may underpin the business for some time yet. However, I think the residential part of the business could be more vulnerable. As an oil heating user myself, I intend to switch to a heat pump when my current boiler needs replacing. [**Food**](https://www.nwf.co.uk/our-business/food/?ref=rolandhead.com):this division operates as Boughey Distribution. According to [the Boughey website](https://boughey.co.uk/about-us/company-history/?ref=rolandhead.com), NWF started this transport business in 1964\. It's since grown to operate c.150 lorries and 1.1m sq feet of warehousing, with a specialism in consolidating ambient groceries. Operating from sites in Nantwich and Crewe, Boughey collects and stores palletised ambient grocery products from suppliers and manufacturers. These are then consolidated into complete loads for delivery to supermarket distribution centres and other large retailers. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-fy23-foods-locations.png) NWF Crewe warehouse and customer locations (source: FY23 presentation) NWF says that the Food business works with all retailers \[supermarkets\] and cash and carry operators nationwide, and has an *"active pipeline of customers looking to join us"*. A new warehouse that opened in 2020 increased storage capacity to 135,000 pallets. This expansion was backed by customer contracts and has been fully utilised since then: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-fy23-pallets.png) Source: NWF FY23 presentation (pallets stored) The company says it has *"an ambitious five-year growth plan".* According to the FY23 presentation, this may involve adding further warehouse space (backed by customer contracts), optimising the customer mix and providing value-added services such as e-fulfilment and repacking. From what I have heard of this business, Boughey is well run and respected by both its staff and customers. The company [recently won](https://boughey.co.uk/company-wins-employer-of-the-year-award/?ref=rolandhead.com) a local Employer of the Year award and says it has a waiting list of HGV drivers who would like to work for the firm. [**Feed**](https://www.nwf.co.uk/our-business/feeds/?ref=rolandhead.com): NWF supplies ruminant feed – primarily for dairy cows – to more than 4,100 farmers across the UK. Alongside this, the company offers a nutritional advice service that I'd imagine has a strong sales bias: > "over 55 trained nutritional advisors analysing forage and farmers’ objectives to deliver feed to optimise performance." > Providing the full range of feed and nutritional products for dairy farmers – opportunities for range extensions > Target 50 farmers for each nutritionist with up to 10,000 tonnes of feed per annum NWF has its own feed mills and delivers direct to farmers. The company says it feeds one-in-six dairy cows in the UK. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-fy23-feed-locations.png) NWF feed mills and farming customers (source: FY23 presentation) This is essentially a commodity business, and NWF does take some price risk here on its inventories. Feed costs and pricing can vary depending on market conditions, while demand also fluctuates depending on factors such as weather and farm-gate prices for milk. Feed volumes fell by 2.7% to 514,000 tonnes last year, which NWF blamed on *"a mild autumn and a later transition to indoor housing for dairy herds"*. Volumes also declined in FY22: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-fy23-feed-volumes.png) Source: NWF FY23 presentation (feed volumes) Like the fuels business, I think it's fair to say that the UK market for ruminant feed is mature and is unlikely to grow significantly. The company says falling volumes are linked to market conditions and the impact of Brexit. Apparently, farmers are not expanding their herds, even when milk prices are favourable. NWF has sought to grow the Feeds business by acting as a consolidator in addition to seeking organic growth opportunities, such as *"added value products"* to optimise cows' diets. For example, it offers a range of *"low emission feeds"*. ### Recent trading & outlook NWF enjoyed a period of record profits in 2022, as high energy prices and volatile market conditions worked in favour of suppliers such as NWF. Market conditions are now normalising again and operating profit from Fuels fell by 25% last year (y/e 31 May). However, improved trading for the Food and Feed business offset this decline somewhat, leaving group operating profit down by around 4% at £21m last year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-opprofit-081223.png) Broker consensus forecasts suggest this process of normalisation will continue this year. Estimates on SharePad suggest NWF's operating profit could fall by around 20% to £16m in FY24\. That would put the group's profits back on a pre-2022 trajectory. **CEO succession:** chief executive Richard Whiting is retiring in March 2024, after fifteen years in charge. He's being replaced by finance director Chris Belsham, who has been with NWF since 2017. Belsham obviously knows NWF well, but his background is quite different to that of Whiting. Whereas Whiting had experience in senior roles at industrial companies prior to joining NWF, Belsham's background was as a corporate finance specialist with *"extensive mergers and acquisition"* experience. Fortunately, new CFO Katie Shortland does have plenty of infrastructure and industrial experience, with previous senior roles at FTSE 250 engineer **Meggitt** and Midland Expressway (M6 Toll operator). Even so, I wonder whether the company's strategy may evolve under new leadership – perhaps through more aggressive use of acquisitions, or even, maybe, through a sale or partial disposal of the business. **Outlook:** the first quarter of the company's financial year (June-Aug) is the quietest period of the year for NWF. But the company says that overall trading during these three months was in line with expectations. **Fuel** volumes increased year-on-year with *"expected normalisation of margins"* reflecting more stable supply conditions. The [acquisition of Geoff Boorman Fuels](https://www.investegate.co.uk/announcement/rns/nwf-group--nwf/acquisition-and-notice-of-final-results/7640780?ref=rolandhead.com) expanded the group's coverage in the South East. In **Food**, trading was in line and unchanged from the prior year period. Storage volumes reached a peak of *"just over 140,000 pallet spaces"*, with overflow capacity being used to make up the shortfall from capacity of 135,000 spaces. The company is investigating opportunities to add a further warehouse. In **Feeds**, volumes and margins were stable across the summer, relative to a more volatile period last year. With the busier months of winter ahead, the company's overall outlook for the year remained unchanged. A trading update is expected later in December, ahead of the NWF's half-year results in the New Year. --- ### NWF Group: crunching the numbers **Description:* a distribution group specialising in consolidation in the UK fuel, grocery and agricultural feed markets.* | **NWF Group (LON:NWF)** | **Quality Dividend score: 80/100** | **Forecast yield: 4.0%** | | ----------------------- | ---------------------------------- | ------------------------------ | | Share price: 207p | Market cap: £101m | *All data at 08 December 2023* | ***Latest accounts:*** [*final results for the year ended 31 May 2023*](https://www.investegate.co.uk/announcement/rns/nwf-group--nwf/final-results/7666922?ref=rolandhead.com) */* [*trading update for three months to 1 September*](https://www.investegate.co.uk/announcement/rns/nwf-group--nwf/agm-statement-and-trading-update-/7782548?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [**dividend screening system**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think NWF could be a suitable addition to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: excellent NWF's credentials as a stealth multibagger are supported by its excellent dividend record, in my view. The company has paid a dividend every year since 1996, during which time its payout has quadrupled: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-dividend-081223.png) I score companies for their dividend culture based on the number of years of consecutive payouts. With an 27 years of dividends under its belt, my dividend screen awards NWF a perfect score. **NWF scores 5/5 for dividend culture in my screening system.** --- ### Dividend safety: good My screen scores dividends for safety by comparing the payout to earnings and free cash flow cover. This reflects the old market adage that revenue is vanity, profit is sanity, but cash flow is reality. In this chart we can see that earnings cover for the dividend has been remarkably stable for most of NWF's listed life, at 2.0x-2.5x. Free cash flow cover has been more volatile, presumably reflecting spikes in capital expenditure, such as the 2019/20 construction of a new warehouse. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-div-fcf-cover-081223.png) I think it's worth noting the increase in cover levels over the last couple of years. This reflects the exceptional profitability of the last couple of years. Management has prudently maintained the payout at a level that should remain affordable as profits return to more normal levels. **NWF scores 4/5 for dividend safety in my screening system.** --- ### Dividend growth: well supported NWF's dividend has risen by an average of 4.9% per year since the company's first payout in 1996\. That is a pretty good record, in my view. This growth is nice to have and I am sure long-term shareholders are happy with the income they've received. However, this growth rate does not necessarily tell me very much about whether the growth has been *sustainable*. This is an important factor for me. After all, no one wants to be ambushed with a shock pay cut. To score stocks for dividend growth, I look at three metrics: - dividend per share growth - free cash flow per share growth - net asset value per share growth Here's a chart showing these three factors for NWF: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-divps-fcfps-navps-081223.png) I admit that this chart isn't the easiest to read. But I hope that it shows that NWF's dividend growth has largely been mirrored by growth in its asset base and free cash flow. Somewhat lumpy free cash flow means NWF doesn't earn a perfect score here. But I think the data support my view that dividend growth has been supported by a corresponding increase in NWF's *capacity* to pay dividends. **NWF scores 3.7/5 for dividend growth in my screening system.** --- ### Dividend yield: average NWF's prudent dividend cover means it's not generally been a high-yielding stock. However, I think the yield has provided a useful guide to the valuation of the business over the years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-div-yield-081223.png) Right now, NWF's forecast yield of 4% is roughly in line with the long-term average for the business, according to SharePad. Recent years have seen the dividend increased by about 4% per year, a rate that's expected to continue. On this basis, an expected return calculation (dividend yield + dividend growth rate) suggests NWF stock could deliver a total return of about 8% per year, broadly in line with the long-term average from the UK stock market. **NWF scores 2.4/5 for dividend yield in my screening system.** --- ### Valuation: could be cheap My comments above bring me to the subject of valuation. An expected return of 8% seems reasonable to me, but not extremely cheap. However, on other measures I think the shares look a little cheaper than this. My scoring system looks at a stock's trailing earnings yield (EBIT/EV) and free cash flow yield to gauge valuation. On these backward-looking measures, NWF shares look extremely cheap. However, we've already seen that the company coming off a period of abnormally high profits. To compensate for this, I've included SharePad's forecasts for EBIT and free cash flow yield in the chart below. I would argue that on the basis of this year's expected earnings, NWF shares could still be very reasonably priced: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-ebit-fcf-yield-081223-1-.png) An expected EBIT yield of 13% is well above the 8% level I use as a rule of thumb for value. Similarly, a free cash flow yield of 6% might also be reasonably attractive, providing a comfortable level of cover for the 4% dividend yield. I'd also like to highlight one other measure of valuation that seems interesting to me. This isn't included in my scoring system, but NWF's price-to-NAV ratio is currently at its lowest level for 20 years. Assuming the group's profitability remains fairly stable, I think this could be a value signal: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-pnav-081223.png) **NWF scores 5/5 for valuation in my screening system.** --- ### Profitability: hidden leverage? In this section I want to look at NWF's profitability as a whole. In addition, I want to consider the profitability of its individual operating segments and look at how these low-margin businesses are able to generate attractive returns for shareholders. Let's start with the big picture, which is what I use in my dividend scoring system. For this, I use two metrics, return on capital employed and net asset value per share growth. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-navps-roce-opmargin-081223.png) I don't use operating margin in my scoring, but I've included it above to reiterate an important point about this business – it's very low margin. Low margins are fairly typical of distributors, due to the pass-through nature of much of their revenue. For example, NWF buys fuel in bulk and then resells it, with a small margin added on. Well-run distributors can generate decent returns by managing working capital carefully and making good use of supplier credit (effectively free debt). I believe that's the case here. What the accounts show, however, is that NWF's profitability is heavily skewed to the Fuels division: | **FY23** | **Fuels** | **Food** | **Feeds** | **Group** | | --------------------------------- | --------- | -------- | --------- | --------- | | Revenue | £757.2m | £70.9m | £225.8m | £1,053.9m | | Op profit | £12.9m | £4.2m | £3.9m | £21.0m | | Op margin | 1.7% | 5.9% | 1.7% | 2.0% | | Pre-tax return on segment assets | 12.7% | 8.4% | 7.9% | 10.4% | | Pre-tax return on net seg. assets | 54.0% | 15.7% | 15.9% | 27.6% | *Source: FY23 segmental results* The Fuels business is the most profitable, measured by return on segment assets. However, this profitability is magnified to an impressive 54% when we look at *net segment assets*. What lies behind this is – in effect – a high level of gearing in the Fuels business. Liabilities (mainly money owed to suppliers) represented almost 77% of segment assets at the end of last year. This is a much higher level of liabilities than in the other two divisions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-fy23-segment-assets.png) Source: NWF FY23 results In reality, I suspect NWF Fuels operates with rapid inventory turnover and collects payment for fuels from customers before it has to pay its suppliers. This means that today's sales are used to pay for earlier orders. This negative working capital model is used by supermarkets and some other businesses, too – it's effectively a form of free credit and can work well. The only risk is if trading worsens suddenly, when a cash crunch can occur. The attraction of this business model is that it allows NWF to generate after-tax returns on equity of 15%-20%, despite operating a low-margin business with no current bank borrowings. If this sounds like a negative comment, it isn't really. I think this is a very well run operation. But I think it's worth understanding the difference between NWF's business model and that of a company that can generate high returns without any form of leverage. **NWF scores 4/5 for profitability in my screening system.** --- ### Fundamental health: good My fundamental health score looks at leverage and interest cover in order to gauge whether a company might have too much debt – or might have problems servicing that debt. NWF reported a net cash position of £16.3m, excluding lease liabilities at the end of May. Even including these obligations, net debt was only £13.5m, which looks very comfortable to me relative to the group's net profit of £14.9m. We've already seen that the group has generally produced good levels of free cash flow, so I do not expect any serious problems here. Even so, here's how the chart looks: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/12/nwf-leverage-intcover-081223.png) Interestingly, the positive value for interest cover (EBIT/net interest paid) tells us that NWF did use borrowing facilities at some point last year. The cash flow statement shows £1.4m of interest paid, of which £0.8m related to bank loans and overdrafts (the remainder related to IFRS 16 lease accounting). There's no mention of interest received, which suggests to me that NWF's year end of 31 May is probably when the group's cash position is at its strongest each year. By this time, peak winter trading has passed and NWF has collected cash from its fuel and feed customers. At the same time, the company is able to reduce its stock levels for the summer months, generating a cash surplus. However, I don't see anything to worry about here. In my view, NWF is in good financial health. I do not have any concerns about the group's balance sheet. **NWF scores 4/5 for fundamental health in my screening system.** --- ### Conclusion: a good business **My quality dividend system awards NWF an overall score of 80/100 at the time of writing (December 2023).** As always on this website, my comments and analysis are made as much for my own understanding as anything else. The stocks I write about here are within my investable universe, even if I don't currently own them in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). I went into this review with a favourable opinion of NWF, but I haven't previously looked at the business in this much depth. Having done so, my view is still very positive – I think this is a good business at a reasonable price. But I think I am probably a little more aware about some of the potential weaknesses of this business. Here's a summary of some of the pros and cons I can see with NWF. **Pros:** - Long and successful track record of incremental growth through a consolidation model - Clearly-defined business model with good market share - Food business may provide further significant growth opportunities - Long-term management culture - Good cash generation and an impressive dividend history **Cons:** - The Fuels and Feed divisions have seen volumes decline over the last three years. Both operate in mature or perhaps declining sectors and are dependent on consolidation for growth - There are no obvious synergies between the group's three divisions, except perhaps some procurement benefits; I wonder if this business could eventually be broken up and sold - Change of leadership after 15 years introduces some succession risk **My view:** on the whole, I think NWF shares look fairly valued at current levels. I wouldn't rule out the possibility that the stock could get cheaper in the short term. But on balance, I think there's a good chance I would get an acceptable return from buying the shares at current levels (c.200p). I would consider owning NWF shares in my portfolio, but at present there's too much overlap with another of my dividend stocks for me to consider a purchase. However, I will continue to follow NWF with interest. --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Nov '23 dividend portfolio update: risks and opportunities URL: https://www.rolandhead.com/portfolio/nov-23-update-risks-and-opportunities/ Last updated: 2023-12-24T09:11:09.000Z Welcome to my review of November's news and results from companies in my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Last month's news flow came from seven different companies and was something of a mixed bag. One FTSE 100 member in my portfolio warned on profits, while another reached an all-time high. Meanwhile, one of my small caps has become exposed to some new external risks that could hit future earnings. It wasn't all drama, though. Several of my companies reported solid trading in line with expectations. Some of these firms have already seen their share prices recover somewhat from the weakness we've seen this year. I'm not planning any immediate changes to the portfolio following these results, but there are one or two areas I'll be watching more closely. --- ### In this month's report: Here's a summary of the company results covered in this report, with a link to each section: _This post is for paying subscribers only._ ### Dividend notes: quality choices? BVIC, DPLM, CWK (24/11/23) URL: https://www.rolandhead.com/dividend-notes/quality-choices-bvic-dplm-cwk-24-11-23/ Last updated: 2024-01-19T15:23:32.000Z Welcome back to my dividend notes. In this review I'm looking at two FTSE 250 food/drink companies with solid track records and a FTSE 100 industrial group that I'd like to own – but can't bring myself to pay for. --- ### Companies covered: - [**Britvic (LON:BVIC)**](#britvic-bvic)\- I can see plenty to like about this business, as a possible long-term holding. But I have some niggles over capital allocation and debt levels. The shares aren't cheap enough to tempt me at this time. - [**Diploma (LON:DPLM)**](#diploma-dplm)\- a quick look at FY results from this distribution group, which I admire greatly, but am currently priced out of. - [**Cranswick (LON:CWK)**](#cranswick-cwk)\- this meat and food producer has an impressive track record but looks fully valued to me at the moment. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Britvic (BVIC) > "Excellent progress in a challenging market" [Final results y/e 30 September 2023](https://www.investegate.co.uk/announcement/rns/britvic--bvic/final-results/7895762?ref=rolandhead.com) I've covered FTSE 250 soft drinks group Britvic once before, when I looked at its interim results [in May this year](https://www.rolandhead.com/dividend-notes/reliable-performers-rnwh-bvic/). At the time I was broadly positive, but thought the share price was up with events. Britvic's share price has fallen back a little since then and the company has just published its full-year results. It seems a good time to take a fresh look at a business whose [brand portfolio](https://www.britvic.com/our-brands/?ref=rolandhead.com) means that it *should* be a nicely defensive and reliable performer. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/bvic-1y-chart-241123.png) **FY23 results highlights:** Britvic's headline numbers don't look too bad, if you accept the adjusted picture. But I think they look a little more humdrum when you scroll further down, as I'll explain. - Revenue up 6.6% to £1,748.6m at constant exchange rates - Adjusted EBIT up 5.9% to £218.4m - *Adjusted operating margin: 12.5% (FY22: 12.7%)* - Reported operating profit down 5.6% to £181.5m - *Reported operating margin: 10.4% (FY22: 11.9%)* - **Dividend up 6.2% to 30.8p per share** **Profitability:** adjusted earnings of 61p per share price the stock on a fairly modest 14 times earnings. But reported earnings of 48.3p per share price Britvic on a more demanding 17x multiple. Which should I rely on? As always, the devil is in the adjustments, which totalled £38.4m last year (21% of operating profit!). Having looked at the list of adjusting items, my view is that most of them are part of the normal cost of doing business for Britvic. But I would exclude the single largest adjustment, which is a £20.5m pension scheme cost. This appears to have been a genuine one-off payment related to a change in the pension scheme rules. Excluding this item gives me an adjusted operating profit of £202m. In turn, this gives me an operating margin of 11.6% (FY22: 11.9%) and a return on capital employed of 17.1% – a pretty decent result. **Cash flow/debt:** in my half-year review I suggested that Britvic's H1 cash outflow might reverse in H2\. This hasn't happened. The final results show a £38m increase in inventories. The company says this is due to both cost inflation and *"an increased level of both raw materials and finished goods stock"*. This is attributed to precautionary stockbuilding to protect customer service levels but also *"softer quarter four volumes"*. I'm not sure why Britivic would be building stock to protect customer service when supply chain conditions have largely normalised. I suspect that falling volumes are to blame – see below. The end result is that operating cash flow for the year was broadly flat at £238.4m, while free cash flow was also largely unchanged from last year at £130m, excluding acquisitions. That's equivalent to a free cash flow yield of just over 6%. This valuation seems reasonable to me. But as I predicted in my H1 review, Britvic's cash generation last year wasn't enough to cover both the £75m cost of the dividend and the £74m of share buybacks carried out last year. Nor was it enough to cover the £25m spent on acquisitions during the year. As a result of this shortfall, the group's adjusted net debt rose by £63m to £538m last year. This represents 1.9x trailing EBITDA or around five times 5yr-average net profits – slightly higher than I'd like, although unlikely to be problematic. Personally, I don't like to see companies using borrowed money to buyback shares, especially now that the cost of debt has risen. Britvic's interest bill rose by 42% to £21.1m last year – I think the buyback cash would have been better spent on debt reduction. **Trading summary:** revenue growth last year appears to have been entirely driven by price increases. Britvic's segmental reporting shows that volumes fell in all of the group's markets during the period, due mainly to a softer Q4 (UK summer): - **Great Britain:** volumes down 2.3% to 1,750.2m litres, with average price per litre up 10.6% to 67.9p - **Brazil:** volumes down 0.9% to 296.5m litres, with average price per litre up 10.3% to 52.7p - **Other international:** volumes down 2.7% to 416.5m litres, with average price per litre up 11% to 97.2p The cost increases do appear to have been justified – Britvic's fixed cost base rose by 10.4% to £397.0m during the period. We've already seen that margins were flat, at best, last year. **Outlook:** there was no explicit outlook statement in Britvic's results, other than a confident statement from chief executive Simon Litherland: > "I am confident Britvic will continue to make excellent progress next year and beyond, delivering growth and creating value for all our stakeholders." For what they're worth, broker consensus forecasts on Stockopedia suggest adjusted earnings will rise by around 3% to 62.7p this year, pricing the stock on 13.5 times forecast earnings. A modest dividend increase to c.32p per share is expected, giving a prospective yield of 3.7%. #### My view Britvic is a business that I could see in my dividend portfolio at some point. Profitability is quite decent and cash generation is fairly strong. The valuation looks reasonable to me at the moment, with an EBIT/EV yield of 7.3%, using my adjusted version of operating profit. However, I'm not a fan of the group's use of debt-funded buybacks and would like to see net debt a little lower. I would also like to secure a dividend yield closer to 4%, given the risk of sluggish growth over the coming year. On balance, Britvic isn't quite cheap enough for me right now. But it's a business I'll continue to watch with interest. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Diploma (DPLM) > "we are confident of continuing to deliver sustainable quality compounding" [Full-year results y/e 30 September 2023](https://www.investegate.co.uk/announcement/rns/diploma--dplm/full-year-results-/7890471?ref=rolandhead.com) I've covered this distribution group a [couple](https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/) of [times](https://www.rolandhead.com/dividend-notes/quality-shines-through-cto-spt-dplm-13-07-23/) before and been impressed with its quality and long history of compound growth. Diploma operates with a buy-and-build model that focuses on regular, smallish acquisitions that operate within a decentralised group. Within this, there are [three operating segments](https://www.diplomaplc.com/about-us/?ref=rolandhead.com) – controls, seals and life sciences. To give an idea of scale, Diploma has a market cap of £4.5bn and spent £280m on 12 acquisitions last year. **FY23 results highlights:** Diploma's latest results do nothing to change my view on the business. Revenue rose by 19% to £1,200.3m, driven by organic growth of 8% and a contribution from acquisitions. Operating profit for the year rose by 27% to £183.3m, giving a useful 15.3% operating margin. My sums suggest a return on capital employed of 14.9%, also a respectable figure. Cash conversion was excellent, too. Free cash flow of £163m (excluding acquisitions) represents 100% conversion from adjusted net profit, or 138% of statutory post-tax profit. However, the free cash flow yield remains modest, at just 3.6%. **Dividend**: the full-year payout has been lifted 5% to 56.6p per share, giving a rather modest dividend yield of 1.7%. **Outlook:** chief executive Johnny Thomson expects to report organic revenue growth of c.5% next year, with a 6% contribution from acquisitions announced to date. Margins are expected to improve slightly. Broker forecasts suggest adjusted earnings will rise by 7.5% to 136p per share, pricing the stock on around 25 times forecast earnings. #### My view My view on Diploma hasn't changed. Here's what I said in July: > "A business that earns 15%-20% returns on equity and has a 20+ year record of dividend growth probably deserves some kind of valuation premium, but for me, this is still a stretch." True quality compounders are always expensive and perhaps I should buy at any price. I'm not going to, though, for a couple of reasons: - I'm a dividend investor, not a pure quality investor. I need my holdings to generate a meaningful level of income - The outlook seems relatively muted, but this business is still valued on an EBIT/EV of under 4%. That seems quite full to me, unless earnings rise much faster than expected. Diploma shares traded below £25 on a number of occasions last year. I might be interested at that level, but as things stand today, this business just isn't a good fit for my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). --- ### Cranswick (CWK) > "the outlook for the current financial year ending 30 March 2024 is now expected to be at the upper end of current market consensus" [Interim results for the 26 weeks ended 23 September 2023](https://www.investegate.co.uk/announcement/rns/cranswick--cwk/interim-results/7893061?ref=rolandhead.com) This FTSE 250 business is a large-scale, vertically integrated food producer, specialising in chicken and pork products. It's the kind of business I'd expect to deliver average results, but it's actually been a reliable and high quality performer for many years. The shares have 10-bagged over the last 30 years as Cranswick's earnings have steadily motored higher: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/cwk-price-eps-241123.png) There's also a rather impressive dividend record to admire – my sums suggest the payout has grown at a CAGR of 10.5% for 30 years. That's an impressive record: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/cwk-dividends-241123-1.png) Cranswick scores a respectable 66/100 in my dividend screen and I'm wondering whether I should consider this share as a possible buy for my dividend portfolio. To start learning a little more about it, I've taken a look at the latest results. **Half-year results summary:** full-year results are now expected to be at the top end of consensus forecasts, after a solid start to the year. Cranswick's revenue rose by 12% to £1,253.7m during the first half, while pre-tax profit rose by 41% to £86.9m. On an adjusted basis, pre-tax profit was 25% higher at £81.6m, so perhaps this is a more meaningful guide to underlying performance. Adjusted earnings were 13.8% higher at 112.2p per share, while the **interim dividend** was lifted 10.2% to 22.7p per share. Net debt remained reassuringly low at £51m, excluding lease liabilities and Cranswick says its £250m bank facility provides plenty of headroom. **Profitability:** operating margin for the half year was 6.8% on an adjusted basis, supporting a trailing 12-month return on capital employed of 16.2%. That's consistent with performance over the last 20 years or so: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/cwk-roce-241123.png) **Free cash flow:** cash flow tends to fluctuate from year-to-year, as Cranswick goes through capex cycles to invest in new capacity. But my impression is that cash conversion is generally quite good. My sums suggest trailing 12-month free cash flow (exc. acquisitions) of £78m, which gives Cranswick a 3.7% free cash flow yield. **Outlook:** management expects results for the year ending 30 March 2024 to be *"at the upper end of current market consensus"*. This is helpfully specified as being for an adjusted pre-tax profit between £153.2m and £160.8m. So I guess we can expect a figure towards £160m, which would represent a 14% increase on last year. In terms of earnings, consensus estimates are for c.219p per share, pricing Cranswick on about 18 times forecast earnings. #### My view Somewhat against my expectations for this sector, this does seem a good business. Given Cranswick's multi-decade history of consistent growth, I'd have to conclude that it's well run as well. However, a free cash flow yield of 3.7% does not suggest obvious value to me and the 2.1% dividend yield is also a little too low for my purposes. In addition, I have to confess that I'm not a big fan of this sector, either. Even so, the apparent quality of this business is attractive to me. If the valuation became more compelling, then I might consider Cranswick. For now, I remain an interested observer. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Is Macfarlane a good dividend share? URL: https://www.rolandhead.com/dividend-shares/is-macfarlane-a-good-dividend-share/ Last updated: 2023-12-08T23:20:47.000Z Glasgow-based packaging specialist **Macfarlane Group (LON:MACF)** is expected to report record revenue and profits this year, but its shares are back at levels first seen in 2018. Has the small-cap market slump created an opportunity for me to invest in this interesting business at a reasonable price? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-10y-chart-161123.png) I've reviewed trading updates from Macfarlane twice this year in my [dividend notes](https://www.rolandhead.com/tag/dividend-notes/) (in [May](https://www.rolandhead.com/dividend-notes/underrated-quality-full-price-macf-reci-bez/) and [August](https://www.rolandhead.com/dividend-notes/sleeper-stocks-bnzl-macf-qlt-30-08-23/)) – and have been left with a positive impression of the business. I've started to wonder whether this stealth multibagger – the shares have doubled in 10 years – could be a potential candidate for my quality [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). To learn more, I decided to run Macfarlane through my dividend scoring system and take a closer look at its business. Here's what I found. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Table of contents - [**History**](#macfarlane-50-years-on-the-lse)\- 50 years on the LSE - [**Crunching the numbers**](#macfarlane-group-crunching-the-numbers) \- how does Macfarlane score in my screening system? - [**Dividend culture**](#dividend-culture-pretty-good) \- pretty good - [**Dividend safety**](#dividend-safety-excellent) \- excellent - [**Dividend growth**](#dividend-growth-well-supported) \- well supported - [**Dividend yield**](#dividend-yield-average) \- average - [**Valuation**](#valuation-potentially-cheap) \- potentially cheap - [**Profitability**](#profitability-consistent) \- consistent - [**Fundamental health**](#fundamental-health-good) \- good - [**Conclusion**](#conclusion-a-good-business-at-a-reasonable-price) \- could Macfarlane win a place in my portfolio? ### Macfarlane: 50 years on the LSE Macfarlane was founded by Norman Macfarlane in 1949 as a Glasgow stationery supplier. The company was listed on the LSE Main Market in 1973\. I haven't checked, but I would guess that makes it one of the older small-cap shares on the market today. This video, narrated by Lord Macfarlane of Bearsden – as he became – provides an interesting introduction to the company's history: The group is now a specialist in protective packaging, with annual sales approaching £300m and operations at 37 sites across the UK, Ireland, Netherlands and Germany. Althlough there doesn't seem to be any significant Macfarlane family involvement anymore, chief executive [Peter Atkinson](https://www.macfarlanegroup.com/investors/board-of-directors/?ref=rolandhead.com) has run the business since 2003 and has a shareholding worth nearly £1.5m, according to SharePad. This suggests to me that he may have something of an owner's eye. Macfarlane is both a distributor and a manufacturer, and reports its results under two operating segments: - **Packaging distribution (FY22: 90% of sales / 80% of profit)**:management describe this business as the *"UK market leader"* in the sourcing and supply of protecting packaging. *FY22* o*perating margin: 6.5%* - **Manufacturing operations (FY22: 10% of sales / 20% of profit)**: this side of the business specialises in the design and manufacture of bespoke protective packaging, typically for high-value industrial items. It's smaller, but much higher margin. *FY22 operating margin: 14.3%* Macfarlane's customers are mainly in the ecommerce, logistics, electronics, aerospace, and automotive sectors. The group's [business model](https://www.macfarlanegroup.com/about-us/business-model/?ref=rolandhead.com) is to expand through a mix of organic growth and regular, small acquisitions – there have been 18 since 2014: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-1h23-acquisitions.png) Source: Macfarlane H1 2023 presentation In general, these deals either improve Macfarlane's geographic coverage or expand its product range, allowing to target new customers. For example: - **May 2023:** acquisition of Manchester-based Gottlieb Packaging Materials for a maximum of £3.55m (5x EBITDA). This deal was said to improve Macfarlane's ability to serve customers in north-west of England. - **October 2023:** acquisition of specialist protective packaging firm B&D 2010 Group for a maximum of £3.85m (7.7x EBITDA). B&D supplies customers in the aerospace, defence and space sectors *"throughout the UK and internationally"*. In my experience, small bolt-on deals that fit within a company's core business can be a good way to supplement organic growth without the risks attached to larger acquisitions. **Current trading:** Macfarlane's financial year follows the calendar year, so the most recent results cover the six months to 30 June 2023\. Sales rose by 2% to £141,612 during this period, while pre-tax profit climbed 13% to £10.0m. In packaging distribution, organic sales fell by 5% due to weakness in the UK and Ireland. However, this was offset by progress in Europe and contributions from recent acquisitions. Overall, distribution revenue was flat at £124m during the period, with operating profit up 6% at £8.0m. The manufacturing division turned in a stronger performance. This was credited to a strong contribution from the acquisition of Suttons in February 2023 and the benefit of price rises to offset higher costs. Manufacturing revenue rose by 12.6% to £17.7m, while operating profit was 34% higher, at £2.8m. The operating margin for this division was a healthy 16.0% (H1 2022: 13.4%). **Outlook:** full-year guidance was left unchanged, despite a uncertain outlook: > "Whilst we expect the second half of 2023 to remain challenging, our good progress in Europe, diverse customer base, strong new business momentum and effective management of pricing and costs mean that our profit expectations for the full year remain unchanged." Broker forecasts suggest earnings of 11.9p per share for 2023, with a 3.6p dividend. That prices the stock on a modest nine times forecast earnings, with a 3.3% yield. --- ### Macfarlane Group: crunching the numbers **Description:* a specialist distributor and manufacturer of protective packaging, serving customers in consumer, logistics, medical, and industrial markets.* | **Macfarlane Group(LON:MACF)** | **Quality Dividend score: 72/100** | **Forecast yield: 3.3%** | | ------------------------------ | ---------------------------------- | ------------------------------ | | Share price: 109p | Market cap: £175m | *All data at 16 November 2023* | ***Latest accounts:*** [*half-year results for the six months to 30 June 2023*](https://www.investegate.co.uk/announcement/rns/macfarlane-group--macf/half-year-report/7714159?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [**dividend screening system**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think Macfarlane could be a suitable addition to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: pretty good Since chief executive Peter Atkinson took charge in 2003, I don't think Macfarlane has cut its dividend payout, except during the pandemic. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-dividends-161123.png) Source: SharePad My screening system scores shares based on the number of years of continuous payouts, which I would put at 19\. This isn't quite up their with true dividend royalty, but I think it's a pretty good record for a growing small cap. I am not entirely sure what happened prior to 2003 – I have to confess that my research has not (yet) extended this far back. **Macfarlane scores 3/5 for dividend culture in my screening system.** --- ### Dividend safety: excellent I score stocks for dividend safety based on dividend cover by both earnings and free cash flow. I also include a weighting for leverage, which I will look at separately later. The chart below shows that for the period from 2003 onwards, dividend cover by both earnings and free cash flow has generally been between 1.5x and 3.0x, which looks reasonable to me. In addition, the closeness of the blue and green lines tells me that Macfarlane's cash conversion from earnings has been consistently good. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-div-fcf-cover-161123.png) Overall, I feel that Macfarlane's dividend payout looks quite safe. **Macfarlane scores 4/5 for dividend safety in my screening system.** --- ### Dividend growth: well supported When I look at dividend growth, what I really want to see is that the increases in the payout have been sustainable. For me, this means they should have been supported by growth in free cash flow and net asset value per share. We can see that this is true here. Since CEO Peter Atkinson took charge in 2003, Macfarlane's aggregate free cash flow has covered the dividend. NAV growth took a little longer to get started, but has been strong since 2011\. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-divps-fcfps-navps-10y-171123.png) I focus on net asset value because I see this as a key driver of long-term returns. If NAV isn't growing, then profit and dividend growth can only be driven by increased profitability or increased leverage (which boosts return on equity). In my view, neither of these are generally sustainable for more than a limited period. I'm looking for businesses that can deploy new capital at attractive rates of return, without relying on excessive leverage. Over time, this growth should compound to increase the equity value of the business. In turn, the share price and dividends should also rise steadily (and sustainably), assuming I haven't overpaid for my shares. We'll look at profitability shortly. But in terms of dividend growth, Macfarlane's dividend appears to have increased at a sustainable rate, reducing the chance that a cut will be needed. **Macfarlane scores 4/5 for dividend growth in my screening system.** --- ### Dividend yield: average Macfarlane's current forecast yield of 3.3% is decidedly average and at the lower end of what I'd consider for my dividend portfolio. But it wasn't always that way. Anyone who was willing to buy during the aftermath of the 2008 crash was able to lock in very high dividend yields. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-div-yield-171123.png) Macfarlane's current dividend is expected to be covered three times by earnings this year. So the company could perhaps afford a slightly larger payout. However, management appear to be prudently reserving cash to support the continued growth of the business during a more uncertain period for the UK economy. This seems sensible to me. **Macfarlane scores 2/5 for dividend yield in my screening system.** --- ### Valuation: potentially cheap Macfarlane's dividend yield is low by historic standards, which can sometimes be a sign that a business is not especially cheap. However, I don't think that's true here. The group's relatively conservative dividend payout ratio means that the yield could be low, even if the business is trading on an attractive valuation. Indeed, that seems to be the case here: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-fcf-ebit-yield-171123.png) Macfarlane shares look fairly decent value to me in terms of both EBIT/EV yield and free cash flow yield. Indeed, if the company matches consensus forecasts this year (the pale bar on the right), then I think the shares could be outright cheap at current levels. It's also interesting to see that the company's valuation is at the lower end of the range seen over the last decade or so. This suggests to me that the shares could re-rate to a (modestly) higher valuation if market sentiment improves and Macfarlane's earnings remain stable. On balance, the shares look attractively priced to me at the moment. **Macfarlane scores 4.5/5 for valuation in my screening system.** --- ### Profitability: consistent In the Dividend Growth section above, I mentioned how important net asset value growth is for me. Here's the other half of that story – Macfarlane's profitability. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-roce-navps-171123.png) This is a great example of what I look for – stable return on capital employed and rising net asset value per share. This tells me is that the company has been able to deploy new capital (rising NAVps) while maintaining a stable and attractive level of profitability (ROCE). It's probably fair to say that Macfarlane isn't quite profitable enough for me to view it as a true high quality business. For that, I'd probably look for ROCE consistently above 15%. However, Macfarlane's consistency and double-digit ROCE is still quite attractive, in my view. **Macfarlane scores 4/5 for profitability in my screening system.** --- ### Fundamental health: good This section of my screen is really all about making sure that a company's leverage is not too high and that it can service its debts comfortably. I don't take a completely standard approach to this, so let me explain what I do. **Leverage:** company reporting generally compares net debt to EBITDA for the trailing 12 months. On this metric, I prefer to see a leverage multiple below 2x, or at most 2.5x. However, I'm not a fan of EBITDA, which includes many real cash costs. As far as it's of any use at all, I think EBITDA is only really relevant as a debt service metric; for a lender, EBITDA can be a useful guide to a company's ability to pay interest on its loans. As an equity investor, this isn't conservative enough for me. I want to try and get an idea of a company's ability to *repay* its debt, should it become necessary. For this reason, I use net profit rather than EBITDA in my leverage ratio. In addition, I'm also aware that most debt is long term. Profits (whether EBITDA or otherwise) can fluctuate from year to year. This alters a company's leverage multiple, even if net debt is unchanged. For these reasons, I measure (non-financial) companies' leverage by comparing **last-reported net debt** with **five-year average net profits**. As a rule of thumb, I prefer this ratio to be under four. *(When I last reviewed my dividend portfolio's* [*performance at the end of September*](https://www.rolandhead.com/portfolio/q3-2023-review-buying-shares-and-looking-ahead/)*, the average leverage multiple across the portfolio was just 0.3x.)* **Debt service capacity:** historically I have used fixed charge cover to measure a company's ability to meet its interest and rent payments. However, I don't find this metric as useful as it once was, at least for screening purposes, due to the impact of IFRS 16 lease accounting. This became compulsory in 2019 and has altered the way in which companies report rental and lease payments. As an alternative, I'm experimenting with using interest cover, which simply compares operating profit with net interest paid. The downside of this is that it doesn't include lease payments. But it is more consistently reported and available in screening results. **Finally:** after that somewhat lengthy preamble, here's a chart showing my view of Macfarlane's fundamental health: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/macf-leverage-int-cover-171123-1.png) We can see that Macfarlane's leverage has mostly been between two and three times average net profit since 2008\. This looks acceptable to me given the group's steady growth, especially as the figure for more recent years also includes a sizeable chunk of lease liabilities (which were not shown on the balance sheet prior to IFRS 16). Excluding lease liabilities, my sums suggest Macfarlane's net debt is less than 0.5x five-year average profits. **Macfarlane scores 3.7/5 for fundamental health in my screening system.** --- ### Conclusion: a good business at a reasonable price **My quality dividend system awards Macfarlane an overall score of 72/100 at the time of writing (November 2023).** **My view:** Overall, I don't see very much to worry me with Macfarlane. My impression is that it's a well-run business with long-term management and a sensible strategy for growth. Here's a summary of the main points, as I see them. **Pros:** - Clearly-defined strategy and market segment - Fairly attractive levels of profitability - Bolt-on acquisition model appears to have delivered steady growth - Good cash generation and solid balance sheet - Long-term management, committed to a progressive dividend **Cons:** - Cyclical exposure - the company has already seen volumes weaken in some markets. In a proper recession, things could get worse - The chief executive has been in charge for 20 years – he could be a tough act to follow - Risk that future acquisitions will be less successful, perhaps due to the loss of key personnel, mispricing, or failure to integrate successfully I would want to do some additional research if I was considering buying Macfarlane for my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). But my initial inspection suggests to me that the business may have many of the qualities I look for in a dividend share. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: 12% yield from this unloved financial? AV, LIO, CSN (16/11/23) URL: https://www.rolandhead.com/dividend-notes/12-yield-from-this-unloved-financial-av-lio-csn-16-11-23/ Last updated: 2023-11-24T17:28:38.000Z Welcome back to my dividend notes. In my conversation with Paul Hill earlier this week, we touched on just how deeply unloved UK financials are at the moment and looked at two examples with dividend yields around 9%. Today I'm taking a brief look at three more financials with very high yields. I don't own any of these stocks at present, but I wouldn't be too unhappy if I did. I'm fairly sure there's value on offer at these levels. --- ### Companies covered: - [**Aviva (LON:AV.)**](#aviva-av)\- the insurance group is continuing to deliver on its strategy and make steady gains in its core markets. I think the shares offer value. - [**Liontrust Asset Management (LON:LIO)**](#liontrust-asset-management-lio)\- deeply unloved, but these half-year results do not seem to contain any fresh horrors and my sums suggest the dividend remains affordable for now. giving a prospective yield of 12%. - [**Chesnara (LON:CSN)**](#chesnara-csn)\- this life insurance consolidator has a 19-year record of dividend growth, good cash generation and a 9% yield. I'm positive on this as a pure income investment. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Aviva (AV.) > "Outlook for capital returns unchanged" Aviva's [third-quarter trading update](http://www.investegate.co.uk/announcement/rns/aviva--av./aviva-plc-q3-2023-trading-update/7884400?ref=rolandhead.com) suggests this well-known insurer is continuing to make steady progress. The company reiterated guidance for 5%-7% operating profit growth this year, despite higher weather-related claims from events such as storms Babet and Ciarán. Chief executive Amanda Blanc and confirmed plans for a full-year dividend of 33.4p, with *"low-to-mid single digit growth"* in the cash cost of the dividend thereafter. Performance across the business has been positive during the first nine months of the year, with growth in all key areas: - **General insurance** (e.g. home, motor): gross written premium up 13% to £8.0bn, *"driven by strong rate, new business volume and retention"*. - **Protection & Health** (e.g. income protection, health insurance): sales up 23% to £330m, with value of new business (the present value of future profits) up by 18% to £168m. Health insurance is doing particularly well, with sales up 56% to £123m *"supported by strong performance with corporate clients"*. - **Wealth** (asset management): net flows remained positive at 6% of opening AuM. Total AuM was £159bn at the end of September 2023. - **Retirement** (annuities): sales rose by 2% to £4.4bn, with growth in both bulk and individual annuity sales. - **Solvency II cover** – a regulatory measure – remains steady at 200% (HY23: 202%). Although this is a complex area, my understanding is that this is a fairly conservative level of cover. - **M&A:** continuing its strategy of focusing on core markets where it has scale, Aviva recently agreed to sell its Singapore joint venture for £850m. The company has also agreed to acquire AIG's UK protection business for £460m. Both deals look logical to me. **Outlook:** current forecasts, supported by this commentary, price Aviva shares on 11 times 2023 forecast earnings, with an 8% dividend yield. #### My view With UK government bonds offering c.5% risk free, what's a reasonable level of income to expect from a big general insurer? The market's answer seems to be 8%+, but this looks cheap to me. Given that the long-term average total return from the UK market is about 7%-8% per year, an 8% dividend yield implies that zero growth is expected from a business. In this case I think that's an unfair assumption. Based on the company's 8% yield and guidance for low-single digit dividend growth going forward, I think the shares look decent value at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Liontrust Asset Management (LIO) > "This has been a challenging period for the asset management sector, including Liontrust" Today's [half-year results](https://www.investegate.co.uk/announcement/rns/liontrust-asset-management--lio/half-year-report-for-6-months-to-30-september-2023/7884351?ref=rolandhead.com) from this small-cap asset manager made predictably grim reading, but I don't think there's anything new to worry about. The slump in UK equities is well documented and is – perhaps – close to the bottom. Liontrust's focus on this market means that it's been hit hard, but could equally enjoy a strong recovery if markets turn. I think we could be nearing that point. There's certainly a lot of value on offer, in my view, unless we're heading for a calamitous collapse in corporate earnings. I'm not planning for such a dire outcome; I'm fully invested at present. Although I think some mild softness in corporate earnings is possible (probable?), I'd argue this already priced into the valuations of many businesses. **Half-year highlights:** These results cover the six months to 30 September 2023 and look largely as I'd expect: - Assets under Management (AuM) down 12% to £27.7bn - Net outflows of £3.2bn during the half year - Adjusted pre-tax profit down 16% to £36m - Adjusted earnings down 21% to 42.3p per share - Interim dividend unchanged at 22p per share Regular readers will know that I prefer to rely on statutory profits rather than adjusted figures. Here we have a loss to report: - Statutory loss before tax of £10.2m – this is mainly due to a £30m impairment charge on the intangible assets and goodwill associated with the 2022 acquisition of Majedie Asset Management - CEO John Ions says that the UK bear market has *"negatively impacted the funds and mandates we inherited from the acquisition of Majedie"* Perhaps this acquisition was not as well timed as it might have been. But Ions is correct to say that these impairments don't affect Liontrust's strong balance sheet or net cash position. **Cash position/dividend:** my sums suggest that Liontrust's net cash fell to £97m during the half year, from £121m at the end of March. This reduction reflects the payment of £32m of dividend during H1 (last year's final payout of 50p/share), offset by a free cash inflow of £8.7m. In my view, this gives us an idea of the runway left before a dividend cut might be needed. Broker forecasts suggest free cash flow of c.£20m this year. This seems plausible to me, based on the H1 performance, and implies H2 free cash flow of about £12m. Adding this to net cash gives a figure of £109m. Maintaining the full-year dividend at 72p/share will cost about £47m, suggesting a possible year-end net cash figure of £62m, after subtracting the full dividend (although the final payout won't be made until after the year end). Based on this reading of events, I would guess that Liontrust will feel able to sustain the current dividend this year (y/e 31 March 2024) and perhaps a little longer, if needed. #### My view The 72p payout gives a 12% yield at the current share price of around 600p. I think this looks attractive, based on the assumptions I've laid out above. I do not expect the UK asset management industry to crumble away completely and I think Liontrust looks very cheap at current levels. While the situation isn't without risk – generalist asset managers are under pressure from passive funds and specialist fund managers – I think there's a decent chance of a recovery from current levels. --- ### Chesnara (CSN) > "the 19th year of consecutive \[dividend\] increases" Chesnara's [interim results](https://www.investegate.co.uk/announcement/rns/chesnara--csn/half-year-report/7768505?ref=rolandhead.com) were published on 21 September, but they've been stuck in my backlog until now. This £400m market cap business acquires portfolios of life insurance policies and consolidates them, running them to completion. Acquisitions are made regularly to maintain scale and support continued growth. This isn't the easiest business to understand, and I'm no expert. For what it's worth, the approach I take with this business (and its larger peer **Phoenix**) is to monitor cash generation, solvency coverage and the reported economic value per share. Cash generation is particularly useful, in my view, as this is usually used as a KPI by management and provides a clear view on the sustainability of the dividend. **Half-year highlights:** these figures cover the six months to 30 June 2023 - Commercial cash generation: £21.8m *\- on an annualised basis this should comfortably cover the £36m cost of this year's forecast dividend* - Group solvency: 205% (FY22: 197%) *\- this is above Chesnara's normal operating range of 140%-160% and looks comfortable to me* - Economic value: £523m (347p per share) - *this is a measure of the expected value that will be created by Chesnara's assets over their lifetime and is comfortably above the current share price of c.270p.* - Cash balances at group holding companies rose to £127.5m (FY22: £108.1m) providing funding to support further acquisitions - **Interim dividend** up 3% to 8.36p per share, the 19th year of growth **Outlook:** management remain confident that the company can continue to perform well and grow despite the change in macroeconomic conditions: > "Whilst a volatile macro-economic backdrop will continue to be a material factor in all our markets, we remain confident that the Chesnara business model will continue to generate cash across a wide variety of market conditions, as it has done over its history." Broker forecasts for the current year suggest a total dividend of 24p per share, giving a prospective yield of 8.9%. #### My view I have only skimmed the surface of Chesnara's results and as mentioned earlier, I am not an insurance expert. However, as an income investor, I like the cash-generative and high-yield nature of life insurers and want some exposure to this sector. For this reason, I place quite a high level of importance on companies' ability to provide consistent guidance and meet this guidance. Together with some key metrics, such as those discussed above, I think this is a useful guide to progress and safety. I may be wrong. But Chesnara has been trading successfully as a listed business for almost 20 years. Over that time the firm's shares have risen by 150% and I estimate the company has paid out 347p per share in dividends – a return of nearly 250% on the IPO price. That gives an annualised total return of nearly 9% per year, with the majority delivered in income. It's a strong record, and I do not see any obvious reason why the business cannot continue to generate attractive returns. I would be happy to add Chesnara shares to my portfolio at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: quality growth + beating expectations - EXPN, GEN, CGS (15/11/23) URL: https://www.rolandhead.com/dividend-notes/quality-growth-beating-expectations-expn-gen-cgs-15-11-23/ Last updated: 2023-11-16T15:40:39.000Z Welcome back to my dividend notes, where I record my thoughts on UK dividend shares from my investment universe. Today I look at two more companies that expect to beat expectations this year, plus a FTSE 100 business that could be a classic quality compounder. --- ### Companies covered: - [**Experian (LON:EXPN)**](#experian-expn)\- a solid set of half-year results. Too expensive for me, but from a growth perspective I think the shares could still be fairly valued. - [**Genuit (LON:GEN)**](#genuit-gen)\- the company formerly known as Polypipe has upgraded full-year guidance slightly ahead of the year end, but the outlook for 2024 looks a little uncertain to me. - [**Castings (LON:CGS)**](#castings-cgs)\- a strong set of results from this foundry business, reflecting elevated demand from its core heavy truck customer base. Substantial net cash is available to fund growth and dividends; I think this is a good business. *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Experian (EXPN) > "We grew in every region and across both B2B and Consumer Services" Experian is known as a credit rating agency, but nowadays provides a broader range of information services for corporate and consumer clients all over the world. Today's half-year results show the kind of steady progress I've come to expect from this business, which has many of the quality compounder attributes I look for in a long-term holding. **H1 results summary:** Experian saw revenue rise by 5% to $3,424m during the half year, while operating profit rose by 56% to $799m. Last year's H1 operating profit was depressed by a $152m goodwill impairment relating to the group's European markets. Excluding this, there was a 20% increase in underlying operating profit compared to H1 last year. Europe appears to be subscale and something of a weak spot for Experian. As the chart below shows, North America and Latin America account for the vast majority of both growth and profit (due to higher margins): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/expn-1h24-revenue-split-1.png) Source: Experian H1 FY24 results *Note these are the company's Benchmark EBIT margins, which exclude amortisation of acquired intangibles (c.$190m/yr)* **Profitability/cash flow:** my sums suggest Experian's free cash flow for the period was $319m (excluding acquisitions), down from $346m for the same period last year. The reduction was largely due to a cash inflow of $192m into working capital. Excluding this, free cash flow would have shown a 90% conversion rate from reported profit of $572m. I'm not sure why so much cash flowed into working capital – presumably to support investment in sales growth and new products. I prefer to look at statutory operating margin and returns on capital employed, as these include the company's sizeable amortisation charge on previous acquisitions. I view this as a real cost as it reflects past capital allocation decisions – so I want to see the returns on that spending. Even on this conservative basis, Experian boasts a consistent and attractive record of profitability, in my view: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/expn-roce-opmargin-151123.png) **Dividend:** the interim dividend has been increased by 6% to $0.18 per share, in line with forecasts for a full-year payout of $0.58 per share. This gives a paltry 1.7% yield at current levels. **Trading commentary:** as shown in the table above, the group saw double-digit revenue growth in Latin America at attractive margins, with North America continuing to contribute the highest-margin revenue, albeit at a lower growth rate. Organic revenue from consumer services rose by 6%, while B2B organic revenue was 4% higher. This was driven by *"superior data, new product performance"* and successful sales efforts, according to the firm. **Outlook:** Experian's financial year ends on 31 March, so the current financial year is FY24\. The company's guidance is for organic revenue growth of 4-6% and modest margin improvement – this sounds broadly like a continuation of the H1 results to me. Broker consensus forecasts suggest adjusted earnings will rise by 7% this year, to $1.44 per share. That puts Experian on 23 times forecast earnings. #### **My view** I think this is an attractive business with many of the quality compounder elements I look for in a dividend growth stock. It's a stock I'd like to own at the right price, but the valuation isn't really there for me at current levels. Experian's trailing EBIT/EV yield is under 4% at the moment and the dividend yield is under 2%. Admittedly, this isn't the only way to look at this business. Consensus forecasts suggest earnings growth will run at 8% or more over the next couple of years. Dividend growth is expected to be similar. On this basis, I think it's possible the shares could offer an expected total return of 8%-10% per year at current levels – potentially attractive. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Genuit (GEN) > "... profit marginally above market expectations" Continuing [yesterday's theme of guidance upgrades](https://www.rolandhead.com/dividend-notes/profit-upgrades-x3-hils-azn-bme-14-11-23/), Genuit (formerly known as Polypipe) has tweaked its 2023 guidance higher, with six weeks of the year left to go. This business produces drainage and ventilation products used in residential and commercial buildings. Management now expect to report full-year adjusted operating profit marginally ahead of consensus expectations. This is given as £89.7m, so I guess we can expect a figure slightly over £90m. Depending on the scale of the adjustments required to achieve this figure – statutory operating profit last year was just £53m – this expected result suggests to me that Genuit shares *might* be quite reasonably valued. The market was certainly impressed, sending the shares up by 10% on Wednesday morning. However, a look at the company's segmental breakdown for the first 10 months of the year suggests that revenue is still likely to fall this year: - Group revenue 10 months to 31 October: £504m (2022: £527m) - the company says this is a 4.8% like-for-like reduction, driven by an 11% slump in volumes - Sustainable Building Solutions: sales down 12.3% to £210m - Water Management Solutions: sales flat at £149m - Climate Management Solutions: sales up 5.3% to £139m Cost cutting and *"business simplification"* is underway to improve the efficiency of operations and mitigate the impact of lower volumes. These are expected to deliver annualised savings totalling £15m. **Outlook:** no guidance was provided for 2024 in this update, but chief executive Joe Vorih says he believes the company should be well positioned to realise higher margins when volumes *"return to more normal levels"*. #### My view I don't see anything too much to worry about, but it does seem like the outlook for 2024 could be a little soft, at least in H1. Genuit has achieved operating margins of 15% in the past, but not since the pandemic. Returns on capital employed have also fallen from c.12% to 6% over this period. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/gen-roce-opmargin-151123.png) The dividend yield of 4% looks like it should be fairly safe to me, as this year's payout is expected to be covered 2x by adjusted earnings. With the stock trading on a P/E of 12, I think Genuit could offer some upside from current levels. But on balance, I don't think the outlook is exciting enough to really interest me – I think there are more compelling choices elsewhere in the construction materials sector. --- ### Castings (CGS) > "Management believes that the company will trade marginally ahead of market expectations." This West Midlands engineering firm has a market cap of £168m and specialises in making cast iron engine parts for heavy trucks (80% of revenue). The business is also expanding into new areas such as trailer braking, trailer couplings, wind energy and rail. Castings has been in business for more than 100 years and operates two foundries and a machining business in the UK. The group has been listed on the London market since 1986, I believe. Long-time chairman Brian Cooke has just retired after a 63-year career with the business, but still has a 4.6% shareholding. The firm's results typically make for pleasant reading as they are short, clear and do not rely on adjusted accounting metrics. **H1 results summary:** Truck manufacturers were left with order backlogs last year when the semiconductor shortage forced them to slow down production. This affected Castings, too – but the firm's main customers now appear to have upped the pace in an effort to reduce their order books. The company says that revenue for the half year to 30 September rose to £111.3m (H1 2022: £85.6m), with pre-tax profit up 37% to £10.3m. Operating profit for the period was £9.6m, giving a margin of 8.6% – pre-tax profit was higher than operating profit due to £648k of interest income on the group's £31m net cash balance. Cash generation was excellent, albeit boosted by some working capital outflows: > "The group maintains a very strong balance sheet with cash levels of £31.3 million. Free cash flow during the period was £8.5 million which was used to pay dividends totalling £12.4 million (including a supplementary dividend of £6.5 million)." Cost inflation is said to have stabilised and deflation is being seen *"in some areas"*. The company is continuing to pass on higher electricity costs to its customers, so there's no impact on profit. - **Foundry operations:** output rose by 1.6% to 25,500 tonnes - 62.1% of foundry output by weight was machined castings, compared to 57.4% last year. This is seen as a positive because these are valued-added products. - Current demand is in excess of foundry capacity, so the company has temporarily outsourced some production to other foundries - Looking further ahead, Castings has approved a new foundry production line at its existing William Lee site. This will cost around £17m and add up to 12,000 tonnes of additional foundry capacity, providing headroom for expansion into areas such as truck electrification, wind energy and the US market. **Dividend:** an interim dividend of 4.13p per share has been declared, an increase of 7.6% on last year's interim payout of 3.84p per share. Broker forecasts suggest a full-year payout of 17.8p per share, giving a prospective yield of 4.6%. **Outlook:** demand for heavy truck parts is expected to remain strong: > "The long-term demand schedules continue to reflect the high build rates that the heavy truck OEMs require to satisfy their order books." As a result, management expect the business will *"trade marginally ahead of market expectations"* this year. Broker forecasts suggest earnings of 34p per share this year, pricing the stock on 11.5 times forecast earnings. ### My view I think this is an excellent and well-run business. As far as I can see, Castings has maintained a net cash balance for at least 30 years and has never cut its dividend. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/cgs-div-netdebt-151123.png) I suspect that the relatively capital-intensive nature of the business means that returns on capital employed and margins will always be relatively average. In recent years, ROCE has averaged around 9%. However, the quality of execution and the strength of the group's balance sheet means that this is a stock I would consider buying, at the right price. The obvious risk is that electrification or other technology changes will make the core heavy truck business reduntant, over time. The company acknowledges this and is expanding into new areas. However, I think it's safe to assume that heavy trucks will be among the last forms of transport to be electrified or switched to lower-carbon fuels such as hydrogen. In the meantime, I think Castings is doing all the right things. At current levels the shares are trading at around 1.3x their book value of c.300p per share. If the shares fell back towards the 300p level – as they did earlier this year – I'd probably view that as a buying opportunity. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: profit upgrades x3 - HILS, AZN, BME (14/11/23) URL: https://www.rolandhead.com/dividend-notes/profit-upgrades-x3-hils-azn-bme-14-11-23/ Last updated: 2023-11-15T14:51:25.000Z Welcome back to my dividend notes. While it's certainly true that *some* UK-listed companies are having problems at the moment, many of them appear to be doing okay. Today I'm looking at three quite different FTSE 350 companies that have all issued upgraded profit guidance over the last week. --- ### Companies covered: - [**Hill & Smith (LON:HILS)**](#hill-smith-hils)\- a(nother) earnings upgrade from this infrastructure products group, which is benefiting from its US exposure. I rate this business highly. - [**AstraZeneca (LON:AZN)**](#astrazeneca-azn)\- the FTSE 100 pharma group has edged up its forecasts for this year. Free cash flow seems to be improving, too, and could be poised for a big step up next year. A little too expensive for me, but I'm watching with interest. - [**B&M European Value Retail (LON:BME)**](#b-m-european-value-retail-bme)\- a solid set of half-year results suggest to me that this business is continuing to perform well. The failure of Wilkos may have provided an opportunity for further market share gains. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Hill & Smith (HILS) > "we now expect FY23 operating profit to be slightly ahead of the top end of current analyst consensus" This 200-year-old FTSE 250 business makes *"sustainable infrastructure products and services"*. Many of these are products for use in heavily-regulated environments, such as road barriers, bridge supports, street lighting and so on. **Another upgrade:** I've covered this business twice before this year, in [May](https://www.rolandhead.com/dividend-notes/contrasting-approaches-pets-ajb-hils-ihp/#hill-smith-hils) and [August](https://www.rolandhead.com/dividend-notes/in-a-sweet-spot-cch-ror-hils/#hill-smith-hils). On both occasions, the company upgraded its 2023 profit guidance slightly. We're near the end of the year now, but Hill & Smith has just upgraded its 2023 guidance again. That's three upgrades this year, by my reckoning. The company says that trading has been *"strong"* in its US business, which now accounts for nearly three-quarters of profit. The company now expects operating profit to be slightly ahead of the consensus range, which is given as £116.0m-£118.6m. So I wonder if we can expect adjusted operating profit of c.£120m, or perhaps even a little more. That would value the business with an EBIT/EV yield of just under 8%. I think that could be reasonable value, given that the company is also positive about the year ahead: > "Given the good trading performance, we now expect ... to start FY24 with positive momentum" **CEO vacancy:** one slightly odd quirk about this business is that it seems to be having an unusual amount of difficulty recruiting a new chief executive. The previous incumbent left in July 2022 *"with immediate effect"* and no explanation provided. Since then, the company has failed to find a replacement, to the extent that the chairman was appointed executive chair earlier this year on a 12-18 month agreement. As far as I can see, there's still no update on the search for a CEO. #### My view Despite the slightly mysterious absence of a CEO, I think this is a good quality business with many of the hallmarks of a long-term compounder. The group's US operations leave it well-positioned to benefit from spending under the Inflation Reduction Act, while its focus on regulated and (mostly) less cyclical infrastructure also appeals to me. In terms of valuation, I'd like to pay less than 17 times earnings and receive a yield higher than 2.3%. But in truth, I think the shares may not be all that expensive if the company can maintain its current momentum and profitability. This is certainly a stock I would consider adding to my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) if the right opportunity arose. --- ### AstraZeneca (AZN) > "we have increased our full-year guidance" Another company, another upgrade. FTSE 100 pharmaceutical group AstraZeneca increased its full-year guidance for 2023 in its third-quarter results, citing strong momentum in sales of non-Covid-19 medicines. As [I've commented before](https://www.rolandhead.com/dividend-notes/value-at-the-right-price-bats-azn-spt-02-08-23/#astrazeneca-azn), earnings at the big pharma groups tend to be heavily adjusted. I also lack the medical knowledge needed for a meaningful understanding their products and end markets. What I can do instead is to use free cash flow as a measure of progress. On this basis, AstraZeneca appears to be doing okay, with the promise of much more to come. **Free cash flow:** AstraZeneca is one of a relatively small group of UK companies that publishes full quarterly accounts. Using this information, I've calculated free cash flow for the first nine months of 2022 and 2023: - Jan-Sept 2022: $3,470m - Jan-Sept 2023: $3,898m This year's result shows a 12% increase on the same period last year. It also appears to be in line with broker forecasts for 2023 free cash flow of $5,130m. However, with a market cap of £158bn, this still leaves AZN stock with a forecast free cash flow yield of 2.6%, which is a bit pricey for me. What's interesting is that broker forecasts suggest free cash flow will double to $10bn next year. That would increase the free cash flow yield to around 5%. It would also imply a much higher level of cash conversion from profits – something I look for. **Outlook:** AstraZeneca now expects adjusted "core" earnings to increase by *"low double-digit to low-teens percentage"* this year, compared to *"high single-digit to low double-digit"* previously. Broker forecasts don't seem to have changed much as a result, unless they're being slow to filter through to consensus numbers on SharePad and Stockopedia. For what they're worth, current-year forecasts I can see price the shares on a forecast P/E of 17.5, with a 2.4% yield. #### My view For me, this remains one to watch. I don't really understand the industry or much of the detail of the company's operations. But I do get the impression AstraZeneca is firing on all cylinders and is starting to deliver on the promise of the investment we've seen in recent years. The valuation is a little too rich for me at the moment, but I might consider AZN shares if the price provided a greater margin of safety. --- ### B & M European Value Retail (BME) > "FY24 ... guidance is increased" I've written positively about value retailer B&M on several previous occasions, most recently in [May](https://www.rolandhead.com/dividend-notes/a-b-for-this-selection-bme-boy-bmy/#b-m-european-value-retail-bme) and then [July](https://www.rolandhead.com/dividend-notes/taking-stock-shel-bme-rs1-28-07-23/#b-m-european-value-retail-bme). The group's recent half-year results covered the six months to 23 September 2023 and continued to support my positive view of the business. Like the other two companies covered in these notes, B&M has recently upgraded its profit guidance for the current financial year. **H1 summary:** B&M's sales rose by 104.% to £2,549m during the half year, while operating profit climbed 11% to £275m. That means operating margins were stable at just under 11% – a good result for a general retailer. Profits (at least, adjusted EBITDA) rose in each of the group's three operating divisions compared to the same period last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/bme-adj-ebitda-1h24.png) Source: BME H1 FY24 presentation Earnings per share rose by a more modest 4.2% to 16.3p per share, largely reflecting increased tax and finance charges. My sums suggest free cash flow for the half year of £120m (H1 FY23: £168m). This fall reflects higher finance and tax costs, plus c.£120m cash inflow into working capital. This reverses a similar working capital outflow in the full-year results earlier this year. B&M tends to stock up ahead of the festive season (*"the Golden Quarter")*, so I don't see anything to worry about here. Returns on capital employed (ROCE) also remain high – one of the core attractions of this business for me. I estimate B&M's trailing 12-month ROCE is just under 20%. Not many large UK retailers can match this. It's leagues ahead of the single-digit ROCEs achieved by the big supermarkets. **Dividend:** the interim dividend has increased by 2% to 5.1p per share. Broker forecasts suggest a full-year payout of c.20p, giving a prospective yield of 3.8%. **Expanded store opening programme:** the company has increased its long-term store opening target. The group now plans to open at least 1,200 B&M UK stores, up from a previous target of 950 stores set in FY17\. To put this in context, there are currently 707 B&M UK stores, according to the company's [website](https://www.bandmretail.com/about-us/at-a-glance?ref=rolandhead.com). This suggests the UK store estate is expected to expand by a further 70% over the coming years. It may be a coincidence. But B&M's decision to increase its UK store target appears to have come shortly after the recent failure of Wilkos, which had c.400 UK stores. The failed retailer's product ranges and customer demographic overlapped heavily with that of B&M. The company's explanation for its increased growth target is simply that *"move by consumers to discounters is a major trend ... set to continue over the long term"*. In the UK, B&M says that its market share is just over 2%, *"meaning there are many more years of growth ahead"*. I'm not quite sure how the company defines its UK market to derive a 2% share – the NIQ dataset referenced is only available on subscription. However, my guess is that this market share relates to the company's core sectors of grocery, FMCG, and general merchandise – a pretty broad sweep of UK retail spend. B&M now expects to open at least 125 new B&M UK stores over the next three years, adding 20% to its sales area. This will include some relocations, plus up to 51 Wilkos stores that are being purchased from the administrator. New stores are also planned for the B&M France and Heron Foods fascias. **Outlook & current trading:** management say that in the first six weeks of the Golden Quarter (October-December), B&M UK has achieved like-for-like sales growth of 1.6%. This performance has improved over the last three weeks to give an exit-rate LFL growth of 4.5%. The company warns that it's trading against tough comparatives from last year and describes this as *"a pleasing result against an uncertain and ever-changing economic background"*. Although *"this volatile background makes forecasting for the full year difficult"*, B&M's management are sufficiently confident to upgrade their full-year adjusted EBITDA guidance to £620m-£630m (previously *"higher than FY23 \[£573m\]"*). #### My view I think B&M is a well-run business with a successful model that's likely to remain popular. As I've [discussed previously](https://www.rolandhead.com/dividend-notes/taking-stock-shel-bme-rs1-28-07-23/#b-m-european-value-retail-bme), I think there's a degree of key-person risk, but that appears to have been resolved for now. The 9% upgrade to adjusted EBITDA guidance for this year is sizeable, but I think it's worth remembering that this is a heavily-adjusted measure of profit that excludes a lot of real costs. Broker consensus forecasts have hardly budged following last week's upgrade. The language used in the outlook statement also suggests to me a fair degree of uncertainty about Christmas and trading next year. Despite this, I think B&M should be fairly well positioned to ride out any softness and profit when conditions improve. If the group stays disciplined with its store openings and doesn't sacrifice profitability for growth, I think this business should continue to generate attractive value for its shareholders. In my view, B&M shares are probably priced about right for now. But I'd take a closer look if they dropped below 500p again. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: contrasting fortunes - DGE, RDW, TW (10/11/23) URL: https://www.rolandhead.com/dividend-notes/contrasting-fortunes-dge-rdw-tw-10-11-23/ Last updated: 2023-11-15T09:09:54.000Z Welcome back to my dividend notes. Today I'm looking at a surprise downgrade from FTSE 100 drinks giant Diageo. I've also taken a look at two housebuilders that are having contrasting experiences in the current market. --- ### Companies covered: - [**Diageo (LON:DGE)**](#diageo-dge)\- the drinks group has surprised investors with a warning that half-year operating profit will be lower than expected. I feel there's still some uncertainty, so I'm staying on the sidelines. - [**Redrow (LON:RDW)**](#redrow-rdw)\- the company's customers are generally affluent and often cash buyers. But they're being held back by mortgage problems for buyers lower down the housing chain. I remain positive, on a medium-term view. - [**Taylor Wimpey (LON:TW.)**](#taylor-wimpey-tw)\- in contrast to Redrow, Taylor Wimpey is guiding for results at the top end of guidance after a year that has been less bad than previously expected. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Diageo (DGE) > "we now expect to see slower growth" FTSE 100 drinks group Diageo has warned that profits will be lower than expected during the first half of its current financial year. The news left the group as the FTSE 100's biggest faller on Friday, closing down by around 12%. **What's gone wrong?** Diageo says that sales in its Latin America and Caribbean (LAC) region are expected to fall by around 20% year-on-year during the six months to 31 December. The company says that weaker economic conditions in this region have affected spending, resulting in downtrading to cheaper brands and lower levels of consumption. In turn, this is holding back efforts to reduce stock levels. As a result, organic operating profit for the first half of Diageo's 2023/24 financial year is expected to be lower than the same period last year. Previous guidance – just [six weeks ago](http://www.investegate.co.uk/announcement/rns/diageo--dge/diageo-issues-trading-commentary-ahead-of-agm/7782522?ref=rolandhead.com) on 28 September – was for operating profit to rise. LAC sales during the same period in 2022 actually rose by 20% (versus 2021), which I think was at least partly due to the football World Cup. So to some extent, this year's slump appears to be just unwinding last year's gains. But if that's the case, I'm surprised that Diageo would not have expected this. #### My view Diageo says that *"momentum is continuing"* in its other regions of the world. However, the commentary seemed a little uncertain to me and the company also made further general references to increased marketing spend and cost inflation. I'm not completely sure if the other regions of the world where Diageo operates are trading in line or perhaps slightly below. I got the impression that there was still some scope for further disappointment. Diageo shares are now trading back at levels first seen in 2018\. I might normally see this as a buying opportunity, but the uncertain tone of today's update (in my opinion) is discouraging. Debt levels are also slightly higher than I'd really like to see – August's results showed Diageo with net debt/EBITDA ratio of 2.6x. In my view, some of the cash that's been spent on buybacks in recent years (mostly at much higher prices) might have been more usefully directed to debt reduction. I could be wrong – Diageo could be cheap and may bounce back quickly. But for now, I'm going to remain patient and await further news. --- ### Redrow (RDW) > "the rate of breakdown of chains is elevated because of difficulties with mortgages lower down the chains." I view FTSE 250 builder Redrow as one of the better-quality housebuilders, but the company's more upmarket focus appears to be causing some problems. In its AGM trading update on Friday, the company said that while its customers are *"generally financially resilient"* and often cash buyers, they are frequently at the top of a home purchase chain. According to Redrow, chains are breaking down more often than usual at the moment due to *"difficulties with mortgages lower down the chains"*. This has caused Redrow's cancellation rates for the year to date to rise to 25% (comparative: 22%) as its customers are struggling to sell their existing homes. Reflecting this, management now expect the average number of sales outlets to fall to 113 this year, compared to previous guidance of 117. As we've seen elsewhere, the scale of the slowdown is considerable. Redrow's order book is 36% smaller than at the same time last year: > "The total order book at 3 November is £864m of which 66% is exchanged, compared to £1.36bn at the same time last year with 74% exchanged." However, prices have remained relatively firm so far, with the average private selling price slipping 2.5% to £471k so far this year, compared to £483k last year. **Outlook:** Redrow stopped short of issuing a profit warning, but I think there's clearly some risk of disappointment if the housing market slows further: > "We continue to expect our results to be in the guidance range we gave in September 2023 of revenue between £1.65bn and £1.7bn and profit before tax of between £180m and £200m. However, with the lower than anticipated sales rate due to the more subdued Autumn housing market they are more likely to be towards the lower end of the range." #### My view I don't think there's too much cause for alarm. Redrow has experienced management and founder Steve Morgan remains a 17% shareholder, so I expect the firm will be carefully stewarded through this more difficult period. My view is that with Redrow shares trading around 15% below book value, the stock probably offers value, on a cyclical or medium-term view. The recent £100m buyback (below book value) should be supportive of book value per share, while the balance sheet is expected to remain in a net cash position at the end of the current financial year, in June 2024. The major danger is that the housing market will freeze up more seriously. Housebuilders can cope with falling prices, but a lack of volume is much more difficult. I don't know how likely this is, but it does seem that mortgage rates have peaked for now. I already own shares in [a housebuilder](https://www.rolandhead.com/dividend-shares/cyclical-ftse-250-stock-with-a-6-yield/), but I think Redrow could be attractive at the moment, on a medium-term view. *For an interesting counterpoint to Redrow, see the next section below.* --- ### Taylor Wimpey (TW) > "we now expect Group operating profit to be at the top end of our guidance range of £440 million to £470 million." This is about as close as we're getting to an upgrade in the current market. So why is Taylor Wimpey sounding so bullish when Redrow is struggling? I suspect one reason my be Taylor Wimpey's more affordable market positioning. It's more of a volume builder with a greater exposure to first-time buyers and others at the lower end of house purchase chains. Perhaps that means deals are easier to complete than for Redrow customers, whose home sales may depend on multiple completions further down the chain. In contrast to Redrow, Taylor Wimpey's cancellation rate has fallen to 21% during the second half of this year, compared to 24% for the same period last year. Taylor Wimpey's order book has also remained a little stronger, falling by 27% over the last year, compared to 36% at Redrow (above): > "As at 5 November 2023, our current total order book excluding joint ventures stood at c.£1.9 billion (2022: c.£2.6 billion) representing 7,042 homes (2022: 9,153)." **Outlook:** Taylor Wimpey chief executive Jennie Daly expects to report operating profit at the top end of the group's guidance range of £440m-£470m. Net cash at the end of calendar 2023 is expected to be between £500m and £650m, although as with most housebuilders this metric excludes land creditors, which were £588m at the end of June. Analysts forecasts suggest that's equivalent to around 13 times forecast earnings and are pencilling a 9.4p per share dividend which seems plausible to me and would give a 7.9% yield. #### My view I don't see too much to worry about at Taylor Wimpey. Right now, the group's higher volume, lower-priced positioning appears to be working better for buyers. The dividend has so far remained higher than at some rivals and offers a tempting yield. However, there's less asset backing than at some others, with TW shares trading within 10% of their book value of 128p. I guess the question is whether this is as bad as it gets, or whether conditions will get tougher next year. Answers on a postcard, please... 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: turnaround + stock overhang - MKS, RS1 (08/11/2023) URL: https://www.rolandhead.com/dividend-notes/turnaround-stock-overhang-mks-rs1-08-11-2023/ Last updated: 2023-11-10T18:14:16.000Z Welcome back to my dividend notes. Today I'm looking at an impressive turnaround story (I think) and an industrial firm that's suffering from an unfortunate stock hangover. --- ### Companies covered: - [**Marks and Spencer (LON:MKS)**](#marks-and-spencer-mks)\- the high street stalwart returns to the dividend list for the first time since 2019\. Half-year results show a recovery in margins and improved cash generation. I'm impressed with this turnaround. - [**RS Group (LON:RS1)**](#rs-group-rs1)\- this electronic component supplier appears to be suffering with excess stock and an uncertain outlook. I remain on the sidelines, although I don't think there are any serious problems here. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Marks and Spencer (MKS) > "Restoration of dividend of 1p per share" It wasn't so long ago that Marks and Spencer's turnaround seemed unlikely. But chief executive Stuart Machin appears to be succeeding where his predecessors have failed. M&S's half-year results showed solid profit growth, positive cash generation and the resumption of dividend payments. The 139-year-old retailer apparently regained its crown as the UK's largest womenswear retailer over the summer – a position it has not held for four years. This isn't a stock I'd consider for my dividend portfolio at the moment, but M&S has had a good dividend record in the past. I think it's worth keeping an eye on the company's progress, now that payouts have restarted. **Results summary:** revenue rose by 10.8% to £6,134m during the six months to 30 September, lifting pre-tax profit by 56.2% to £325.6m. Operating margin for the half year was 5.1%, consistent with the 5.2% reported last year. The company's measure of free cash flow from operations showed an inflow of £27.7m for the six months, compared to an outflow of almost £117m during the same period last year. Looking at the cash flow statement, my sums suggest half-year free cash flow of £44.5m, compared to an outflow of £184m during H1 last year, excluding acquisitions. In either case, the trend appears to be positive. This improvement helped to support a reduction in financial debt, which fell by £310m to £0.32bn during the half year. Including more than £2bn of lease liabilities, the company's reported net debt at the end of September was £2.6bn (H1 2022: £2.9bn). **Trading commentary:** M&S Food has been an acceptable performer in recent years, but the company's Clothing & Home business has been struggling for almost as long as I can remember. This situation appears to be improving, with both divisions performing well during the half year. - **Food:** total sales rose by 14.7%, with like-for-like (LFL) sales up 11.7%. M&S says it outperformed all the main supermarkets on volume thanks to increased customer numbers. An adjusted operating profit of £164.9m gives a credible operating margin of 4.3% (H1 2022: 2.2%) for this division, slightly above **Tesco**. - **Clothing & Home:** sales rose by 5.7%, with LFL sales up 5.5%. Customer numbers increased and comments such as *"more confident buying and further improvements in style perceptions"* suggest that M&S is at last managing to make its ranges a little more appealing to shoppers. Operating profit rose by 30% to £223.4m. An improved operating margin of 12.1% (H1 2022: 9.8%) was supported by a reduction in discounting and lower supply chain costs. **Dividend:** M&S has declared an interim dividend of 1.0p per share. Broker consensus estimates suggest a full-year payout of about 5p per share, giving a prospective yield of 2.2%. **Outlook:** management say that momentum was maintained through October and they *"are planning for a good Christmas"*. However, factors such as higher interest rates and erratic weather mean that they *"are not relying on the favourable recent market conditions persisting"* into 2024\. As a result, profits are expected to be weighted towards the first half of the current year. This is a contrast to the last couple of years, but is more consistent with the group's pre-pandemic performances. Consensus forecasts already seem to reflect this expectation – H1 adjusted earnings of 12.7p per share represent 66% of full-year estimates of 19.2p per share. #### My view Full-year forecasts price M&S shares on around 12 times earnings. That looks about right to me for the moment, given the company's cautious commentary on the year ahead. Improved cash generation and margins look reassuring to me, but I'd imagine M&S will continue to face tough competition from rivals such as retailer **Next** and the main supermarkets. Although M&S's brand proposition does seem to be holding up well, I would guess that any further margin gains will be tougher to achieve. That would leave the group reliant on sales growth alone, which I'd expect to be slower. I'm going to remain an interested observer for now. But if CEO Stuart Machin can continue to deliver, I think this could be one of the more impressive big cap turnarounds in recent years. --- ### RS Group (RS1) > "RS has delivered a resilient performance in difficult markets, which have been more challenging than anticipated at the beginning of the year" I've looked at this FTSE 250-listed electronic component supplier twice this year (in [May](https://www.rolandhead.com/dividend-notes/8-yield-industrial-headwinds-av-rs/) and [July](https://www.rolandhead.com/dividend-notes/taking-stock-shel-bme-rs1-28-07-23/)), noting the falling share price and historically strong quality metrics. The company has also risen (fallen?) to become one of the top-ranked shares in my dividend screen results. However, with the outlook seemingly deteriorating, I've opted to stay on the sidelines. This week's half-year results provided an opportunity for the company to provide a more concrete view on progress and the near-term outlook. Unfortunately, the picture seems to remain uncertain. The company also seems to have been caught with excess inventory at just the wrong time, as I'll discuss below. *Here's a quick review of RS Group's half-year results, which cover the six months to 30 September 2023.* **Results summary:** falling sales volumes hit profits and margins during the quarter, demonstrating what happens when operating leverage goes into reverse. RS Group's revenue fell by 1% on a reported basis or 8% like-for-like to £1,447m. However, pre-tax profit dropped by 31% to £126m. Although gross margin was relatively stable at 43.7% (-0.4% LFL), the group's operating margin – which includes a much wider range of costs – fell to 9.6% (H1 22/23: 12.8%). The company says employee costs were a significant factor, with *"a mid-single digit pay increase"* awarded across the group during the period. My sums suggest that free cash flow for the half year was just £11m (H1 22/23: £102.6m). The main reason for this seems to be a sharp rise in unsold stock. RS says its gross inventories rose by £139m to £799m during the half year (FY22/23: £660m). Of this, £74m relates to the acquisition of Distrelec in July. The remaining £65m of additional inventory has come from the easing of supply chain issues. This means suppliers are now fulfilling new orders more quickly, including items previously on long lead times. Inventory strength worked in RS's favour during the supply chain crisis, when rivals were strugging to get stock. But it now seems to be backfiring. My impression is that RS has over-ordered and is now stuck with excess stock: > "Inventory provisions have increased by £35 million to £79 million since the year end, £23 million due to the acquisition of Distrelec as expected and the balance due to the continued sales slowdown pushing inventory into excess, particularly of electronics products where minimum order quantities are high." I'm surprised to see that almost one third of stock acquired with Distrelec was already expected to be impaired. This business is a similar firm that was acquired for €365m acquisition to expand RS's market presence in Germany, Switzerland and Sweden. At the time of the acquisition, in April, management said that the Distrelec deal would create *"material cost synergies including procurement, logistic and warehousing"*. My impression now is that it could take longer for these to feed through, given the level of excess stock now being held by the combined group. The acquisition of Distrelec also contributed to a sharp rise in net debt. The balance sheet has moved from a net cash position of £3m one year ago to a net debt of £502m today. While this does not look problematic in itself, it's a further pressure on cash flow, with net finance costs expected to rise to £30m in this financial year (FY23: £12.2m). **Dividend:** the interim dividend has been increased by 15% to 8.3p per share. However, broker consensus forecasts I can see suggest a full-year payout of 21.1p per share, almost unchanged from 20.9p last year. This suggests to me that the final dividend might be cut, or more likely held flat. I estimate a forecast yield of around 3.1%, at current levels. **Outlook:** disappointingly, these results did not include any updated guidance for the current year. However, commentary from CEO Simon Pryce did not sound all that positive to me on a near-term view: > "Whilst markets remain difficult in the short term, the medium and longer-term growth characteristics are attractive." City analysts – at least some of whom will have been briefed by new CFO Kate Ringrose – appear to have trimmed their forecasts slightly for FY24 and FY25, but not made any major changes. A cost-cutting programme has been launched. This is expected to deliver annualised savings of *"over £30m"* by 2025, at a cost of £15m. Adjusted earnings for H1 were 22.3p per share, while consensus estimates for the full year are for earnings of 53p per share. This suggests a significant second-half weighting (Oct-Mar), which would be in keeping with recent years. These forecasts put RS shares on a forecast P/E of 13\. That's below average but perhaps appropriate for this more difficult period. #### My view Assuming that the economic outlook doesn't get too much worse, I would guess that RS shares could be quite reasonably priced at under 700p. The last time the company's P/E ratio was this low was in 2009/10, according to SharePad. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/rs1-pe-081123.png) However, given the lack of clarity over the outlook and the group's substantial stock overhang, I don't see any need to rush in here. I intend to stay on the sidelines and await further news. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### October '23 dividend portfolio update: value on offer? URL: https://www.rolandhead.com/portfolio/october-23-dividend-portfolio-update-value-on-offer/ Last updated: 2024-10-22T13:47:09.000Z Welcome to my review of October's news and results from the companies in [my model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). October turned out to be a difficult month for UK investors, especially in smaller companies. However, results from my portfolio stocks last month were broadly reassuring and I think there's plenty of value on offer from the stocks I'm discussing this month. Indeed, I'm planning to use the portfolio's dividend income to top up some of the positions in the [model portfolio](https://www.rolandhead.com/dividend-portfolio/). I'll have more on that in next week's update. This month's report covers seven companies, so it's a little lengthy. But as usual, there's a summary of my thoughts on each stock at the top. --- ### In this month's report: Here's a summary of the company results covered in this report, with a link to each section: _This post is for paying subscribers only._ ### Dividend notes: big cap roundup - BP, GSK, NXT (01/11/23) URL: https://www.rolandhead.com/dividend-notes/big-cap-roundup-bp-gsk-nxt/ Last updated: 2023-11-08T16:30:43.000Z Three big FTSE 100 dividend stocks have issued their third-quarter updates this week. Two companies included upgrades to guidance, while one big name missed forecasts. I've been taking a look. --- ### Companies covered: - [**BP (LON:BP.)**](#bp-bp)\- the FTSE 100 energy giant's third-quarter numbers missed City expectations, but performance and cash flow looks pretty solid to me. I think BP shares may offer value *if* improved profitability can be sustained. - [**GSK (LON:GSK)**](#gsk-gsk)\- another upgrade to 2023 guidance plus a strong showing from the pharma group's vaccine division suggest to me that value may be emerging here. - [**Next (LON:NXT)**](#next-nxt)\- another profit upgrade from this well-run retailer, but I think the good news is probably already in the price. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### BP (BP.) > "Further $1.5bn share buyback announced" BP's third-quarter numbers came in slightly below expectations, as more stable gas markets resulted in a sharp reduction in profits from the group's gas trading business. This result triggered a sell-off that continued the slump seen over the last couple of weeks: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/bp-1yr-chart-011123.png) I don't see too much to worry about in BP's Q3 numbers, but I think they do highlight a return to normal after the exceptionally profits of the last 18 months. **Q3 highlights:** BP reported an underlying profit of $3.3bn for the third quarter, 60% below the $8.2bn reported during the same period in 2022\. Oil and gas production were both broadly stable during the period, but income from gas trading fell sharply due to more normal market conditions. Underlying profit for the first nine months of the year was $10.9bn, 53% below the $22.9bn generated last year. These are big falls, but last year's profits were exceptional. This year's numbers still look relatively high to me, in a historical context. Cash generation has also fallen. Although Q3 cash flow was only down by 10% compared to Q3 last year, BP's measure of surplus cash flow for the year-to-date was down by over 60% to $5.1bn (9M 2022: $14.1bn). **Dividend:** the quarterly payout was left unchanged at 7.27 cents per share, in line with consensus estimates for a payout of 28.1 cents per share this year. That gives BP shares a prospective yield of 4.7% at a share price of 493p. The payout is expected to be covered around three times by earnings and free cash flow this year and looks very safe to me. **Share buyback:** a further $1.5bn share buyback has been announced, adding to the $6.6bn of shares already repurchased this year. BP's sharecount has fallen from 20.3bn in 2021 to around 18.8bn today. Buybacks on this scale should provide some support for future earnings per share, even in less favourable environments. **Outlook:** BP expects oil prices to remain firm in the final part of the year, due to OPEC+ production cuts and rebounding demand. The company says that LNG prices could be more volatile, depending on the weather and on demand in Europe and China. Production is expected to be broadly flat versus Q3. Consensus estimates appear to be largely unchanged, suggesting BP will report earnings of $0.92 per share this year, compared to a figure of $1.45 per share last year. These estimates give BP shares a forecast P/E of around 6.5. #### My view As far as I can see, BP is performing well and benefiting from robust demand in most major markets, especially for oil. The group's low-carbon energy strategy is continuing to unfold and develop. Net debt has fallen to $22bn and does not look a serious concern to me, although given the impact of higher interest rates I might prefer to see more emphasis on debt reduction than buybacks. Broker forecasts suggest free cash flow could range between c.$14bn and $16bn between now and 2025\. Taking $15bn as a mid-point gives the shares a free cash flow yield of about 14%, which appears to be good value. My concern is that these estimates seem to be based on a view that BP will maintain double-digit operating margins over the coming years. This may be possible, but BP has struggled to achieve this consistently over the last 30 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/bp-opmargin-011123.png) Oil and gas has always been cyclical, even without the periodic company-specific problems BP has suffered. I am not yet convinced that the future will be different to the past, so I'd be looking for a lower valuation to buy BP shares. --- ### GSK (GSK) > "Strong year-to-date and Q3 performance drives upgrade to full-year guidance" Another quarter, another upgrade from GSK. I last looked at this FTSE 100 pharma group [in July](https://www.rolandhead.com/dividend-notes/what-happens-next-lloy-gsk-fdm-26-07-23/#gsk-gsk), when the company tweaked its guidance higher for the year. The third-quarter results included another useful upgrade to guidance, alongside what appear to be solid operational results. Let's take a look. **Q3 highlights:** GSK says that its third-quarter sales rose by 10% to £8,140m, at constant exchange rates. Operating profit for the quarter rose by 64% to £1,949m, or by 6% to £2,772m on an adjusted basis. The increase was driven by vaccine sales, which rose by 33% to £3,218m. This increase was mostly driven by GSK's shingles vaccine (+15%) and a £709m contribution from the US launch of *Arexvy*, which is the world's first RSV vaccine. Like its peer AstraZeneca, GSK's profit adjustments are lengthy and complex. I prefer to focus on free cash flow, as this is the ultimate driver of R&D, dividends, and debt service capability. My sums suggest free cash flow of £2,540m for the first nine months of the year, compared to a figure of £3,426m for the same period last year. However, GSK received a $1.25bn settlment from US pharma firm **Gilead** last year, so stripping this out suggests a more neutral picture. This year also saw an increase in working capital, which appears to relate to stock build in vaccines in anticipation of continued strong demand. Broker forecasts suggest free cash flow of £5,400m this year, which seems to be consistent with my nine-month calculation. This estimate prices GSK shares on a free cash flow yield of 9.1%, or 7.3% including debt. Both valuations look reasonable to me. **Updated 2023 guidance:** continued strong trading was supported by the *Arexvy* launch and CEO Emma Walmsley has issued updated 2023 guidance that suggests both profits and margins will be stronger than previously expected: - Turnover up by 12%-13% (previously 8%-10%) - Adjusted operating profit growth of 13%-15% (previously 11%-13%) - Adjusted earnings per share growth of 17%-20% (previously 14%-17%) - Full-year dividend guidance unchanged at 56.5p per share **Outlook:** Ms Walmsley says GSK has *"clear momentum"* and that the group's longer-term outlook also *"continues to strengthen"*. I don't have access to updated broker forecasts for GSK, but my sums suggest this guidance leaves the stock trading on something like 9.5x forecast earnings, with a 4% dividend yield. #### My view GSK has a somewhat different problem to BP. Unlike the oil giant, GSK has always been a high margin business. But as I've [discussed previously](https://www.rolandhead.com/dividend-shares/is-new-gsk-a-quality-dividend-share/), this business has struggled to grow over the last 15 years or so, with operating profit and free cash flow both rangebound since 2008: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/gsk-opprofit-margin-fcf-011123-1.png) This lack of growth – and the perennial patent cliff/innovation challenge faced by pharmaceutical firms – is the main reason why I don't own these shares. I'm not sure yet whether GSK has broken this streak of stagnating growth, but on balance I'm gaining confidence and will continue to watch with interest. --- ### Next (NXT) > "We are increasing our full year guidance for profit before tax" Retailer Next's third-quarter trading statement included the company's fourth profit upgrade in six months. (See my previous coverage [here](https://www.rolandhead.com/dividend-notes/upgrade-an-8-dividend-yield-stem-nxt-nesf/#next-nxt).) The company said that full price sales rose by 4% between August and October, ahead of the company's previous guidance for an increase of 2%. As a result, Next has increased its pre-tax profit guidance for the current year by £10m to £885m. The company says that stronger demand during the third quarter added £10m to profits during this period. This appears to mean that the outlook for the final quarter of the year is effectively unchanged. Management say they believe colder weather in October helped to lift sales. As long as Q4 is not worse than expected, Next's forecasts should be reliable, I think. If Q4 is better than expected – which seems possible to me – then a further upgrade may be needed in January's Christmas trading statement. #### My view I think Next is a good quality and well-run business, but the underlying growth rate has been fairly pedestrian in recent years. The share price has also been rangebound for most of the last 10 years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/11/nxt-10y-chart-011123.png) Although I have confidence in the company's ability to manage its store estate and develop its online offering, I think the shares look up with events on c.13x forecast earnings. I would prefer to buy Next shares during one of their periodic sell offs. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: this 8% yield looks safe to me - SXS, TCAP (31/10/23) URL: https://www.rolandhead.com/dividend-notes/this-8-yield-looks-safe-to-me-sxs-tcap-31-10-23/ Last updated: 2023-11-04T09:38:27.000Z In this edition of dividend notes, I'm revisiting two companies that have just issued positive third-quarter updates. I think much of the risk is probably in the price at both firms, although I can still see some potential concerns. --- ### Companies covered - [**Spectris (LON:SXS)**](#spectris-sxs)\- a solid Q3 statement from this FTSE 250 engineer, with updated guidance for adjusted profits towards the upper end of expectations - [**TP ICAP (LON:TCAP)**](#tp-icap-tcap)\- this interdealer broker is trading in line with expectations but remains stubbornly cheap. I explain why I'm still on the fence, despite a tempting 8% yield. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Spectris (SXS) > "full year operating profit expected to be in the top half of guidance range" When I wrote about FTSE 250 precision measurement specialist Spectris [in April](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/), I said the business looked good, but the shares were too expensive for me. Step forward six months, and Spectris's share price has fallen by over 15% to around £31 per share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/sxs-5yr-chart-311023-1.png) The company's third-quarter update reads fairly positively to me. Should I be taking a closer look at this British engineer? **Q3 highlights:** Spectris kicked off its third-quarter statement by updating its full-year guidance to suggest that adjusted operating profit will be *"in the upper half of our guidance range of £250m - £265m".* My sums suggest that implies an adjusted operating margin of around 17%-18%. The company's trading commentary also seems pretty reassuring to me: - Q3 like-for-like (LFL) sales up 11% - Year-to-date LFL sales up 16%, - YTD book-to-bill of 0.97x (i.e. new orders are running at 97% of completed orders) - Customer demand has now *"broadly normalised"* with backlog and lead times returning to *"more typical levels"* - "strong progress" on profit margins; presumably this means they have improved - Net cash of £164m at the end of September 2023 - Full-year sales now expected to be up by 10% LFL Sales growth appears to have been fairly broad based across the group's operating divisions and geographic markets: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/sxs-3q23-segmental.png) Source: Spectris Q3 2023 update **Outlook:** chief executive Andrew Heath says that he is confident in guidance for 2023 and expects *"another year of progress in 2024"*. Brokler forecasts suggest earnings of 195p per share this year, rising by 6% to 207p per share in 2024. Those estimates price the stock on 15.5x 2023 earnings falling to a multiple of 14.5x for 2024. The dividend – which has an unbroken 30-year growth record – is expected to rise by 7% this year and slightly less next year, giving a prospective yield of around 2.8%. #### My view I think Spectris is a good quality business and the shares score fairly well in [my dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at the moment. However, I think it is worth flagging up that this business tends to apply fairly substantial adjustments to its annual results. In each of the last two years, adjustments to operating profit have added more than 25% to the group's reported operating profit. This has had the effect of reducing the company's reported operating margin to around 13%, versus an adjusted figure of c.17%. Many of the adjustments applied look like business-as-usual spend to me. Examples include IT project costs, restructuring and acquisition-related items. As regular readers will know, I prefer to take a more conservative approach and rely on reported profits, rather than company-adjusted figures. Assuming a similar level of profit adjustments in 2023, I estimate Spectris could report a statutory operating profit of perhaps £205m for 2023\. That would give the stock an EBIT/EV yield of around 7%, which looks fairly reasonable to me. Although the dividend yield here is a little low for me, at under 3%, I think it's the kind of quality business that could fit well into my portfolio. It's also worth remembering that Spectris has increased its dividend every year for the last 30 years. Such quality has a price. This Q3 update outlook looks broadly reassuring to me, although I think there's still some risk that growth will remain sluggish as the boost from unwinding the backlog fades. For now, I'll continue to watch closely and have added the shares to my watch list. --- ### TP ICAP (TCAP) > "The Group continues to trade in line with the Board's expectations." A short third-quarter update from this interdealer broker caught my eye today. TP ICAP [describes itself](https://tpicap.com/tpicap/who-we-are?ref=rolandhead.com) as a *"world leading liquidity and data solutions specialist"* and has a market share of more than 40% in its core over-the-counter (OTC) business. What this means is that the company's broker teams institutional buyers and sellers of assets that are not listed on an exchange (hence OTC). These days, TP ICAP's services also include data and analytics products and a lower-touch execution venue, Liquidnet. I've covered this business before, in [an in-depth review](https://www.rolandhead.com/dividend-shares/tcap-8pc-dividend-yield-buy/) in May '22 and earlier this year, when I looked at [TP ICAP's Q1 update](https://www.rolandhead.com/dividend-notes/a-hidden-profit-warning-tcap-svs-smin/). I'm intrigued by the low valuation, 8% dividend yield and seeming potential for strong profitability and cash generation. But a re-rating has been elusive so far and the firm is to some extent a hostage to market conditions. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/tcap-5y-chart-311023.png) **Q3 update:** TP ICAP's results for the first nine months of the year don't seem very conclusive to me, reflecting external market conditions rather than any clear underlying growth trends: - YTD group revenue +2% to £1,644m - Global Broking revenue: -1% - Energy & Commodities: +16% - Liquidnet: -3% - Parameta Solutions: +5% **Outlook:** management say the company is continuing *"to trade in line with the Board's expectations".* Broker consensus forecasts I can see suggest adjusted earnings will rise by 3% to 25.7p per share this year, putting the stock on a forecast P/E of 6.5. A total dividend of 13.2p per share is expected, which would give a tempting and apparently well covered 8% yield. #### My view TP ICAP appears to be trading stably and managing – if not reversing – the structural decline in OTC trade versus electronic venues. However, the business has relatively high remuneration costs (broker bonuses) and it isn't yet clear to me whether it can generate sustainable growth from its non-broking divisions. My [podcast colleague](https://www.rolandhead.com/podcast/) (and former banking analyst) Bruce Packard has written extensively about TP ICAP on [the ShareScope website](https://knowledge.sharescope.co.uk/?s=tcap&ref=rolandhead.com), so I'd recommend taking a look at his comments if you'd like to learn more about this business. I don't think I understand enough to take a position here, but my feeling is that the shares probably do offer value at current levels and could prove to be an interesting high-yield pick. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: patience could be rewarded - BAG, MAB1, JHD (27/10/23) URL: https://www.rolandhead.com/dividend-notes/patience-could-be-rewarded-bag-mab1-jhd-27-10-23/ Last updated: 2023-11-01T20:09:26.000Z In this update I'm catching up with some companies that interest me and have published results over the last month or so. --- ### Companies covered: - [**AG Barr (LON:BAG)**](#ag-barr-bag)\- a solid set of half-year results show sales growth in the core soft drinks business and continued investment for the future. Margin weakness remains a potential concern, but can see plenty to like here. - [**Mortgage Advice Bureau (LON:MAB1)**](#mortgage-advice-bureau-mab1)\- this intermediary has been gaining market share in subdued conditions and could be well positioned for a recovery. - [**James Halstead (LON:JHD)**](#james-halstead-jhd)\- a record set of results from this vinyl flooring specialist highlight its quality credentials and strong balance sheet, in my view. A watch list share for me. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### AG Barr (BAG) > "confident of delivering full year profit in line with recently increased market expectations" This FTSE 250 soft drink firm owns Irn-Bru and range of [other brands](https://www.agbarr.co.uk/our-brands/?ref=rolandhead.com). I think it's a quality business. While Barr has faced some challenges around growth in recent years, I think these are starting to ease as management make selective acquisitions and continue to develop in-house brands. This is a business I could imagine owning, so let's take a look at September's interim results, which cover the 26 weeks to 30 July 2023. **H1 results summary:** sales rose by 33% to £210.4m during the half year thanks to a contribution from Boost Drinks, which was acquired in December 2022\. On a like-for-like basis, revenue rose by 10.4%. The company says this reflects market share gains and volume growth, as well as some price increases. Pre-tax profit for the period rose by 12.6% to £27.8m, but earnings remained flat at 18.9p per share due to the increase in corporation tax rate from 19% to 25%. Segmental results show revenue growth across the business, with particular strength in the core soft drinks business: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/bag-1h24-segmental.png) Source: BAG H1 2023/24 results Free cash flow for the half year was just £8.7m, due to higher levels of working capital relating to the Boost acquisition and seasonality. I expect cash conversion from profits to improve over the full year, as these factors normalise. Barr ended the period with net cash of £47.3m (H1 2022/23: £61.3m), reflecting last year's Boost and MOMA acquisitions and the working capital movements mentioned above. With net cash representing nearly 10% of the market cap, the balance sheet looks very strong to me. Perhaps my main concern with this business is the trend of weaker profitability seen over the last five years or so. The H1 operating margin of 12.9% is well below the 17% figure achieved in 2018. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/bag-roce-opmargin-271023.png) Management says plans to rebuild operating margin over the *"medium term"* are *"progressing well, supported by brand and portfolio development, Group manufacturing optimisation and disciplined cost control."* **Dividend:** the interim dividend was lifted 6% to 2.65p per share, which seems consistent with full-year forecasts for a payout of 14.5p per share. That would give a 2.9% yield at the current £5 share price. AG Barr's dividend has not been cut for at least 27 years, prior to the pandemic. The payout is being rebuilt and is expected to return to pre-pandemic levels in the next couple of years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/bag-dividend-271023.png) Although the yield isn't high, I see this as a good quality dividend stock with an excellent track record of cash-backed payouts. **Outlook:** guidance in the half-year results is unchanged from the August trading update, when Barr said that full-year profit performance was expected to be *"marginally above the top end of analyst expectations".* The latest consensus forecasts I can see suggest FY23/24 earnings of 32p per share, giving a forecast P/E of 15.6. **My view:** I remain a fan of this business. Results over the last 12 months give a trailing EBIT yield of 9%, which is above the 8% level I use as a rule of thumb for value. Although investment and acquisitions have held back free cash flow, I expect this to start improving from next year. Based on the limited growth of recent years, I think the shares could be fairly priced. But if the company can deliver on forecasts for stronger growth over the next couple of years, then I think Barr could offer some value at current levels. --- ### Mortgage Advice Bureau (MAB1) > "Market share of new lending up 19% to 8.1%" This mortgage advisory business floated on AIM in 2014\. It has more than 2,100 advisers on its books and recently reported an 8% share of new lending in the UK mortgage market. MAB published its half-year results on 26 September 2023. The shares have fallen by 60% from their pandemic highs and now trade substantially below pre-pandemic levels. This strikes me as potentially interesting, especially as this business has a good record of cash generation and is led by 23-year CEO and 18% shareholder, Peter Brodnicki. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/mab1-10y-chart-271023.png) **H1 results summary:** it's obviously a tougher market for housing-related businesses at the moment, but MAB's half-year results suggest to me that it's doing the right things, benefiting from demand for product transfers and gaining overall market share. - Market share of new lending up 19% to 8.1% - Total revenue up 22% to £117.5m, including acquisitions - Organic revenue up 1% - Pre-tax profit down 25% to £7.6m - Earnings down 19% to 11.3p per share - *Pre-tax margin of 6.4% (H1 2022: 10.5%)* - *Gross mortgage completions -1% at £12.1bn* - *Revenue per adviser up 17%* This chart shows how MAB has outperformed the wider market in these more difficult conditions, gaining market share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/mab1-1h23-vs-market.png) Source: MAB1 H1 2023 presentation This looks like a strong result to me, but I think it's worth taking a look at the reasons for the sharp fall in profits. One factor appears to be the switch from purchase mortgages (-14%) to product transfer mortgages (+84%), as homeowners have hunted out new fixed-rate deals. Transfers carry lower fees, and typically also result in lower levels of protection product sales (e.g. life insurance, serious illness cover). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/mab1-1h23-lending-profile.png) Source: MAB1 H1 2023 results Reported profits have also been hit by an increase in overheads and substantial additional costs relating to acquisitions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/mab1-1h23-costs.png) Source: MAB1 H1 2023 results **Fluent acquisition**: MAB has been on something of an acquisition spree over the last couple of years. The largest of these deals was the £73m purchase of a controlling stake in [online/telephone mortgage advice service Fluent](https://www.fluentmoney.co.uk/?ref=rolandhead.com) in early 2022\. Fluent was said to have a very strong growth trajectory at that time and was expected to generate £38m of revenue/£4.2m of EBITDA in the year ending March 2022. However, management say that Fluent has been harder hit by the housing market slowdown than its main in-person advisory business. Unfortunately, Fluent seems to have been ramping up its operations just as the market peaked: > "Fluent experienced significant growth in lead flow from price comparison websites and other national lead sources right through to the point of the mini-budget. Accordingly, the business had continued to scale up its adviser base and fulfilment capabilities in anticipation of a consistent and sustained growth path. > The significant market downturn has hit Fluent hard across all product lines, and unlike more mature first charge mortgage businesses, they have not had the benefit of a significant client bank to counter this effect. > Fluent's existing major lead sources have also been adversely affected in the short term both in terms of lead numbers and conversion potential." Fluent contributed £19m of revenue in H1, but given the statement below, I'm not sure it's currently making any meaningful profit: > "Our acquisition of Fluent will bring significant earnings enhancement to the Group when market conditions improve." MAB remains confident that Fluent will recover its previous profitability and growth potential when market conditions improve. I hope so. For now, I'm putting a question mark against the success of this £73m deal, which looks relatively large for a company that reported an annual profit of £12m last year. **Balance sheet:** the acquisition of Fluent also had one other undesirable side effect – debt. MAB reported net cash in every year following its 2014 IPO, but took on new borrowing to fund the purchase of Fluent (in addition to a £40m share placing). Net debt was said to be £19.4m at the end of H1\. This doesn't look problematic to me in itself, but could be a further drag on cash generation and profits. **Dividend:** the interim dividend was left unchanged at 13.4p per share. Broker forecasts suggest a full-year payout of 28.1p, giving a prospective yield of 5%. Based on the net debt position and forecast earnings of 28.7p per share, the dividend looks tight to me, but not necessarily unaffordable for a short period. **Outlook:** my reading of the outlook statement is that it – almost – includes a slight profit warning, due to the underperformance of Fluent (my **bold**): > "Although the Board still expects the MAB Group **excluding Fluent** to be at least in line with its original expectations for the year, it now expects the Group to report an adjusted profit before tax of not less than £22m for the 2023 financial year, with some upside likely to materialise should market conditions normalise." Broker consensus forecasts have edged lower since these results were published, falling from 30.6p to 28.7p per share, according to Stockopedia. These forecasts put the shares on a forecast P/E of 20, which appears to price in some recovery in earnings in 2024. **My view:** I think this is a fairly decent business and I'm encouraged by the CEO's long tenure and sizeable shareholding. On the other hand, I think it's too soon to be sure of the timing of any housing market recovery. Against this backdrop, I am not yet entirely convinced by the Fluent acquisition. However, it's probably fair to say that mortgage activity and MAB's profits could both recover quite quickly when housing market conditions do improve. The shares aren't quite cheap enough to tempt me at the moment, but I'll be watching progress with interest. --- ### James Halstead (JHD) > "I am pleased to announce a very respectable performance across the Group and another record sales performance." I thought I'd wrap up with a quick look at the latest results from flooring manufacturer James Halstead, whose main brand is [Polyflor vinyl flooring](https://www.polyflor.com/?ref=rolandhead.com). This family-controlled AIM firm published its accounts for the year to 30 June 2023 on 2 October. Maynard Paton and I took an in-depth look at this company in [a podcast earlier this year](https://www.rolandhead.com/podcasts/shares-podcast-james-halstead-with-maynard-paton-roland-head/) (free to listen). It's fair to say I'm a fan of this high-margin and cash generative business, which has an unbroken dividend growth record stretching back more than 30 years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/jhd-divps-271023.png) Halstead shares have come down somewhat recently and currently offer a 4.2% yield, so I was interested to see if the latest results highlight any potential concerns. After all, the company is exposed to the building and construction sectors. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/jhd-10y-chart-271023.png) **Full-year highlights:** James Halstead's results statement is refreshingly free of adjustments and simply starts by presenting statutory profits, the dividend, and the group's cash position. - Revenue up 4% to £303.6m - Pre-tax profit flat at £52.1m - Earnings per share up 5.2% to 10.2p - Full-year dividend up 3.2% to 8.0p per share - Net cash up 21% to £63.2m (vs a market cap of £835m) The cash position benefited from a £23m reduction in stock levels as supply chain conditions eased. This partially reverses a massive £50m investment in inventory in 2022 that was undertaken to ensure stock availability for customers. Halstead's focuses on providing a quality product and a quality service, rather than being the cheapest. The group's strong balance sheet meant it had the cash to backup this promise when supply chain issues arose last year, without needing to borrow money. A focus on quality has long supported high margins, which were largely maintained in FY23, despite some impact from cost inflation: - Operating margin: 17.0% (FY22: 17.9%) - Return on capital employed: 28.4% (FY22: 29.0%) **Dividend:** as mentioned above, the full-year dividend was increased by 3.2% to 8p per share, a new record payout. Although earnings of 10p per share suggest a low level of cover for this payout, the group's cash generation and sizeable cash position mean that the dividend continues to look very safe to me. Based on the 8p payout/190p share price, Halstead's offers a 4.2% yield. **Outlook:** one strength of this business is that it sells internationally, not just in the UK. Flagship projects last year include *"the best hospital in Mexico"* and accounting group Deloitte's new headquarters in Milan. Overseas sales now account for 60%-65% of turnover and are said to be growing. Although demand in Halstead's UK home market is now reported to be *"slightly less buoyant",* the company says that it remains *"confident in the prospects of the year ahead and progress across the Group"*. Broker coverage is minimal, but forecasts I can see suggest earnings will be broadly flat at c.10p per share this year, with a further modest dividend increase to 8.1p per share. Those estimates price Halstead shares on 20 times forecast earnings, with a 4.2% yield. **My view:** the stock's recent fall below 200p has left James Halstead trading at a level first seen in 2015\. Although a P/E of 20 isn't obviously cheap, I think the company's long track record, bulletproof balance sheet and strong profitability probably do deserve a certain premium. The flipside of this is that the prospects for growth over the next 12-18 months seem limited, based on current expectations. Using last year's profits as a guide, Halstead's current valuation gives an EBIT/EV yield of 6.7%. That's more expensive than AG Barr (above), but is within the range I'd consider for a business of this quality. As things stand, James Halstead is on my watch list and is a potential purchase for my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: markets shrug despite stable outlook - INCH, BMY (26/10/23) URL: https://www.rolandhead.com/dividend-notes/markets-shrug-despite-unchanged-outlooks-inch-bmy-26-10-23/ Last updated: 2023-10-31T10:35:30.000Z Welcome back to my dividend notes, which are now resuming after a short break. In this update I'm looking at two companies that have published solid updates and reiterated guidance – but failed to excite investors. --- ### Companies covered: Update: this article was amended on 31 October 2023 to add correct disclosure information. - [**Inchcape (LON:INCH)**](#inchcape-inch)\- the shares have been falling recently but this solid Q3 update reiterates 2023 guidance and highlights continued organic growth. - [**Bloomsbury Publishing (LON:BMY)**](#bloomsbury-publishing-bmy)\- a solid set of H1 results from the Harry Potter publisher, which scores very well in [my dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at the moment. However, I have some slight concerns about the non-consumer business. *Disclosure: at the time of publication, Roland owned shares in Inchcape and Bloomsbury Publishing.* 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Inchcape (INCH) > "expectations for the Group's results for FY 2023 remain unchanged" Shares in this FTSE 250-listed international automotive distribution group have fallen sharply this year and are now trading at levels first seen 10 years ago. Although the firm's third-quarter statement showed continued revenue growth and reiterated full-year guidance, investors remain wary. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/inch-10y-chart-261023.png) Depending on your viewpoint, Inchcape's share price weakness may highlight the cyclicality of this business – or it might suggest a buying opportunity. I'm fairly positive, although I recognise some risks to the outlook *(I hold Inchape shares in my systematic [SIF model portfolio at Stockopedia](https://app.stockopedia.com/content/sif-folio-q-3-review-im-preparing-for-a-recovery-976760?ref=rolandhead.com)).* **Investment case:** in my view, the key point about Inchcape is that it is now primarily a distribution group, not a retailer. Car retail generated less than 10% of group operating profit during the first half of this year – the remainder came from the faster-growing distribution business. Inchcape's distribution business effectively provides an outsourced service to handle manufacturers' operations in countries where they don't wish to establish a full operating infrastructure. This can include marketing, parts, localisation and managing franchised dealer networks. The company has been rolling out this strategy [since 2016](https://www.inchcape.com/our-story/heritage/?ref=rolandhead.com) and has accelerated growth through a number of acquisitions, including a £1.3bn deal in 2022 to acquire Derco, the largest independent automotive distributor in Latin America. I believe this focus on distribution should reduce the cyclicality of this business and support higher margins and returns on capital. However, the market doesn't seem convinced and I would admit that this strategy is not yet fully proven. Let's take a look at today's Q3 update. **Q3 update:** today's update is fairly short but highlights continued organic growth and progress with the integration of Derco. - Q3 total revenue up 35% to £2.8bn (+10% organic growth) - Q3 distribution revenue up 47% (+13% organic growth) - Q3 retail revenue up 2% (+1% organic) Geographically, the company's broad footprint appears to have helped offset the impact of weaker conditions in some countries: - **Americas**: *"growth in the majority of markets, market share gains"*, but *"softer markets in Chile and Colombia"* - **APAC:** *"broad-based growth accross our markets"*, supported by three acquisitions during the quarter - **Europe and Africa:** revenue was supported by order-book unwind in Europe, but *"new consumer demand remains muted across the region"*. This seems to suggest that the outlook may be weaker when backlogs have been cleared. **Outlook:** Inchcape reiterated its full-year guidance, as previously stated with this year's interim results: > "we expect full year results for FY 2023 to be towards the top end of the range of published market consensus" According to the company, this is based on a range of analyst estimates for adjusted pre-tax profit of between £470m and £506m. For what it's worth, consensus estimates for pre-tax profit in SharePad suggest a figure of £503m. This would represent a 35% increase from 2022, albeit boosted by the Derco acquisition, which was partly funded by new shares. Including the impact of dilution, forecasts suggest adjusted earnings of 84p per share this year, a 16% increase from 72p in 2022\. **My view:** These FY23 forecasts suggest Inchcape stock is currently trading on around eight times forecast earnings, with a possible 5% dividend yield. Given the group's historically strong cash conversion, I think this could be an attractive entry point. My main concern is the lack of guidance for 2024\. I think there's a risk that as the supply chain backlog unwinds, underlying demand for new cars might be weaker next year. This could hit Inchcape's earnings. The integration of Derco is another potential concern – it was a big acquisition. However, progress is said to be good so far and has included a 50% reduction in excess inventory, reducing working capital (and freeing up cash). Based on the information available today, I think Inchcape could be attractive at current levels. --- ### Bloomsbury Publishing (BMY) > "our highest ever first half results, with year-on-year revenue growth of 11% to£136.7 millionand profit growth of 11% to£17.7 million" Independent publishing house Bloomsbury is best known as the publisher of Harry Potter, but also has much broader consumer and academic publishing businesses. I last covered this business – which is still led by [founder Nigel Newton](https://www.bloomsbury.com/uk/connect/about-us/our-story/?ref=rolandhead.com) – following [May's full-year results](https://www.rolandhead.com/dividend-notes/a-b-for-this-selection-bme-boy-bmy/). Today's half-year results also look fairly reassuring to me, with a strong set of figures from the consumer business. However, I do have some concerns about the weaker growth of the non-consumer business, which I discuss below. **H1 results summary:** the headline numbers from these results showed continued growth, with revenue up 11% to £136.7m and pre-tax profit up 8% to £14.0m. **Consumer division:** sales in the **consumer** division rose by 17% to £89.4m, supporting a 26% rise in pre-tax profit to £11.0m and a 12% pre-tax margin. That seems respectable, based on [this commentary](https://www.thebookseller.com/comment/the-profits-from-publishing-a-publishers-perspective?ref=rolandhead.com) from a rival UK independent publisher, which suggests an industry-standard target of 10%. In addition to the continued strength of Harry Potter sales, sales of fantasy author Sarah J. Maas rose by 79% due to strong demand for her backlist. All 15 of Maas' titles have been published by Bloomsbury. **Non-consumer division:** Growth was slower in the **non-consumer** division, which publishes academic and professional material. Sales in this division rose by just 2% to £47.3m, while pre-tax profit fell by 21% to £3.6m. This gives a pre-tax margin of 7.6%, somewhat lower than the consumer business. Management say the fall in profits reflects normalised (higher) staffing costs and exchange rate movements. The company also seems to suggest that the somewhat flat sales performance may be linked to a normalisation of US sales after a *"one-off"* boost provided by government funding to encourage digital learning. However, I remain slightly concerned about the strength of organic growth in this business, which has been heavily acquisitive over the last 17 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/bmy-1h24-acquisitions.png) Source: BMY H1 2024 presentation Last year, Bloomsbury reported organic growth of 3% in non-consumer, with the 19% rise in total revenue driven by acquisition contributions. There have been no acquisitions during the current year or the comparative period in 2022 and these interim results show organic revenue growth of just 2%. This lack of organic growth suggests to me that Bloomsbury may be purchasing mature products with limited growth potential. Thus the continued growth of this division may rely on further acquisition spend. **Free cash flow:** Free cash flow for the half year was £0.85m (H1 2023: £4.4m) reflecting some lumpy working capital movement. However, operating cash flow before working capital was up slightly to £20.7m; I do not see anything to worry about here. On a trailing 12-month basis, I estimate free cash flow at £17.4m, reflecting the company's traditional H2 weighting to sales, due to festive shopping. My sums suggest a free cash flow/EV yield of 6.0%, which looks quite reasonable to me. **Balance sheet:** net cash fell by 6% to £39.1m (H1 2023: £42.5m) but given the underlying strength in cash generation, I don't see this as a concern. Bloomsbury's balance sheet looks very strong to me. **Dividend:** Bloomsbury's free cash flow certainly appears to provide comfortable cover for the stock's forecast dividend yield of 3%. The interim dividend was increased by 162% to 3.7p per share, but this is not an outright increase. Management says that to reflect a reduction in seasonality in the group's cash flow, the proportion of the dividend paid following the half-year results has been increased. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/bmy-1h24-interim-divi.png) BMY interim dividend (source: H1 2024 presentation) However, **overall dividend guidance for the full year is unchanged.** Consensus forecasts suggest a total dividend of 12.3p per share for the full year, giving a prospective yield of 3.0%. **Outlook:** guidance for the current year is unchanged: > "we are confident of achieving the Board's expectations for the year ending 29 February 2024" Broker consensus forecasts I can see suggest earnings of 29.4p per share, pricing the shares on less than 14 times forecast earnings. **My view:** on balance, I think this is a decent business with an attractive list and some very attractive star authors, such as J.K. Rowling and Maas. However, I'm not yet completely convinced about the quality of the non-consumer business. At present, this appears to be lower margin and much slower-growing than the consumer business. I accept that the non-consumer offer may in time lead to a high level of recurring subscription revenue and other attractive outcomes. But right now, it seems to be dilutive to the profitability of the wider group. Return on capital employed is not especially high, either. On a trailing 12-month basis, my sums suggest a figure of 13.4%. That's above average, but well below the [22% average of existing dividend portfolio](https://www.rolandhead.com/portfolio/q3-2023-review-buying-shares-and-looking-ahead/). In all honesty, I'm not sure how heavily I should weight my concerns about Bloomsbury. I currently hold Bloomsbury shares in my [systematic SIF portfolio at Stockopedia](https://app.stockopedia.com/content/sif-folio-q-3-review-im-preparing-for-a-recovery-976760?ref=rolandhead.com), but not in my long-term dividend portfolio. I can't shake off a suspicion that the group's profits are reliant on a relatively small number of publications, but I do admire the its long-term growth record and strong dividend history. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! *Disclosure: at the time of publication, Roland owned shares in Inchcape and Bloomsbury Publishing.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Podcasts: how to value companies + QTX, HL, TUNE & KETL URL: https://www.rolandhead.com/podcasts/podcasts-how-to-value-companies-qtx-hl-tune-ketl/ Last updated: 2024-01-10T12:46:08.000Z Over the last month or so, I've recorded some new podcasts with my fellow UK private investors [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com), [Mark Simpson](https://smallcapslife.substack.com/), and [Bruce Packard](https://knowledge.sharescope.co.uk/bruce-packard-2/?ref=rolandhead.com). Some of these podcasts are available through our [premium podcast service](https://privateinvestors.supercast.com/?ref=rolandhead.com), but we've also released a number of new [**free podcasts**](https://www.youtube.com/@fundyourretirement8299/videos?ref=rolandhead.com) to give you a taster of how we discuss UK shares and our different approaches to investing. Here's a roundup of our latest podcasts. **Company valuation**:in this Investor's Round Table podcast, Bruce, Maynard, Mark and myself discuss the thorny issue of how we value companies. Topics covered include our use of price targets (or not!) and how we decide when to sell **(free to listen)** *If you enjoyed this, we also recorded a short round table on how we learned to analyse financial accounts – including book recommendations and our suggestions for other useful tools and resources.* [***You can listen free here***](https://www.youtube.com/watch?v=vEMouW0yois&ref=rolandhead.com)*.* ### Private Investor's Podcast: Quartix Technologies (LON:QTX) This AIM-listed telematics specialist has been a big faller recently due to some disappointing news. Shortly before this happened, Maynard and I recorded a Private Investor's Podcast taking an in-depth look at this interesting business, where founder Andrew Walters has recently returned to take control. We didn't predict the share price crash, but we did discuss some of our concerns, at least one of which has turned out to be a bigger problem than we had thought. Despite these issues, I'm planning to keep an eye on this stock. Historically, cash generation and dividends have been strong, and the company has benefited from sticky customers and high profit margins. If Walters can resolve recent problems, then I think Quartix may still have some attractive qualities – and might be a potential takeover target. **Maynard and I discuss all of these topics – and more – in our Quartix podcast, which is** [**available here**](https://privateinvestors.supercast.com/?ref=rolandhead.com)**.** ### Investor's Round Table: HL, TUNE & KETL In October's Investor's Round Table, Mark, Bruce, Maynard and I discussed three popular stocks that have all suffered big falls over the last year or two. **Hargreaves Lansdown (LON:HL):** this DIY investor fund platform has enjoyed a sudden boost to profits thanks to rising interest rates. With the shares trading at levels first seen more than 10 years ago, we discuss whether Hargreaves is cheap and if this highly-profitable business can return to growth. **Focusrite (LON:TUNE):** this music equipment business was founded by a former Led Zepplin roadie and enjoyed booming sales during the pandemic, as homebound musicians splashed out on new gear. Sales of these core ranges have now flattened out somewhat, but in theory, the return to live music performances should support the growth of some of the group's other brands. With Focusrite shares now trading on just 12 times forecast earnings – despite double-digit profit margins – we discuss whether TUNE's share price slump is offering investors a second opportunity to buy into this founder-led business. **Strix (LON:KETL):** this AIM-listed firm floated in 2017, but it's been around for much longer and is a global market leader in kettle controls – the device that makes your kettle turn off automatically when it boils. As we discussed in the IRT podcast, Strix *should* have been a reliable performer paying healthy dividends. But things haven't quite worked out that way. Acquisitions, new factories, debt, and slowing economic growth have all combined to cause issues. However, management has now promised a renewed focus on strong cash generation and disciplined spending, so there could be some turnaround potential here. In the podcast, Mark explains why he bought some KETL stock after its September results and believes the shares may have fallen too far. **You can listen to this Investor's Round Table podcast** [**here**](https://privateinvestors.supercast.com/?ref=rolandhead.com)**.** --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Q3 2023 review: buying shares and looking ahead URL: https://www.rolandhead.com/portfolio/q3-2023-review-buying-shares-and-looking-ahead/ Last updated: 2023-10-26T21:16:54.000Z Welcome to my latest quarterly review. This update will look at the portfolio's overall performance during the third quarter of 2023\. Subscribers receive [detailed monthly reviews](https://www.rolandhead.com/dividend-newsletters/) of individual company results – this update looks at the portfolio as a whole. I've used the last three months to make some changes to my portfolio, which I discuss below. I've replaced two shares, making all the transactions at the end of the quarter in keeping with my [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/). I'm currently mulling over one further change for this year, but haven't yet made a final decision. If I do decide to go ahead, I'll write it up here for subscribers beforehand. --- ### Q3 2023 portfolio performance The portfolio I'm discussing here is my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/), which is run using my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). This model portfolio was launched on 1 December 2021\. It contains largely the same shares as my personal portfolio, which has been run on a similar basis for a number of years. Here are the performance figures for the third quarter and first nine months of 2023. **Q3 2023:** - Dividend portfolio total return: +2.1% (including **1% dividend income**) - FTSE 100 Total Return index: +2.2% (including **1.2% dividend income**) **9M 2023:** - Dividend portfolio total return: -3.4% (including **3.7% dividend income**) - FTSE 100 Total Return index: +5.5% (including **3.4% dividend income**) This chart shows the portfolio's performance against the FTSE 100 Total Return index since the model portfolio's inception on 1 December 2021\. **Both lines show total return (capital return + dividends):** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/3q23-portfolio-perf-chart-1.png) I'm glad that the model portfolio has returned to breakeven from its starting point in December 2021\. But there's no avoiding the fact that so far, I would have done better to invest the model portfolio in a cheap FTSE 100 tracker fund. I could make all the obvious excuses – war, oil prices, small-cap exposure, inflation, etc – but I think the reality is that it's too soon to be sure whether my approach will pay off. As I'll explain below, I believe my portfolio contains companies that are above-average quality and (mostly) reasonably valued. Over long periods, I hope they'll outperform the index. But there's no guarantee of this, and I may simply have chosen the wrong stocks. Of course, portfolio movements generally mask a much wider range of individual share price movements. Here's how the individual stocks in the model portfolio rose and fell during the third quarter of 2023: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/10/3q23-shareprice-changes.png) 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). The top two movers are the two shares that I sold at the end of the third quarter – see below. All of the remainder were contained within a +/- 15% range for the quarter. In my view, this is fairly unremarkable and is typical of the short-term volatility equity investors need to be able to accept. During this period, it's fair to say that the majority of my shares moved down, rather than up. But given the wider context of rising interest rates and poor investor sentiment, I don't think any of these movements are all that significant. Although one or two companies issued somewhat downbeat results, there were no major problems reported during the quarter. ### Stocks sold during Q3 2023 My [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/) allows me to make up to two changes to the model dividend portfolio each quarter. Unusually, for me, I maxed out this allowance in Q3, selling and replacing two shares. The stocks sold were: [**EMIS Group (LON:EMIS)**](https://www.rolandhead.com/dividend-portfolio/#emis-group) \- the UK competition regulator has finally approved the takeover of software group EMIS by Optum Health Solutions, which is a subsidiary of US healthcare giant **UnitedHealth**. Having held onto my shares in case the bid failed, I decided it was time to release my capital and reinvest it in a new opportunity. ***The model portfolio held EMIS from 01/12/21 to 29/09/23, generating a total return of 54% and an annualised return of 27%.*** [**Concurrent Technologies (LON:CNC)**](https://www.rolandhead.com/dividend-portfolio/#concurrent-technologies)\- as I suggested in my [July update](https://www.rolandhead.com/portfolio/july-23-dividend-portfolio-update-no-drama/), I have decided that this small-cap engineer is no longer a good fit in my model dividend portfolio. Chief executive Miles Adcock may well be doing the right things. I think this could be a much bigger business in the future. But I think the short-term result of Adcock's aggressive focus on growth is that the dividend appears to have been deprioritised and the business is no longer as cash-generative as it was. ***The model portfolio held Concurrent Technologies from 01/12/21 to 29/09/23, generating a total return of -6% and an annualised return of -3%.*** ### New stocks & top-ups To replace EMIS and Concurrent, I bought two new shares at the end of the quarter. Subscribers can find full details of both companies in these reviews, which were published during September: - [A FTSE 250 share I'm buying for dividends and growth](https://www.rolandhead.com/dividend-shares/a-ftse-250-share-im-buying-for-dividends-and-growth/) - [New stock #2: another new share for my dividend portfolio](https://www.rolandhead.com/newsletter/new-stock-2-another-new-share-for-my-dividend-portfolio/) --- ### Model dividend portfolio: financial metrics Stock picking is fascinating and potentially rewarding, but ultimately the only result that matters is the performance of my portfolio. This is one reason why I like to monitor the financial profile of my whole portfolio, as if it was a single company. I find this a useful way to help make sure that I'm staying on track with my process and avoiding style drift. Here's how my quality dividend model portfolio looked at the end of September 2023 (the half-year figures are [here](https://www.rolandhead.com/portfolio/h1-2023-positioning-the-portfolio-for-long-term-growth/)): | **Medianmkt cap** | **TTM ROCE** | **TTM EBITyield** | **TTM FCFyield** | **Net debt/5yravg net profit** | **TTM divyield** | **5yr avgdiv grth** | **F'castdiv yield** | **No. yrsdiv paid** | | ----------------- | ------------ | ----------------- | ---------------- | ------------------------------ | ---------------- | ------------------- | ------------------- | ------------------- | | £1.7bn | 22.3% | 11.9% | 8.5% | 0.3x | 5.4% | 7.4% | 5.5% | 23 | *Data source: SharePad/author analysis 05/10/2023\. Some adjustments were needed; please don't take this as gospel.* **The portfolio stocks' average score in my dividend screen at the end of September 2023 was 70/100.** **Comment:** the portfolio's **forecast dividend yield** increased during the quarter to 5.5% (H1 2023: 5.0%). This was partly due to the changes I made at the end of the quarter, and partly due to falling share prices. I'm happy with this level of yield – I'm not targeting the maximum possible income, as I also want to own shares with the capacity to reinvest earnings for growth. This isn't always the case with the highest-yielding stocks. Looking back across the table, the portfolio's mid-cap bias (**avg mkt cap** £1.7bn) and average **return on capital employed** of more than 20% are largely unchanged from previous periods. The **trailing free cash flow yield** of 8.5% indicates good support, in aggregate, for the portfolio's **trailing dividend yield** of 5.4%. **Dividend growth** over the coming year seems likely to be lower than in recent years. However, I don't think that's surprising, given the impact of the recovery from pandemic cuts and the uncertain economic outlook at present. Reassuringly, the companies in my portfolio have, on average, **paid unbroken dividends for the last 23 years**. Although this may have included some cuts, I believe this track record suggests that there is a strong corporate culture of dividend payments in these firms. That's one of the things I'm looking for. Balance sheets remain strong, in aggregate, with **net debt across the portfolio** averaging less than 0.5 times five-year average net profit. In real terms, I think this is very low. I'm broadly happy with the make-up of the portfolio and am looking forward (hopefully) to a more positive performance over the coming year. As always, thank you for reading and supporting this project. Please feel free to get in touch with any questions or feedback – you can reach me by [email](https://www.rolandhead.com/contact/) or [on X (Twitter](https://twitter.com/rolandhead?ref=rolandhead.com)). Roland Head 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Sept '23 dividend portfolio update: keep going URL: https://www.rolandhead.com/portfolio/sept-23-dividend-portfolio-update-keep-going/ Last updated: 2023-10-25T14:00:21.000Z Welcome to my review of September's news and results from the companies in [my model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Winston Churchill is supposed to have said *"if you're going through hell, keep going"*. I don't think things are that bad for the companies in my portfolio, but many of them are certainly facing headwinds that are holding back growth and profitability. To varying degrees, I think these trends are affecting all five of my stocks that have issued results or trading updates over the last month. The good news is that I believe most of these companies should be well positioned to benefit when external conditions do start to improve. In the meantime, I think all of these businesses remain in decent financial health and are likely to continue paying reliable dividends. ### In this month's report: Here's a summary of the company results covered in this report, with a link to each section: _This post is for paying subscribers only._ ### New stock #2: another new share for my dividend portfolio URL: https://www.rolandhead.com/newsletter/new-stock-2-another-new-share-for-my-dividend-portfolio/ Last updated: 2023-10-07T07:15:29.000Z Welcome back to my weekly newsletter. There's plenty to cover this week, as I've decided to replace a second stock in my portfolio at the end of September. In this update I'll reveal which stock I'm selling and discuss the company I've chosen to replace it. ### 2 new stocks Last week I introduced a new FTSE 250 share I'm planning to buy to replace healthcare software group **EMIS**, which is being taken over. You can read my full write-up here: - [New stock: a FTSE 250 share I'm buying for dividends and growth](https://www.rolandhead.com/dividend-shares/a-ftse-250-share-im-buying-for-dividends-and-growth/) I've also decided to sell and replace a *second* share in the [model portfolio](https://www.rolandhead.com/dividend-portfolio/). This is a more subjective decision. I'm selling because I feel that the company concerned has changed to such an extent that my original investment thesis no longer makes sense. Subscribers can find out the name of the company I'm selling and full details of the AIM-listed company I'm buying to replace it in the section below. As usual, I'll make both of these trades on the final market day of the month, which will be 29 September 2023. 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). _This post is for paying subscribers only._ ### Dividend notes: quality dividends for my watch list - RSW, CHH (20/09/23) URL: https://www.rolandhead.com/dividend-notes/quality-dividends-for-my-watch-list-rsw-chh-20-09-23/ Last updated: 2023-09-26T10:24:36.000Z Welcome back to my dividend notes. In this post I'm looking at two companies that have issued results in the last week or so. I think both of them could potentially be quality dividend stocks, so these comments are an initial marker to help me start tracking these firms in more depth. --- ### Companies covered: - [**Renishaw (LON:RSW)**](#renishaw-rsw)\- a solid set of results from this specialist manufacturer, despite some weakness in the semiconductor sector. I'm impressed by the group's quality and long-term focus and believe the valuation could be coming down to a level that might be attractive. - [**Churchill China (LON:CHH)**](#churchill-china-chh)\- this venerable tableware manufacturer has survived the pandemic and retained its strong position supplying hospitality operators. Cyclical risks are a concern – volumes are down slightly – but I can see plenty to like. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Renishaw (RSW) > "We have seen a steady start to FY2024 and our order book remains solid." This FTSE 250 engineering group specialises in precision measurement equipment and healthcare technology. It's also *"a world leader"* in additive manufacturing, better known as 3D printing. **Company information:** I'm still learning about Renishaw's product range, but I think it's fair to say that the brief summary I've used above probably understates the breadth and sophistication of the group's offerings, which you can read more about [here](https://www.renishaw.com/en/products--32083?ref=rolandhead.com). The business was founded by Sir David McMurty and John Deer in 1973\. Both men remain on the board today as executive chairman and non-exec deputy chairman, respectively. Collectively, the founders control almost 53% of Renishaw shares. This gives them a combined shareholding worth about £1.4bn at current prices. Both are over 80 years old and are – perhaps – due for retirement. But when the pair put Renishaw up for sale in 2021, they failed to find a buyer able to satisfy all of their requirements. These included protecting local employment and the group's UK supplier base – effectively a barrier to cost-cutting or offshoring. The shares traded at £69 when the sale attempt was announced and £50 when it was scrapped. Today they're changing hands for less than £37 – a level first seen in 2017 – despite continued profit growth. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/rsw-shareprice-profit-210923.png) I'm interested to see if this share price decline has opened up some value in what appears to be a high-quality business. That's the background – let's take a look at Renishaw's results for the year to 30 June 2023, which have just been released. **FY2023 highlights:** Revenue rose by 3% to £688.6m last year, although this represented a 1% fall at constant exchange rates. Pre-tax profit for the half year was flat at £145m, while reported earnings were down 3% at 159.7p per share. The group ended the year with net cash of £206m (FY22: £253m) following £74m of capital expenditure (FY22: £30.8m), including a new production facility in Wales. **Profitability/cash flow:** Renishaw's key quality metrics remained fairly strong last year, but were lower than in FY22 and – on the whole – slightly below medium-term average levels: - Operating margin: 19.5% (FY22: 21.3%) - Return on capital employed: 15.8% (FY22: 18.3%) - Free cash flow: £14.6m (FY22: £84.3m) I don't see this dip as a big concern; this is a cyclical business with exposure to some sectors that have slowed, notably semiconductors. By continuing to invest for growth, Renishaw should be well positioned for the next upturn. **Dividend:** the dividend was lifted 5% to 76.2p per share, giving a trailing yield of 2.1%. That's lower than I'd want. But this dividend increase extends a growth streak that stretches back at least 30 years and has only been interrupted twice – briefly – by the great financial crisis and the pandemic: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/rsw-dividends-200923.png) **Trading commentary:** management say the main weakness in last year's results was in the semiconductor sector, where there was weaker demand for optical encoders in the Asia Pacific region. Elsewhere, there was *"good growth"* in sales of products such as the group's high-end 3D printing machines and *"5-axis co-ordinate measuring machine (CMM) inspection systems"*. Overall, sales from manufacturing technology product lines rose by 2% to £648.2m. In the smaller healthcare business, revenue from analytical instruments and medical devices rose by 10% to £40.3m. This included record sales for spectroscopy products. **Outlook:** chief executive Will Lee seems to expect more of the same in FY2024: > "We have seen a steady start to FY2024 and our order book remains solid. We continue to see positive trends for investment in low emission transportation, defence, additive manufacturing and robotics. Meanwhile, demand from semiconductor equipment suppliers for position encoders remains subdued." Broker forecasts ahead of these results suggested a modest improvement in earnings and the dividend over the coming year. These forecasts price the stock on 21 times forecast earnings, with a 2.2% yield. That's well below the valuation seen in recent years, but is broadly in line with the longer-term average P/E for Renishaw, according to SharePad. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/rsw-pe-210923.png) #### My view My initial impression is that Renishaw is a high-quality British engineering company, with much to recommend it as a long-term investment. The balance sheet looks extremely strong to me and the group's pension deficit has now been eliminated, with no more payments expected for the foreseeable future. In valuation terms, the shares aren't obviously cheap, but the valuation is certainly far more reasonable than it's been for a number of years. My sums suggest the stock is trading with a trailing EBIT/EV yield of around 5.5%. That's at the lower end of the range I'd look for, but it's not outrageous. Renishaw's balance sheet is free of goodwill and intangibles and backed by plenty of owned assets, so this suggests another possible approach to valuation. Historically, the shares have often performed well when their valuation has dropped to less than three times net asset value: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/rsw-sp-pnav-200923.png) By my reckoning, 3x NAV would be equivalent to a share price of just under £35, based on these results. Although the near-term outlook remains uncertain, I think the shares could be interesting at this level on a long-term view. However, one caveat to this is that Renishaw's return on equity has only averaged about 15% over the last couple of years. Buying a share at 3x NAV with a return on equity of 15% is equivalent to buying a return on equity of 5%. To get a satisfactory return from £35, I think we'd still need to see an improvement in profitability (or a lower valuation). Renishaw has certainly provided me with food for thought. I can see plenty to like here and have added the stock to my watch list. 💡 ****Podcasts for private investors!** Enjoy in-depth discussions on UK shares with Maynard Paton, Bruce Packard, Mark Simpson and myself. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) --- ### Churchill China (CHH) > "despite some market headwinds the Group is in a good position to meet the Board's profit expectations for the full year." Churchill China is another [British manufacturer](https://www.churchill1795.com/our-history?ref=rolandhead.com), specialising in tableware for the hospitality sector. The pandemic and subsequent supply chain crisis caused some disruption, but the firm's recent interim results suggest to me that the business is steadily returning to normal. Fortunately, Churchill's historic habit of maintaining a net cash balance sheet means that it's been able to negotiate this difficult period without any financial difficulty and has now returned to dividend growth, versus pre-pandemic levels. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/chh-divps-net-debt-200923.png) **H1 highlights:** revenue for the half year rose by 6.3% to £44m, while operating profit rose by 39% to £4.9m due to a 3% improvement in margins as labour efficiency measures bedded in. The company had recruitment problems last year and had to rely more heavily on inexperienced agency staff. As this situation normalises, productivity is improving and wastage is reducing. Management say that revenue from the hospitality sector rose by 9.2%, despite some weakness in volumes *"due to the general macro-economic climate"*. A focus on higher-margin value-added products is helping to offset this. Net cash was £9.9m at the end of the period (FY22: £14.7m), reflecting an increase in stock levels to meet demand and support a return to normal service levels. Operating margin for the half year was 10.2% (H1 2022: 9.6%), while my sums suggest a return on capital employed of 17.6% for the trailing 12 months. While this business clearly has some cyclical exposure, I'm impressed by the average levels of profitability achieved over the last 30 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/chh-roce-opmargin-200923.png) **Dividend:** the interim dividend has been increased by 4.8% to 11p per share. Broker forecasts suggest a payout of 36p (+14%) for the full year, which gives a prospective yield of 2.8%. **Outlook:** the company expects to report further improvements in profitability and is hoping to move towards levels *"that were evident prior to the pandemic"*. However, management warn that rising interest rates *"will naturally have an impact on consumer discretionary spend and therefore impact out markets"*. Despite this, expectations for the full year are unchanged: > "Overall, the Group is in a good position to meet the Board's profit expectations for the full year." Broker forecasts suggest earnings of 74p per share and a 36p dividend in 2023\. This prices Churchill stock on about 18 times forecast earnings, with a 2.8% yield. #### My view Given this company's long history of above-average profitability and continued growth, I think a modest valuation premium may be justified. The stock does not look overly expensive to me, based on the trailing EBIT/EV yield of 7.6% – considerably cheaper than Renishaw, above. This business offers a simpler and easier to assess investment case than Renishaw, too, I think. My only real reservation here is that the economic outlook could yet turn out to be weaker than expected. It's worth remembering that volumes fell during the first half of this year. Further weakness could slow Churchill's recovery and leave the shares looking a little expensive at current levels. Even so, I can see plenty to like here. I've added Churchill to my watch list as well. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: buying £1 for 70p? BOOT (19/09/23) URL: https://www.rolandhead.com/dividend-notes/buying-1-for-70p-boot-19-09-23/ Last updated: 2023-09-21T07:46:04.000Z Welcome back to my dividend notes. Today I've taken a look at the latest numbers from a small-cap property company that I think could offer value at current levels. --- ### Companies covered: - [**Henry Boot (LON:BOOT)**](#henry-boot-boot)\- this family-owned property group has an impressive 135-year track record and looks fairly safe and reasonably valued to me. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Henry Boot (BOOT) *"an increase in NAV of 3%, plus the confidence to grow our interim dividend by 10%*" This quote sums up some of the appeal for me of this family-owned property group. With a £270m market cap, Henry Boot is one of the smaller listed players in this market. But it's been in business for 135 years, and I think it has an impressive record of value creation for long-term shareholders. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/boot-dps-navps-190923.png) Henry Boot's business is divided into [three core divisions](https://www.henryboot.co.uk/our-businesses/?ref=rolandhead.com): - **Land Promotion:** the company buys land, gains permitting and then sells it on for a profit, mostly to housebuilders. The current land bank is sizeable, with 97k plots, of which 8.3k are permitted; - **Property Investment & Development:** commercial property and housebuilding projects, including sales and lettings; - **Construction:** property construction, plant hire and road building. Boot's half-year results cover the six months to 30 June 2023 and seem quite respectable to me, given current market conditions. Revenue for the half year rose by 24.5% to £179.8m, driven by land sales and housing completions. However, a sharp rise in input cost inflation appears to have contributed to a slump in profit. The group's gross margin fell from to 22.7% (H1 2022: 30.4%). When paired with a 12% increase in operating costs (presumably energy and wages), this caused Boot's pre-tax profit to fall by 36% to £25.0m (H1 2022: £38.8m). Management says that *"build cost inflation started to moderate"* during the first half, falling from 10% in 2022 to 8%. Hopefully this means margins will stablise in H2. **NAV/debt:** Net asset value rose by 2.6% to 303p during the half year. This was achieved despite an increase in net debt to £70.8m (Dec 2022: £48.6m), reflecting spending on committed developments. Boot shares are trading at 203p at the time of writing, giving a potential discount of 33% to NAV of 303p. **Dividend:** the interim dividend was increased by 10% to 2.93p per share. This is consistent with broker forecasts for a full-year payout of 7.3p, covered 2.5 times by earnings. At the time of writing, this gives Boot shares a forecast dividend yield of 3.6%. **Profitability:** I was pleased to see return on capital employed mentioned frequently and conspicuously in the results. ROCE in H1 2023 was 6.3%, but the full-year figure for 2023 is expected to be at the lower end of the group's medium-term target range of 10%-15%. ROCE of 6% is obviously not that impressive. But the fact this metric is used publicly as a KPI reflects well on management, in my view. Moreover, I think the group's medium-term target looks credible, based on past performance: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/boot-roce-190923.png) **Pension:** Boot appears to have a substantial final salary scheme, as might be expected. Recovery contributions have fallen to £1.2m annually, but the scheme seems to have suffered badly from rising interest rates. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/boot-1h23-pension-chart.png) Source: Henry Boot H1 2023 presentation I'd want to understand a little more before investing, although I don't think there's a problem here. **Outlook:** chief executive Tim Roberts paints a mixed picture of the outlook: > "our focus on prime strategic sites, high quality development and premium homes has provided us with a degree of resilience." However, the outlook remains uncertain: > "Whilst uncertainty in our markets has increased, we believe we have enough momentum to carry us through the year, although the outlook for 2024 for the time being is not so clear." There's no change to guidance for the full year, suggesting that Henry Boot could report earnings of 18p per share and pay a 7.3p dividend this year. That's equivalent to a forecast P/E of 11, with a 3.6% yield. When paired with the stock's c.30% discount to NAV, this rating does not look expensive to me – see below. #### My view The short version of this update is that over the last 20 years, this family-owned property group has tended to be a good buy when its share price has fallen below net asset value: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/boot-sp-navps-190923.png) Of course, past performance is not a guide to future returns. Even if I'm right, market conditions may get worse before they start to improve. I'd want to dig a little deeper before considering this share as an investment, but given Boot's long track record of profitability and value creation for shareholders, I can see plenty to like at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### New stock: a FTSE 250 share I'm buying for dividends and growth URL: https://www.rolandhead.com/dividend-shares/a-ftse-250-share-im-buying-for-dividends-and-growth/ Last updated: 2023-09-30T07:44:50.000Z I'm looking for a new stock for my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) to replace healthcare software group EMIS, where a [takeover bid is finally going through](https://www.rolandhead.com/email/7aac6922-8543-4527-9e76-e6c924a644cd/) after some delays. I'm planning to sell the model portfolio's EMIS shares at the end of September and will replace them with this new stock. The company I've chosen was founded in the 1980s and has become a market leader in its sector, gradually expanding into Europe and the US. I think it has an excellent track record of growth and profitability. The dividend hasn't been cut since 1998 and its shares have risen by 300% over the last 10 years alone: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/anon-dividends-sp-150923.png) Although the shares aren't *quite* as cheap as I'd like them to be right now, I still believe the combination of value, quality and growth that's on offer is compelling. In addition I think there's a good chance of a substantial additional capital return over the next 12-18 months, in addition to the ordinary dividend. I also believe this company has the potential to continue growing, despite near-term economic headwinds. I'll be adding this share to my dividend portfolio at the start of October, in line with my usual quarterly trading schedule. 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). _This post is for paying subscribers only._ ### Dividend notes: FTSE 250 shares that are too cheap? RDW, ASHM (14/09/23) URL: https://www.rolandhead.com/dividend-notes/ftse-250-shares-that-are-too-cheap-rdw-ashm/ Last updated: 2023-09-19T19:13:33.000Z Welcome back to my dividend notes. Today I'm looking at two fairly unloved FTSE 250 shares. They're facing tough cyclical conditions at the moment, but I think there are good reasons to be more optimistic about the medium-term outlook. --- ### Companies covered: - [**Redrow (LON:RDW)**](#redrow-rdw) \- profits are expected to halve this year, but this upmarket housebuilder looks in good health and fairly cheap to me, on a cyclical view. - [**Ashmore (LON:ASHM)**](#ashmore-ashm)\- I think the 8.8% dividend yield may remain supportable, if the emerging markets asset manager can stem the tide of outflows. There are less risky options elsewhere, but the high yield looks tempting to me. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Redrow (RDW) > "as we go into 2024 the market remains challenging and uncertain" Full-year results from this housebuilder appear reassuring at first sight, but the firm's management expect profits to halve over the coming year. **Full-year results highlights:** as we've seen elsewhere, housebuilders have been running off their order books this year and converting these backlogs to cash. This has led to some surprisingly strong results. Redrow is a good example of this. Revenue for the 52 week to 2 July 2023 was almost unchanged at £2.13bn, with underlying pre-tax profit down just 4% to £395m. Price rises helped offset the impact of rising costs. The average selling price on private homes rose by 8%, with affordable home prices up by an average of 5%. The company says the average price of its flagship Heritage Collection homes rose by 9% to £473,300\. My sums suggest that the average price of one of the firm's affordable homes was c. £176k. A *"very selective"* approach to land buying helped to boost cash conversion. I reckon Redrow generated £155m of free cash flow last year. That's equivalent to a free cash flow yield of about 9.5%. Return on capital employed for the year was a creditable 18.2%. Redrow's year-end balance sheet shows net cash of £235m and a net asset value of £2,026m, or 612p per share (FY22: 554p). That's a discount of around 20% to the last-seen share price of 503p. **Dividend:** a final dividend of 20p per share takes the total FY23 dividend to 30p. However, this payout is expected to fall in FY24. **FY24 guidance/outlook:** last year's strong performance is not likely to be repeated during the current year. Redrow's **order book** fell by 41% to £0.85bn last year. Profits are expected to **halve** this year, *"based on a sales rate in line with FY23 of 0.46 \[homes\] per outlet per week"*. Sales during the first 10 weeks of the financial year have only averaged 0.34 per outlet per week, but this figure is presumably expected to improve. Management guidance for the 2024 financial year is as follows: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/rdw-fy24-guidance-140923.png) Source: Redrow FY 2023 results On this basis, Redrow shares are trading on 12 times forecast earnings, with a 2.8% dividend yield. #### My view I think Redrow's net cash position and discount to book value are probably a more meaningful guide to its valuation than cyclically-depressed annual earnings. Historically, buying Redrow shares at a discount to book value has worked well: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/rdw-shareprice-navps-140923.png) Although I can't rule out the possibility that market conditions will worsen – especially in terms of volumes – the shares look decent value to me at the moment, given the strength of the balance sheet. Founder Steve Morgan remains a 17% shareholder, so I imagine he'll ensure that management remain careful stewards of the business he built. However, Redrow's depressed dividend yield means that for me, there are better options elsewhere in this sector. For example, the housebuilder I own in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) is expected to deliver a 5%+ yield over the coming year. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Ashmore (ASHM) > "Ashmore has delivered meaningful investment outperformance for clients this year and momentum is building as the recovery in Emerging Markets continues." How should active asset managers compete against the rising tide of passive investing? Specialisiation seems the obvious answer to me, and emerging markets specialist Ashmore has always followed this path. The company is still led by founder Mark Coombs, who also has a 31% shareholding. Results for the year to 30 June 2023 show that Ashmore's investments outperformed the market last year, with a *"positive performance of $3.4bn"* on year-end assets under management (AuM) of $55.9bn (FY22: $64.0bn). Unfortunately, *"de-risking"* by clients resulted in net outflows of $11.5bn, limiting Ashmore's ability to deliver a recovery in earnings. Net outflows means lower fees, which are usually charged as a percentage of AuM. Given this backdrop, last year's results do not seem especially bad to me. Revenue fell by 24% to £195.4m, reflecting a 23% fall in AuM. However, pre-tax profit of £111.8m was only 6% lower than the prior year, thanks mainly to a rise in interest income and a reduction in bonus costs. Cash generation remained good, albeit down on the prior year. The company says an operating profit of £77.4m was converted into £111.6m of cash from operations. The equivalent figures for FY22 were £119.2m and £182.1m. The group's year-end cash balance was £478.6m (FY22: £552.0m). Although I'd imagine that some of this cash is required for regulatory purposes, Ashmore's cash generation suggests to me that a dividend cut may yet be avoided. **Dividend:** Ashmore's dividend was maintained at 16.9p per share last year, giving the stock a **dividend yield of 8.8%**. My sums suggest the payout will cost around £120m, so it should largely be covered by last year's cash generation. I estimate that Mr Coombs' share of the dividend is c.£37m per year, so I imagine he'll be reluctant to cut the payout while it remains supportable. Ashmore's dividend has not been cut since its flotation in 2006, but growth has been minimal since 2015, as earnings have stagnated: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/ashm-divps-eps-140923.png) **Outlook:** Ashmore's results commentary each year generally includes a bullish outlook statement from Mr Coombs. Even so, I think Ashmore's outperformance against its benchmarks last year may provide some justification for his confidence about the outlook for the year ahead: > "Some investors remain cautious, but client activity levels are increasing and the combination of positive performance and attractive valuations available across Emerging Markets should drive capital flows over the medium term, as has occurred after previous down cycles." Broker forecasts suggest a 6% increase in earnings to 13.1p per share this year, with an unchanged dividend. That puts Ashmore on a P/E of 15, with a chunky 8.8% dividend yield. #### My view I don't know whether Ashmore will be able to attract new client inflows and stage a recovery in AuM this year. But my general impression of this business is that it's fairly good at what it does. For much of the last decade, Ashmore generated 20%+ returns on equity and operating margins in excess of 60%. So a return on equity of c.10% in each of the last two years is a disappointment. However, this business remains profitable and appears to be well capitalised. In my view, the dividend is only slightly stretched at present. With the shares trading at post-2009 lows, I can't help feeling that Ashmore shares are probably cheap at current levels. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/ashm-chart-all-140923.png) 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: safe as houses? BKG, MBH (12/09/23) URL: https://www.rolandhead.com/dividend-notes/safe-as-houses-bkg-mbh/ Last updated: 2023-09-19T09:40:49.000Z Welcome back to my dividend notes. Today's update covers reassuring recent updates from two construction sector businesses (one of which is a customer of the other). **Podcast update:** before we get started, I just want to take this opportunity to mention a new [podcast service](https://www.rolandhead.com/podcast/) I'm contributing to that may be of interest. Earlier this month I took part in two new podcasts with my fellow private investors [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com), [Bruce Packard](https://knowledge.sharescope.co.uk/bruce-packard-2/?ref=rolandhead.com) and [Mark Simpson](https://smallcapslife.substack.com/). In the [**Investor's Roundtable Podcast**](https://privateinvestors.supercast.com/?ref=rolandhead.com) the four of us covered: - Asset manager **Liontrust #LIO** (which offers an 11% dividend yield at the time of writing); - Translation specialist **RWS Holdings #RWS** (which I recently covered [here](https://www.rolandhead.com/dividend-shares/is-dividend-share-rws-holdings-an-ai-bargain/)); - Retailer **Quiz #QUIZ** (which has since issued a profit warning – we discussed some possible warning signs); - Vaping distributor **Supreme #SUP**. We also spent time discussing our views on share tips, 'finfluencers' and the approaches each of us uses to help find new shares to buy. Meanwhile, in the September's episode of the [**Private Investor's Podcast**](https://privateinvestors.supercast.com/?ref=rolandhead.com), Maynard and I took an in-depth look at family-controlled property business **Mountview Estates #MTVW**. This landlord has a niche business that's supported an unbroken dividend record stretching back more than 40 years. We considered the pros and cons of Mountview's business model ... and talked about hidden value, family disputes, and the best-buy price we'd pay to buy Mountview shares today. You can listen to these podcasts – and our other discussions – through the [Podcasts for Private Investors service](https://privateinvestors.supercast.com/?ref=rolandhead.com). --- ### Companies covered: - [**Berkeley Group Holdings (LON:BKG)**](#berkeley-group-bkg) \- this reassuring trading statement reiterates previous guidance and confirms my view that Berkeley remains one of the best-run UK housebuilders. - [**Michelmersh Brick Holdings (LON:MBH)**](#michelmersh-brick-holdings-mbh)\- solid half-year numbers reassured me, while an informative half-year results call helped to expand my knowledge of this sector and provided further encouragement. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Berkeley Group (BKG) > "Berkeley re-affirms its earnings guidance to deliver pre-tax profits of at least £1.05 billion across the current and next financial years" I last covered FTSE 100 housebuilder Berkeley Group in June, when it [published full-year results](https://www.rolandhead.com/dividend-notes/cheap-cyclical-stocks-hfd-bkg/). These looked reassuring to me and demonstrated the financial strength and reliable returns I've come to associate with this business. Last week's trading update covered the four-month period from 1 May to 31 August and contained further reassurance. **Guidance reaffirmed:** Berkeley reiterated its previous earnings guidance for pre-tax profit of at least £1.05bn across FY23 and FY24\. The only potential note of uncertainty, if I'm being picky, is that this is *"likely to be weighted slightly to FY24"*. Net cash at the end of October 2023 *"will be around £325 million"*. **Trading commentary:** the group competes at the mid-upper end of the market and appears to have managed a fairly resilient sales performance. Berkeley says that more than 90% of FY24 revenue is already exchanged. Cash due on forward sales is expected to be *"around £2 billion at 31 October 2023"*. The company says that *"enquiries have stayed at similar levels over the last four months"*. However, the value of underlying private sales reservations is 35% below last year's rate, *"reflecting the elevated macro-economic and political volatility"*. Pricing is said to remain *"resilient"* thanks to the *"constrained supply of both new-build and second-hand homes to the market"*. Build cost inflation is now said to be *"at negligible levels"*. **Market commentary:** like several other housebuilders recently, Berkeley used its trading statement to have a dig at the state of the planning system and lack of clear government policy on housebuilding: > "The complexity and protracted nature of the current planning system and lack of clarity surrounding certain regulatory changes affecting our sector, at a time of considerable uncertainty for the UK economy with persistent high inflation and interest rates, continues to deter investment into brownfield regeneration and the wider housebuilding sector. " Berkeley says it has not acquired any new land so far in the current financial year and will only invest *"very selectively"* in new opportunities. **Dividend/buybacks:** the company says it's on track to deliver the next annual shareholder return of £282.7m (266p per share) by 30 September 2024\. However, this will be through a combination of buybacks and dividends – with only 66p guaranteed to be through dividends (equivalent to a 1.6% yield at current levels). #### My view Management say they remain focused on delivering a *"sustained pre-tax return on equity of 15% through the cycle"*. Berkeley's track record of timing market cycles is better than many of its rivals. I rate the firm highly and always take note of the company's commentary on market conditions. This business has achieved a post-2009 average return on equity of just under 20%, according to SharePad. Meanwhile, the shares are trading on less than 10x 10-year average earnings with a trailing free cash flow yield of 10%. I think Berkeley shares look reasonably priced at the moment. My only reservation is that while shareholder returns remain generous, the dividend yield could be quite low, depending on the split between buybacks and dividends. I prefer dividends, but I do recognise that if a business is genuinely trading cheaply with surplus cash, buybacks can provide superior results for shareholders. This could apply here, in my view. Incidentally, my fellow private investor and Stockopedia co-writer Graham Neary is a big fan of buybacks. He says he often prefers them to dividends – something he explains in [this new podcast](https://www.fundyourretirement.com/podcasts/fyr074-graham-neary-on-running-a-concentrated-portfolio-uk-vs-us-averaging-down-fixed-income/?ref=rolandhead.com) (below). It's a good listen with some great insight and ideas – I think it's well worth a few minutes of your time: --- ### Michelmersh Brick Holdings (MBH) > "on track to meet full year expectations" AIM-listed Michelmersh specialises in producing premium bricks and related products under a range of brands. Upmarket housebuilder Berkeley – above – is said to be a customer, but Michelmersh says it doesn't generally sell to cheaper mass-market builders. This premium positioning helps to differentiate Michelmersh. I suspect it could support the group's trading over the coming months. Michelmersh's issued half-year results on 5 September, but the company held a call for retail investors on the Investor Meet Company platform on the 8th, which I listened into. I found this filled in some of the gaps in my knowledge of the business and confirmed my favourable view of management – co-CEOs Peter Sharp and Frank Hanna are both clearly very experienced in this sector. I've included some of my notes from the call below, but first, here's a quick summary of Michelmersh's half-year results. **H1 financial highlights:** the company describes a *"resilient performance"* in H1\. I think that's a fair description, based on the numbers. Although higher costs did have an impact on margins, profitability remains within historical norms and is now expected to have stabilised. - Revenue up by 23.5% to £42.0m (+10.3% organic, plus acquisition contribution) - Operating profit up 7% to £6.1m - *Operating margin: 14.5% (H1 2022: 16.7%)* - Earnings per share up 7.8% to 5.0p - Net cash up 19% to £11.8m - **Interim dividend** up 15.4% to 1.5p per share My sums suggest a trailing 12-month operating margin of 15.7%, with a return on capital employed of just over 11%. Those seem respectable numbers to me, for a fairly capital and energy-intensive sector. **Outlook:** guidance for the full-year was unchanged. Consensus forecasts suggest earnings of 10.1p per share, with a 4.3p per share dividend. That puts Michelmersh on a P/E of nine, with a 4.8% yield. That looks pretty reasonable to me, given the apparently stable outlook. **Interim results presentation notes:** I've included below a selection of notes I made on the IMC presentation. These were mostly points that helped flesh out my understanding of the business and the brick sector. These notes were made as I was listening to the call, so may contain errors – please DYOR. The presentation is available for replay on the [IMC platform](https://www.investormeetcompany.com/?ref=rolandhead.com) for anyone who is interested (free registration). *My comments in italics.* - Michelmersh generally aims to **hedge 90% of energy costs** over the year ahead - The company stuck to its planned schedule of price increases last year, giving customers confidence and clear visibility; mgt believe this **aided order intake** - Tangible net assets are revalued every year, so the fixed assets listed on the balance sheet should be realistic – *the latest balance sheet shows a *tangible net asset value of £65m*, versus a market cap of £84m.* - **UK brick stocks** reached a five-year high of 475m in June – *a sign of easing demand?* For context, 2.5bn bricks are said to be equivalent to c.200k housing starts. - Management say the UK has seen a 30% **contraction in construction activity** since the end of the year. - Most UK brick manufacturing capacity is for wire cut bricks, including new capacity coming on stream (e.g. Ibstock, Forterra) - **Brick imports** have fallen from 21% to 18% of UK market share this year - but UK manufacturers have limited ability to meet demand for stock bricks (soft mud, made in moulds). The shortfall tends to be imported from BE/NL, so imports are likely to persist even in a construction slump – *I hadn't previously realised this, I assumed imports would dry up and domestic supply would be preferred, but this appears to be incorrect.* - Michelmersh benefits from import demand as it owns the [Floren](https://www.floren.be/en?ref=rolandhead.com) business in Belgium, which exports c.45% of production to the UK - Focus on *"medium to upper end"* of housing market means that mortgage problems affecting mass-market housing aren't having the same impact on Michelmersh customers/end buyers. - Re. **bad debt risk** from contractors failing: Michelmersh sells through distributors, not direct to developers. Credit insures all accounts, very tight control on receivables - quotes from co-CEO Frank Hanna: > "insuring to the hilt" > "very good at collecting our cash" - Hanna also said that he thinks the RAAC concrete problems could end up being *"a Grenfell-type issue"*, potentially creating medium-term opportunities for brick suppliers. #### My view I often find that listening to company presentations is a good way to flesh out my knowledge of a company/sector and gain some insight into its management. With so many presentations now available online (plus transcripts and slide sets), this is much easier for private investors than it used to be. I already had a positive view on Michelmersh, but the presentation strengthened this and provided some useful additional understanding of the UK brick market. Despite this, it's worth pointing out that a construction materials firm isn't without risk at this stage in the cycle. In my view, this business is also unlikely ever to become a compounder, due to the capital intensity of its operations. However, Michelmersh has a strong balance sheet and its shares look reasonably priced to me. I also have a positive impression of management. I can see plenty to like here. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! *Disclosure: Roland owned shares in Kitwave at the time of publication.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: back on the road? DLG, BLV (07/09/23) URL: https://www.rolandhead.com/dividend-notes/back-on-the-road-dlg-blv-07-09-23/ Last updated: 2023-09-12T17:53:03.000Z Welcome back to my dividend notes. Today I'm looking at a troubled former holding that may be on the road to recovery – and an impressive performer in the property sector. ### Companies covered: - [**Direct Line Insurance Group (LON:DLG)**](#direct-line-insurance-dlg)\- I suspect the worst is over for this troubled insurer, but the company has had to sell some attractive assets in order (I suspect) to avoid an equity fundraising. - [**Belvoir (LON:BLV)**](#belvoir-blv)\- a solid set of half-year results show remortgaging and letting income picking up the slack from lower property sales. A decent business at a fair price, in my view. **Tip:** to search for my previous coverage of a company, enter its ticker code into the search tool at the top of this page. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Direct Line Insurance (DLG) > "Looking forward, the improved Motor margins now being achieved should provide a platform to support an improvement in operating profit into 2024." This troubled FTSE 250 insurance group ([a former holding of mine](https://www.rolandhead.com/dividend-shares/should-i-sell-my-direct-line-insurance-shares/)) has released half-year results. Direct Line says that gross written premium for the six-month period rose by 9.8% to £1,615.2m. However, the group reported a pre-tax loss of £76m, as last year's underpriced motor policies continue to drive underwriting losses. This is reflected in Direct Line's Solvency Capital ratio, remains slightly below target levels at 147%. These results highlight two problems – **capital strength** and **motor losses** – which acting chief executive Jon Greenwood says are his top priorities this year. He's now confident that fixes for both of these issues are in place and should start to deliver results from H2 onwards. ***Capital strength:*** DLG's solvency ratio of 147% (a regulatory measure of surplus capital) is at the bottom of the group's target range of 140%-180%. I think it's too low to safely support dividend payments. *For contrast, rival *Admiral* had a ratio of 182% at the end of June.* To address this problem, Greenwood has agreed the **sale of the majority of Direct Line's commercial insurance business**. Direct Line has agreed to sell its brokered commercial insurance business to RSA Insurance for £520m. This is expected to add a around 45% percentage points to the group's solvency capital ratio, potentially lifting it to around 190%. The businesses being sold provide a comprehensive range of commercial insurance for UK businesses under the NIG brand, and specialist insurance for farmers under the FarmWeb brand. These policies are sold through brokers rather than directly, so on this basis the company says the business is non-core. Perhaps. But the sale also means that one of the strongest-performing parts of the business in recent years will be lost. The operations included in the disposal generated a pre-tax profit of £43m last year. This accounts for the majority of the £58m operating profit reported under the Commercial segment in 2022. All that will be left of Commercial business are the group's direct sales to small business customers under the Direct Line and Churchill brands. **Comment:** The decision to sell the Commercial business is a pragmatic solution. It's allowed Direct Line to avoid a rights issue or placing, which I suspect would have been needed otherwise. However, I think DLG is losing a decent business with good growth potential. Expansion into commercial insurance has also helped to diversify the group away from the mature and highly-competitive UK motor insurance market. ***Motor profitability:*** Direct Line was caught on the hop by inflation last year and consistently underpriced its Motor policies. Investments in IT and underwriting in recent years failed to deliver hoped-for improvements in pricing ability and margins last year. Big operating losses in 2022 and H1 2023 are primarily the result of these problems. Greenwood says that he has been spending (even) more on IT and adding operational expertise to the business. He's now confident that new Motor policies are being written profitably, consistent with the group's targeted 10% net insurance margin. Pricing has been increased with *"significant rate increases"* over the half year, such that motor renewal premiums have increased by an average of 25%. The impact of these price increases will take a while to filter through, but is expected to support a stronger operating profit in 2024. **Comment:** this isn't the first time the company has told us that motor margins have been restored. But I suspect that the problems probably have been fixed this time. Direct Line remains one of the largest motor insurers in the UK. While I have some concerns about the strength of its direct model versus price comparison, I still think it should be a decent business. **Dividends:** unsurprisingly, the board has not declared an interim dividend. Management say that while the sale of the commercial business should be sufficient to repair the balance sheet, they plan to wait until the Motor business is generating surplus capital before resuming dividend payments. This makes sense to me. The motor business drives the majority of profits and is crucial to the success of the group. Dividends should primarily be funded with surplus capital generated by this core business, in my view. **Outlook:** operating profit in 2023 is expected to be *"adversely affected"* by last year's Motor business. Claims inflation is expected to be in line with expectations, but Direct Line doesn't expect to be able to release much cash from prior-year reserves due to the impact of inlation. Broker forecasts ahead of today's results suggested earnings of 14.5p per share in 2023\. That puts the stock on 12 times forecast earnings at 175p. It's not clear to me if forecasts are likely to change after today's results. #### My view I suspect the worst is now over for Direct Line and shareholders can (probably) look forward to a gradual recovery in profitability. However, the fixes to the Motor business have not yet been proven. I also continue to have concerns about Direct Line's ability to deliver growth in such a mature and competitive sector. The disposal of the majority of the commercial division means that the group is now even more dependent than previously on the motor insurance market. This partially reverses previous efforts to diversify into higher-growth markets. An experienced new chief executive has been appointed and will start work early next year. I plan to revisit the shares when he's in role and look forward to learning more about his plans. --- ### Belvoir (BLV) > "the Group is trading comfortably in line with management's expectations for the year ending 31 December 2023" Belvoir is currently one of the higher-scoring stocks in my [dividend screening](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) results, so I wanted to take a brief look at the latest numbers from this estate agency group. In common with most other large chains in this market, Belvoir's rising **letting income** is helping to offset the impact of slowing **property sales**. The company's half-year numbers reveal that revenue rose by 3% to £15.9m, with management service fees from franchisees rising by 4% to £5.5m. This increase was driven by an 8% rise in lettings income, offsetting a 9% drop in fees from property sales. **Financial services** is also emerging as an important driver of growth, with revenue up by 11% to £8.6m during the six months. Remortgaging demand is helping to offset a reduction in new purchase mortgages. Overall, lettings generated 58% of the group's gross profit for the half year, with 15% from sales and 21% from financial services (H1 2022: 60%, 17%, 19%). Pre-tax profit for the half year rose by 10% to £4.4m, with earnings up 3% to 9.0p. Belvoir reported net cash of £387k at the end of the half year, compared with a net debt position of £2.5m one year earlier. My sums suggest a half-year operating margin of 26.9% and a trailing 12-month return on capital employed of 22.8%. Both are very respectable figures, in my view. **Dividend:** the interim dividend has been increased by 25% to 5.0p per share. This is consistent with broker forecasts for a full-year payout of 11p, giving a prospective yield of 4.7%. **Outlook:** chief executive Dorian Gonsalves remains confident about the outlook for the full year: > "Current pipelines of agreed sales, the level of written mortgage business, ongoing excess demand for rental properties and the incremental revenue from the two recent acquisitions underpin the Board's confidence in Belvoir'sperformance for the second half of the year." Broker forecasts suggest earnings of 17.1p per share for 2023, pricing the shares on a forecast P/E of 13. ### My view Belvoir doesn't look quite as cheap as it did a few months ago, but the group's resilient profits and diversified business model suggest to me that the valuation remains reasonable. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/09/blv-5y-chart-070923.png) My sums suggest the shares are trading with a trailing free cash flow yield of around 10%, which looks attractive to me and should provide strong support for the dividend. I wouldn't have a problem owning these shares, although I would say that rivals **Winkworth** and **Property Franchise** also look good value to me at the moment. Both of these firms also benefit from owner management, which Belvoir lacks. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### August '23 dividend portfolio update: macro headwinds URL: https://www.rolandhead.com/portfolio/august-23-dividend-portfolio-update-macro-headwinds/ Last updated: 2023-09-16T09:41:50.000Z Welcome to my review of August's news and results from my portfolio companies. Last month saw five of my stocks issue results or trading updates. I think the common theme running through these updates was external headwinds. Rising interest rates, supply shortages, currency headwinds and economic weakness all feature. These might sound like excuses, but as far as I can see, these companies are all continuing to operate well. Political risks are causing me some concern at one business, but this aside, I remain comfortable with all of these holdings. **Let's take a closer look at last month's portfolio news.** 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). ### In this month's report: Here's a summary of the company results covered in this report, with a link to each section: _This post is for paying subscribers only._ ### Dividend notes: sleeper stocks? BNZL, MACF, QLT (30/08/23) URL: https://www.rolandhead.com/dividend-notes/sleeper-stocks-bnzl-macf-qlt-30-08-23/ Last updated: 2023-09-07T07:51:45.000Z After enjoying a short but welcome respite from company newsflow, I'm catching up with a few results from August. These include: - upgraded profit guidance from two FTSE 350 companies - a possible 'sleeper' small-cap with a financial track record that's impressed me ### Companies covered: - [**Bunzl (LON:BNZL)**](#bunzl-bnzl)\- another solid set of results from this FTSE 100 distribution group. I can see much to like here, although the valuation looks about right to me at current levels. - [**Macfarlane (LON:MACF)**](#macfarlane-macf)\- this small-cap packaging business impresses me again with a strong set of half-year numbers and stable outlook. - [**Quilter (LON:QLT)**](#quilter-qlt)\- this wealth manager has upgraded its 2023 profit guidance, but earnings are still expected to be below 2022 levels. I think the shares could offer value, but it's not my top pick in this unloved sector. **Tip:** to search for my previous coverage of a company, enter its ticker code into the search tool at the top of this page. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Bunzl (BNZL) > "2023 outlook: adjusted operating profit guidance upgraded" Bunzl has just upgraded its 2023 profit guidance for the second time in three months. This FTSE 100 distributor flies below the radar for many investors, but has historically proven to be a far more successful investment than some popular stocks. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/bnzl-vs-asx-all-chart-300823.png) Bunzl vs FTSE All-Share index Bunzl operates in more than 30 countries, [supplying](https://www.bunzl.com/about-us/bunzl-at-a-glance/?ref=rolandhead.com) customers with a vast range of not-for-resale items such as safety gear, cleaning products, and catering consumables. I commented on Bunzl's June upgrade [here](https://www.rolandhead.com/dividend-notes/warnings-upgrades-and-a-6-yield-vct-crda-bnzl-vp/). This week's half-year results show further fuss-free progress. **Half-year results summary:** Bunzl's revenue rose by 4.5% to £5,906.8m during the first half of the year, although this increase fell to 0.6% at constant exchange rates. A quick look at the group's geographic breakdown shows that operating profit rose in all regions, despite some volume weakness in certain markets. Cost inflation seems to be easing, but Bunzl appears to have been able to successfully push through inflation-linked price rises. Pre-tax profit for the period rose by 6.9% to £317.1m, while half-year earnings were 6.9% higher, at 70.8p per share. Free cash flow for the period rose by 21% to £286.3m, helped by *"a substantial reduction in inventory"*. Operating margin for the half year was 7.4% (H1 2022: 7.3%) and my sums suggest a trailing 12-month return on capital employed of around 15% – a solid figure that's slightly above the 14% average seen in recent years. Bunzl acquired 12 companies during the period, in keeping with its normal growth strategy. These are almost always small bolt-on deals that can be integrated into Bunzl's global infrastructure and benefit from its purchasing power and distribution efficiencies. One of the deals announced with the half-year results was the firm's first acquisition in Poland. The country was described by CEO Frank van Zanten as *"a key target for expansion"*. **Dividend:** the interim dividend was increased by 5.2% to 18,2p per share. Broker forecasts suggest a full-year payout of 66p, giving a prospective yield of 2.3%. **Outlook:** full-year profit guidance has been upgraded due to higher margin expectations: > "2023 outlook: adjusted operating profit guidance upgraded, driven by a meaningful increase in operating margin expectations" Broker forecasts have been tweaked up very slightly. Consensus estimates I can see suggest earnings of 180p per share this year. That puts the stock on 16 times forecast earnings. #### My view I rate this as a quality business with good management. Despite a relatively low dividend yield, Bunzl shares also score quite highly in my [dividend stock screening ](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/)results. At current levels the shares look fairly valued to me. I'd be open to owning Bunzl shares in [my dividend portfolio](https://www.rolandhead.com/dividend-portfolio/), but would prefer to wait for a market sell-off to provide a higher yield (and higher expected total return). 💡 ****Podcasts for private investors!** Enjoy in-depth discussions on UK shares with Maynard Paton, Bruce Packard, Mark Simpson and myself. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) --- ### Macfarlane (MACF) > "Profit before tax at £10.0m increased by 13%" I last covered small-cap packaging group Macfarlane [in May](https://www.rolandhead.com/dividend-notes/underrated-quality-full-price-macf-reci-bez/), when I noted that it *"has been churning out steady growth for a number of years"* and seemed *"reasonably priced"* to me. I also said that the stock scored quite well in my dividend quality screen. That remains true today – Macfarlane's score of 72/100 has increased slightly since May. The group's recent half-year results left full-year profit guidance unchanged and confirmed my view that this business is in good shape at the moment. Let's take a look. **Half-year results summary:** Macfarlane's revenue rose by 2% to £141.6m during the six months to 30 June, while pre-tax profit rose by 13% to £10.0m. Net debt improved slightly to £3.3m (Dec 22: £3.4m). Free cash flow before acquisitions rose to £15.5m (H1 2022: £0.8m) thanks mainly to a £9m reduction in inventories and outstanding receivables. **Profitability:** the group's operating margin for the half year was 7.6%, while I estimate a trailing 12-month return on capital employed of 15.6%. These are decent figures for a business of this kind, in my view. **Trading:** growth was split across the firm's two divisions, with operating profit from distribution activities up by 6% to £9.4m, and profits from the group's specialist manufacturing business up by 36% to £3.4m. Both figures are on an underlying basis. Lower demand in some sectors was offset by several small acquisitions during the period and some new business wins. **Dividend:** the interim dividend was lifted by 4% to 0.94p per share. Broker forecasts suggest a payout of 3.6p per share this year, giving a prospective yield of 3.4%. **Outlook:** full-year profit guidance was unchanged: > "Whilst we expect the second half of 2023 to remain challenging, our good progress in Europe, diverse customer base, strong new business momentum and effective management of pricing and costs mean that our profit expectations for the full year remain unchanged." Broker forecasts suggest full-year earnings will rise by 19% to 11.8p per share this year. That prices Macfarlane on nine times forecast earnings, which doesn't seem excessive to me. #### My view I'm impressed by the continued growth of this business, although mindful that at least some of it is being contributed by acquisitions. Macfarlane's half-year results did not split out organic and acquisitive growth, so we're left guessing about the mix between the two. Even so, I think the track record here is probably good enough to justify giving management the benefit of the doubt. This chart shows growth in earnings and free cash flow (left scale) and return on capital employed (right scale). Earnings growth appears to have been consistently backed by cash conversion and solid profitability: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/macf-eps-fcfps-roce-300823.png) This business obviously remains vulnerable to wider economic conditions and could suffer in a serious recession. Even so, I remain interested in Macfarlane and can see plenty to like at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Quilter (QLT) > "the adjusted profit out-turn for this year is expected to be meaningfully ahead of current market expectations, assuming broadly stable markets." I've not looked at this wealth manager and investment platform before, but I have recently considered investment platform providers [**IntegraFin**](https://www.rolandhead.com/dividend-notes/3-owner-led-dividend-stocks-ihp-luce-arbb-18-07-23/), [**Hargreaves Lansdown**](https://www.rolandhead.com/dividend-notes/founder-stocks-with-reliable-dividends-hl-chrt/)and [**AJ Bell**](https://www.rolandhead.com/dividend-notes/navigating-uncertain-markets-crda-hwdn-ajb-25-07-23/). Quilter is a wealth manager but also operates its own platform, so there's some overlap. Given this, I thought it might be interesting to take a look at Quilter's recent half-year numbers. This business was spun out of Old Mutual in 2018 and is now a standalone business. Share price performance so far has been underwhelming, but the stock offers a 5%+ yield, which is higher than any of the rivals I mentioned above: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/qlt-price-divyield-300823.png) **What does Quilter do?** From what I can tell, Quilter is focused on wealthy investors who use financial advisers. It operates both under the Quilter brand and as a service provider to independent financial advisers. The firm's operations are divided into two core segments, *High Net Worth* and *Affluent*. This business isn't a direct rival to DIY-focused HL, but may compete for advisers' business with IntegraFin and AJ Bell. Both of these rival firms offer investment platforms specifically for financial advisers. Quilter's platform has had about £70bn of assets under management or administration at the end of the half year, representing the *Affluent* customer segment. The *High Net Worth* segment had a further c.£25bn under management or administration; presumably this isn't funnelled through the platform. Total assets under direction are c.£100bn. This compares to £54bn on IntegraFin's platform and £47bn for AJ Bell's advised service at the end of H1\. Quilter's platform was ranked second in the UK by market share at the end of March, according to IntegraFin. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ihp-1h23-adviser-platform-share.png) Source: IntegraFin H1 2023 presentation One big difference is that Quilter (and AJ Bell) use third-party software to power their platforms, whereas IntegraFin has its own proprietary solution. This could mean that differentiation relies more on marketing and less on functionality. On this basis, IntegraFin's positioning as a pure-play, independent platform provider looks more attractive to me. **Half-year results summary:** Quilter saw net inflows of £0.7bn during the half year, lifting AuMA to £98.3bn in the group's core business. Adjusted pre-tax profit rose by 24.6% to £76m, while the group's operating margin improved from 20% to 24%. Profits were boosted by the benefit of higher interest rates on client funds and *"strong cost management"*. There might be further scope for margin improvement, too. Quilter still appears to be rationalising and modernising its infrastructure in the wake of its split from OM five years ago. The company has completed an initial £65m *"optimisation"* programme and is now moving into *"simplification"*. This is expected to yield a £50m cost reduction from the 2022 cost base by 2025. **Fee margins:** Quilter's group revenue margin for the half year was stable at 0.48%. Comparable half-year figures for AJ Bell and IntegraFin were 0.22% and 0.24% respectively. Quilter's higher margins appear to be correlated to the wealth of its clients – high net worth clients generate around 0.7%, with affluent segment clients expected to be in the *"low 40s bps"*. Interestingly, the company says that *"platform pricing initiative"* – i.e. cutting fees – will lead to a decline in revenue margins over the next 18 months. **Dividend:** shareholders will receive an interim dividend of 1.5p per share, consistent with forecast for a full-year payout of 4.6p per share. That gives Quilter shares a prospective yield of 5.2%. **Outlook:** profits are expected to be lower in the second half of the year than in H1\. This is due to the *"repricing of our Platform"* and an expected modest increase in costs. Despite this, full-year adjusted profits are now expected to be *"meaningfully ahead of current market expectations, assuming broadly stable markets"*. The company doesn't quantify this guidance, but broker consensus estimates have risen by 15% to 7.4p per share over the last month. That prices the stock on around 12 times forecast earnings. However, despite this recent upgrade, Quilter's earnings are still expected to be below their 2022 level of 7.9p per share. #### My view I don't see anything obvious to dislike here and I suspect Quilter's current valuation could be quite reasonable – this whole sector is out of favour at the moment. However, a number of other larger firms are currently seeking to expand into wealth management at the moment. Quilter appears to be operating in a competitive market and I wonder how differentiated its offering really is. I will also be interested to see how fee reductions affect the platform's revenue margins over the remainder of the year. I would need to do more research to understand the company's market segments and positioning in more detail. However, my initial impression is that I would be unlikely to choose Quilter over the other platforms I've considered previously. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Is dividend share RWS Holdings an AI bargain? URL: https://www.rolandhead.com/dividend-shares/is-dividend-share-rws-holdings-an-ai-bargain/ Last updated: 2023-09-14T14:30:48.000Z Shares in translation and structured content specialist **RWS Holdings (LON:RWS)** are trading at levels last seen in 2016\. I'd have expected some kind of post-pandemic slump, given the Covid-era hype over all things tech and AI-related. But RWS's earnings per share and its dividend have both doubled since 2016\. Has the sell-off created a buying opportunity? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-sp-eps-divps-250823-1.png) RWS generated about £750m of revenue last year and has a £900m market cap. But its shares currently trade on a forecast price/earnings ratio of just nine, with a tempting 5% dividend yield. I'm looking for a new stock for my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) to replace healthcare software group EMIS, where a [takeover bid is finally going through](https://www.rolandhead.com/email/7aac6922-8543-4527-9e76-e6c924a644cd/) after some delays. I've been taking a closer look at RWS and running the shares through [my scoring system](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) to see if this firm could be a suitable choice for my portfolio. Here's what I've found. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Table of contents - [History](#rws-20-years-of-growth) \- 20 years of growth - [Will AI make RWS redundant?](#will-ai-make-rws-redundant) - [Crunching the numbers](#rws-holdings-crunching-the-numbers) \- how does RWS score in my screening system? - [Dividend culture](#dividend-culture-excellent) \- 19 years of unbroken growth - [Dividend safety](#dividend-safety-very-strong) \- very strong - [Dividend growth](#dividend-growth-well-supported) \- well supported - [Dividend yield](#dividend-yield-post-2008-high) \- RWS's yield is at a post-2008 high... - [Valuation](#valuation-cheap) \- I think the shares *could* be very cheap - [Profitability](#profitability-disappointing) \- a downward trend disappoints - [Fundamental health](#fundamental-health-a-clean-sheet) \- a clean sheet - [Conclusions](#conclusions-in-the-running) \- is RWS a contender to fill the upcoming vacancy in my portfolio? --- ### RWS: 20 years of growth RWS provides language, content management and intellectual property (IP) services to a wide range of corporate and public sector customers. The company currently has around 7,700 staff in 36 countries, supported by a network of 29,000 freelancers (mainly translators) in 169 countries. RWS says it can support 270 language pairs and has substantial in-house technology assets, including AI services. The business is structured into four operating divisions. These cover a wide range of services – from fairly general commercial translation, to complex and specialised intellecutal property services: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-fy22-rev-split.png) Source: RWS 2022 results presentaiton **History:** Executive chairman [Andrew Brode](https://www.rws.com/about/investors/our-board/?ref=rolandhead.com) acquired RWS from private equity group **3i** in 1995\. Brode then listed the business on the AIM market in 2003\. He remains the group's largest shareholder, with a 23% position worth over £200m. This suggests to me that RWS is still very much an owner-managed business. Brode has previously led a series of companies that have subsequently been sold. He's currently also the largest shareholder and non-executive chairman of £600m AIM group **Learning Technologies**. RWS has expanded considerably over the last 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-fy22-20yr-history.png) Source: RWS 2022 results presentation Some of this growth has been driven by acquisitions, notably big deals in 2017 and 2020\. These correspond to the big shifts in profit shown in the chart above: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-cmd22-acquisition-timeline.png) Source: RWS 2022 Capital Markets Day Funding these deals has required a certain amount of debt, but this has been repaid promptly and RWS has generally maintained a net cash balance. In the meantime, earnings per share have trended steadily higher, suggesting to me that shareholders have not suffered too much from this dilution: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-sharecount-eps-netdebt-250823.png) This acquisitive growth has supported a substantial degree of diversification since 2015: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-cmd22-diversification.png) Source: RWS 2022 Capital Markets Day RWS's now appears to enjoy strong positions in a number of key markets, based on this summary of the group's customer base: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-fy22-customers.png) Source: RWS 2022 results presentation The company says that its top 30 customers have an average tenure of 15 years and generated 43% of group revenue in 2022\. That sounds like a fairly solid foundation to me. **Current trading:** market conditions do not seem entirely favourable for RWS at the moment. In its half-year presentation to analysts, RWS said it was facing a combination of macroeconomic headwinds and regulatory bottlenecks. These had lead to a slowdown in new client decision making, lower levels of activity, and greater client focus on costs. In response, RWS is planning cost savings of £10m this year and £25m next year. The company is also continuing to focus on sales efforts on higher-value IP markets and developing new services, including offering its own AI-centred products to customers. **Half-year results:** I covered RWS's recent half-year results [here](https://www.rolandhead.com/dividend-notes/a-contrarian-bargain-rws-resi-whr/). But in summary, revenue rose by just 2.5% to £366.3m, while earnings per share fell 11% to 5.4p for the six-month period. On an organic constant-currency basis (i.e. excluding acquisitions and exchange rate movements), revenue fell by 7% during the first half, suggesting a slowdown in translation volumes. Cash generation remained excellent, with free cash flow of £30m from net profit of £21m. But a combination of acquisitions, capex, and dividend payments meant that net cash fell from £72m to £58m between 30 September and 31 March (RWS has a 30 Sept year end). **Outlook:** full-year guidance was left unchanged at the half-year, with management continuing to expect a second-half weighting to profits as various bottlenecks ease. SharePad forecasts suggest earnings of 24.4p per share, with a dividend of 12.2p. That prices the shares on 9.6 times forecast earnings, with a prospective dividend yield of 5.2%. I'm pretty confident that if the future was like the past, I could rely on RWS returning to growth as economic conditions ease. The elephant in the room, of course, is AI. The future isn't going to be like the past. 💡 ****Podcasts for private investors!** Enjoy in-depth discussions on UK shares with Maynard Paton, Bruce Packard, Mark Simpson and myself. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) ### Will AI make RWS redundant? RWS says that AI and technology *"represent significant opportunity"* (my **bold** throughout): > "RWS has longstanding AI capability and expertise in relation to localisation, language and content technology and content development, with **a pioneering machine translation solution (Language Weaver), a full data services proposition (TrainAI) and deployment of AI-functionality in our Tridion and Trados products,** all of which make us a significant beneficiary of developments in AI." According to the recent half-year results, the majority of its translation work already flows through an AI-supported process: > "With 60% of the words that we translate through the LXD being supported by AI, we **are already extensive users**, benefiting from the **efficiency opportunities** this technology brings in the medium term" I think the idea is that RWS uses AI in-house where it can achieve cost or speed savings, while overlaying human expertise to ensure a higher standard of quality and reliability. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-human-tech-service-split-cmd22-1.png) Source: RWS Capital Markets Day 2022 At the same time, the company is hoping to sell its curated data models and AI services to clients: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-1h23-ai-chart.png) Source: RWS H1 2023 results presention My feeling is that the wide availability of cheap general AI services will inevitably cause some attrition at the lower-value end of RWS's solutions spectrum. On the other hand, I expect that many of RWS's core markets will continue to require a standard of quality and specialism that won't be freely available. From what I understand, many of RWS's translations need to be guaranteed to be correct in legal, scientific, and regulatory terms. Presumably the company's service offering includes some liability for errors, much like an accountant or lawyer might offer. Ultimately, you can't fine software or send it to prison. Only people and corporations can accept liability for errors. I don't see many generalist or low-cost AI translation service providers offering this kind of accountability and service guarantee in the near future. After all, the leading mainstream AI services are currently known to suffer from hallucinations – they [invent facts that *sound* plausible](https://arstechnica.com/tech-policy/2023/06/lawyers-have-real-bad-day-in-court-after-citing-fake-cases-made-up-by-chatgpt/?ref=rolandhead.com). **I could be wrong:** I fully accept that I could be completely wrong about all this. AI is certainly going to change the world, we just don't yet know how. New services could improve quickly and become available at prices that will leave RWS looking bloated and redundant. I certainly see AI as a risk as well as an opportunity for RWS, regardless of what the company's management is saying. **Investors need to do their own research and form their own view on this.** My comments above represent my working hypothesis at the moment. But this view may change (and may be wrong!). However, my approach to investing is not just about a company's story. As a systematic investor, I place a heavy weighting on historic financial performance. Let's move on and see how RWS stacks up in this regard. --- ### RWS Holdings: crunching the numbers ***Description* *: a specialist in high-quality translation, content management, and intellectural property services, such as patent translation.*** | **RWS Holdings(LON: RWS)** | **Quality Dividend score: 72/100** | **Forecast yield: 5.2%** | | -------------------------- | ---------------------------------- | ---------------------------- | | Share price: 233p | Market cap: £899m | *All data at 24 August 2023* | ***Latest accounts: [half-year results for the six months to 31 March 2023](https://www.investegate.co.uk/announcement/rns/rws-holdings--rws/half-year-report/7565011?ref=rolandhead.com)*** In the remainder of this review, I'll step through the different stages in my [**dividend screening system**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think RWS could be a suitable addition to my quality dividend portfolio . Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: excellent RWS Holdings listed on AIM in late 2003 and has increased its dividend in each of the 19 years since then. That's not quite long enough to earn a top score in my screening system, but it's a very impressive result nevertheless. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-dividend-250823.png) I estimate that 23% shareholder Andrew Brode received nearly £11m in dividends last year. With him in the chairman's seat, I'm confident that RWS has a strong dividend culture. **RWS scores 3/5 for dividend culture in my screening system.** --- ### Dividend safety: very strong I score shares for dividend safety by looking at the level of earnings and free cash flow cover for the dividend. My score also includes a measure of leverage, which I've represented here as net borrowing in order to simplify the graph: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-div-fcf-cover-net-debt-250823.png) I can't see anything to dislike here. RWS's dividend has been covered comfortably by earnings in each of the last 19 years. Free cash flow cover has only fallen below 1.2x on one occasion during that period. As we've seen already, the company has generally maintained a net cash position, except during a period when several major acquisitions were made. Past performance is no guide to future returns. But historically, I think RWS's dividend has looked very safe. **RWS scores 4/5 for dividend safety in my screening system.** --- ### Dividend growth: well supported When rating a company's dividend growth record, I do look at the rate of growth. However, my main goal is to try and gauge how *sustainable* this growth has been. In other words, has dividend growth been well supported by free cash flow and net asset value per share growth? Poorly supported dividends are far more likely to be cut, in my experience. This chart compares these three metrics for RWS. We can see that both free cash flow and NAVps have trended steadily higher. This suggests to me that the **dividend-paying capacity** of the business has increased in step with the growth of the dividend. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-divps-fcfps-navps-250823.png) **RWS scores 4/5 for dividend growth in my screening system.** --- ### Dividend yield: post-2008 high RWS has not generally been a high-yield stock. But the share price slump suffered by RWS over the last two years has caused the stock's trailing dividend yield to rise to the highest level since 2010: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-divyield-250823.png) I've seen this with a number of stocks recently, including some I've [written about here](https://www.rolandhead.com/dividend-shares/a-high-yield-stock-to-replace-direct-line/). I have to ask whether this is a sign of problems ahead, or whether these shares have been oversold and now offer contrarian value. Unfortunately, the answer to this question is usually only obvious with hindsight. In the meantime, my scoring system tells me that on a medium-term view, RWS has typically been a stock with a fairly average yield. **RWS scores 2.7/5 for dividend yield in my screening system.** --- ### Valuation: cheap? The share's unusually high dividend yield (above) suggests to me that RWS shares could be cheap at the moment. I think the stock's valuation supports this view, but it also offers another possible interpretation – perhaps RWS shares had become too expensive. This chart shows the stock's historic EBIT (EBIT/EV) and free cash flow yields. These are the main valuation measures I use in my screening system. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-ebit-yield-fcf-yield-250823-2.png) We can see that the stock's EBIT and FCF yields ranged from 2%-4% between 2017 and 2021\. That seems quite a full valuation to me. In particular, I would argue that the 2% EBIT/FCF yields on offer in 2021 were decidedly unattractive. The shares have since fallen by 50%, despite profits rising sharply in 2022. I've already talked about some of the risks facing the business. But I'd like to highlight two important **positives** that I take from this chart: - Free cash conversion from operating profit appears to be excellent, especially since 2015 (the red and blue bars are almost the same height each year) - Based on last year's results, the shares look very attractively valued, with a trailing free cash flow yield of over 9% - Broker forecasts (shaded lines) suggest operating profit will rise this year but free cash flow will fall. In either case, the prospective yields implied still seem attractive to me. **£50m share buyback:** one other point of interest regarding the valuation is that RWS launched a £50m share buyback programme alongside its half-year results. This is equivalent to just over 5% of the current market cap – a big buyback. The company says it has enough headroom under its current banking facilities (and cash pile) to fund the buyback while maintaining the dividend and pursuing further acquisitions. I'm only speculating, but RWS shares are currently trading below book value for the first time in their history, as far as I can tell: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-price-navps-250823.png) The group's assets are dominated by goodwill and intangibles from acquisitions. But if these deals were fairly valued and the acquired assets perform as expected, then I reckon this buyback could prove to be good value for shareholders. On the other hand, in a worst-case scenario, this big buyback could simply prove to be an expensive effort to prop up flagging earnings. Given that Andrew Brode has run the business since 1995 and holds 23% of the shares, I'd hope that his superior insight will produce a positive result. But it seems a pretty confident move at present, all the same. On balance, I have to conclude that RWS shares look very cheap at the moment, unless the business is about to suffer serious new problems. **RWS scores 4/5 for valuation in my screening system.** --- ### Profitability: disappointing RWS's growth has come at a price. The company's profitability has worsened steadily over the last 20 years. When I say this, I'm not talking about profit margins (profit as a percentage of revenue). These have remained fairly stable: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-op-gross-margin-250823.png) However, my experience is that margins don't provide a full picture of a company's long-term profitability. What I'm looking for is evidence that the business has been able to generate attractive returns while continuing to expand its asset base. This combination can drive attractive long-term compound returns. To this end, the factors I use to score for profitability are return on capital employed (ROCE) and net asset value per share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-roce-exgw-navps-250823.png) We can see that ROCE (red bars) used to be exceptionally high – over 40% – but has now declined to single-digit levels. One reason for this is the company's acquisitive growth. This usually results in a buildup of goodwill on the balance sheet. Goodwill represents the takeover premium, or the price paid on top of the acquired company's asset value. To illustrate this point, I've also shown ROCE excluding goodwill assets on the chart above. It's higher, but the downward trend is still the same. We can see that the big acquisitions in 2017 and 2020 generated a step up in RWS's net asset value but caused ROCE to fall. Over time, this situation may reverse, as the goodwill charge is gradually amortised and new growth projects deliver. In a presentation last year, management said they would target ROCE of 14%-16% from 2024 onwards. Such an increase could deliver a sharp rise in profit. For now, though, I have to conclude that RWS's profitability is slightly lower than I'd like to see. **RWS scores 2.4/5 for profitability in my screening system.** --- ### Fundamental health: a clean sheet My fundamental health score is really about looking for potential problems relating to debt. I don't see any here, based on the two measures I use: - Fixed charge cover: EBIT dividend by rent and interest costs - Leverage, which I calculate as net debt divided by five-year average net profit ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rws-fixchgcov-leverage-250823.png) Unsurprisingly, RWS earns a perfect score for fundamental health. When paired with the evidence of strong free cash flow I've seen elsewhere in this review, I'm very happy that this business has strong financial footings. **RWS scores 5/5 for fundamental health in my screening system.** --- ### Conclusions: in the running **My quality dividend system awards RWS Holdings an overall score of 72/100 at the time of writing (August 2023).** **My view:** I'd like to spend a little more time on RWS, reviewing some of its larger acquisitions and trying to gauge whether they've delivered value. However, my initial impressions are quite positive. Here's a summary of the main bull and bear points, as I see them. **Pros:** - RWS has a decent growth record and has increased its dividend for 19 consecutive years - Cash generation is consistently good and the balance sheet looks strong to me - Owner management with strong alignment to shareholders' interests. - The shares could be cheap **Cons:** - The near-term macro outlook is weak, with slower spending and pricing under pressure - Profitability has suffered as the business has grown - Over the medium-long term, RWS's business model could be upended and devalued by AI translation systems. - Regular acquisitions also may carry some risk, especially given the reduction in profitability seen in recent years On balance, I think RWS has many of the characteristics I'm looking for. I haven't seen anything yet that would cause me to rule out the stock as a possible investment. **I'm keeping RWS on my shortlist as a possible replacement for EMIS.** As always, please let me know what you think in the comments below. Am I being dangerously naive about the likely impact of AI, or is RWS a potential contrarian bargain? 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! *Disclosure: at the time of publication, Roland owned shares in EMIS Group.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: in a sweet spot - CCH, ROR, HILS (18/08/23) URL: https://www.rolandhead.com/dividend-notes/in-a-sweet-spot-cch-ror-hils/ Last updated: 2023-08-18T14:53:36.000Z In today's dividend notes I'm catching up with a defensive drinks business and looking at two engineering businesses that are benefiting from exposure to strong, growing markets. ### Companies covered: - [**Coca-Cola HBC (LON:CCH)**](#coca-cola-hbc-cch)\- half-year results show stable margins and decent cash generation. I have some concerns about the continuing level of exposure to Russia, but otherwise remain positive about the defensive income qualities of this business. - [**Rotork (LON:ROR)**](#rotork-ror)\- solid half-year numbers with a sharp rise in order intake and profits for this specialist engineering firm. I'm impressed by strong profitability and the group's long-term track record. - [**Hill & Smith (LON:HILS)**](#hill-smith-hils)\- I like this infrastructure equipment business and admire recent progress, spurred by growing US demand. But I wonder how much of a premium I should pay for the shares. **Tip:** to search for my previous coverage of a company, enter its ticker code into the search tool at the top of this page. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Coca-Cola HBC (CCH) > "We delivered a better-than-expected financial performance in the first half of 2023" When I covered Coca-Cola HBC's half-year trading update [in July](https://www.rolandhead.com/dividend-notes/looking-for-cyclical-buys-cch-vct-rwa-11-07-23/), I promised to take a look at the firm's accounts in August. To clarify, this business is one of Coca-Cola's regional bottling partners (HBC originally stood for Hellenic Bottling Company). CCH doesn't own [the brands it sells](https://www.coca-colahellenic.com/en/our-24-7-portfolio?ref=rolandhead.com), except in Russia. Of which more shortly. **Half-year financial highlights:** Net sales revenue for the first half of the year rose by 19.3% to €5,021.5m, but volumes were only 4% higher, at 1,383.1m cases. The increase in revenue reflects prices increases and *"mix management".* These measures led to a 21.2% increase in comparable operating profit, which rose to €557.3m (H1 2022: €462.5m). The group's operating margin remained stable at 11.2% on a comparable basis, excluding impairment charges last year relating to the Russia-Ukraine war. A group operating margin of 11% is slightly ahead of the average reported by the group since its 2013 IPO: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/cch-opmargin-180823.png) According to my sums, free cash flow fell by 19% to €249m during the half year (H1 2022: €305m). This weaker performance seems to have been caused by additional working capital outflows, so it may well reverse over the remainder of the year. Cash generation in this business generally seems quite good to me. Net debt of €1.8bn looks manageable, if not minimal. **Dividend:** CCH pays a single annual dividend, so there was no update on this year's payout in these results. However, the payout has trended steadily higher since the company's IPO: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/cch-dividends-180823.png) Source: SharePad The company's dividend culture may be linked to the needs of its two largest shareholders, the Coca-Cola Company and Kar-Tess Holding SA, who each control c.23% of CCH stock. I believe Kar-Tess Holding SA represents the interests of the Levantis-David families, who owned CCH before it was floated. **Geographic split/Russia:** the group's operations are divided into three geographical regions – established, developing and emerging. You can see a detailed breakdown [here](https://www.coca-colahellenic.com/en/about-us/what-we-do/markets?ref=rolandhead.com). The real profit engine of the group are its emerging market operations, which include parts of central/Eastern Europe, Russia, Nigeria and Egypt. Emerging markets generated €322m of CCH's adjusted EBIT during the first half of the year, or 57% of the group total. Margins were higher too, at 13.4%, versus 10.1% in established markets and 6.5% in developing. We don't know exactly how much of this comes from the group's operations in Russia, which now operate as a self-contained 'local brands' business called Multon Partners LLC. However, the 2022 annual report shows €1,100m of external revenue attributed to Russia, or just over around 10% of the group total. Given the superior profitability of the emering markets segment, I wonder if we can speculate that around 10% of profit still comes from Russia. I don't know. But this factor may be worth considering for investors who have a view on exposure to Russia. **Outlook:** management have become increasingly bullish this year. Like most other consumer businesses, CCH expects cost inflation to ease over the remainder of the year. Cost increases are now expected to be limited to *"high single digits"* over the year as a whole, down from *"low teens"* previously. However, profit guidance is unchanged. Operating profit is expected to rise by 9-12% in 2023, in line with previous guidance. Broker forecasts suggest adjusted earnings of €1.90 per share this year, an 11% increase on 2022\. That prices CCH shares on 14 times forecast earnings, with a prospective dividend yield of 3.3%. #### My view My sums suggest this business should return to delivering low-teens returns on capital employed this year, in line with past years. The valuation also doesn't seem unreasonable to me. I estimate a trailing EBIT/EV yield of 8.5%. That's slightly above the 8% rule-of-thumb level I use as a sign of value. On balance, I think this is a good business, with the kind of defensive qualities that could support a reliable long-term dividend income. However, I do have some reservations about the group's continuing exposure to Russia, which looks material to me. I'd also hope for a slightly higher dividend yield as an entry point. For now, this remains a business I'll watch with interest. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Rotork (ROR) > "Good first half, expectations for the full year unchanged" Rotork is a £2.4bn FTSE 250 industrial group that designs and manufactures industrial flow control equipment. Founded in 1957, the firm's core products are actuators – electric components that open and close fluid control valves remotely. Key market sectors include oil, gas, chemicals and utilities. Despite its cyclical exposure, Rotork has an impressive dividend history: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ror-dividends-180823.png) This payout has been supported by a consistent track record of excellent cash conversion from profits: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ror-netprofit-fcf-180823.png) Profitability is also pretty impressive, in my view: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ror-roce-opmargin-180823.png) Rotork's historic share price performance shows the volatility you'd expect from exposure to capital-intensive and cyclical market sectors such as oil and gas. But the long-term share price trend has been very positive for investors who've invested during cyclical lows. The shares have risen tenfold in 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ror-chart-all-180823.png) The group's long track record and strong profitability suggests to me it has a sustainable competitive advantage in its core markets. This could certainly be an industrial stock I'd be interested in owning, at the right price. Rotork's shares are already well down from last year's highs, but the recent half-year results suggest trading remains strong. I've taken a look at the recent half-year results to see if an opportunity might be emerging here. **Half-year financial highlights:** Rotork said its order intake rose by 11.9% to £386.9m during the first half of the year. Revenue rose by 19.5% to £334.7m, while pre-tax profit rose by 35% to £60.2m. The group's operating margin improved to 17.7%, from 15.7% during H1 2022\. However, last year's full-year margin of 19.3% suggests that the full-year result for 2023 may also be higher; Rotork's profits appear to be consistently weighted to the second half of the year. My sums suggest the group has achieved a trailing 12-month return on capital employed of 23.8%, which is an improvement from the 20% achieved in calendar 2022. Rotork ended the half year with net cash of £97.8m and an undrawn overdraft. This group has generally maintained a net cash balance in recent years, perhaps helping to explain why it has not needed to issue new shares for at least 30 years. **Dividend:** the interim dividend was increased by 6.3% to 2.55p per share. Broker forecasts suggest a total payout of 7.1p per share this year, giving a prospective yield of 2.5%. **Outlook:** chief executive Kiet Huynh says that supply chain problems have eased and customer demand in the oil and gas sector is higher than it's been since 2019\. Huynh sounds positive about the outlook for the remainder of the year: > "The outlook for all our divisions is positive and we entered the second half with a record order book. Whilst mindful of residual supply chain challenges, we anticipate delivering further progress in 2023 in line with expectations on an OCC basis." Broker forecasts suggest adjusted earnings will rise by 15% to 14.6p per share this year. That puts Rotork on a forecast P/E of 19\. #### My view I still need to learn a little more about this business. But my initial impressions are very positive. My only concern – unsurprisingly – is over valuation. Market conditions seem strong at the moment and I wonder if Rotork's valuation reflects this. The group's forecast P/E of 19 is not especially high for such a profitable business, but I prefer to use a company's EBIT/EV and free cash flow yield as measures of valuation. On this basis, Rotork shares look more expensive than they have for a while: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ror-div-fcf-ebit-yield-180823.png) I'd hope to find a slightly better buying opportunity for Rotork. But this is certainly a business that I could see joining my model dividend portfolio at some point. --- ### Hill & Smith (HILS) > "Hill & Smith is exceptionally well placed to benefit from US industrial expansion" The US Inflation Reduction Act has triggered a surge in industrial spending in the USA. FTSE 250 infrastructure group Hill & Smith appears to be an early beneficiary of this largesse. This 199-year-old business recently reported a surge in half-year profits and says it's now making almost three quarters of its profit in the US. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/hils-1h23-geo-split.png) Source: Hill & Smith H1 2023 presentation Hill & Smith started out as a West Midlands ironworks in 1824, producing products such as fencing and gates. Today it's [product lines](https://hsgroup.com/what-we-do/product-map/?ref=rolandhead.com) include structural steel, energy grid infrastructure, and road safety barriers. Like Rotork (above), this business has a long track record of steady dividend and attractive profitability. But my feeling is that the infrastructure focus of this business could mean that it's less sensitive to cyclical swings than Rotork, which is heavily exposed to the oil and gas sector. **Half-year highlights:** Hill & Smith's interim results triggered a surge in the share price and a further modest upgrade to full-year forecasts, following [May's upgrade](https://www.rolandhead.com/dividend-notes/contrasting-approaches-pets-ajb-hils-ihp/). The company said that revenue from continuing operations rose by 20% to £420.8m, while pre-tax profit increased by 54% to £48.2m. This increase supported an operating margin of 12.7%, up from 9.9% in H1 2022\. My sums suggest a trailing 12-month return on capital employed of c.17%, up from 14.2% in 2022. **Acquisition boost:** admittedly, this rapid profit growth was boosted by acquisitions and some currency tailwinds. The company acquired US firms Enduro Composites and Korns Galvanizing for a total cost of £38.5m in H1. This follows the acquisition of roads firm National Signal during the second half of last year. HILS says that these three firms contibuted £41m of revenue and £8m of operating profit in H1\. Stripping this out gives like-for-like revenue growth of 9%, with a 20% rise in underlying operating profit. At first glance, these acquisitions look more reassuring and reasonably priced to me than BAE Systems' recent $5.5bn blockbuster deal, which [I covered yesterday](https://www.rolandhead.com/dividend-notes/do-these-ftse-100-shares-offer-value-adm-av-ba/). **Dividend:** HILS shareholders will see the interim dividend rise by 15% to 15p per share, on track for a full-year forecast payout of 38.9p. That's equivalent to a yield of 2.2% at current levels. **Outlook:** full-year operating profit is now expected to be *"modestly ahead"* of market consensus. Market estimates I can see on SharePad suggest operating profit of £116m in 2023. Earnings per share forecasts suggest a 2023 figure of about 97p per share, valuing the firm on about 19 times forecast earnings. #### My view One idea I've seen put forward in recent months is that industrial markets in developed countries are going to enjoy a sustained increase in industrial spending. Governments are using measures such as loan guarantees and subsidies to drive investment in energy infrastructure, reshoring manufacturing, and various other capital-intensive activities. I'm not sure what the likely scale and impact of this will be for companies such as Hill & Smith. There seems to be the potential for significant growth. At the same time, competitive pressures could rise and inflation might remain an issue. I mention this because – like Rotork – Hill & Smith looks expensive to me in a historical context: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/hils-div-ebit-fcf-pe-yield.png) This is a business I'd quite like to own, but I have some reservations about buying in at what appears to be a historically-expensive valuation. On the other hand, if this business really is at the start of a period of strong expansion, the shares might easily grow into the current valuation. My value bias means I'm likely to wait for an opportunity to buy this business when it's less popular. But I can see plenty to like at current levels too, and will continue to follow HILS's progress with interest. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: do these FTSE 100 shares offer value? ADM, AV, BA (17/08/23) URL: https://www.rolandhead.com/dividend-notes/do-these-ftse-100-shares-offer-value-adm-av-ba/ Last updated: 2023-08-30T16:27:19.000Z Welcome back to my dividend notes. Today I'm looking at a trio of FTSE 100 firms that have reported recently. These include: - a seven-bagger; - a business that's just announced its biggest ever acquisition; - and a company whose share price is lower than it was 20 years ago! ### Companies covered: - [**Admiral (LON:ADM)**](#admiral-adm)\- solid half-year results confirm my view this firm is the class of the field in the UK motor insurance sector, but I'm less convinced by Admiral's international diversification efforts. - [**Aviva (LON:AV)**](#aviva-av)\- solid half-year results show continued cash generation and delivery to plan. I don't think the quality of this business justifies a high rating, but at current levels the 8.7% dividend yield looks attractive to me. - [**BAE Systems (LON:BA)**](#bae-systems-ba)\- defence giant BAE looks in good shape at the moment and has a record order book. But the company has just announced its largest ever acquisition. BAE shares are also trading at a near-record valuation. I'm not sure how much value is on offer at this point. **Tip:** to search for my previous coverage of a company, enter its ticker code into the search tool at the top of this page. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Admiral (ADM) > "we believe that the cycle is turning" Admiral has issued a solid set of half-year results and a confident outlook for the year ahead. The company believes the cycle could be turning for UK motor insurers, after a difficult year in 2022 when claims costs soared. These challenging conditions exposed some weaknesses in rival Direct Line's business and DLG reported a loss for 2022\. I subsequently [decided to sell DLG](https://www.rolandhead.com/dividend-shares/should-i-sell-my-direct-line-insurance-shares/) from my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and my own holdings. However, FTSE 100-listed rival Admiral fared much better in 2022, reporting a pre-tax profit just 7% below pre-pandemic levels. In truth, I think Admiral has always been a superior business to Direct Line. My original decision to purchase Direct Line was based on valuation rather than quality grounds. With hindsight, this may have been short sighted. This week's half-year results from Admiral showed a further drop in earnings and a reduction in the interim dividend – but these numbers still seemed pretty respectable to me, given the improving outlook. **Half-year highlights:** Admiral says its group revenue rose by 21% to £2.24bn during the six months to 30 June, as insurance premiums were increased to reflect continued inflation. The company says that new business quotes for UK motor insurance rose by 20% during the half year, compared to the same period last year. While this is painful for consumers, Admiral doesn't appear to be profiteering. Pre-tax profit rose by just 4% to £233.9m, while after-tax earnings per share fell 5% to 57.6p. The group's financial health remained good, though. Admiral's solvency ratio was 182% at the end of the half year (H1 22: 185%) reflecting a comfortable cushion of surplus capital to support dividends. Profitability was also strong, with a return on equity of 39% (H1 22: 36%). Admiral's heavy use of reinsurance has long supported high returns on equity. I'm not sure if the business will return to its long-run average of c.50% ROE, but these results suggest to me that Admiral's business model is continuing to work well in more difficult circumstances. **Dividend:** the interim dividend fell by 15% to 51p per share, as the company maintained its payout ratio of c.90% of earnings. Current forecasts suggest a full-year payout of 116p, giving a prospective yield of 5%. **Operating commentary:** the total number of group customers rose by 4% to 9.4m last year, but the company says its UK motor customer base fell by 7% to 4.76m customers, as it prioritised margins over growth. Customer numbers in the firm's other UK operations rose, as these operations were less affected by inflation and presumably remained more competitive on price. The group's underwriting remained profitable, with a combined ratio at group level of 89.8%. The combined ratio represents the sum of claims costs and operating expenses, compared to premium income. So a figure under 100% represents profitable insurance underwriting. In addition to underwriting profits, insurers may generate investment income by investing customers' premiums. In the UK motor business, higher interest rates drove an investment income of £50.9m during the half year, compared to £20.9m during the same period last year. This helped to offset a slight reduction in underwriting profits, which fell from £198.5m to £189.5m for the half year. There are lots of moving parts here, but performance in the core UK business during the first half of this year looks good to me and was also fairly consistent with past years. It's hard to find serious fault with this business, in my view. **International operations/diversification:** Admiral is already the largest motor insurer in the UK and has limited room to expand. It's addressing this challenge in two ways: - the UK business is expanded into adjacent areas such as home and travel insurance and personal loans - the group has several interational insurance operations in Europe and the US These secondary businesses all generated revenue and customer growth during the half year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/adm-1h23-revenue-segments.png) Source: Admiral H1 2023 presentation However, several of them remain loss-making. None of them make a material contribution to the profitability of the group: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/adm-1h23-profit-split.png) Source: Admiral H1 2023 presentation Admiral's international insurance operations now have 2.2m customers and generated £464m of revenue during the first half of the year. So these businesses are not trivial – but their customers are spread across multiple operating subsidiaries in the US, France, Spain and Italy. International insurance growth has [been underway](https://admiralgroup.co.uk/who-we-are/our-milestones?ref=rolandhead.com) for well over a decade: - Spain (2006) - Italy (2008) - USA (2009) - France (2010) Yet collectively, these operations generated a pre-tax loss of £7.6m in H1. In contrast, Admiral's UK insurance business was launched in 1993\. In 2003, it generated a pre-tax profit of £57m. The group's UK loan business, Admiral Money, has also delivered a quicker journey to profitability. It was launched in 2017 and turned profitable in 2022. I wonder if the overseas insurance businesses lack the kind of disruptive innovation that characterised Admiral's strong early growth. Presumably they all face large, established incumbent competitors. Each market will also have different cultural and market characteristics. Insurance is not exactly the same everywhere. It's not clear to me if Admiral's overseas insurance businesses will ever reach the kind of attractive scale and profitability enjoyed by its UK operations. I'm also slightly unsure about the [Admiral Pioneer](https://www.admiralpioneer.com/?ref=rolandhead.com) business, which appears to be an in-house venture capital division: > "Admiral Pioneer is a new entity within Admiral Group with the aim of seeding, launching and scaling new businesses to grow and diversify Admiral in the future." Admiral Pioneer generated an increased pre-tax loss of £12.4m during the first half (H1 2022: £8.8m loss). I think it's possible to argue that Admiral and its shareholders would be better served by the firm focusing on its UK business and returning any additional surplus capital to shareholders, perhaps through buybacks as well as dividends. In reality, only time will tell. I accept that all of these efforts could go either way. One (or more) of them may yet become a standout success, justifying all the others. Although I'm a little sceptical about these diversification efforts, the company's track record of creating shareholder value does perhaps justify giving management the benefit of the doubt. Admiral shares have seven-bagged in 20 years, backed by steady dividend and NAV growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/adm-navps-divps-sp-170823.png) #### My view Despite my concerns about diversification (diworsification?) I think Admiral remains an excellent and very profitable business. Broker consensus forecasts currently price the shares on 19 times forecast earnings, with a dividend yield of around 5%. This P/E rating is slightly above the long-run average according to SharePad data, but I think it could still represent fair value for this business, given Admiral's high returns on equity. I remain interested in Admiral, which also scores well in my dividend screen for financial stocks. I'll continue to follow the business, but I'm aware that inflation has been more persistent than expected. Even if price rises ease, I wonder if they may continue to weigh on Admiral's ability to take market share and grow profits, given competitive pressures. For now, I'm on the sidelines. But Admiral is certainly a stock I could see myself owning in my dividend portfolio. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Aviva (AV) > "Confident outlook for 2023, expect to exceed Group medium-term targets" I last looked at this FTSE 100 insurer [in May](https://www.rolandhead.com/dividend-notes/8-yield-industrial-headwinds-av-rs/), when I thought that the shares were reasonably valued and potentially attractive to me from an income perspective. **Half-year results highlights:** this week's interim results don't change that view. Aviva's operating profit rose by 8% to £715m during the first half of this year, while Solvency II own funds generation (a measure of surplus cash generated) climbed 26% to £648m. Aviva's Solvency II coverage ratio remained very comfortable, at 202%, while the group's combined operating ratio of 94.8% confirmed that it general insurance underwriting remains profitable. Profitability improved on the same period last year, with a return on equity of 10.8% (H1 2022: 6.7%). **Dividend:** the interim dividend will rise by 8% to 11.1p per share and the company confirmed previous guidance for a payout of c.33.4p per share this year. That gives Aviva shares a prospective yield of 8.7% at current levels. However, management say that dividend growth from next year is likely to be at *"low-to-mid single digit"* levels. **Operating commentary:** Aviva said gross written premium rose by 12% to £5,274m in its general insurance business, primarily driven by price increases. Sales of health insurance rose by 58%, presumably driven by buyers seeking to circumvent long NHS waiting lists. Annuity sales (bulk and individual) rose by 17% to £3,223m, while the Aviva Investors asset management business maintained net inflows of £0.2bn, unchanged from the same period last year. **Outlook:** CEO Amanda Blanc believes that profitability should continue to improve in the general insurance business as inflation eases and the benefits of previous price increases feeds through. Ms Blanc expects to report a group operating profit up by 5%-7% in 2023, from a figure of £1,350m in 2022\. **Note:** *Anyone looking at last year's results for a comparison may be confused - operating profit last year was reported as £2,213m. The reason for the discrepancy is that the firm's 2022 results have now been restated to reflect the new IFRS 17 accounting rules for insurers. This shouldn't have any impact on dividend-paying capacity, but results in some reporting and measurement changes - details available [here](https://www.aviva.com/investors/ifrs-17-transition-update/?ref=rolandhead.com).* Aviva says it remains on track to generate £1.5bn of own funds per annum by 2024 and return a total of £5.4bn to shareholders between 2022 and 2024. Targeted cost savings of £750m are expected to be delivered *"by 2024"*, one year early. Broker forecasts suggest earnings of 41.6 per share this year, pricing the stock on just nine times forecast earnings – with a near-9% dividend yield. #### My view As I discussed in my [dividend share review of Aviva](https://www.rolandhead.com/dividend-shares/can-aviva-keep-on-delivering/) in January, Aviva's profitability has always been somewhat average – sometimes below average: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/av-roe-170823.png) Although I believe CEO Amanda Blanc has made some sustainable improvements to performance, I think it's worth remembering the company's poor record of shareholder value creation: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/av-navps-divps-170823.png) Compare this chart to the equivalent one for Admiral, above! This may be one reason why Aviva's share price has essentially made no progress over the last 25 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/av-chart-all-170823.png) I suspect Aviva's large, mature operations in developed markets will always struggle to generate much sustainable growth. But the group's improved cash generation and stronger balance sheet suggest to me it could remain a decent cash cow for income seekers. Everything has its price, in my view, and with a covered forecast dividend yield of 8.7%, I would consider Aviva for a high-yield portfolio. --- ### BAE Systems (BA) > "secured £21.1bn of orders to set a record order backlog of £66.2bn" The war in Ukraine has triggered a widespread increase in defence spending by western governments. FTSE 100 defence group BAE Systems upgraded its profit guidance earlier this month after publishing half-year results showing operating profit up by 20% to £1,233m for the six-month period. Underlying earnings per share are now expected to rise by 10%-12% this year, compared to 5%-7% previously. Free cash flow is expected to top £1.8bn, versus previous guidance of £1.2bn. Debt levels are down and the group has a record order book of £66.2bn. The outlook appears strong, with high single-digit percentage earnings growth forecast through to 2025. BAE has an impressive 20-year record of dividend growth and the firm's interim payout has just been lifted by 11%. That's well above the 4% average growth rate of recent years. Should I be considering this stock for my dividend portfolio? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ba-dividends-170823-1.png) #### My view I have followed BAE Systems for several years but do not currently own the shares. I think the business is in good shape at the moment and appears to be well positioned to benefit from the external environment. The shares currently score fairly well in my dividend screen, earning a score of 68 out of a possible 100\. However, while the group's dividend record naturally appeals to me, there are several reasons why I'm not considering buying the shares at the moment. **Acquisition:** chief executive Charles Woodburn appears to be feeling confident. He's just agreed a $5.5bn deal to acquire the Ball Aerospace business from its parent company, US packaging group **Ball Corporation**. Ball Aerospace is described as a *"space and defence technology leader":* > "Ball Aerospace is a leading provider of spacecraft, mission payloads, optical systems, and antenna systems" The deal will be BAE's largest ever and is expected to help BAE gain scale in this fast-growing segment of the market. Woodburn says he *"couldn't be more pleased"* to have secured this deal and believes the *"strategic and financial rationale is compelling"*. However, the value – or not – of this acquisition appears to be highly dependent on continued growth hopes. - BAE has agreed to pay $5.55bn for Ball Aerospace - Management say that this includes tax benefits with a net present value of $750m, reducing the effective cost to around $4.8bn - *Including* this tax benefit, BAE says the deal is valued at **13 times Ball's 2024 forecast EBITDA**, suggesting an EBITDA figure of about $370m - However, Ball's 2023 forecast EBITDA is said to be $310m, increasing the valuation multiple to **15.5x EBITDA** - Moreover, EBITDA includes depreciation and amortisation costs that are very real for engineering and manufacturing businesses. - I prefer to consider acquisitions based on historic operating profit - The mandatory disclosures reveal that Ball generated revenue of c.$2bn and EBIT of $170m in 2022 - These numbers imply BAE is paying a **multiple of 28 times trailing operating profit,** including the expected tax benefit - For contrast, BAE itself currently trades on a trailing EV/EBIT multiple of 13x – as we will see, this is somewhat above average for this business. I suspect that the Ball acquisition will probably be a reasonable deal for BAE over the medium term, expanding its capabilities in key areas. But my feeling is that BAE is probably paying quite a full price. More generally, my experience suggests that when companies have the confidence to make record-sized acquisitions, market conditions are often quite bullish, limiting the value on offer. This leads me to my next concern. **Profitability:** I really want to own businesses with above-average profitability and the ability to deliver compound growth over long periods. BAE's return on capital employed has averaged just over 10% in recent years. Margins are also somewhat unexciting, averaging around 10%. These numbers are okay for a large and somewhat capital-intensive engineering business. But they're at the lower end of the range I target, especially given the rising cost of capital (interest rates): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ba-roce-opmargin-170823.png) I wouldn't rule out investing in BAE, based on this historic profitability. But I'd want to do so when I felt that the valuation provided a comfortable margin of safety. I'm not sure that's true at the moment. **Valuation:** BAE shares are currently trading on about 16 times forecast earnings. The dividend yield has dropped to about 3%. Historically, such a low yield has been unusual and signalled the start of a period of share price weakness: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ba-sp-divyield-170823.pn.png) Of course, past performance is not a guarantee of future returns. But the stock's P/E is also unusually high at the moment: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/ba-sp-cape-pe-170823.png) In my view, the current valuation reflects two possibilities: - BAE's earning power will be significantly improved for the foreseeable future, due to a resurgence in government defence spending - Market exuberance for defence stocks means that BAE shares are trading above the level I would normally expect for this business, which I'd characterise as mature, of average profitability, and relatively slow growing. In situations like this, we all have to do our own research and form our own view. My personal view is that BAE shares look relatively expensive at the moment. To be interested in buying, I'd be looking for a dividend yield of 4%-5%, which would be equivalent to a share price of 600p - 750p. I may be wrong, of course! Time will tell. Please let me know what you think in the comments below. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Shares Podcast: Investor's Roundtable discussing Asset Allocation, Ocean Wilsons (OCN), Tristel (TSTL) & Arcontech (ARC) URL: https://www.rolandhead.com/podcasts/shares-podcast-investors-roundtable-with-maynard-paton-mark-simpson-bruce-packard-and-roland-head/ Last updated: 2024-01-10T12:46:36.000Z I recently took part in another Investor's Roundtable podcast with fellow private investors [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com), [Mark Simpson](https://smallcapslife.substack.com/?ref=rolandhead.com) and [Bruce Packard](https://knowledge.sharescope.co.uk/bruce-packard-2/?ref=rolandhead.com). In this episode we discussed our approach to asset allocation and the investment potential of shipping and investment group **Ocean Wilsons (LON:OCN)**, medical disinfectant specialist **Tristel (LON:TSTL)**, and financial software firm **Arcontech (LON:ARC)**. **Timestamps:** 3:50 Why Bruce bought Ocean Wilsons (OCN). 5:30 A four-way discussion about the investment potential of Ocean Wilsons (OCN). 20:05 Why Maynard bought Tristel (TSTL). 23:35 A four-way discussion about the investment potential of Tristel (TSTL). 38:30 Why Mark bought Arcontech (ARC). 42:25 A four-way discussion about the investment potential of Arcontech (ARC). 51:05 A four-way discussion about the value of asset-allocation. Thanks for listening! --- **Disclaimer:** This podcast is provided for information and educational purposes only. All comments represent participants' personal views and should not be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: property special - SVS, PSN, DLN, RECI (10/08/23) URL: https://www.rolandhead.com/dividend-notes/property-special-svs-psn-dln-reci-10-08-23/ Last updated: 2023-08-10T16:15:58.000Z Welcome back to my dividend notes. In today's report I've focused on recent news from four property stocks. They're all very different businesses, but I think the common threads I'd draw are that: - Value and quality is available for equity investors in this sector, selectively - Balance sheet strength is more important than ever - It could take the market longer to adjust to higher interest rates than expected - Property prices are likely to fall, in general No great surprises here, probably. Let's take a look at the company-specific news. ### Companies covered: - [**Savills (LON:SVS)**](#savills-svs)\- half-year profits have slumped at the real estate group due to a collapse in transaction volumes. I continue to like this business on a long-term view, but feel that patience may be needed. - [**Persimmon (LON:PSN)**](#persimmon-psn)\- not my favourite housebuilder, but a reasonably reassuring update, in my view. - [**Derwent London (LON:DLN)**](#derwent-london-dln)\- today's half-year results confirm my view that this is one of the best quality REITs out there, at a potentially attractive valuation. - [**Real Estate Credit Investments (LON:RECI)**](#real-estate-credit-investments-reci)(I hold) - a solid update from this specialist property lender. The 9.5% yield still looks sustainable to me, but this niche stock isn't without risk. **Tip:** to search for my previous coverage of a company, enter its ticker code into the search tool at the top of this page. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Savills (SVS) > "our range of expectations for the year as a whole has reduced somewhat" International real estate group Savills says full-year profits will now be lower than expected, due to a sharp slump in property transaction volumes. I last covered Savills [in May](https://www.rolandhead.com/dividend-notes/a-hidden-profit-warning-tcap-svs-smin/) when I (and others) suggested that the firm's AGM update was a profit warning in disguise. I've also covered Savills previously in an [in-depth dividend share review](https://www.rolandhead.com/dividend-shares/savills-is-this-property-firm-a-good-dividend-share/) last December. **Half-year highlights:** Savills revenue fell by 2.5% to £1,011.4m during the first half of the year, but the group's reported pre-tax profit fell by 88% to just £6m. The reason for this profit slump is that the company has maintained its staffing levels and continued to invest in IT and other areas. This will allow it to maintain good relationships with existing customers and be well-positioned for when market conditions improve. As a result, Savills operating costs rose by 2.4% to £972m during the first half of the year, compared to the same period last year. *This is another example of operating leverage in reverse, similar to what we saw with [recruiter Robert Walters earlier this week](https://www.rolandhead.com/dividend-notes/cyclical-opportunities-bbox-bp-rwa-tw-08-08-23/).* Savills' net cash balance fell to just £12.9m during the period (H1 2022: £149m) but I don't think this is as worrying as it sounds. The group's cash generation is generally heavily weighted to the second half of the year. **Trading commentary:** with the exception of its transaction advisory (estate agency) business, Savills' performance seems to have been quite strong during the first half. All other parts of the business reported stable or rising revenue: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/svs-1h23-segment-revenue.png) Source: Savills H1 2023 results The UK delivered the biggest hit to revenue. The firm's home market generates about 40% of group revenue, but management said UK commercial property transactions fell by 60% during the first half of the year and were 46% below the five-year average. Commercial property transactions were also subdued in most of the company's main overseas markets, due to valuation issues and the uncertain economic outlook. **Dividend:** Savills has increased its interim dividend by 4.5% to 6.9p per share and reiterated its policy that the dividend *"is designed to provide sustainable real income growth and be supported by the less transactional business earnings"*. I don't expect the payout to be cut unless conditions get significantly worse. Broker forecasts ahead of today's results suggested a payout of 36p per share this year, giving a 4% yield. **Outlook:** Savills' view is that many market participants are waiting to see where interest rates settle down before committing to major transactions. > "Market participants, whether investors or occupiers, seek greater certainty on the trajectory of interest rates over the next 18 months, something which has become somewhat clearer in recent weeks than for much of the period." The company says it can see some positive signs but paints a mixed picture: > "We are seeing some positive signs in markets such as the UK and continued strength in certain Asia Pacific markets including Japan; in Continental Europe and mainland China we now expect reduced market volumes to continue through much of the year." Frustratingly, there's no clear guidance given on the group's revised expectations: > "Accordingly, our range of expectations for the year as a whole has reduced somewhat." #### My view Today's downgrade probably shouldn't be a big surprise. But I don't see anything to suggest the fundamental qualities of this business have changed. I expect Savills to emerge from this downturn in reasonable financial shape. The main area of uncertainty for me is whether Savills may struggle to regain the momentum seen over the last decade, against a backdrop of higher interest rates. I think there's a risk that the property market could take longer to adjust to rising rates than is currently expected. Despite this, I am confident Savills will remain a profitable and market-leading business. On balance, I think the shares are probably relatively attractive at current levels on a long-term view, although I wouldn't be surprised to see a bit more downside from here. Even after today's drop, Savills' share price is actually higher than it was at in December 2022, when I [reviewed this business](https://www.rolandhead.com/dividend-shares/savills-is-this-property-firm-a-good-dividend-share/). 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Persimmon (PSN) > "operating profits in line with expectations given stubborn build cost inflation in the period" FTSE 100 housebuilder Persimmon says that it expects to build *"at least 9,000"* homes this year, at the top end of the company's [previously-guided range](https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/). However, the firm said that *"stubborn"* cost inflation and a slowdown in Q1 hit profit margins during the first half. **Half-year highlights:** Persimmon completed 4,249 homes during the first half of the year, a 36% reduction on the 6,652 completed in H1 last year. This fall was reflected in a 30% drop in revenue, which fell to £1.19bn. Underlying operating profit for the half year fell by 65% to £152.2m, reflecting lower volumes and cost inflation. As a result, operating margin for the half year fell from 27% to 14%. Margins were also hit by an increased proportion of sales to housing associations. These accounted for 23% of completions during the half year, up from 17% last year. Persimmon's net cash balance fell from £780m to £360m, while land holdings fell from 89,052 to 84,751, reflecting completions and a slower pace of buying. Slimming down their land banks is one trick housebuilders can use to release more cash during a downturn. Net assets per share fell by 2.4% to 1,050.7p in H1\. Persimmon is relatively asset-light compared to some rival firms and is still trading slightly above its book value at the time of writing. Management say that average selling prices rose by 4.4% to £256,445 during the first half, but this included *"a greater proportion of larger homes"*. The firm's sales force is also making *"controlled use of incentives"* such as part-exchange. This accounted for 3.2% of private sales during the half year. I would argue that these facts suggest that like-for-like selling prices net of incentives are not rising, and may well have fallen slightly. However, the big risk for housebuilders isn't so much falling prices as a collapse in volumes. Broadly speaking, firms can build and sell homes profitably at any reasonable price, as long as they haven't overpaid for land holdings. But they can't make money if they can't shift any houses. Transaction volume is the lifeblood of this business, not price growth. **Dividend:** Persimmon will pay an interim dividend of 20p per share. This is in line with a new dividend policy introduced last year that saw payouts fall by 75% from their previous levels. Full-year forecasts for a payout of 62.3p per share look reasonable to me and suggest a prospective yield of 5.5%. **Outlook:** Persimmon's forward sales position is currently said to be £1.6bn, down from £2.2bn at the same point last year. The company expects to complete *"at least 9,000"* homes this year, at the top end of previous guidance. However, operating profit is only expected to be *"in line"*, due to *"stubborn build cost inflation"*. Broker forecasts suggest earnings of 83.9p per share, putting the stock on a forecast P/E of 13. #### My view Persimmon isn't my favourite housebuilder, as I'm not a fan of the company's strategy of paying dividends that represent almost all its earnings. I prefer a focus on dividend sustainability and higher levels of cover during the good times. My pick among housebuilders is [Bellway, which I added to the model portfolio in October last year](https://www.rolandhead.com/dividend-shares/cyclical-ftse-250-stock-with-a-6-yield/) *(subscribers only)*. I also prefer to buy property stocks at a discount to their book value, to provide a margin of safety. Even so, I don't see any particular concerns in Persimmon's half-year numbers. There's still a risk that market conditions will continue to worsen. But for now, the company's shift to bulk deals and its low price positioning seems to be helping sustain its performance. --- ### Derwent London (DLN) > *"We have delivered over £26m of new leases in 2023 to date, a near record level"* Demand for offices with high sustainability ratings is a key theme in commercial property at the moment. Derwent London provides us with another example of this today. This London office REIT has secured lettings of £26m so far this year, a new record for the firm. These new lettings were priced at an average of 8.3% ahead of December 2022 estimated rental values, suggesting healthy demand. Derwent [specialises](https://www.derwentlondon.com/about/our-business?ref=rolandhead.com) in redeveloping office properties to high specifications. Its [portfolio](https://www.derwentlondon.com/properties?ref=rolandhead.com) is focused on prime London areas, particularly the West End. I've previously [commented favourably](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/) on the quality and value I think are on offer here. Today's half-year results do nothing to change that view. **Half-year highlights:** Derwent says new lettings in H1 included sizeable deals with tenants such as PIMCO, Moelis, Buro Happold, and Uniqlo. Vacancy rates have fallen to 4.5%, from 6.4% at the end of 2022. Gross rental income for the half year rose by 3.9% to £105.9m, but falling property prices meant that the Derwent's EPRA earnings (an industry metric) fell by 7% to £55.6m, or 49.5p per share. Falling portfolio valuations essentially reflect higher interest rates – landlords need higher rental yields in order to finance properties. Derwent's total property return fell by 2% in this environment, outperforming its benchmark which dropped 3.2%. *(Total property return = change in capital value, less capex, plus net income)* **Net asset value:** Derwent's NAV per share was 3,444p at the end of June. That's a reduction of 14% over the last year. (June 2022: 4,023p). The shares are trading at 2,160p as I type, giving a discount of 37%. I think that's a comfortable margin of safety on a high-quality London portfolio. **Balance sheet:** there's still a lot of uncertainty about the outlook for commercial property. For equity investors, it's worth remembering that equity is the first capital layer to get wiped out in a refinancing. In my view, it makes sense to focus on REITs with low debt levels and good cash flow visibility on existing leases. Derwent is one of the best at the moment, in my view: - Loan-to-value ratio of 25% - 98% of borrowing at fixed rates with £562m of undrawn facilities and cash - Weighted average debt term to maturity of 5.6 years - Portfolio weighted average unexpired lease term (WAULT) of 7.2 years **Dividend:** the interim dividend has increased by 2.1% to 24.5p per share. Broker forecasts suggest a payout of 80.8p per share this year, giving a prospective yield of 3.7%. That's an unusually high yield for this stock, according to SharePad data: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/dln-divyield-100823.png) **Outlook:** management guidance is unchanged. Derwent says its portfolio should be more resilient than the wider London office market and expects to report a 0%-3% rise in estimated rental values (ERV). #### My view I continue to think Derwent London is one of the better quality listed commercial property REITs. With a strong balance sheet and the shares trading nearly 40% below book value, I believe there should be some value here. Although British Land and Landsec both offer much higher yields – a potential attraction – Derwent London's share price has outperformed both by a sizeable margin over the last 25 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/dln-chart-vs-blnd-land-100823.png) We can't be sure that the share price has bottomed out yet. The full impact of rising interest rates is still unclear, as today's update from Savills makes clear. Even so, I'd be comfortable adding DLN to my portfolio today on a medium-term view. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Real Estate Credit Investments (RECI) > "Dividends maintained at 3p per quarter, 9.5% yield, based on share price, as at 30 June 2023" RECI is an investment company. It provides senior loans to property developers. These are typically short-term, with an average duration currently of 1.8 years. The business is externally managed by Cheyne Capital, a specialist real estate business with $5bn of real estate assets under management. The company's [latest update](https://realestatecreditinvestments.com/investors/results-reports-and-presentations/?ref=rolandhead.com) covers its fiscal first quarter, ending 30 June. The company's presentation started with some interesting (and somewhat bearish) commentary on the outlook for commercial property over the next few years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/reci-1q23-macro-comments.png) Source: RECI June 2023 update **Q1 update:** the comments above make sense to me and seem consistent with commentary from other market participants. But to some extent, RECI may be talking its book. RECI's loan book doesn't have much exposure to sectors identified as risky above. Its focus on senior loans also means that it should be the last to take losses if the value of properties in its portfolio falls. Although the average loan-to-value ratio on RECI's loans is 60%, the company's own balance sheet is not so heavily geared. Repayments on several projects saw RECI's debt-to-equity ratio fall from 30% to 25% during the quarter. As a result, net assets per share rose to 149.9p (31 Mar 23: 146.9p per share). RECI currently has 45 investment positions (including some market bonds) with a net value of £338.2m, including the company's £28m cash balance. There's a bias towards residential assets of various kinds, but the largest single class is hotels: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/reci-1q23-asset-class-300623.png) Source: RECI Q1 FY24 presentation The UK accounts for 60% of assets, with the remainder spread over selected western European countries. Although RECI isn't a REIT, it targets a dividend payout of around 7% and has – in practice – paid out most of its profits as dividends over the last decade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/reci-1q23-dividend-nav-record.png) **Outlook:** RECI says it continues to have an attractive pipeline of deals offering attractive rates of return. Bank lending is expected to remain constrained, delivering *"a compelling emerging opportunity set in senior loans"*. #### My view I hold this share outside my main dividend portfolio. My impression is that it's well-run and focused on a specialist sector of the market where Cheyne Capital has good skills. However, I'm aware that the current dividend policy has only been in place since 2011\. So it hasn't yet been tested in a rising interest rate environment. There's also the risk that some of RECI's projects may yet go wrong, resulting in NAV impairments. Problem loans can often take a while to emerge in a downturn. I see this as a specialist and somewhat riskier investment than – say – [British Land](https://www.rolandhead.com/dividend-notes/value-or-not-blnd-expn-bt-a/) (no position). However, RECI's 9.5% dividend yield looks sustainable to me based on the information available today. I remain happy to hold. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! *Disclosure: at the time of publishing, Roland owned shares in RECI and Bellway.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: cyclical opportunities? BBOX, BP, RWA, TW (08/08/23) URL: https://www.rolandhead.com/dividend-notes/cyclical-opportunities-bbox-bp-rwa-tw-08-08-23/ Last updated: 2023-08-08T20:11:52.000Z In this update I'm looking at four cyclical businesses from different sectors of the economy. All four offer potentially attractive dividend yields that range between 4% and 8%. I wouldn't buy all of these shares today, but there are some I'd consider. I can definitely see *some* value among this selection of UK dividend shares. ### Companies covered: - **[Tritax Big Box (LON:BBOX)](#tritax-big-box-bbox)** \- Last week's interim results from this warehouse REIT confirm [my prevous view](https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/) that this stock could be attractive, with a fairly safe 5% yield. - **[BP (LON:BP)](#bp-bp)** \- profits fell by 50% during the first half of this year, but remain very high by historical standards. BP's dividend is being rebuilt, but as I explain, the shares are not yet cheap enough to tempt me. - **[Robert Walters (LON:RWA)](#robert-walters-rwa)** \- half-year results show a dramatic slump in profits as operating leverage kicks in. However, net cash covers a quarter of the group's market cap and supports a 6% yield. I think the business could be attractively valued on a cyclical view. - **[Taylor Wimpey (LON:TW)](#taylor-wimpey-tw)** \- this housebuilder looks in reasonable shape and offers a yield of nearly 8%. I discuss the potential sustainability of TW's dividend policy, given what we know so far. **Tip:** to search for my previous coverage of a company, enter its ticker code into the search tool at the top of this page. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Tritax Big Box (BBOX) > "approaching 10 years of consistent 100% rent collection" I covered this warehouse REIT's half-year update [back in May](https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/). At that time, I was cautiously optimistic and considered that the shares could offer reasonable value. In my view, BBOX is one of the best quality of the current crop of logistics REITs. It has a large portfolio of modern property and good quality, investment grade tenants (most notably, **Amazon**). Last week's half-year results do not seem to have contained any fresh bad news. **NAV:** Property valuations remained stable and net asset value per share rose by 1.5% to 183p. This means that the shares currently trade at a discount of around 20% to their book value. **Dividend:** the interim dividend will rise by 4.5% to 3.5p per share (paid quarterly). This payout was covered comfortably (for a REIT) by adjusted earnings of 3.94p. In this case, I think this is a reasonable proxy for surplus cash generated from rental income. Consensus forecasts suggest a full-year payout of 7.2p, giving a prospective yield of 5.1%. **Debt/leverage:** a weighted average cost of debt of 2.6% looks competitive, with the majority at fixed rates. The REIT's average unexpired lease period (WAULT) of 12 years should provide good visibility on cash generation. The only possible risk that I'd flag up is that BBOX has a £450m RCF (overdraft) that's due for renewal by the end of next year. This represents around 25% of its borrowing capacity, although only £129m was drawn down at the end of June. Work is underway to renew this facility. I don't expect a problem, but the cost is likely to increase. #### My view On balance, my feeling is that Tritax Big Box's half-year results support the view I took in May. I think BBOX shares could offer decent value and a reasonably safe 5% yield at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### BP (BP) > "we're delivering for shareholders growing our dividend and announcing a further share buyback" BP's results contained a surprise 10% dividend increase. This was a bigger increase than I expected, given that BP's underlying replacement cost profit fell by almost 50% to $7.6bn during the first half of this year (H1 2022: $14.7bn). However, I think it's worth remembering that BP's profits remain very strong in a historic context, even factoring in this year's forecast decline (the shaded bar): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/bp-pat-080823.png) CEO Bernard Looney has sensibly kept the dividend payout ratio low during this period of bumper profits. Overall, I think BP is in good shape right now. Oil and gas prices remain supportive, debt levels have fallen, and operating costs appear to be under control. **Valuation/yield:** my main interest in this business lies in assessing the valuation of the stock and the sustainability of BP's dividend. BP's forecast P/E of 6.7 looks low and the stock's trailing free cash flow yield of c.20% is also remarkably cheap. However, as I explained in my recent in-depth review of **Shell**, I believe that BP and Shell's dividend yields provide a more objective, through-cycle measure of valuation. On this basis, BP's forecast dividend yield of 4.4% looks no better than average to me. Sure enough, we can see that historically, the current share price of c.480p has typically been a mid-cycle valuation – neither expensive nor cheap: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/bp-all-chart-080823-1.png) In contrast, I think BP has generally been an attractive buy at under 400p. At this level today, BP shares would provide a forecast yield of 5.3%. As things stand, I don't see much attraction in buying BP (or Shell) with a yield under 5%. I see BP as a mature and cyclical business with a limited ability to deliver structural growth. So I'd want the shares to provide a dividend yield above the 5% I can get risk-free, in order protect me from the risk that BP's future performance will reflect its past performance (see above chart). #### My view As I commented in my [recent in-depth piece on Shell](https://www.rolandhead.com/dividend-shares/should-i-buy-dividend-giant-shell-for-my-portfolio/), there's a risk that I'm wrong about BP (and Shell). Perhaps both companies will be able to become less cyclical and more profitable than they have been in the past. Or maybe oil and gas prices will stay higher for longer, powering a long period of stable profits. Maybe it will be different this time... I can't rule out these possibilities entirely. But personally, I don't see it. The good times could keep rolling for a while yet. But at some point, I expect that the usual cyclical forces and cost pressures will become an issue again, especially when the energy transition comes back into focus (assuming this happens). BP's (and Shell's) current focus on jumbo-sized share buybacks suggests to me that both companies' boards share my view that future profits are likely to be lower. As a long-term investor, I aim to buy cyclical shares at a valuation that's *cyclically* attractive. In other words, at the lower end of the company's historic valuation range, reflecting cyclical swings in profits. I don't think BP shares are at this level today. But if the share price continues to drift down towards 400p, I might revisit this view. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Robert Walters (RWA) > "Candidate and client confidence levels have yet to show sustained improvement across many of the Group's markets and specialist disciplines." It's (relatively) tough out there for recruiters at the moment, especially in the UK, US and China. These geographies were highlighted as weak spots in Robert Walters' half-year results. They were also flagged up by larger rival **PageGroup** in its recent interims. RWA's share price action since October 2022 provides a reminder of the cyclicalty of this sector. The stock is down by more than 50% from its post-pandemic peak: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rwa-3y-chart-080823.png) I covered Robert Walters' half-year trading update [in July](https://www.rolandhead.com/dividend-notes/looking-for-cyclical-buys-cch-vct-rwa-11-07-23/), but I think the full numbers are worth a brief look. In my view, they highlight the powerful operating leverage at work here – and suggest a possible buying opportunity. **H1 results highlights:** gross profit (or net fee income, a proxy for revenue) only fell by **4%** to £202.3m during the six months to 30 June. But this resulted in a **67%** drop in Robert Walters' pre-tax profit, which fell to just £8.1m. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rwa-1h23-highlights.png) Source: RWA H1 2023 results What's happened is that a small drop in fee income has been set against an *increased* fixed cost base, compared to the same period last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rwa-1h23-income-stmt.png) Administrative expenses – primarily payroll – have increased over the last year. Because these overheads consume the majority of gross profit, the impact on operating profit is dramatic. Companies which cannot flex their operating costs in response to changes in sales can deliver big swings in profit. This is known as operating leverage. It can work in both directions; up and down. **Why are costs rising?** Robert Walters' costs appear to have risen because the company is actually employing more people than it was one year ago. Management says headcount was 6% higher at the end of June than it was the previous year. Although the company says that headcount fell by 3% in Q2 (vs Q1), new chief executive Toby Fowlston says he's keen to *"protect the Group's strategic core".* Understandably, he wants to ensure the business well positioned to benefit from the eventual upturn. Fowlston has only recently taken charge following the retirement of founder-CEO Robert Walters. I'd imagine his strategy to date will have followed Walters' playbook fairly closely. **Cash provides margin of safety:** it's too soon to know whether this cyclical judgement will be proved correct. But a net cash balance of £69.8m (H1 2022: £81.8m) should provide a substantial safety margin, as long as the business remains profitable. This cash balance represents almost a quarter of the current market cap, or around 95p per share. It's probably worth noting that Robert Walters didn't need to cut its dividend in 2008/9\. Indeed, the firm has not cut its payout for more than 20 years. This suggests to me that the current high dividend yield could represent an opportunity: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rwa-dividend-yield-080823.png) **Outlook:** CEO Fowlston says that over the last two years, the group has invested in developing its global infrastructure and *"attracting and developing our people"*. He rightly points out that the company has a global brand and strong balance sheet, giving the group the capacity to take a longer view. Current trading is said to remain in line with Board expectations, which were revised down following June's profit warning. Earnings per share are expected to fall by 47% to 29.6p per share (2022: 56.2p per share). These forecasts put RWA stock on a 2023 forecast P/E of 13, with a 6% dividend yield that remains covered by forecast earnings. #### My view Recruiters like Robert Walters are fantastically profitable during the good times. Return on capital employed at this business peaked at over 30% in 2017/18 and has averaged 24% over the last six years. The business is highly cash generative, has a strong balance and experienced management. I would imagine that the founder-led culture of the business remains strong, even though Robert Walters has now retired. The shares now trade on just 12 times 10-year average earnings (CAPE), the lowest level seen since 2011\. The share price chart also looks attractive to me, assuming the business can maintain its long-term growth record: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/rwa-all-chart-080823-1.png) I think there's definitely some risk of further volatility and earning downgrades. But in my view, Robert Walters shares are likely to offer good value and sound prospects from current levels. This is a stock I would consider buying for my dividend portfolio at the moment. --- ### Taylor Wimpey (TW) > *"we have delivered a resilient performance with first half completions slightly ahead of our expectations."* When I covered this FTSE 100 housebuilder [in April](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/), I noted that the company's guidance for the year suggested it would complete 9,000-10,500 homes – roughly a 30% fall from 2022. The group's half-year numbers include updated guidance for completions of 10,000-10,500 in 2023\. It looks like demand has been stronger than first feared. Let's see how this affects the numbers – and dividend prospects – for this business. **H1 financial highlights:** Taylor Wimpey's revenue fell by 21% to £1,637.1m during the period. In a further example of operating leverage in action (see Robert Walters, above), the group's operating profit fell by 44.5% to £235.6m (H1 2022: £424.6m). However, one benefit of a shrinking order book is that it allows housebuilders to release cash from working capital. There's less money tied up in materials and work in progress. As a result, Taylor Wimpey's net cash balance rose by 2% to £655m during the half year, despite a substantial reduction in money owed for land purchases. Including these so-called land creditors, the firm swung from net debt of £201m in June 2022 to net cash of £67m at the latest half year. Net asset value remained unchanged at 126.7p per share (Dec 2022: 126.5p). Profitability remained reasonably healthy, in my view. The group's H1 operating margin fell to 14.4% (H1 2022: 20.4%). My calculation of return on capital employed shows ROCE falling from 16% last year to just over 14%, on a trailing 12-month view. **Dividend:** Taylor Wimpey's dividend policy is to pay out 7.5% of net asset value, or at least £250m annually throughout the cycle. This year's forecast payout of 9.2p per share will cost around £325m. This tells me the dividend could be cut by nearly 25% while remaining within the firm's policy. I estimate the minimum payout would be about 7p per share, after which a new dividend policy might be needed. The company says the current policy has been stress tested to include conditions including *"up to a 20% fall in house prices and 30% decline in volumes"*. The firm's numbers suggest that we aren't far off from a 30% decline in volumes compared to 2022\. But house prices have (so far) remained fairly stable. Average selling prices actually **rose** by 6.7% to £320k during the half year, although we aren't told how much of this is due to mix effects (i.e. larger, more expensive homes). Prices are [generally said to be falling](https://www.nationwidehousepriceindex.co.uk/reports/annual-house-price-growth-edged-further-into-negative-territory-in-july?ref=rolandhead.com). On balance, Taylor Wimpey's dividend looks safe to me at the moment. However, I'm not sure it's quite as robust as the company's narrative might suggest. Historically, this business has not managed to provide *"increased certainty of a reliable income stream through the cycle"*: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/tw-dividends-080823.png) **Outlook:** the *"seasonally quieter"* third quarter has started, well, quieter. TW's net private sales rate was 0.47 per outlet per week, 18% below the 0.57 per week reported for the Q3 period last year. Cancellations are slightly higher, too. The order book stood at £2,175m at the end of July (2022: £2,893m), representing 7,900 homes (2022: 10,392 homes). Full-year operating profit including joint ventures is expected to be £440m-£470m, with net cash at £500m-£650m. Consensus forecasts suggest this will equate to earnings of 9.1p per share, with a 9.2p per share dividend. This prices the shares on a forecast P/E of 13, with a 7.8% yield. #### My view Taylor Wimpey chief executive Jenny Daly says buyers are taking longer mortgages to help offset the impact of higher mortgage rates. Apparently, 27% of first-time buyers are taking mortgages over 36 years, compared to 7% in 2021\. For second-time buyers, 42% are taking mortgages with durations over 30 years, compared to 28% in 2021. If this is truly representative of what's being seen across the housing market, I think it could be a leading indicator of weak/sluggish house prices for the foreseeable future. We could even see a slow-motion house price crash, as my fellow dividend investor John Kingham [has suggested](https://www.ukdividendstocks.com/blog/uk-housing-market-valuation-and-forecast-for-2023?ref=rolandhead.com). However, I don't think this necessarily needs to be a big concern for housebuilders and their shareholders. Costs are stabilising and TW's profit margins remain in double digits. The build-to-rent market also seems likely to remain strong. I don't see why housebuilding won't remain a profitable and cash-generative business, especially for larger firms. Taylor Wimpey has plenty of cash and trades below book value. The 7.8% dividend yield looks sustainable to me, albeit not rock solid. On balance, however, I think this business is probably attractively valued as a potential investment at current levels. I already own [another housebuilder](https://www.rolandhead.com/dividend-shares/cyclical-ftse-250-stock-with-a-6-yield/), but if I didn't, I might consider TW. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### July '23 dividend portfolio update: no drama URL: https://www.rolandhead.com/portfolio/july-23-dividend-portfolio-update-no-drama/ Last updated: 2023-11-29T19:00:58.000Z July was a busy month for company news. No fewer than 11 of my model dividend portfolio companies issued results or trading updates during the period – more than half the portfolio. I've tried to be concise where possible, but this is still a long update. As usual, I've provided a summary at the top with links to each section. For an even shorter summary, I'd say that most companies appear to be trading reasonably well, in the context of current circumstances. All of the portfolio companies reporting were able to maintain or increase their dividends for the period. As far as I can see, the model portfolio forecast yield of c.5% I calculated for my [half-year review](https://www.rolandhead.com/portfolio/h1-2023-positioning-the-portfolio-for-long-term-growth/) remains a reasonable expectation for 2023. --- **Let's take a closer look at last month's portfolio news.** 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). ### In this month's report: Here's a summary of the company results covered in this report, with a link to each section: _This post is for paying subscribers only._ ### Dividend notes: value at the right price? BATS, AZN, SPT (02/08/23) URL: https://www.rolandhead.com/dividend-notes/value-at-the-right-price-bats-azn-spt-02-08-23/ Last updated: 2023-08-02T18:34:34.000Z Welcome back to my dividend notes. Today I'm looking for signs of value at two FTSE 100 firms following recent half-year results. I also consider the outlook for an unloved – but potentially cheap – FTSE 250 tech stock. ### Companies covered: - **[British American Tobacco (LON:BATS)](#british-american-tobacco-bats)** \- rising interest rates and legal costs are adding pressure to deleverage. I think there's a fair chance the 9% dividend yield will remain safe, but I don't think it's certain. Despite this, I reckon the shares are likely to offer a decent return from under £26. - **[AstraZeneca (LON:AZN)](#astrazeneca-azn)** \- financial performance at this pharma group seems to be improving after a tough few years. The valuation is still too steep for me, but I can see the potential for a future investment here. I'll be watching more closely from now on. - **[Spirent Communications (LON:SPT)](#spirent-communications-spt)** \- profits collapsed in H1 at this network testing specialist. But the order book is at record levels and the balance sheet carries net cash. A profit warning remains a risk, in my view, but I think the shares could offer decent value on a medium-term view. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### British American Tobacco (BATS) > "Commitment to dividend growth in sterling terms and our long-term 65% dividend pay-out ratio" A 29% rise in sales of vapes and other non-combustible products provided a boost to revenue at FTSE 100 tobacco group BATS during the [first half of this year.](http://www.investegate.co.uk/announcement/rns/british-american-tobacco--bats/half-year-report/7654921?ref=rolandhead.com) Revenue at the high-yield favourite rose by 4.4% to £13,441m during the first half of the year, despite a 0.5% fall in cigarette volumes by value. New Categories – vapes, nicotine pouches and heated tobacco – generated £1,656m of revenue during the quarter, as customer numbers rose by 1.5m to 24m. Chief executive Tadeu Marroco says that this business is now *"close to breakeven"* and should make a profit contribution next year. Adjusted operating profit for the half year rose by 3.6% to £6,020m, while free cash flow for the period was £2,467m, by my estimation. It's worth pointing out that BATS' cash flow is always second-half weighted due to various timing issues. So full-year cash generation should be much stronger. The group's trailing 12-month cash flow is about £8.1bn and a similar result is expected this year. That should provide sufficient cover for the dividend, which cost £4.9bn last year. This FTSE 100 tobacco giant has been a reliable source of dividend income for many years, despite rising debt levels, legal settlements, declining tobacco volumes and now rising interest rates. The dividend is declared annually but paid quarterly. The current payout of 230.9p (57.72p/qtr) was declared with the 2022 results and currently provides a yield of more than 9%. However, commentary in these half-year results suggest to me the payout could be under greater pressure than previously. **Dividend vs net debt?** BATS' net debt was £38,345m at the end of June, down from £39,281m at the end of December and £40,806m on 30 June 2022\. This reduction seems encouraging, but leverage remains high – net debt/EBITDA was 2.9x at the end of last year. 2023 guidance suggests only that BATS will make *"progress towards the middle of our 2-3x"* leverage corridor. Indeed, the following management quote suggests to me there could be a growing tension between the need to deleverage and maintain dividends at current levels: > in 2023 the Board has taken a pragmatic approach to prioritise strengthening our balance sheet. At the same time, we understand the importance of cash returns to shareholders, and remain committed to our 65% dividend payout ratio over the long term. I can see a couple of possible reasons for a renewed focus on debt reduction. **Legal woes:** in April BATS reached a $635m settlement with US authorities relating to allegations the firm was selling cigarettes to North Korea in breach of sanctions. The company has not yet settled this case in Canada, but its operations there are currently operating under bankruptcy protection (Canada's CCCA). One consequence of this is that the £1,653m of cash and £302m of investments held by BATS' Canadian subsidiary (confusingly, this is Imperial Tobacco Canada) are not currently available to the wider group. I don't have enough knowledge of these proceedings to predict what might happen next. But presumably there's a risk that at least some of this cash will be lost permanently or required for a settlement. **Rising debt costs:** A second potential concern is the impact of rising interest rates. The company says it has debt maturities of around £4bn per year over the next two years, and expects to report higher finance costs. Given the relatively small size of these maturities, the immediate impact of higher interest rates may be limited. But from what I can see in recent RNS notices, BATS is refinancing notes with rates of 2%-4.5% with new notes at 6%-7%. If average borrowing costs are rising by c.2.5% on refinancing. then each £1bn of debt refinanced could add c.£25m to annual interest payments. Thus, refinancing £4bn per year might added £100m/yr to interest costs. I should stress these are only my estimates and may be incorrect. But the direction of travel is clear and these extra costs will have to come out of free cash flow, before any debt repayments are made. **Outlook:** full-year guidance is unchanged. Global tobacco industry volumes are expected to fall by 3%, but BATS expects to achieve underlying revenue growth of 3%-5%, thanks to price increases and New Categories sales. This graphic from the H1 numbers provides a neat illustration of how price increases are used to offset volume declines: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/1h23-revenue-bridge-1.png) Operating cash flow conversion for the full year is expected to be over 90%. The company is maintaining its *"commitment to dividend growth in sterling terms"* and its *long-term* target for a 65% dividend payout ratio. Broker forecasts price the stock on less then seven times forecast earnings, with a 9.2% yield. ### My view Will British American be able to maintain its dividend while achieving the necessary deleveraging? Possibly, I think, but I don't think it's certain. However, the continued growth of the New Categories business seems encouraging. If this business unit can turn profitable (and cash generative) next year, it will be a significant milestone. BATS shares look cheap to me on pretty much any measure – for example, £8.1bn of free cash flow gives a trailing free cash flow yield of more than 8%, even when the company's debt burden is included in its valuation. The long-term risks to this business are well-rehearsed and don't need repeating here. But at current levels, I think the odds are favourable that the shares can deliver an acceptable shareholder return on a medium-term view. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### AstraZeneca (AZN) > "Strong revenue and EPS growth, reflecting momentum of recent launches and robust commercial execution" Pharmaceutical group AstraZeneca has been on a journey since CEO Pascal Soriot took charge in 2012\. The firm's recent [half-year results](http://www.investegate.co.uk/announcement/rns/astrazeneca--azn/half-year-report/7660546?ref=rolandhead.com) suggest to me that his decision to ramp up debt to fund acquisitions and growth may be paying off. Measuring progress objectively isn't always easy, though. AstraZeneca reported 'Core' earnings per share of $4.07 in H1, but statutory earnings of $2.34 per share. Which should I rely on? Rather than spending hours in the quagmire of adjustments that lie behind the core numbers, I've been monitoring AZN's free cash flow in recent years. After all, this is reality. The results have been encouraging, I think, and forecasts suggest stronger results are coming down the line. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/azn-fcfps-dividend-020823.png) The good news is that Astra's dividend is now covered by free cash flow again, after six years without cover. There are still a couple of potential sticking points for me, though. **Valuation:** my sums suggest the shares are currently trading with a trailing 12-month free cash flow yield of about 3%. That's a little lower than I normally look for. Consensus forecasts on SharePad suggest free cash flow will rise to $10.7bn in 2024 and $12.3bn in 2025\. That would imply free cash flow yields of 4.8% and 6% respectively, based on current exchange rates. That seems potentially attractive, especially as the group's rising profits have brought leverage down to a comfortable level, in my opinion. **Profitability:** AstraZeneca's balance sheet capital employed has risen from $41bn to $75bn since 2012\. I think this mostly reflects spending on acquisitions and new products, which has lifted intangible assets from $26bn to $58bn over the same period. As a result of this, the group's profitability has suffered. Return on capital employed has collapsed and operating margins have also taken a big hit: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/azn-roce-opmargin-capemplyd-020823-2.png) However, if profits (and cash flow) continue to strengthen as forecast, then I can imagine that AstraZeneca may soon be reporting improved profitability. ### My view I think it's fair to say that a fair amount of growth is already priced into AstraZeneca shares. But to my surprise, this FTSE 100 stock doesn't look as expensive as I thought it would. With a dividend yield of just 2.1% and such low historic profitability, AZN isn't in the buy zone for me at the moment. But I wouldn't rule out a possible investment in the future. I will be paying closer attention to this stock going forwards. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Spirent Communications (SPT) > "Operating profit was materially impacted by negative operating leverage which we expect to meaningfully reverse in the second half of 2023." Glass half full, or half empty? [Half-year results](https://www.investegate.co.uk/announcement/rns/spirent-communications--spt/results-for-the-six-months-ended-30-june-2023/7669954?ref=rolandhead.com) from network testing specialist Spirent Communications could be read both ways. A 10% share price slump on the day suggests the naysayers have the upper hand for now, but I think an opportunity could be emerging here. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/08/spt-2yr-chart-020823.png) **H1 highlights:** Spirent's revenue fell by 20% to $223.9m during the first half of the year, triggering a 96% drop in reported operating profit to just $1.6m. This appears to be an example of [operating leverage](https://www.investopedia.com/articles/stocks/06/opleverage.asp?ref=rolandhead.com) in reverse. It can be painful. However, the order book rose to a record $303.4m (H1 2022: $283.6m) and order intake remained healthy at $239.4m (H1 2022: $295.5m). Spirent's balance sheet also appear to be in good health. Despite spending $34m on a share buyback, the group ended the half year with net cash of $148m (H1 2022: $189m). The interim dividend rose has been lifted 5% to 2.76 cents per share, putting the stock on track to offer a 4% dividend yield this year. **What's the problem?** Telecoms is a cyclical business and Spirent's customers – mainly mobile network operators – appear to be slowing their spending. The popular argument that 5G spending is necessary and unavoidable appears not to be entirely true. The spending may be necessary, but it can still be delayed. However, chief executive Eric Updyke says that performance improved in the second quarter: > "we have been encouraged by the strong uptick in orders in the second quarter, which will feed into second half revenue and beyond." Updyke says the company secured some important wins in Q2: > "we saw good engagement for our service assurance solution with North American Tier 1 operators, closed strategically important deals for our 5G O-RAN services, maintained our 800G high-speed Ethernet testing leadership and continued aligning the capabilities of our sales organisation with our customers by focusing on ROI." Efforts to diversify the group's customer base are also continuing: > "we are diversifying our customer base into new verticals and are currently finalising the detailed work scope for a significant lab and test assurance and services solution, worth over $15 million, with a major retail bank. This will establish a brand new customer segment that presents a significant opportunity for our solutions in a sizeable market." **Outlook:** when I [last looked at Spirent](https://www.rolandhead.com/dividend-notes/quality-shines-through-cto-spt-dplm-13-07-23/) in July, I commented on the risk that the expects H2 profit weighting might end up leading to a profit warning later in the year. Today's outlook commentary doesn't change my view that this remains a possibility. The company warns that *"order intake momentum has not yet fed into revenue",* but says that Spirent does say that it's seeing increasing signs of customer confidence and order growth. Management reiterate full year guidance, with the caveat that *"trading performance will be materially more weighted to the second half of the year than usual."* Broker forecasts price the stock on about 12 times earnings, with a forecast yield of 4%. That seems decent value to me, for a company with net cash and a recent track record of 20% returns on capital employed. ### My view Spirent's share price fell after these figures were announced, rather suggesting that the market shares my fear that a profit warning remains likely. I don't know how likely this is, but I can't help feeling that this business is probably cheap on a medium-term view, regardless of any short-term weakness. I don't see any reason to think that the group's franchise strength or competitive advantages are about to erode. My only concern about Spirent as a *long-term* investment is the group's lack of a consistent track record. This is something I discussed in my [in-depth review of the company back in May](https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/). If Spirent had the kind of consistent long-term record I'm looking for, I'd probably be lining the shares up as a potential purchase for my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). As things stand – rightly or wrongly – I'm staying on the sidelines for now. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: taking stock - SHEL, BME, RS1 (28/07/23) URL: https://www.rolandhead.com/dividend-notes/taking-stock-shel-bme-rs1-28-07-23/ Last updated: 2023-07-28T17:50:21.000Z Welcome back to my dividend notes. Today I've revisited three companies I've commented on in recent months. Do new updates from these firms change the picture for me? ### Companies covered: - **[Shell (LON:SHEL)](#shell-shel)** \- with energy prices back to pre-2022 levels, profits are falling fast. Shell's cash performance remains excellent, but I think there will be better buying opportunities ahead. - **[B&M European Value Retail (LON:BME)](#b-m-european-value-retail-bme)** \- the retailer has secured the services of trading boss Bobby Arora with a lucrative new retention deal. I'm glad B&M has been reading my notes! - **[RS Group (LON:RS1)](#rs-group-rs1)** \- a brief Q1 update reveals a weaker start to the year, but I remain a fan of this business, which is on my watch list. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Shell (SHEL) > "lower realised oil and gas prices, lower volumes, and lower refining margins" Shell's profits fell by more than 50% during the second quarter, compared to the same period last year. The company reported adjusted earnings of $5.1bn for the period, compared to $11.5bn in Q2 2022, when oil and gas prices peaked. Oil and gas prices are all at comparable levels to before the invasion of Ukraine. Refinery margins have also returned to more normal levels, as this chart from Shell's Q2 presentation shows: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-2q23-commodity-prices-slide.png) Souce: Shell Q2 2023 presentation Taking a broader view, Shell's half-year results were still strong: - Adjusted earnings: $14.7bn (-29% vs H1 2022) - Free cash flow: $22.0bn (H1 2022: $23.0bn) - Net debt: $40.3bn (H1 2022: $46.4bn) - H1 dividend: $0.6185 (H1 2022: $0.50) As I commented in my [recent in-depth review of Shell](https://www.rolandhead.com/dividend-shares/should-i-buy-dividend-giant-shell-for-my-portfolio/), I've not seen the company's finances look this healthy for a long time. But although the current forecast P/E of 7 may seem temptingly cheap, I think it makes sense to consider a broader perspective when assessing such a cyclical business. One metric I like to use in this scenario is the CAPE ratio (price/10-year avg earnings). SharePad data tells us that Shell still looks quite expensive on this metric, relative to historic levels: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-cape-280723.png) ### My view As I discussed in [my piece](https://www.rolandhead.com/dividend-shares/should-i-buy-dividend-giant-shell-for-my-portfolio/) last weekend, the bull case here might be that Shell's profitability is about to return to levels not seen since before 2008\. I can't rule this out, but it's not something I'm willing to count on. I think Shell remains a fundamentally mature, low-growth business that will – at some point – need to evolve its activities to reflect the realities of the energy transition. Although Shell's forecast 4.6% dividend yield is well supported and looks very safe to me, I suspect there will be better buying opportunities ahead. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### B & M European Value Retail (BME) > "Group Trading Director Retention Agreement" B&M has agreed a new retention deal with its Group Trading Director Bobby Arora that could payout up to £16m over the next three years. Arora is the brother of former CEO Simon Arora. The pair bought the business in 2004 and built it into its current form. Bobby Arora's role as Group Trading Director means that he's ultimately responsible for all sourcing and ranging decisions. His judgement and skill in these areas has been a key element of B&M's long-running success. When I wrote about [B&M in May](https://www.rolandhead.com/dividend-notes/a-b-for-this-selection-bme-boy-bmy/), I suggested that Bobby Arora represented a key-person risk. As a potential shareholder, I'd be concerned about his departure. Clearly, B&M's board are also concerned about this risk. This new retention agreement will payout cash bonuses of up to £16m over the three years to the end of 25 March 2026, based on unspecified performance criteria. This is in addition to Bobby Arora's existing remuneration, which isn't disclosed. The company have justified this retention agreement by saying that as he is not a board member, Bobby Arora has *"historically not received a performance-based long term incentive plan award".* However, there's no escaping the generousity of this deal, which could pay out more than £5m per year. For context, former CEO Simon Arora's *total* remuneration in his last full year at B&M was £4.4m. We don't know whether Bobby Arora would have left suddenly if he hadn't secured this deal. Perhaps. For now, I think this bonus scheme is probably money well spent, given the value Arora has helped to create over the last 20 years. However, one obvious question for the board is whether Arora is planning to retire in 2026\. In any case, I would hope that the company will plan carefully for a potential succession over the next three years in order to mitigate this risk. --- ### RS Group (RS1) > "Like-for-like revenue declined 7% reflecting a more challenging environment" I reviewed electronic component supplier RS Group's full-year results [in May](https://www.rolandhead.com/dividend-notes/8-yield-industrial-headwinds-av-rs/) and earmarked the company as a potential investment, despite the uncertain outlook. Last week's first-quarter update covered the three months to 30 June and confirms the company has seen trading slow: - Total revenue down 2%, despite a 6% contribution from acquisitions - Like-for-like revenue down by 7% - Trading in EMEA and Americas was *"softer than anticipated",* while Asia Pacific was *"volatile"* This chart shows the steadily weakening quarterly trend over the last 15 months: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/rs1-1q24-lfl-revenue.png) Source: RS Group Q1 2024 results ### My view RS Group scores well in my dividend screen and boasts attractive quality metrics, with a long-term average return on equity above 20%. The shares currently trade on around 13 times forecast earnings, with a 2.8% yield. While I don't think this is unreasonable, I'm hoping that any further weakness later this year could provide a more tempting buying opportunity. For now, I remain on the sidelines. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: what happens next? LLOY, GSK, FDM (26/07/23) URL: https://www.rolandhead.com/dividend-notes/what-happens-next-lloy-gsk-fdm-26-07-23/ Last updated: 2023-07-26T20:21:02.000Z Welcome back to my dividend notes. Today I've been looking at solid results from two FTSE 100 stalwarts – plus an IT services firm with an uncertain outlook. ### Companies covered: - **[Lloyds Banking Group (LON:LLOY)](#lloyds-banking-group-lloy)** \- half-year results show a fall in profits and an increase in bad debt provisions. But the overall picture still seems fairly benign. Lloyds' 6% dividend yield looks safe to me. - **[GSK (LON:GSK)](#gsk-gsk)** \- half-year results show a healthy rise in profits and 30% operating margin. Cash generation was poor, but I expect this to improve. The shares look cheap to me, *if* GSK can return to growth. - **[FDM Holdings (LON:FDM)](#fdm-holdings-fdm)** \- this IT services company saw demand slow during the second quarter. Full-year expectations are unchanged but are vulnerable to a downgrade, in my view. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Lloyds Banking Group (LLOY) > "Strong return on tangible equity of 16.6 per cent in the first half of 2023 and 13.6 per cent in the second quarter" When I last wrote about this FTSE 100 bank in May, [I commented](https://www.rolandhead.com/dividend-notes/cash-producers-bp-bdev-lloy-03-05-23/) that Lloyds management appeared to have left themselves some wiggle room for later in the year. Despite the Q1 figures being better than expected, full-year guidance had been left unchanged. **Financial highlights:** Today's half-year results show a mixed picture. Pre-tax profit for the second quarter fell by 29% to £1.6bn, compared to Q1\. This reflected higher costs, a reduction in net interest income and an increase in provisions for bad debt. The bank's net interest margin (NIM) during the second quarter fell to 3.14%, compared to 3.22% during the first quarter. However, on a half-year view, both profits and NIM remain comfortably ahead of the same period last year thanks to the impact of higher interest rates. Lloyds CEO Charlie Nunn now also expects to see a greater benefit from interest rates this year. The bank has updated its forecasts to suggest that rates will peak at 5.5% this year, compared to previous expectations of a 4% peak. As a result, net interest margin for the full year is now expected to be at least 3.1%. This compares to February's guidance of 3.05% and a 2022 result of 2.94%. **Profitability & balance sheet:** Bad debt provisions nearly doubled to £419m during Q2 (Q1 2023: £243m) but remain low in the context of the group's £451bn loan book. The bank's CET1 ratio, a measure of surplus capital, was 14.2% at the end of the half year, compared to 14.7% one year ago. Return on tangible equity improved to 16.6% during the six months to 30 June, compared to 11.8% for the same period last year. Both balance sheet and profitability look strong to me. **Dividend:** the interim dividend will rise by 15% to 0.92p per share, representing less than one quarter of half-year earnings of 3.9p. This increase implies a full-year dividend of 2.8p, giving a prospective yield of 6%. **Outlook:** the bank expects to generate a return on tangible equity greater than 14% this year. That's a solid figure which should provide decent support for continued dividend growth. The group's asset quality ratio – a measure of bad debt – is expected to be c.0.3%, compared to 0.29% in H1\. This seems to suggest the bank doesn't expect credit quality to worsen much more this year. I don't think consensus forecasts will change all that much after today's results – current estimates put the stock on a P/E of 6 with a 6% dividend yield. ### My view Big banks are hard to analyse, but I don't think Lloyds' half-year results contained any serious surprises. Lloyds' relatively affluent customer base does not yet seem to have been much affected by higher interest rates and a slowing economy. The main risk, in my view, is that this pain has been deferred, not avoided. However, the bank's shares continue to trade in line with their tangible book value of c.46p per share and do not look expensive to me. I think Lloyds is probably decent value at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### GSK (GSK) > "2023 guidance upgraded" Like Lloyds, pharma giant GSK nudged up its full-year guidance after issuing its half-year results today. But as with Lloyds, the upgrade was marginal and the market reaction was minimal. **Financial highlights:** revenue for the half year was stable at £14.1bn, but pre-tax profit rose by 30% to £3.9bn. The group's operating margin for the half year was almost 30%, an impressive figure. The increase in profits during H1 was due to lower cost of sales, which is said to be the result of a change in product mix to higher-margin items. Sadly there was no progress on net debt, which rose by £1bn to £18.2bn. This was due to acquisition spending (£1.4bn) and rather poor cash flow. GSK's operating cash flow fell to £1.9bn during H1, compared to £3.9bn in H1 2022\. The company says this was due to the timing of a one-off settlement received last year, as well as working capital movements and pension contributions. As a result, GSK reported an H1 free cash *outflow* of £341m (H1 2022: £1,741m inflow). In fairness, six months is too short a period to draw many conclusions. Broker forecasts suggest full-year free cash flow of more than £5bn, so hopefully some of the outflows in H1 will unwind in H2. **Operating highlights:** GSK reported sales growth across all three of its operating divisions, once Covid-19 related items were stripped out: - **Vaccines**: H1 sales up 20% to £4,063m, led by shingles vaccine *Shingrix (+20%)* - **Specialty Medicines**: H1 sales down 18% to £4,759m, due to the loss of Covid-19 sales. **Excluding Covid sales,** Specialty sales were up 16% to £4,728m - **General Medicines**: sales rose by 8% to £5,307m, led by 12% growth in sales of respiratory medicines. **Outlook:** GSK has increased its guidance (slightly) for the current year: - **Turnover** is now expected to rise by 8%-10% (previously 6%-8%) - **Adjusted operating profit** is expected to rise by 11%-13% (previously 10%-12%) - **Adjusted earnings per share** are expected to rise by 14%-17% (previously 12%-15%) - **Full-year dividend** guidance unchanged at 56.5p per share Based on last year's adjusted earnings of 139.7p, my sums suggest earnings could hit 160p per share this year, before adjusting for currency effects. Consensus forecasts prior to today were around 150p, so this isn't a massive upgrade. My sums suggest GSK shares are now trading on about nine times forecast earnings, with a 4% yield. ### My view I covered GSK in an in-depth piece [back in February](https://www.rolandhead.com/dividend-shares/is-new-gsk-a-quality-dividend-share/). My view then was that the stock *ought* to be cheap, but the company still needs to prove it can convert its pipeline into successful commercial products. These half-year results don't really change much for me. I continue to think that the group's debt levels may still be slightly restrictive, in terms of supporting big acquisitions. I'd hope to see cash flow improve and borrowing come down during the second half of the year. In the meantime, investors with more conviction or insight into GSK's pipeline might be able to snaffle a bargain. The shares offer an trailing 12-month EBIT/EV yield of 10%, according to my calculations. The stock is also at the bottom of its 10-year trading range, which might suggest an opportunity to technically-minded investors: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/gsk-all-chart-260723-1.png) I'm not going to change my view just yet. But my feeling is that GSK shares *probably* offer an opportunity at current levels. --- ### FDM Holdings (FDM) > "After a good start to the year, market conditions weakened through the second quarter." Shares in IT services provider FDM closed down by 9% after its half-year results were published, suggesting a weak outlook. This business trains IT consultants who are then deployed to customers – in effect, it's an outsourcer. These half-year results weren't quite a profit warning, as expectations were unchanged. But note the use of *"broadly"* – in my experience, this is often translated as 'slightly below'... > "the Board anticipates that the Group's financial performance for the year as a whole will be broadly in line with its expectations" **Financial highlights:** oddly enough, revenue and profits both rose during the first half of this year, despite emerging signs of weakness. Revenue was up by 18% to £179.9m, while adjusted pre-tax profit was 4% higher, at £26.0m. Operating margin for the period was 16.3%, supporting an impressive trailing 12-month return on capital emoployed of 61%. Turning to cash flow, this also improved. My sums suggest free cash flow for the half year of £14.3m, compared to just £5.7m in H1 2022. However, this increased cash generation actually serves to highlight weaker trading. One of the main reasons why cash generation improved is that growth in receivables slowed. In other words, FDM did not take on as much new business as it did in H1 last year. **Trading commentary:** FDM says that the year started well, but trading weakened during the second quarter. The UK appears to have been the weakest region for the firm. The number of UK consultants assigned to clients fell by 15% to 1,743 and operating profit for the firm's home market fell by 21% to £12.2m. Performance was more robust in the US and Asia. **Dividend:** FDM's interim dividend was held unchanged at 17p per share. If the final dividend is also maintained at 19p, the resulting full-year payout of 36p would give a 6.4% yield. **Outlook:** FDM is able to flex its headcount fairly quickly, but the company warns that *"a backdrop of uncertain market conditions"* are resulting in clients delaying budget decisions. Management believe that *"structural and systemic skills shortages"* remain in all of its main markets and say client engagement remains encouraging. However, the unchanged guidance for this year appears to rely on hopes that client confidence will improve in H2: > "We remain optimistic that there will be an improvement in client confidence as the second half progresses, and the Board anticipates that the Group's financial performance for the year as a whole will be broadly in line with its expectations." Assuming broker forecasts remain unchanged, FDM now trades on about 14 times forecast earnings, with that 6.4% dividend yield I mentioned above. ### My view For such a profitable business, FDM's current valuation could be attractive, if performance stabilises. However, I'm not sure how likely this is. I think there's a chance that weaker spending will persist for a while, as businesses adjust to higher interest rates and slowing economic growth. FDM actually scores well in my screening, thanks to its strong profitability and (usually) good cash generation. I've owned the shares before, but sold them some time ago because I was no longer convinced by the group's business model. The firm's consultant workforce mostly operates in entry-level roles, as far as I can tell, and I would guess that it's main attraction is its flexibility. FDM is essentially an IT temping agency, I think. My feeling is the business could be vulnerable to cyclical swings. I think FDM could end up issuing a profit warning later this year. I'm not inclined to back the stock at current levels, despite the potentially attractive yield. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: navigating uncertain markets - CRDA, HWDN, AJB (25/07/23) URL: https://www.rolandhead.com/dividend-notes/navigating-uncertain-markets-crda-hwdn-ajb-25-07-23/ Last updated: 2023-07-28T15:28:36.000Z Welcome back to my dividend notes. These quality firms have all seen their share prices bounce back somewhat from recent falls. Do they tick the boxes as possible members of my dividend portfolio? ### Companies covered: - **[Croda International (LON:CRDA)](#croda-international-crda)** \- half-year results from the FTSE 100 group are in line with June's revised guidance. I remain interested but cautious, given the continuing weakness in volumes reported by the company. - **[Howden Joinery (LON:HWDN)](#howden-joinery-hwdn)** \- the market has slowed from its pandemic peak, but I don't see any serious concerns in the kitchen company's latest accounts. I'm neutral on valuation, but remain positive on the business. - **[AJ Bell (LON:AJB)](#aj-bell-ajb)** \- a solid Q3 update reiterates the appeal of this business, for me. The shares remain on my watch list. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Croda International (CRDA) > "Group performance in line with revised June 2023 expectations; full year 2023 guidance reaffirmed" FTSE 100 chemicals group [Croda issued a profit warning in June](https://www.rolandhead.com/dividend-notes/warnings-upgrades-and-a-6-yield-vct-crda-bnzl-vp/), but today's half-year results are in line with (reduced) expectations. With the stock down by 40% from its pandemic peak, is this a buying opportunity? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/crda-10y-chart-250723.png) These half-year results appear to show a mixed picture. On the one hand, it's reassuring to see that there has been no further downgrade to expectations. On the other hand, the half-year numbers do show a fairly dramatical drop in sales and profits compared to last year. On an adjusted, pro forma basis (reflecting the sale of the group's PTIC industrial business), revenue fell by 6% to £880.9m, while pre-tax profit was down 32% to £174.3m. Sales were down in all three divisions, but I think there were some signs of hope in the core consumer care and life sciences businesses: - **Consumer care:** this business produces products such as minerals for sunscreen and hair care ingredients. Volumes rose by 8% compared to the *second* half of 2022, but were 14% below the *first* half of last year. Croda reports continued destocking and says customers *"have continued to reduce inventory levels"*. Price increases and a favourable mix meant that revenue was flat at £455.6m. - **Life sciences:** sales were down 8% to £303m due to the loss of Covid-19 lipid sales to vaccine customers, which totalled $62m in in H1 2022\. Excluding lipids, life sciences sales rose by 8%, due to *"good sales growth in Pharma and Seed Enhancement"*. - **Industrial markets:** the sales of the PTIC business on 30 June last year means that this division is now far smaller. According to the company, Industrials is *"not a priority for capital allocation and strategic growth",* but it plays a role in the group's manufacturing model. Excluding the impact of the PTIC sale, revenue fell by 20% to £122m in H1, due mainly to destocking and weak industrial demand. This has prompted a £21m impairment charge on the group's SIPO joint venture in China. **Cash flow and profitability:** despite the fall in profit, Croda's free cash flow improved as inventories fell and the impact of last year's raw material cost increases started to unwind. The company reports free cash flow of £76.4m for the half year, although my more inclusive measure suggests a figure of just £39.8m, excluding items relating to acquisitions and disposals. Profitability took a hit from lower volumes. I calculate an operating margin for the half year of 14.8% (H1 22: 25.6%), while return on capital employed for the trailing 12-month period fell to 9% (FY22: 25.6%). **Outlook:** chief executive Steve Foots expects customer destocking to continue into the second half of the year. Full-year adjusted pre-tax profit is expected to be between £370m and £400m. This appears to be in line with consensus forecasts, so I guess we can assume that full-year adjusted earnings will be about 215p. That prices the shares on 26 times forecast earnings, while an unchanged dividend of 107p would give a yield of 1.9%. Croda's dividend yield tends to be low, but this business has an impressive dividend history that stretches back 30 years without a cut: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/crda-dividendps-250723.png) ### My view These half-year numbers look broadly reassuring but leave some questions, in my view. We don't yet quite know how long it will be until volumes turn positive across the group's core businesses. I would guess there's still some risk that the second half of the year could disappoint. However, Croda remains in good shape financially and I fully expect the group to return to growth and more typical profits margins over time. I'm still learning about this business and will continue to monitor progress. The yield is a little lower than I look for and the valuation still seems relatively full to me. But it's a company I'd be happy to own, if a good buying opportunity arose. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Howden Joinery (HWDN) *(This is a catch-up item from last week - Howden's interim results were published on 20 July 2023.)* > "Howdens performed well in the first half in a more challenging marketplace" Kitchen specialist Howden Joinery supplies fitted kitchens to trade customers (e.g. kitchen fitters and builders) across an estate of 895 UK depots. The company is also expanding into France and now has 31 depots in this market, which is said to have a low penetration rate of fitted kitchens. Howden has developed a track record of disciplined growth and double-digit profit margins in recent years. The stock has doubled since November 2014, but new kitchens seem unlikely to be a top priority for households facing cost-of-living pressures. I wonder if a slowdown might be on the horizon? **Results summary:** these results cover the 24 weeks to 10 June 2023 - Howden has an unusual 24 December year end. The company says that the half-year numbers show trading normalising, after the exceptional demand seen as the UK exited the pandemic last year. Revenue for the half year rose by 1.5% to £926.9m, but operating profit fell by 21.5% to £117.0m (H1 2022: £149.1m). This drop reflected an additional £32m of operating costs. Management says underlying operating costs were stable and the increase reflected branch openings and refurbishments, plus investment in manufacturing, distribution and IT. Earnings for the period fell 21.4% to 15.4p per share, but dividend growth was maintained, with the interim payout rising 2.1% to 4.8p per share. **Trading summary:** management say that the firm's builder customers *"remain busy"*, but that *"activity levels* \[are\] *normalising"* from the exceptional levels seen as we exited the pandemic. Howden has launched 23 new kitchen ranges ahead of the Autumn peak trading period. The company says its placing more emphasis on entry and mid-range designs that account for the majority of cabinet volumes. Improvements have been made to the group's supply chain and there's a renewed focus on ensuring that best-selling items have *"the highest availability"* in the group's UK depots. **Financial performance:** management says that inventory levels are being managed down from the peak *"safety stock"* levels maintained during the pandemic. This is hard for us to assess from the numbers, as cost inflation over the last year may mean that a smaller volume of inventory is more highly valued. Certainly, the reported value of Howden's stock hasn't changed over the last year – inventories were held at £413.5m at the end of the period, compared to £415.6m one year earlier. However, inventory as a percentage of cost of sales is in line with recent years' performance: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/hwdn-inventory-cogs-250723.png) There's no sign yet of elevated receivables, either (a potential precursor of bad debt losses). Receivables as a percentage of revenue were just over 10% at the end of the half year, in line with the average of recent years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/hwdn-debtors-vs-turnover-250723.png) **Profitability & cash flow:** sales in this business typically have a 40/60 weighting to the second half of the year. So it's probably unfair to assess performance based on H1 numbers alone. On a trailing 12-month (TTM) basis, my sums suggest an operating margin of 16.4%, down from 17.9% last year. Return on capital employed was more stable, dropping through at 26.5% for the 12 months to 10 June, compared to 27.8% for the year to 24 December 2022. Net cash from operating activities fell to £182.3m (H1 2022: £209.2m). However, a £108.9m working capital outflow combined with £46.7m of capex and £12.m of pension contributions to drive a £191.6m net cash outflow from the business during the half year. This left Howden with a cash balance of £117.8m at the end of the period (H1 2022: £249.7m) and no debt. However, net debt on a statutory basis was £555m, reflecting nearly £700m of lease liabilities. In fairness, I would expect some of the H1 cash outflow to reverse during the seasonally stronger second half, as stock unwinds. I don't have any particular concern's about Howden's balance sheet. **Outlook:** the company says that its plans are on track and expectations for 2023 remain unchanged. > "We remain confident of delivering growth ahead of our markets, while generating strong cash flow, and attractive returns for shareholders over the medium-term." Broker consensus forecasts suggest earnings will fall by around 25% to 49p per share this year, with a flat dividend of c.20p per share. That puts Howden's shares on 15 times forecast earnings, with a 2.7% yield. ### My view I like this business and have admired the quality of the company's execution in recent years. However, history suggests this business is very susceptible to economic downturns. Dividends have been interrupted with some regularity over the last three decades and profits have also suffered cyclical slumps: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/hwdn-dividends-pat-250723.png) If the UK experiences a recession in 2023/24, will Howden's profits and dividend be more resilient this time? I don't know. **Valuation:** after touching a low of under 472p earlier this year, Howden's share price has bounced back strongly to nearly 750p at the time of writing. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/hwdn-10y-chart-250723.png) Despite this, the stock appears to be quite attractively valued on my preferred measures, with trailing EBIT/EV yield of 8.4%. Although profits are expected to be lower this year, this valuation doesn't look unreasonable to me if the company can avoid a major profit slump. I would have bought Howden shares at 500p, but I'm not yet sufficiently convinced to pay upwards of 700p. For now, I'm staying neutral, but I'll be monitoring progress with interest. --- ### AJ Bell (AJB) *(This is a catch-up item from last week - AJ Bell's Q3 statement was published on 20 July 2023.)* > "Continued growth in customer numbers and net inflows of over £1 billion onto our platform in the quarter" AJ Bell is an investment platform that serves both DIY investors (D2C) and advised clients. This business only floated on the London market in 2018, but it already has many of the attributes I look for in a quality dividend stock. I covered [AJ Bell's half-year results](https://www.rolandhead.com/dividend-notes/contrasting-approaches-pets-ajb-hils-ihp/) in May – this update looks at the firm's Q3 update, which was issued last week. **Trading highlights:** these latest numbers look fairly healthy to me: - Total customers up by 10,6060 to 465,614 (+12% vs Q3 2022) - Assets under administration up 2% to £69.8bn (+10% vs Q3 2022) - Net inflows of £1.1bn (Q3 2022: £1.6bn) As I discussed in [my note last week on **Hargreaves Lansdown**](https://www.rolandhead.com/dividend-notes/founder-stocks-with-reliable-dividends-hl-chrt/), UK investors are flocking to the security of short-dated fixed-income products. AJ Bell reports that eight of the top 20 investment choices by traded value during the quarter were government bonds or money market funds. **Outlook:** there was no change to full-year expectations, but chief executive Michael Summersgill remains confident about the growth potential of the business: > "We continue to see significant opportunities for growth in the platform market and believe we are well positioned to capitalise on these in both the advised and D2C segments." Broker forecasts on SharePad suggest AJ Bell's earnings will rise by 35% to 15.3p per share for the year ending 30 September. The dividend is expected to rise by 31% to 9.7p per share. As I've previously discussed, I expect much of this increase to come from increased interest earned on client cash. These estimates price the stock on 20 times forecast earnings, with a 3.1% yield. 💡 I discussed AJ Bell and how it compares with rival adviser platform IntegraFin in a recent podcast with my fellow private investor Maynard Paton. [You can listen here ->](https://www.rolandhead.com/podcasts/integrafin-with-maynard-paton-roland-head/) ### My view AJ Bell's quarterly numbers look pretty solid to me. I continue to think that the shares look reasonably priced, for a business that generated a 35% return on equity last year. AJ Bell remains on my watch list and is a stock I'd consider owning, if a suitable opportunity arose in [my dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Should I buy dividend giant Shell for my portfolio? URL: https://www.rolandhead.com/dividend-shares/should-i-buy-dividend-giant-shell-for-my-portfolio/ Last updated: 2023-08-18T13:42:58.000Z FTSE 100 energy giant Shell is the UK's second-largest listed company. It's one of the world's largest independent producers of oil, gas, and petrochemicals. New CEO Wael Sawan appears to be focused on maintaining the group's current strong performance and closing the valuation gap with the big US oil giants. That could help to support more attractive shareholder returns. Shell also currently earns a very respectable score in my [quality dividend share screen](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The company's gushing cash generation and reduced leverage has certainly caught my eye over the last year or so. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-fcf-210723.png) However, I think it's worth pointing out that Shell's shares have demonstrated an incredible ability to trade within a range over the last 30 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-all-chart-160723.png) This has always been a very cyclical business. Will things really be different this time? I'm not yet sure. But recent management guidance on free cash flow looks very appealing for an income-minded investor like me: > 6% p.a. absolute free cash flow growth through 2030 > Grow FCF/share >10% p.a. through 2025 My research also suggests that this business was considerably more profitable in the past than it has been in recent years. A return to these past levels of profitability might help to support a stronger and more stable valuation. To find out more, I decided to run Shell through my dividend scoring system and take a more in-depth look at this business. Could this energy giant be a suitable share for my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/)? 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Table of contents - [History](#history-seashells-to-oil-wells) \- seashells to oil wells - [Shell today](#shell-today-new-look) \- a new look? - [Climate change and net zero](#climate-change-and-net-zero)\- should investors be worried? - [Crunching the numbers](#shell-crunching-the-numbers) \- how does Shell score in my screening system? - [Dividend culture](#dividend-culture-exceptional) \- exceptional - [Dividend safety](#dividend-safety-better-than-it-seems) \- better than it seems? - [Dividend growth](#dividend-growth-recovering) \- recovering - [Dividend yield](#dividend-yield-varied) \- varied - [Valuation](#valuation-cheap-right-now) \- cheap right now? - [Profitability](#profitability-underrated) \- underrated? - [Fundamental health](#fundamental-health-robust) \- robust - [Conclusions](#conclusions-should-i-buy-shell) \- would I buy Shell shares today? --- ### History: seashells to oil wells Shell's [history](https://www.shell.com/about-us/our-heritage/our-company-history.html?ref=rolandhead.com) can be traced back to 1833, when Marcus Samuel expanded his London antiques business to start selling oriental seashells, which were imported from the Far East. The business pivoted to oil after Samuel's sons took control in 1870 and became interested in opportunities to export oil – specifically, kerosene to Asia. To solve handling poblems – barrels leaked and were unwieldy – they commissioned a fleet of purpose-designed tankers, including the *Murex*, which was the first oil tanker to pass through the Suez Canal. The [Shell logo](https://www.shell.com/about-us/our-heritage/our-brand-history.html?ref=rolandhead.com) and red branding provided a strong marketing visual to distinguish the company from its main rival at the time, Standard Oil. The group fast became a leading player in oil refining and trading and was renamed the Shell Transport and Trading Company in 1897\. In 1907, a partnership was formed with rival Royal Dutch to form the Royal Dutch Shell Group. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel_advert-rene-vincent-1926-vsm.jpg) 1926 Shell advert, by [René Vincent](https://en.wikipedia.org/wiki/Ren%C3%A9%5FVincent?ref=rolandhead.com) The rest is more or less history – Shell became a major oil and gas producer, one of the world's largest petrochemicals businesses, a major energy trader, and one of the first companies to invest in large-scale LNG. Today, the group employees over 90,000 people generating turnover of c.$350bn per year. --- ### Shell today: new look? One of CEO Wael Sawan's first acts was to reorganise his top team, giving a smaller number of top execs broader responsibility. As a result, Shell's business today is divided into just two major commercial divisions: **Integrated Gas and Upstream:** this included LNG, gas-to-liquids (GTL) and conventional offshore oil and gas production. This really is the cash cow of the group. Collectively, these businesses generated adjusted earnings of $33bn last year, 78% of the group total. Assets in this division have an average breakeven price of $30 per barrel and an average commercial life of more than 20 years. They're expensive to develop, but big and quite cheap to run when they're in production. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-perdido-platform-gom-2018-vsm-1.jpg) Shell Perdido platform, Gulf of Mexico / Credit: Photographic Services, Shell International Limited. Shell's oil production is expected to stabilise at 1.4m barrels per day until c.2030\. LNG production – where Shell is already the global market leader thanks – is expected to rise by 20-30% by 2030. Sawan's strategy is to drive growth by priortising industrial and transport markets. He says these account for 70% of global energy demand and the majority of energy emissions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-0623-cmd-strategy.png) Source: Shell Capital Markets Day June 2023 I think it's fair to say that the strategy for this part of the business is to meet demand for fossil fuels while it exists. It's worth remembering that oil and gas projects generally earn higher returns on capital employed than renewables such as wind farms. Commercially, there's not yet much incentive for Shell to try and force customers to decarbonise too quickly. However, there is more of a focus on abatement and decarbonisation in the other half of the group. **Downstream, renewables and energy solutions:** these operations generated $9.2bn of adjusted earnings last year, 22% of the group total. Shell says that this side of its business is engaged in: > "Profitably decarbonising our customers" There's some truth in this, but I think there's a fair amount of spin, too. This division encompasses fuel refineries, chemical plants, filling stations and energy trading – in addition to renewable generation, lower-carbon energy solutions for industrial customers, and EV charging for motorists. In Shell's financial reporting, these operations are described under slightly different headings. I think they make it easier to understand: **Marketing:** Shell serves around 32m customers each day at 46,000 service stations worldwide. The group also serves 1m business customers in 160 countries. This business also includes Shell's lubricants business and its EV charging network. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-helix-lubricant-0723-vsm.jpg) Shell Helix lubcricants for sale / Credit: Photographic Services, Shell International Limited Marketing is expected to generated adjusted earnings of $4-$5bn by 2025, although it only earned $2.8bn last year. **Chemicals and products:** this includes Shell's global network of so-called energy parks – refineries and chemical plants. In addition to producing petrol and diesel, they also produce a wide range of other chemicals used by industrial customers. I think it's fair to say that demand will remain strong for many of these chemicals, even if transport undergoes widespread electrification. **Renewable and energy solutions:** this includes the sale of natural gas and electricity to end users, in addition to electricity generation, hydrogen, and activities aimed at carbon capture or avoidance (including tree planting). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shell-tree-planting-scotland-0723-sm.jpg) Caledonian pine tree saplings being planted in Glengarry Forest, Scotland / Credit: Photographic Services, Shell International Limited. **Trading:** Like its peers BP, Shell has a large commodity trading business. Each year, this operation buys and sells quantities of commodities that are far in excess of the group's own production. I would guess that Shell's first-hand insight into both physical production and end-user market conditions may provide the firm with an edge over some rivals. In terms of reporting, Shell's trading operations are absorbed into the results for its Marketing, Products and Renewables businesses. Shell (and BP) are pretty cagey about disclosing their trading profits, but they are thought to be substantial, especially in volatile markets. --- ### Climate change and net zero I admit that I haven't devoted too much energy to considering risks such as stranded assets, climate change litigation, and other potentially existential threats to Shell and its peers. This isn't because I don't think fossil fuels are causing serious problems. I do. But as an investor, my aim is to look at the situation objectively, in terms of what is happening now and what is likely to follow. From this perspective, I believe that changes to the global energy system are already underway. I think these changes are likely to accelerate over time and will eventually reach a tipping point, as they have done in the past. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-fulham-road-ev-station-vsm.jpg) Shell's first EV charging station, Fulham Road, London / Credit: Photographic Services, Shell International Limited. In the meantime, the reality is that the world is still largely powered by fossil fuels. Demand for 100m barrels of oil and over 350bn cubic feet of gas *every day* isn't going to disappear overnight, regardless of the impact its consumption may be having on the planet. In my view, Shell has the opportunities and resources it will need to evolve successfully. A prolonged period of mismanagement or strategic misteps could cause problems. But my base assumption is that Shell will remain a viable, large business for the foreseeable future. 💡 **Podcasts for private investors!** Enjoy three high-quality discussions about UK shares every month. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) --- ### Shell: crunching the numbers ***Description:*** *an integrated energy company that's one of the world's largest producers of oil, gas and petrochemicals.* | **Shell(LON:SHEL)** | **Quality Dividend score: 69/100** | **Forecast yield: 4.6%** | | ------------------- | ---------------------------------- | -------------------------- | | Share price: 2,314p | Market cap: £155bn | *All data at 16 July 2023* | ***Latest accounts:*** *[results for the quarter ended 31 March 2023](https://www.shell.com/content/shell/corporate/global/en%5Fgb/investors/results-and-reporting/quarterly-results/latest-results/%5Fjcr%5Fcontent/root/main/section/simple/call%5Fto%5Faction%5Fcopy%5F/links/item1.stream/1683154696914/61d3483f7f7d8c03e25a09b40084a0ee254cec8c/q1-2023-qra-document.pdf?ref=rolandhead.com)* In the remainder of this review, I'll step through the different stages in my **[dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)** and explain whether I think Shell could be a suitable addition to my quality dividend portfolio . Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: exceptional My dividend culture score is based on the number of consecutive years that a company has paid dividends. Cuts don't affect the score - this is just about continuity. Does the company have a strong culture of dividend payments? When Shell cut its dividend in 2020, it was [widely and reliably reported](https://www.bbc.co.uk/news/business-52483455?ref=rolandhead.com) as the first cut to the firm's payout since World War II. However, Shell's corporate structure changed [in 2005](https://www.shell.com/investors/information-for-shareholders/share-information.html?ref=rolandhead.com), when the partnership between Royal Dutch Petroleum and Shell Transport and Trading was dissolved to create a unified group, Royal Dutch Shell (now just Shell). As a result, both SharePad and Stockopedia only have dividend data back to 2005: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-dividends-160723.png) I haven't been able to find a reliable record of Shell's pre-2005 dividend payments. As a result, my scoring spreadsheet awards Shell a score of just 3/5 for dividend culture, based on its 18-year available record. However, I'm confident that Shell shareholders have received annual dividends each year since 1945\. So I've taken the rare step of manually adjusted Shell's data in my spreadsheet. As a result, the firm scores the maximum possible value for dividend culture – the only reasonable result for one of London's oldest dividend payers. **Shell scores 5/5 for dividend culture in my screening system.** --- ### Dividend safety: better than it seems? I score stocks for dividend safety based on the level of earnings and free cash flow cover they generate for their payouts. My score also includes a measure of leverage, to try and highlight firms that should be diverting their surplus cash into debt reduction. This historic chart shows Shell's historic dividend cover by earnings (red) and free cash flow (blue). The black line traces the group's leverage, using my preferred measure of net debt/5yr average profits. It's an interesting story, I think. In the run-up to 2008, we can see that Shell was paying out pretty much all of its free cash flow as dividends. But the payout was comfortably covered by earnings and leverage was very low. So no real worries, in my view. Things went downhill after that though, as Shell's leverage ballooned but its profits and cash flow remained relatively weak: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shell-div-fcf-cover-leverage-160723.png) The rapid rise in Shell's leverage followed the $100+ oil years of 2010-2014\. During this time, oil companies' costs and spending commitments surged. When the boom came to an end in 2014 and oil prices crashed, Shell was left with a bloated cost base and big capex plans that no longer looked quite so attractive. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/brent-crude-25yr-tradingeconomics-160723.png) After taking charge in 2014, former CEO Ben van Beurden engineered a gradual turnaround. This improved Shell's performance and gave rise to a substantial improvement in cash generation. Even so, when Covid hit in 2020, van Beurden's decision to cut the dividend was correct – and arguably overdue – in my view. Of course, what Shell might not have predicted was that the pandemic would be followed by the Russian invasion of Ukraine, triggering a new energy price spike. As a result, Shell's balance sheet has quickly been delevered and the group's cash flow look stronger than it has done for many years. Analysts' expect Shell's profits to fall steadily over the next couple of years. This could reduce dividend cover to more typical levels. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-vara-research-estimates-210723-vsm.png) Source: [Vara Research](https://vara-services.com/shell/?ref=rolandhead.com) (21/07/23) Even so, I think Shell's dividend looks very safe at the moment. **Shell scores 3.5/5 for dividend safety in my screening system.** --- ### Dividend growth: recovering When I score a stock for dividend growth, the main thing I'm looking for is sustainability. I try to gauge this factor by comparing historic dividend growth with growth in free cash flow and net asset value per share. My focus on free cash flow is fairly self explanatory, I hope. Net asset value (NAV) is perhaps less so, but I've come to believe it's a very useful indicator. If NAV (or shareholder's equity) is falling, it's likely to mean one of three things, in my experience: - the value of the company's assets are falling, hence their expected cash generation is probably declining - debt levels are rising faster than asset values (i.e. leverage is increasing) - the business is paying dividends that aren't covered by earnings or free cash flow In the interest of balance, there's one other positive explanation I can think of, too: - the business has so much surplus cash that it's simply returning it to shareholders (thus reducing net asset value) If NAV per share is rising, it's more likely to indicate that companies are retaining a portion of their profits each year, while also investing in productive assets and not borrowing too much. This is the profile I'm looking for in a long-term investment. Ultimately, I think a rising dividend is unlikely to be sustainable if net asset value is continually falling. At some point, some kind of crunch point will occur. This is what I want to avoid. Looking at these measures for Shell, we can see that this is exactly what did happen in the post-2008 period. Assets values were written down as oil prices crashed. Debt levels rose, cash flow worsened and – eventually – the dividend was cut: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-dividends-fcfps-navps-160723-1.png) Since 2020, this pattern has reversed. Dividend growth has been supported by rising free cash flow and an increase in net assets per share. Good news. Shell's free cash flow cover of five times may seem excessive at the moment; the company could clearly support larger dividends right now. But I think it's right to be cautious. History suggests that profits will return to more normal levels at some point. Broker forecasts point to a 30% drop in profits this year, for example. Oil prices are already back at around $80, after last year's foray above $100\. Gas prices are down, too. As I mentioned above, there's also the potential for the energy transition to have a growing impact on Shell's business model. I have little doubt that the company will adapt, but it might not be so large or profitable as in the past. I think this is why Shell has been using so much cash to buy back its shares and repay debt, rather than funding huge dividends. In my view, shrinking the group's capital base in this way when times are good is a logical decision. Although dividend growth has exceeded the company's 4% target over the last couple of years, I don't necessarily expect this to continue. The company's guidance remains for 4% growth, with additional shareholder returns as possible: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-capital-allocation-0623-cmd-1.png) Souces: Shell Capital Markets Day June 2023 My dividend growth score reflects Shell's mixed recent history. But I think that post-2020 dividend growth is probably more sustainable than this lowly rating suggests. **Shell scores 1.7/5 for dividend growth in my screening system.** --- ### Dividend yield: varied Shell has had a reputation as a high yielder. Over the last 20 years or so, that's been true for most of the time, although there have been some periods when the yield has been more average: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-div-yield-160723.png) *Note: I think SharePad's 2023 forecast is lower than current consensus – by my reckoning the forecast yield is c.4.6% at the time of writing.* When looking at the valuation of this business today, it's tempting to focus on the cheap-looking price/earnings ratio of six. However, I think the dividend yield gives us a more nuanced idea of the valuation of the business, based on the board's view of likely future profits through the cycle. **Shell scores 3/5 for dividend yield in my screening system.** --- ### Valuation: cheap right now? There's no escaping the fact that Shell looks very cheap based on its recent profits. Of course, I might also argue that this is a typical trait of cyclical businesses when they're close to peak profits. Using my preferred measures of EBIT yield and free cash flow yield, I think Shell looks cheap, but not unprecedentedly so: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-fcf-ebit-yield-160723.png) Right now, I think it's very tempting to suggest that Shell is cheap and that the old boom-and-bust cycle has been banished. There's also a popular argument that cutbacks to industry capex in recent years will gradually lead to shortages of oil and gas supplies as older fields decline. Perhaps things will be different this time. Personally, I don't think they will. I think the circumstances of last year were exceptional, but the market has now adjusted. For my money, energy profits have probably peaked for now. For this reason, I suspect that Shell shares may not be quite as cheap as they seem... **Shell scores 5/5 for valuation in my screening system.** --- ### Profitability: underrated? ... but then again, perhaps I'm wrong. Looking at Shell's historic profitability has made me realise that in past decades, this business was consistently more profitable than it's been over the last decade. I use return on capital employed as my main measure of profitability for non-financial stocks, rather than operating margin. Here's how Shell has performed on this measure since 1998: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-roce-160723.png) My scoring system looks at ROCE over the last five years. This is designed to provide a smoothed view of a company's *current* performance, *not* its past glories or future potential. On this basis, Shell's profitability looks quite poor. However, on a longer view, SharePad's data shows that Shell was once a business that generated reliable double-digit annual returns each year. If Shell can return the business to this level of profitability, then I could be wrong to dismiss the shares at this level. They *might* be cheap. New boss Wael Sawan certainly expects to report improved profitability across the business over the coming years, according to this slide from the group's Capital Markets Day in June: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-0623-cmd-roace-slide.png) Source: Shell Capital Markets Day June 2023 There are a lot of moving parts in this business. Attempting to forecast profits and ROCE is not easy. But there does seem to be some possibility of a sustained improvement in profitability. **Shell scores 2.2/5 for profitability in my screening system.** --- ### Fundamental health: robust Shell has rapidly cut debt levels over the last two years, significantly strengthening its balance sheet. The company has a solid investment grade credit rating and can borrow money more cheaply than some European countries. I suspect that something apocalyptic would have to happen for Shell to become financially distressed. But as shareholders have experienced over the last decade, this financial strength doesn't rule out periods of poor returns. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-10y-chart-210723.png) Shell 10yr chart - this period also included a dividend cut in 2020 My fundamental health score looks at two simple measures of financial strength: - fixed charge cover (essentially, operating profit divided by finance costs) - leverage (which I measure as net debt/5yr average profits) We've seen Shell's reduction in leverage once already. But by combining it with fixed charge cover, we can see how fixed charge cover collapsed when the firm faced a profit slump at the same time as debt was rising sharply. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/shel-fccover-leverage-160723-1.png) This isn't really the kind of profile I look for in a quality dividend stock. But I don't have any concerns about Shell's fundamental health at the moment. I think the business is in good shape. **Shell scores 3.7/5 for fundamental health in my screening system.** --- ### Conclusions: should I buy Shell? **My quality dividend system awards Shell an overall score of 69/100 at the time of writing (July 2023).** **My view:** I think it's possible that I'm missing the bigger picture and that Shell really is going to become a more profitable and highly valued business over the next 5-10 years. The last decade may just be a glitch in the history of this 190-year-old business. If CEO Wael Sawan can maintain high-margin oil production and gas growth while maintaining strict discipline on lower-margin activities, the business could become a cash cow that justifies a higher valuation. Even for a company of Shell's size, regular multi-billion dollar share buybacks are big enough to provide a lift to per-share performance. On the other hand, I think there are still plenty of reasons to be cautious. The history of the last 30 years shows regular boom and bust cycles in oil prices. I'm not yet convinced this will change. I could well be wrong, but I'm not convinced this is a great time to buy Shell. My instincts as a relatively conservative and value-oriented investor are to stay on the sidelines for now and see how market conditions evolve over the next 6-12 months. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! **As always, please let me know what you think in the comments below. Am I missing the big picture? Would you buy Shell shares today?** *Disclosure: At the time of publication, Roland did not own shares in Shell.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: founder stocks with reliable dividends - HL, CHRT (19/07/23) URL: https://www.rolandhead.com/dividend-notes/founder-stocks-with-reliable-dividends-hl-chrt/ Last updated: 2023-07-19T15:15:32.000Z Welcome back to my dividend notes. [Yesterday's founder theme](https://www.rolandhead.com/dividend-notes/3-owner-led-dividend-stocks-ihp-luce-arbb-18-07-23/) continues today, with a look at two companies where co-founders retain c.20% shareholdings – and presumably – some influence. ### Companies covered: - **[Hargreaves Lansdown (LON:HL)](#hargreaves-lansdown-hl)** \- I question why HL has omitted its usual revenue update from this trading statement, but I continue to like this business as a potential income investment. - **[Cohort (LON:CHRT)](#cohort-chrt)** \- strong results from this small-cap defence stock, despite the drag from one loss-making business. I'm encouraged and believe the valuation remains reasonable. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Hargreaves Lansdown (HL) > "We delivered net new business of £1.7 billion in the period, up 6% on the previous quarter." DIY investment platform Hargreaves Lansdown is still out of favour with investors, but I've been bullish on this stock for a while. I took [an in-depth look at the company back in November](https://www.rolandhead.com/dividend-shares/should-i-add-hargreaves-lansdown-to-my-portfolio/) to explain why. In short, I think the group's 40% market share and 40%+ operating margin mean that Hargreaves holds all the cards. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/hl-opmargin-roe-190723.png) If the company loses its premier place in the market, then I think it will be mostly due to mismanagement. Given the continued strong influence of co-founder Peter Hargreaves (20% shareholder), this seems unlikely to me. **Trading statement:** today's update covers the three months to 30 June, which is the final quarter of the company's financial year. Hargreaves saw net inflows of £1.7bn during the quarter, compared to £1.6bn during the third quarter. This took closing assets under administration up to £134bn. Client numbers rose by 13,000 to 1,804,000, albeit this represented a significant drop in signups from 23,000 new clients in the previous quarter. The only odd feature of today's trading statement was that it didn't include a quarterly revenue figure. All the previous quarterly updates I've looked at from HL *have* included revenue. Naturally, this leads me to wonder whether revenue for the quarter was slightly weaker than might have been expected from such strong inflows. My podcast colleague [Bruce Packard](https://knowledge.sharescope.co.uk/author/bruce-packard/?ref=rolandhead.com) often says that changes to companies' voluntary disclosures can be revealing. I wonder if this might be a (small) example of this. **Is revenue from client cash falling?** One possible explanation for a shortfall in revenue might have been a decline in client cash. Recent results have shown clients holding a lot of cash in their investment accounts. Hargreaves' pays some interest on client cash, but also keeps some for itself. This has been very lucrative in recent months. The half-year results showed Hargreaves' net interest income rising to £125m for the six months to 31 December 2022\. This was **10 times** the equivalent figure of £12m for the same period one year earlier. This is what drove Hargreaves' 20% revenue growth in H1. This kind of windfall rarely lasts forever. [Interest rates on client cash](https://www.hl.co.uk/charges-and-interest-rates?ref=rolandhead.com) appear to have improved slightly since I last looked but remain relatively miserly, in my opinion, especially on lower cash balances. I wonder if clients have taken matters into their own hands and shifted more cash into investments offering low risk and full exposure to the 5% bank rate. This theory appears to be supported by the latest results on Hargreaves' *[Top of the Stocks](https://www.hl.co.uk/shares/top-of-the-stocks?ref=rolandhead.com)* page of most popular trades. This currently shows that the most purchased assets *by value* right now are UK government bonds. Scrolling down the full list, it seems that by value, nearly 20% of deals placed by HL clients last week were for UK government bonds. Until recently, I've never seen this. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/hl-top-of-stocks-190723.png) Source: [HL most bought shares by value](https://www.hl.co.uk/shares/top-of-the-stocks?ref=rolandhead.com), screenshot taken on 19/07/23 I don't know much about gilts, but my understanding is that these ultra-safe bonds are generally offering a yield to maturity of 4%-5% at the moment, with very low costs. This niggle aside, this quarterly statement looks fine to me. Client retention remains stable at around 92%, with asset retention down slightly to c.90% as *"specific cohorts"* of clients withdraw cash to fund living expenses. **Outlook:** there's no update to full-year guidance in today's statement, suggesting that results should be in line with consensus forecasts. These show adjusted earnings rising by 31% to 66.2p per share this year, supporting a 4% dividend increase to 41.3p. At the time of writing, those estimates price the stock on 13.5 times earnings, with a 4.6% yield. ### My view Despite the sceptical tone of some of my comments, my view on this business is unchanged and remains positive. I think it's reasonably priced, with all the advantages of a huge market share, high margins and significant customer inertia. However, I also think that rival AJ Bell and adviser-focused platform IntegraFin look good at the moment. I discussed IntegraFin in more detail in [yesterday's dividend notes](https://www.rolandhead.com/dividend-notes/3-owner-led-dividend-stocks-ihp-luce-arbb-18-07-23/) and in [this recent podcast](https://www.rolandhead.com/podcasts/integrafin-with-maynard-paton-roland-head/). Finally, for another view on Hargreaves Lansdown I'd recommend checking out former bank analyst Bruce Packard's comments in [this recent podcast](https://www.fundyourretirement.com/podcasts/vtp003-mark-bruce-discuss-uk-small-to-mid-caps-inflation-fully-invested-vs-cash/?ref=rolandhead.com) (free to listen). This was recorded shortly after Bruce bought HL shares for his own portfolio. 💡 **Podcasts for private investors!** Enjoy three high-quality discussions about UK shares every month. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) --- ### Cohort (CHRT) > "Dividend increased by 10%; the dividend has been increased every year since the Group's IPO in 2006." A super-reliable dividend record is often a hallmark of a founder-led firm, in my experience. Owners often want a reliable cash return each year, in contrast to hired managers who may have other priorities. Cohort's co-founder Stanley Carter stood down as a director last year, but retains a 22% shareholding in this £185m group. The firm's other co-founder, Nick Prest, also has a material holding and remains chairman of the group: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/chrt-sig-shareholders-300623.png) Source: [Cohort website](https://www.cohortplc.com/investors/shareholder-information?ref=rolandhead.com) (19/07/23) Cohort is a group of semi-autonomous [defence businesses](https://www.cohortplc.com/our-businesses?ref=rolandhead.com) that operate under a central corporate umbrella. There's plenty of information on the company's website, so I won't repeat it here. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/chrt-businesses-190723.png) **FY23 results - financial highlights:** today's full-year results cover the 12 months to 30 April and look pretty strong to me, suggesting a significant step up in growth. Revenue rose by 33% to £182.7m, supporting a 36% increase in pre-tax profit to £13.9m. Order intake for the year rose by 19% to £220.9m, resulting in a year-end order book of £329.1m (FY22: £291m). Net cash ended the year at £15.6m, up from £11m one year earlier. The dividend will rise by 10% to 9.2p per share, maintaining Cohort's unbroken record of dividend growth since its 2006 IPO. My sums suggest free cash flow of just under £10m, excluding acquisitions. That represents after-tax cash conversion of 88% and gives a free cash flow yield of about 5%. Free cash flow is lower than last year, due mainly to working capital movements. I'm not concerned, given the overall improvement in the group's net cash position. Investing cash in the growing pipeline of orders makes sense at this stage. Cohort's profitability seems solid, if not spectacular. I calculate a statutory operating margin of 8.4% and a return on capital employed of 12.3%. **Trading commentary:** unsurprisingly, Cohort – like many other defence companies – is enjoying bountiful trading conditions. The company highlights particularly favourable trading in two of its divisions: > "Especially strong performance from within the Communications and Intelligence division, driven by significant uplift in UK MOD activity at MCL" Also: > "Improved performance within Sensors and Effectors, with Chess delivering better operational performance." However, the group's Portuguese electronics business, EID, has continued to perform poorly and operated at a loss last year: > "our Portuguese business, EID, which made a marginal trading loss, a result of continuing weak performance in Portugal due to continuing delays to new programmes, particularly with the Portuguese Navy. We now expect these orders to be placed in 2023/24." EID's weak performance has been an issue for some time, but perhaps things will finally turnaround this year. Today's results note that EID's managing director stepped down shortly after the year end. The company has put an interim MD in charge and has *"commenced a process to determine the right way forward in the longer term".* **Outlook:** at a group level, Cohort's current order book underpins a record 80% (£140m) of forecast revenue for the current (23/24) financial year, with significant amounts secured for subsequent years. Net cash is expected to decrease this year as a result of *"planned capital expenditure and expansion in working capital"*, but Cohort expects to end the year with a net cash balance. However, management say they've seen an *"encouraging start"* to the current financial year and that full-year expectations are unchanged. The company says that it expects to achieve a *"trading performance"* ahead of the 2022/23 financial year, but broker forecasts don't make it clear how much increase is likely. Today's results show adjusted earnings of 36.5p per share. Forecasts ahead of today's results also appeared to show earnings of about 36p per share for 2023/24. Forecasts may edge higher, I guess. But I think it seems fair to assume growth will be lower this year than it was last year. ### My view Cohort shares are up by 10% as I write. This prices the shares on about 13.5 times forecast earnings, with a dividend yield of around 3%. Today's results do not seem to show any nasty surprises and perhaps the poor performance of EID will finally be resolved this year. Or the business might be divested. Overall, I think Cohort is an attractive business with the potential to be a rewarding long-term investment. I would quite like to see a higher level of profitability, but I think the rather average group-level figures mask much higher profitability in *some* of the group's operating businesses. In terms of valuation, I think Cohort looks reasonably priced, with an EBIT/EV yield of 8% and a 5% free cash flow yield. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: 3 owner-led dividend stocks - IHP, LUCE, ARBB (18/07/23) URL: https://www.rolandhead.com/dividend-notes/3-owner-led-dividend-stocks-ihp-luce-arbb-18-07-23/ Last updated: 2023-07-19T09:22:43.000Z Welcome back to my dividend notes. All three of the companies I'm looking at today have some level of owner management. This is an attribute I have placed growing importance on over the years. Perhaps not coincidentally, I'm encouraged by all three of today's updates. ### Companies covered: - **[IntegraFin (LON:IHP)](#integrafin-ihp)** \- another quarter of net inflows for this investment platform confirms its appeal to financial advisers. I remain a fan of this business. - **[Luceco (LON:LUCE)](#luceco-luce)** \- a solid half-year update that suggests full-year results could be slightly better than previously expected. I like some aspects of this business, but have reservations about some recent growth. - **[Arbuthnot Banking (ARBB)](#arbuthnot-banking-arbb)** \- this private bank has delivered a very strong set of half-year results, powered by rising interest income. I think the shares could offer value for long-term investors, even after today's gains. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### IntegraFin (IHP) > "Robust flows to the Transact platform during Q3 FY23, with net inflows of over £0.6bn" Investment platform IntegraFin offers similar functionality to **AJ Bell** and **Hargreaves Lansdown**, but is designed specifically for financial advisers. Founder Michael Howard remains on the board of this FTSE 250 business, which was the subject of [a podcast I recorded recently](https://www.rolandhead.com/podcasts/integrafin-with-maynard-paton-roland-head/) with my friend and fellow private investor [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com). I hadn't previouly looked at IntegraFin in much detail, but I was impressed with the business. I could see myself owning this stock at some point. **Q3 update:** IntegraFin saw net inflows of £0.6bn in client funds under direction (FUD) during the three months to 30 June. Daily average FUD during the quarter was £54.3bn, higher than the £53.2bn achieved for the year to date. This result maintains IntegraFin's record of net inflows every quarter for the last six years. An impressive feat, I think, which seems to highlight the appeal of the business to advisers and their clients. The number of advisers signed up to IntegraFin's Transact platform was unchanged at 7,606 at the end of June. Chief executive Alex Scott says that client retention remained strong, at 96% on an annualised basis. **Outlook:** CEO Scott admits the outlook remains uncertain but expects to maintain the group's record of net inflows for the year ending 30 September. Broker forecasts show modest profit growth this year, pricing the stock on 18x forecast earnings, with a 4% dividend yield. For a business with c.40% operating margins, this doesn't seem unreasonable to me. **CFO apppointment:** one of the few criticisms Maynard and I made of this business was its puzzling lack of a CFO. We felt this may have led to some accounting glitches in the past. IntegraFin has now addressed this shortcoming with the recent appointment of Euan Marshall as chief financial officer. Marshall will join from financial trading firm **CMC Markets**, where he's currently CFO. This looks like a solid hire to me. **My view:** I can't see much to dislike in IntegraFin's Q3 update. Its large share of the *independent* financial adviser market means that further growth in the adviser count may be slower. But as Maynard explained in the podcast, existing many existing advisers still have plenty of client assets they can bring on board. IntegraFin's unbroken record of net inflows speaks to the appeal of the business to advisers, in my view. I the stock is probably fairly valued at current levels and will continue to watch with interest. 💡 **Podcasts for private investors!** Enjoy three high-quality discussions about UK shares every month. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) --- ### Luceco (LUCE) > "Full year guidance towards the upper end of market expectations." Luceco manufactures and supplies a wide range of wiring products, LED lighting and EV charging accessories. Chief executive John Hornby has an 18% shareholding, providing a reassuring level of skin in the game. Coincidentally, Luceco is another stock I discussed in more depth in a podcast recently – [click here for more details](https://www.rolandhead.com/podcasts/investors-roundtable-with-maynard-paton-mark-simpson-bruce-packard-and-roland-head/) (free to listen). **H1 update:** this business has been buffetted by customer destocking in recent months, but Luceco believes this process has now come to an end. The company says that revenue for the half year to 30 June was *"ahead of expectations"* at £101m, albeit still 5% below last year's level. Gross margins are said to be improving. Adjusted operating profit for the half year is expected to be £10.5m, ahead of expectations. Net debt of 1.3x EBITDA looks acceptable to me and cash generation is expected to improve as inventory levels fall. Non-residential demand is said to be strong, but sadly Luceco did not provide any comment on the performance of its individual operation divisions in this update. As we discussed in the podcast, there are big differences in profitability between the core wiring business and the other two divisions. **Outlook:** activity levels are said to be supported by *"a strong Q3 order book"*. Adjusted operating profit for the full year is now expected to be *"towards the upper end of the range of current market expectations"*. According to figures provided by the company, this suggests a profit figure between £20m and £22m, approximately. Broker forecasts suggest adjusted earnings of 9.2p per share, with a 4.3p dividend. That prices the stock on 13x forecast earnings, with a 3.7% dividend yield. **My view:** I remain neutral on this business. I think Luceco has some attractive qualities, but I'm not convinced that some of the group's more recently acquired operations are really creating much value for shareholders. Even so, I think the valuation looks reasonable at the moment. --- ### Arbuthnot Banking (ARBB) > "The Group continues to benefit from the business model it has established over many years" Arbuthnot Banking is the holding company for the [Arbuthnot Latham](https://www.arbuthnotlatham.co.uk/?ref=rolandhead.com) private bank. This was founded in 1833 and offers private banking, wealth management, commercial banking, and specialist lending. Looking at the website, the bank's lending seems to be focused on property, asset finance, and business loans, in particular for UK media productions. Shares in this £150m AIM-listed firm rose sharply after these half-year results were published: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/arbb-ytd-chart-180723.png) This business is led by chairman and chief executive Sir Henry Angest, who also has a 56% shareholding. So we might argue that it's a private bank in more ways than one! Certainly, liquidity is limited, with a chunky spread and fairly low trading volumes. I don't know much about Arbuthnot, but my previous impressions have been fairly positive. Today's half-year results reinforce that view. **Financial highlights:** rising interest rates have provided a boost to profits, generating *"increased revenue on both ... lending and excess liquidity"*. Underlying pre-tax profit for the half year to 30 June was £29.3m, nearly triple the £10.7m earned in H1 last year. This increase appears to have been driven almost entirely by the impact of higher interest income, which doubled from £50m to £100m for the half year. This increase offset rising interest expenses and higher operating costs, leaving a substantially increased surplus. This increased profit was reflected in Arbuthnot's CET1 ratio, which rose slightly to 12.2% (FY22: 11.6%). This increase in surplus capital should provide comfortable support for an increased interim dividend of 19p per share (H1 2022: 17p). My sums suggest Arbuthnot has generated a **return on equity of 15%** over the last 12 months, which looks very respectable to me. Net assets per share were 1,470p at the end of the half year, up from 1,411p at the end of December 2022\. The stock is trading at about 1,100p as I write. This means that the shares are still trading 25% below book value, even after today's gains. **Operational highlights:** lending rose 9.5% to £2.3bn during the half year, despite *"a tighter credit appetite"*. Customer deposits also rose to £3.3bn, from £3.1bn at the end of 2022\. Assets under management by Arbuthnot's wealth division were £1.4bn at the end of June, compared to £1.3bn at the end of June 2022 and December 2022\. Management says this was driven by net inflows. **Outlook:** The benefit from rising interest rates is expected to be lower during the second half of the year, as older fixed-term deposits roll off and are renewed at higher interest rates. This is expected to reduce the bank's net interest margins. Helpfully, the bank provides some numerical guidance for us. The average cost of deposits was said to be 1.9% during the first half of the year and 2.2% in June alone. If interest rates remain stable at current levels for the next 12-18 months, Arbuthnot would expect its cost of deposits to rise to 2.9%. This reflects the mix of current accounts (lower rates) and term deposit banking (higher rates). Angest acknowledges the uncertain economic conditions and potential increases in credit risk, but believes the bank remains *"well positioned"* for continued progress. Broker forecasts prior to the results suggested that Arbuthnot's earnings per share would double to £2 this year. A dividend of 45p is expected. These estimates price the stock on less than six times earnings, with a dividend yield of about 4%. When paired with a 25% discount to book value, this doesn't seem too demanding to me. ### My view I don't have any particular insight into the outlook for this business. But Arbuthnot's valuation looks very reasonable to me, based on its recent financial performance. One potential area of concern for me is succession, given that the chairman and chief executive is in his 80s and controls 56% of the stock. I don't know if the company has made any comment on this in the past, but it's something I'd try to find out a little more about. On balance, my impression of this business remains very favourable. Prior to the pandemic, Arbuthnot had paid unbroken dividends for at least 28 years, according to SharePad. In this context, I think the 4% yield could be attractive. I don't have room for another bank in my dividend portfolio at the moment. But this is certainly a business I'll keep an eye on. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: quality shines through - CTO, SPT, DPLM (13/07/23) URL: https://www.rolandhead.com/dividend-notes/quality-shines-through-cto-spt-dplm-13-07-23/ Last updated: 2023-07-13T15:52:22.000Z Welcome back to my dividend notes. Today I'm revisiting two FTSE 250 shares I covered in May and looking at a popular small cap I haven't written about here before (but have owned in the past - no position now). Before I get started, I'd just like to mention a new podcast recording I took part in recently. In the latest episode of the [Investor's Roundtable](https://www.fundyourretirement.com/private-investors-podcast/?ref=rolandhead.com), I joined well-known private investors [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com), [Bruce Packard](https://knowledge.sharescope.co.uk/bruce-packard-2/?ref=rolandhead.com) and [Mark Simpson](https://smallcapslife.substack.com/) to discuss **Tristel (TSTL)**, **Ocean Wilsons (OCN)** and micro-cap software firm **Arcontech (ARC)**. There was lots of good insight (and debate!). Find out what we thought [here](https://www.fundyourretirement.com/podcasts/irt002-round-table-discussing-asset-allocation-ocean-wilsons-ocn-tristel-tstl-arcontech-arc/?ref=rolandhead.com) or listen below: --- ### Companies covered in today's dividend notes: - **[T Clarke (LON:CTO)](#t-clarke-cto)** \- a solid set of results from a respected business, with the promise of a stronger second half. But slim margins, dilution and high levels of boardroom pay deter me, even though CTO scores well in my screen. - **[Spirent Communications (LON:SPT)](#spirent-communications-spt)** \- this FTSE 250 network testing specialist remains temptingly priced in my view, but the heavy H2 weighting and inconsistent track record of the group leave me unsure. - **[Diploma (LON:DPLM)](#diploma-dplm)** \- I'm a fan of this specialist distribution group, but I'm continuing to baulk at the price (perhaps mistakenly). A quality business that's trading well, in my opinion. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### T Clarke (CTO) > "Forward order book at record level" This London-focused electrical engineering contractor is one of the highest-ranked stocks in my [dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at the moment. Today's interim results appear solid, if not spectacular, with this small cap (£58m) business reporting a record £781m order book. However, despite these apparent attractions, I don't expect to find myself owning the shares in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). There are a couple of reasons for this. Let's take a look at the results and then I'll explain why I'm not interested. **Financial highlights:** today's half-year numbers cover the six months to 30 June 2023\. In my view, they highlight both the risk and attractions of this business. Revenue was almost unchanged at £207m (H1 22: £206m), but pre-tax profit fell by 13% to £4.8m due to an increase in overheads and finance costs. Earnings per share fell by 15% to 8.7p, but dilution from the £10.7m equity placing on 6 July means that if this figure was calculated today, it would be lower. This cash has been raised to support future growth, but will result in a hit to earnings per share this year. T Clarke's operating margin fell from 2.9% to 2.8% during the period, reflecting higher costs. Cash flow also suffered, with net cash from operating activities falling from £5.3m to just £1.0m. As a result, the group's net cash balance fell from £7.2m at the end of June 2022, to £4.5m at the end of last month. In fairness, underlying operating cash generation was unchanged from the same period last year, at £7.3m. But a £5.2m working capital outflow combined with higher tax and interest charges to reduce *net* cash flow from operations. **Outlook:** the company expects to report significant revenue growth during the second half of the year, allowing it to meet its target of £500m in annual revenue. An updated note today from house broker Cenkos (available on Research Tree) suggests adjusted earnings will fall by 11% to 17.4p per share in 2023, before rising to a forecast figure of 24p per share in 2024\. This reflects higher costs and the dilution from the recent placing in 2023, followed by expected gains from new growth in FY24 onwards. Dividend growth is expected to be maintained despite the increased sharecount. Cenkos expects the payout to rise by 11% to 5.9p per share this year, giving a prospective yield of 4.5%. T Clarke has paid a dividend for the last 31 years, but this has included a number of cuts and the current payout is well below historic highs: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/cto-dividends-130723.png) **Cash / recent placing:** T Clarke's net cash balance looks reassuring, but I don't think this cash is really surplus to requirements. Contracting companies like this need to have plenty of cash to fund new contracts, and to convince customers of their financial strength. No one wants to risk having a key contractor fail mid-project. T Clarke's balance sheet at the end of the half year showed £110m owing from customers and £99.5m owed to suppliers, in addition to £15m of bank debt. These are big numbers for a company that's generated revenue of £427m over the last 12 months. I think they highlight the need for cash – and the risk of a liquidity problem if anything unexpected happens. Customer payment terms are pretty generous, too. My sums suggest that it took an average of 94 days for T Clarke to convert money owed into cash received over the last year. That's slow, but not especially unusual in the construction sector. ### My view Slow payments and low profit margins are two of the reasons why construction and contracting firms have a reputation for being (financially) accident prone – and why I rarely invest in them. If costs overrun or new work dries up, companies can rapidly run short of cash to pay their own bills. T Clarke seems quite well managed to me and appears to offer a somewhat differentiated service. Its directly-employed workforce has a reputation for delivering complex commercial projects such as data centres and large office buildings. The group has been in business since 1889\. Even so, operating margins not risen above 3% since the 2008 crash, highlighting the slim profits in this sector. The must also remain susceptible to the impact of a broader economic or construction sector slowdown. **Pension black hole?** T Clarke's long heritage means it has a sizeable finaly salary pension scheme. Although closed to accruals, this continues to absorb cash. The scheme assets had a fair value of £28m at the end of June, giving rise to a £11m deficit when compared to future obligations of £39m. A more useful measure I use to gauge whether a pension scheme will need regular cash injections is to compare the pension payments with the value of the scheme's assets. T Clarke reported £2.8m of benefits paid last year. When compared to scheme assets of £28m, this implies a 10% rate of return would be needed to support future payouts without further company contributions. I think this is unlikely to be achievable. Deficit reduction payments are currently set at £1.2m per year. I suspect that the pension scheme could remain something of a black hole for cash. **Generous director remuneration:** one other factor that's caught my eye about this business is that the top directors appear to be quite generously paid. Total remuneration for CEO Mark Lawrence and the two other executive directors totalled £4.3m last year. Non-execs collected a further £278k. Total boardroom remuneration of £4.6m represented nearly 45% of last year's pre-tax profit of £10.3m. I think that's quite high. By way of contrast, dividend payments totalled about £2.4m, or less than a quarter of pre-tax profit. **Final thoughts:** I think T Clarke is probably a good business to work for and a reliable supplier to its customers. But I'm not convinced that it's likely to be a great investment, at least, not at this point in the cycle. If the company was priced at distressed levels during a downturn, I might consider it as a cyclical turnaround play. But I don't see the shares as a good fit for my dividend portfolio. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Spirent Communications (SPT) > "Full year expectations unchanged although materially heavier weighting to second half" I covered the [previous trading update](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/) from FTSE 250 network test and assurance business Spirent in May, and then followed up with a more detailed dividend share review later that month (*[Is Spirent Communications a quality compounder?](https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/)*) Check out these pieces (free to read) for more background on my view of this business. **Q2 trading highlights:** after a slow start to the year, trading is said to have improved during the second quarter. Even so, Spirent's half-year numbers are still expected to be down sharply compared to the same period last year: - Half-year revenue down 20% to $224m - H1 order intake down 19% to $239m, compared to the same period last year - Improved performance in Q2: *"order intake in the second quarter broadly similar to same period last year"* - Order book up 6% since December 2022 to $304m - *"Increasing order pipeline and conversion rate with important 5G and Positioning wins"* - *"Near to closing a significant lab and test automation opportunity for a brand new strategic customer segment, Financial Services"* **Outlook:** full-year expectations are unchanged, but management stress again that there will be a *"materially heavier weighting to the second half"*. Interestingly enough, T Clarke (above) also expects an H2 weighting. So is economic activity picking up, or are these companies likely to issue profit warnings later this year? My feeling is that it's about 50/50 – I continue to think there's a risk of a profit warning from Spirent later in 2023, but it's certainly not a foregone conclusion. Consensus forecasts today price suggest earnings of 15.9 per share for 2023, with a dividend of 7.6p. That prices the stock on 14 times earnings, with a 3.4% yield. That doesn't look unreasonable to me, for a cash-rich business that generated a 22% return on capital employed last year. ### My view I continue to think that Spirent Communications shares could offer decent value at current levels. I think it does have many of the characteristics I look for in a quality business. However, as [I explained in May](https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/), I have reservations about the inconsistent track record of this business and its history of regular strategy updates. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/spt-pbt-eps-120523.png) Things may be different this time – if so, I may be missing out. But for now, I'm going to remain on the sidelines. 💡 **Podcasts for private investors!** Enjoy three high-quality discussions about UK shares every month. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) --- ### Diploma (DPLM) > "The first nine months of FY 2023 have increased our confidence in our full year guidance" I would argue that distribution group Diploma is probably a better quality business than Spirent (above), due to its historic ability to generate compound growth. This share price chart comparing the two over the last 20 years tells the story, in my view. Changing the timeframe to one, five or 10 years still shows Diploma outperforming: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/dplm-vs-spt-20y-chart-130723.png) Diploma (black) vs Spirent Communications (blue) Naturally this kind of success doesn't come cheap. But Diploma's latest quarterly update suggests the company is continuing to perform well and is avoiding the revenue slumps reported by some other industrial businesses (including Spirent). *(For more background on Diploma, I covered [the firm's half-year results in May](https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/))* **Q3 update:** today's update covers the nine months to 30 June. It's short, but fairly sweet, reiterating May's guidance with additional confidence. - Reported revenue growth of 21%; this is split out into 9% organic, 8% acquisitions and 4% from foreign exchange gains - Sales growth was said to be "broad-based" across Controls, Seals and Life Sciences divisions - Today's acquisition of fluid power solutions business DICSA for £170m will be integrated into the European Seals business and is expected to contribute 5% earnings per share growth in its first full year. This seems a reasonable price, at first glance. - Diploma has made eight bolt-on acquisitions for £26m since the end of the half year **Outlook:** with nine months of the financial year complete, management has *"increased confidence"* in the full-year guidance issued in May, which is unchanged in this update: - Organic revenue growth of c.7%, with a further 7% contribition from acquisitions - Adjusted operating margin is expected to be around 19%. - Free cash flow conversion of c.90% These are excellent metrics, in my view. Broker consensus estimates for Diploma price the stock on a FY23 forecast P/E of 25, with a prospective dividend yield of 1.9%. ### My view This update strengthens my previous view that Diploma is a quality business I would quite like to own share in. The question, of course, is how much should I pay? Diploma currently scores 60/100 in my dividend screen, reflecting its quality metrics but relatively steep valuation and low yield. Checking two of my preferred valuation measures, the shares do indeed look quite fully priced on a trailing 12-month view: - EBIT/EV yield: 4.3% - Free cash flow yield: 3.8% A business that earns 15%-20% returns on equity and has a 20+ year record of dividend growth probably deserves some kind of valuation premium, but for me, this is still a stretch. Mind you, I might be wrong to refuse to pay up. Genuine quality compounders are quite rare and almost always expensive. But the current share price of almost £31 looks quite full to me. For now, I'm going to continue watching and hope that a better buying opportunity arises at some point. After all, Diploma's share price traded at £26 as recently as April and hit a 52-week low of £22 in September last year. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: bargain property stocks? GLE, GPE, WKP (12/07/23) URL: https://www.rolandhead.com/dividend-notes/bargain-property-stocks-gle-gpe-wkp-12-07-23/ Last updated: 2023-07-12T12:15:51.000Z Welcome back to my dividend notes. In the absence of many interesting new updates from dividend-paying companies this week, I'm continuing to clear some backlog items from last week. Today's notes are property themed, with updates from small-cap a housebuilder and two FTSE 250 commercial property REITs. ### Companies covered: - **[MJ Gleeson (LON:GLE)](#mj-gleeson-gle)** \- a solid trading update from this small-cap housebuilder, which operates at the affordable end of the market. My initial impression ahead of the full-year results is that the shares could offer value. - **[Great Portland Estates (LON:GPE)](#great-portland-estates-gpe)** \- this London commercial property landlord reports rising rents and strong occupancy. Although risks remain, I think the shares are probably too cheap at a 45% discount to NAV. - **[Workspace (LON:WKP)](#workspace-wkp)** \- this flexible work space provider has a big portfolio across London and the south east. Trading nearly 50% below NAV the shares look potentially cheap. But I do have some concerns. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### MJ Gleeson (GLE) > "Purchasing a Gleeson home has become increasingly attractive to customers who would have previously bought a more expensive home" This small cap housebuilder specialises in building affordable homes. Gleeson boasts that a couple earning the National Living Wage can afford to buy a home on any of the company's sites. Gleeson's latest trading update covers the year to 30 June and reports completions of 1,723 homes last year, down from 2,000 the previous year. This included 115 homes sold under bulk sale agreements, presumably to rental landlords. This total appears to have included *"up to 66 homes"* sold as part of a bulk deal to sell 288 homes to private equity group Carlyle. The remainder are due to be completed in the current financial year. **Order book:** the bulk sales to Carlyle has helped to support reservation rates and Gleeson's order book. The group is starting the year with an order book of 665 plots, compared to 618 at the end of FY22\. This is a contrast to most of the big housebuilders, which are reporting shrinking order books at present. However, Gleeson's numbers seem to suggest that at least 222 of these homes – one third – are due to be sold to Carlyle. This deal has clearly helped to offset a slump in sales to homeowners, but it's left Gleeson with some customer concentration risk. **Affordable positioning:** Average selling prices rose by 11.3% to £186,200 last year. This figure reflects cost inflation, but also highlights the group's affordable positioning. According to [Nationwide](https://www.nationwidehousepriceindex.co.uk/reports/house-prices-relatively-stable-in-june-but-annual-growth-remains-in-negative-territory?ref=rolandhead.com), the UK national average house price was £262,239 at the end of June 2023. **Shift in buyer demographics:** rising borrowing costs and the soaring cost of living suggest to me that Gleeson's offering could appeal to an expanded customer demographic at the moment. The company's latest trading update appears to confirm this. The proportion of first-time buyers fell to 50% last year (FY22: 71%), but more than 20% of sales went to over 55s (FY22: 10%). **Outlook:** the company acknowledges uncertainty but says that *"land continues to be available at sensible prices".* Management expect demand from *"value-driven buyers"* to help offset weaker demand from first-time buyers. Full-year results are due in September. ### My view Gleeson's share price is down by 60% from its pre-pandemic highs. The stock trades at a c.20% discount to the firm's December 2022 book value of about 480p per share. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/gle-chart-all-120723.png) According to SharePad, this is the first time Gleeson shares have traded below book value since 2012\. Although net asset value may fall in the full-year accounts, I see this as a potential indicator of value. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/gle-pnav-120723-1.png) Gleeson's balance sheet looked okay to me in the interim results, but the company doesn't have the massive cash piles of some rivals. I look forward to taking a closer look at the accounts when the firm's full-year results are published in September. In the meantime, my feeling is that this is a nice business, reasonably valued. Although the 3.8% dividend yield is more modest than at some larger rivals, it looks well covered by earnings to me. I don't see any obvious reason for a near-term cut to the payout. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Great Portland Estates (GPE) > "we had another active quarter with £6.4 million of new leasing deals at rents 17% higher than the March 2023 ERV" I've believed for a while that quality London property in good locations is starting to look cheap. FTSE 100 REITs British Land and Landsec both offer value, in my view (and big yields). A more niche choice might be Great Portland Estates. This £1.0bn REIT currently trades 45% below its last-reported book value of 757p per share, despite reporting strong occupancy and rising rental rates. GPE's [portfolio](https://www.gpe.co.uk/portfolio?ref=rolandhead.com) is spread over a number of popular [areas in Central London](https://www.gpe.co.uk/portfolio/location-guides?ref=rolandhead.com), including the West End and areas such as Shoreditch, Holborn and Whitechapel. Tenants include retailers, tech firms, and creative businesses. In addition to offering traditional bare-building leases, GPE also offers fitted and fully-managed services, providing an added layer of value and flexibility. This offering seems to have remained popular. The company says that new lettings during the second quarter were agreed at rents 17% higher than March rental estimates. Void rates remain low, at 3.6%, and 99% of rent charged during the quarter was collected within seven working days. **Balance sheet:** I think that refinancing risk is one factor that could differentiate investment returns from property stocks at the moment. Landlords at risk of being forced to refinance debt facilities quickly and at much higher costs may be worth avoiding, in my view. GPE's balance sheet (based on March 2023 accounts) looks fairly low risk to me. The company reported a loan-to-value (LTV) ratio of 20% at the end of March, with an average debt cost of 3%. Of this, 97% was at fixed interest rates or hedged. The average maturity on drawn debt was 6.4 years, suggesting very little near-term refinancing risk. **Outlook:** results for the half-year to 30 September are due in November. Consensus forecasts suggest a dividend of 12.8p per share this year, giving a 3.1% yield – the highest level since 2010/11. ### My view I think this is a well-run business with a good quality property portfolio. It's not a high yielder, but historically, buying the shares at a discount to net asset value has generally been a profitable trade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/gpe-shareprice-pnav-120723.png) However, it's worth remembering that past performance isn't any guarantee of future returns. The group's record of value creation isn't clear cut, in my view, based on historical net asset value per share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/gpe-navps-120723.png) I'm interested to see how market conditions evolve for London-focused REITs over the coming 6-12 months. My feeling is that there's value on offer among stocks such as GPE, with the caveat that this remains a cyclical situation with the potential for further unpleasant shocks. Right now, my strategy here might be to buy a basket of my preferred commercial property REITs, rather than trying to pick an outright winner. 💡 **Podcasts for private investors!** Enjoy three high-quality discussions about UK shares every month. [Full details here ->](https://privateinvestors.supercast.com/?ref=rolandhead.com) --- ### Workspace (WKP) > "Like-for-like occupancy stable at 89.2%" FTSE 250 REIT Workspace describes itself as London's leading owner and operator of flexible work space, primarily offices. The company is hoping that changing post-pandemic working patterns will result in continued healthy demand for its serviced office sites. Conversely, I would guess there's some risk that Workspace could fall victim to a broader glut of office space and be forced to cut prices to remain competitive. **Trading update:** performance during the quarter ended 30 June seems to have been broadly encouraging. - Like-for-like (LFL) occupancy stable at 89.2% - LFL rent per square foot up 3.3% to £41.73 - £83m of non-core disposals and £166m of available cash - A pro-forma loan-to-value ratio of 31% (based on March 2023 valuations) However, the company did see a modest reduction in enquiries, viewings and new lettings across the quarter, albeit with stronger performances in May and June: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/wkp-1q24-update-cust-activity.png) Source: Workspace Q1 FY24 update **Portfolio comments:** chief executive Graham Clemett says that the firm's portfolio provides plenty of opportunity: > "Our extensive property portfolio across London provides us with a rich opportunity to upgrade and reposition our buildings to meet both the changing needs of our customers and higher environmental standards." I think this is probably true, to some extent. But this statement also highlights some of my main concerns about this business: - the office property market seems to be segmenting into well-located properties with high environmental ratings – and everything else. The costs of retro-fitting buildings to meet new environmental standards ahead of coming legislation can be high. This would be one area of Workspace's portfolio I'd want to research before considering an investment – how much spending will be needed? - the company's properties appear to be spread fairly widely over London. Last year's acquisition of McKay Securities has added further properties in the south east. A number of these are still earmarked for disposal. I'd want to know a bit more about McKay's portfolio, too. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/wkp-portfolio-map-120723.png) Source: [Workspace](https://www.workspace.co.uk/investors/our-portfolio?ref=rolandhead.com) 12 July 2023 ### My view Workspace reported a net asset value of 927p per share at the end of March 2023\. At the time of writing, the shares are trading at 483p – a discount of nearly 50%. A forecast dividend yield of more than 5% is an additional attraction. Clearly, I think there *could* be value here. However, one area I'd want to know more about is the expected cost of modernising Workspace's portfolio to meet new environmental standards. Is there a risk this could act as a drag on returns? More generally, another risk with this type of business is so-called *duration mismatch* – in other words, tenants are often able to sign up for quite short leases, while the property owner may have secured longer-term financing on the property. If vacancy rates rise, this can lead to a shortage of cash to fund debt repayments. I'd want to do more research on Workspace's debt and lease profiles. But my initial impression is that the company's balance sheet isn't quite as strong as that of Great Portland Estates. Workspace's 31% LTV ratioo is significantly higher than that of GPE (20%). Borrowing costs are higher, too. At the end of June, Workspace reported an average cost of debt of 4% (GPE: 3%). Looking back at the March 2023 accounts, the average maturity on Workspace's drawn debt at that time was 4.4 years, compared to 6.4 years for GPE. Comparing Workspace and Great Portland Estates isn't an exact apples-to-apples comparison. While overlapping, they have different business models and and they do not operate in all the same locations. I plan to keep an eye on Workspace as the year unfolds. But my initial impression is that the forecast dividend yield of 5.5% may reflect a slightly higher level of risk than GPE's more modest 3.1% yield. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: looking for cyclical buys - CCH, VCT, RWA (11/07/23) URL: https://www.rolandhead.com/dividend-notes/looking-for-cyclical-buys-cch-vct-rwa-11-07-23/ Last updated: 2023-07-11T16:23:35.000Z Welcome back to my dividend notes. Today I'm covering some backlog items from last week. These include a cash-rich small cap share and a FTSE 100 drinks business I think could be interesting. ### Companies covered: - **[Coca-Cola HBC (LON:CCH)](#coca-cola-hbc-cch)** \- I think this soft drink bottling and distribution business has some of the hallmarks of a quality consumer defensive business. I do have a few niggling concerns, though. For now, it's on my radar for further research. - **[Victrex (LON:VCT)](#victrex-vct)** \- the plastic firm's Q3 update confirms full-year guidance, following June's profit warning. However, a 38% slump in volumes during the quarter suggests to me that there's still some risk of another profit warning. I remain interested, but on the sidelines. - **[Robert Walters (RWA)](#robert-walters-rwa)** \- this cash-rich and profitable recruiter looks good value to me on a cyclical view. It's definitely on my radar as a possible dividend share. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Coca-Cola HBC (CCH) > "Coca-Cola HBC announces that, after a stronger than anticipated finish to the first six months of the year, it is upgrading its 2023 earnings expectations." FTSE 100 member Coca-Cola HBC (also known as Coca-Cola Hellenic Bottling Company) is one of the main bottling and distribution partners for US drinks group **The Coca-Cola Company (NYSE:KO)**. I just want to create a brief placeholder for this company covering some initial notes I've made. I'm interested because I think this is probably a good quality business and could potentially be an interesting quality dividend stock. CCH [operates in 29 countries](https://www.coca-colahellenic.com/en/about-us/who-we-are/where-we-operate?ref=rolandhead.com) across western and eastern Europe, plus Russia, and some African states. It was Greece's largest listed company until 2013, when the group transferred its listing to the UK in the midst of the eurozone financial crisis. CCH is now a FTSE 100 member. **Trading update:** in a half-year trading update on 7 July, CCH said that performance in June – a key month – had been better than expected. Management now expects to report *"strong"* growth in adjusted operating profit for the first half of the year, driven by *"double-digit"* sales growth and operating leverage. The company reports good improvements in price/mix - in other words, increasing prices and selling more higher-margin products. **Outlook:** 2023 full-year adjusted operating profit is now expected to rise by 9%-12%, compared to previous guidance of up to 3%. Broker consensus forecasts have been twitched higher and now suggest earnings of €1.80 per share for 2023, giving a forecast P/E of about 15\. An 8% dividend increase is expected, giving CCH shares a prospective yield of 3%. ### My view The Coca-Cola business is much broader than just Coke. It also includes [a huge range](https://www.coca-colahellenic.com/en/our-24-7-portfolio/explore-our-24-7-portfolio?ref=rolandhead.com) of soft drinks, tea, coffee and alcoholic beverages. The affordable, everyday nature of many of these purchases should make this a good defensive investment, in my view. I don't think the shares look too expensive, either, on c.15x earnings. However, when compared to UK-listed alternatives such as [Britvic](https://www.rolandhead.com/dividend-notes/reliable-performers-rnwh-bvic/), AG Barr, or Diageo, I think there are a couple of points about the group's ownership and business that might be worth noting: **Brands:** CCH has huge expertise in local manufacturing and regional distribution. But it doesn't own many of the brands it sells – the vast majority are produced under licence from Coca-Cola. I don't expect this long-term relationship to change. But it *could* change and I think it *does* mean that shareholders don't have any claim on the value of these brands and products. **Location:** CCH is incorporated in Switzerland, not the UK. **Ownership:** The group is effectively controlled by two [dominant shareholders](https://www.coca-colahellenic.com/en/investor-relations/shareholder-centre/shareholder-structure?ref=rolandhead.com) that control more than 23% each - The Coca-Cola Co and Luxembourg-based vehicle Kar-Tess Holdings SA. My impression is that Kar-Tess Holdings SA represents the interests of the Levantis-David Group, who previously owned CCH before its flotation. Certainly, the board contains a number of non-executive directors with the surname Levantis. As a potential investor, I would assume that this ownership structure gives external shareholders, including institutions, very little influence over how the company is run. On the other hand, I'm generally in favour of family ownership. I think it often provides a welcome long-term perspective. **Russia:** CCH still operates in Russia. Following Coca-Cola's exit from this market, CCH restructured its (sizeable) Russian operations to a *"self-sufficient business model focusing on local brands".* Arguably, this could yet give rise to reputational and financial risk, although I don't see this as a huge concern. **Final thoughts:** for now, Coca-Cola HBC is one I'll keep watching. I plan to take a closer look at the group's half-year results in August to expand my knowledge of this business and take a closer look at its financial qualities. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Victrex (VCT) > "Overall, our Outlook is unchanged from what we recently communicated" Updates are coming thick and fast from this specialist plastics manufacturer, which has a £1.3bn market cap and is a FTSE 250 member. I previously commented on Victrex in [May](https://www.rolandhead.com/dividend-notes/warnings-and-uncertainty-vct-dlg-mslh-09-05-23/) (half-year results) and [June](https://www.rolandhead.com/dividend-notes/warnings-upgrades-and-a-6-yield-vct-crda-bnzl-vp/) (profit warning). The most recent update came on 6 July and covers trading for the three months to 30 June. Group revenue fell by 23% to £72m, with volumes of PEEK plastic down by 38% to 818 tonnes. Although this is a big drop, it does appear to confirm an improvement in average selling prices, which have now recovered to £85/kg on a year-to-date basis. Full-year guidance is for ASP to be above £84/kg. Management say that weaker demand and destocking are continuing across multiple markets, particularly electronics, energy/industrial and value-added resellers. Aerospace is said to be seeing good growth, while automotive demand is *"stable"*. Revenue fell by 8% during the first nine months of the year, with volumes down 23%. This run rate is in line with June's guidance for revenue to fall by 6%-10% across the year to 30 September. However, given the 23% revenue decline in the third quarter, I wonder if full-year performance could still miss guidance. My sums suggest that if Q4 revenue falls by more than 20% compared to the same period last year, then full-year revenue would fall by more than 10% from last year's figure of £338m. Hitting guidance appears to depend on market demand and pricing stabilising over the summer. I don't know how likely this is. **Outlook:** chief executive Jakob Sigurdsson says that full-year guidance is unchanged since June's profit warning. Adjusted pre-tax profit is expected to be between £80m and £85m. Consensus forecasts suggest earnings of 83p per share, putting the stock on a forecast P/E of 17. ### My view I remain interested in this business as a potential member of my dividend portfolio. Except during the pandemic, Victrex's dividend has never been cut since its 1995 listing – 27 years. With the yield now approaching 4%, I think the valuation could be starting to look quite reasonable. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/vct-dividends-110723.png) However, I wonder if we could still see another profit warning this year. From what I can see, meeting full-year guidance could still be challenging in such weak markets. More generally, I think Victrex is a good quality business with some attractive assets. But I wonder if growing competitive pressures means that its growth potential and pricing power aren't quite as strong as they once were. In the midst of a broader downturn, it's sometimes hard to separate out the macro and the micro influences on a company's performance. But I expect the picture to become clearer over the coming months and will continue to follow this story with interest. --- ### Robert Walters (RWA) > "candidate confidence and time to hire are not yet showing the anticipated signs of sustained improvement" Recruiter Robert Walters issued a profit warning in June and reiterated its cautious outlook in last week's Q2 trading update. However, this stock has been steadily rising up my dividend screening results in recent months. At the time of writing, this £300m market cap business is ranked among the top 10% of UK stocks by my [scoring system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). You may wonder why this is, given the economic headwinds facing the business. Put simply, when I'm buying cyclical stocks for income, I'm looking for a combination of quality metrics and a *cyclically-*low valuation. In other words, I want the shares to look cheap based on average earnings through the cycle. Robert Walters appear to fit this bill. The stock has a long-term average return on capital employed of around 18%, remains profitable, and has ample net cash to support the dividend. I'm confident its performance should improve when market conditions recover. In terms of valuation, RWA shares currently trade on just seven times 10-year average earnings (the cyclically-adjusted P/E, or CAPE). According to SharePad, this is the cheapest they've been since 2011 and only slightly more expensive than in 2008. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/rwa-cape-110723.png) In addition, Robert Walters' dividend yield is currently at a level only seen during previous recessions of 2001/2 and 2008/9\. Although past performance is no guarantee of future returns, on both of these previous occasions, buying RWA shares would have been a profitable cyclical trade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/rwa-shareprice-divyield-110723-1.png) **Trading update:** let's take a look at the main points from last week's update. The company reported net fee income down by 11% during the second quarter. This represents a reversal of the 4% growth seen in Q1, but it's worth remembering that these figures are comparisons with the same period last year, which was a record year for the business. The US and China were the biggest fallers: - **China:** net fee income down 37% year-on-year, *"economic bounceback from Covid-related disruption is yet to materialise".* - **USA:** net fee income down 47% due to *"significant disruption to hiring"* in the finance and technology sectors. No surprise really, given the big layoffs that have been taking place. Headcount has been cut by 3% as the company controls costs and net cash at the end of the quarter was almost unchanged at £69.9m – equivalent to more than three years' dividends at current levels. **Outlook:** new chief executive Toby Fowlston believes that underlying demand in the employment market remains sound and that hiring activity will recover when market confidence improves. Although last week's quarterly update didn't provide any fresh financial guidance, analysts covering the stock have trimmed back their estimates again since the numbers were published. The latest consensus estimates I can see suggest earnings of about 30p per share this year, down from 50p before June's profit warning. That prices RWA shares on about 14 times forecast earnings, with a still-covered prospective dividend yield of 5.8%. ### My view I'm not calling the bottom, but the combination of a double-digit P/E and an attractive yield looks like a possible cyclical buying opportunity to me. The company's £70m cash pile means that a dividend cut seems unlikely to me, even if earnings remain weak for a time yet. The payout was not cut in 2002 or 2008, either: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/rwa-dividend-110723.png) I've been a fan of this business for some time and it's certainly on my radar at the moment. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### H1 2023: positioning the portfolio for long-term growth URL: https://www.rolandhead.com/portfolio/h1-2023-positioning-the-portfolio-for-long-term-growth/ Last updated: 2023-08-05T09:45:13.000Z The year started with a period of stock market exuberance that looked unwise to me. My feeling was that investors were underestimating the impact of higher-for-longer interest rates and inflation. The second quarter has seen a more subdued performance, with the FTSE 100 giving up its early gains and ending the half year unchanged. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/ukx-ytd-080723.png) My model dividend portfolio (and my real-money holdings) have also suffered. The model portfolio has lagged behind the FTSE 100 so far this year. In my defence, the FTSE 100's [market-cap weighted construction](https://www.ftserussell.com/products/indices/uk?ref=rolandhead.com) means that its performance is disproportionately influenced by a handful of oil and banking giants. I think six months is too short a period to draw any useful conclusions. I remain comfortable with the performance of the underlying businesses in my portfolio. I'm also pleased to have been able to add a new holding at what I believe is a [very attractive valuation](https://www.rolandhead.com/portfolio-shares/a-high-yield-stock-to-replace-direct-line/). In addition, I've used some of the model portfolio's accumulated dividend cash to top up selected existing holdings. Over the coming quarter, I am considering one further possible change in keeping with my [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/), but I haven't yet finalised this decision. As always, subscribers will receive an in-depth review of any new shares before I add them to the model portfolio, or buy them myself. --- ### New podcast: IntegraFin impressed me Before I look at the performance of my portfolio in more depth, I just want to let you know about a new podcast I recorded recently with my friend and fellow investor [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com). This time, we looked at FTSE 250-listed investment platform **IntegraFin (LON:IHP)** – and I have to admit I was impressed. This business is similar to **AJ Bell** and **Hargreaves Lansdown**. However, IntegraFin *only* serves financial advisers, who use the platform to manage their clients' cash. I think IntegraFin looks like a quality business. It's certainly a stock I might consider owning. [Shares Podcast: IntegraFin with Maynard Paton & Roland HeadFounder ownership, 40% profit margins and super cash generation. Maynard and I debate the attractions of investment platform IntegraFin (LON:IHP) and explain why it’s different to AJ Bell and Hargreaves Lansdown.![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/size/w256h256/2022/02/icon-v2.png)Roland HeadRoland Head![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/microphone-sm.jpg)](https://www.rolandhead.com/podcasts/integrafin-with-maynard-paton-roland-head/) --- ### H1 2023 portfolio performance To recap, the portfolio I'm discussing here is my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/), which is run using my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The model portfolio was launched on 1 December 2021\. It contains largely the same shares as my personal portfolio, which has been run on a similar basis for a number of years. Here are the performance figures for the first six months of 2023. **H1 2023:** - Model portfolio total return: -5.4% (including **2.2% dividend income**) - FTSE 100 total return: 3.1% (including **2.2% dividend income**) This chart shows the portfolio's performance against the FTSE 100 Total Return index\* since the model portfolio's inception on 1 December 2021\. **Both lines show total return (capital return + dividends):** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/pf-chart-vs-ukx-tr-010723-1.png) Of course, portfolio movements generally mask a much wider range of individual share price movements. Here's how the individual stocks in the model portfolio rose and fell during the first half of 2023: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/07/1h23-shareprice-changes.png) 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). On average, the share price of portfolio stocks fell by around 6% during this period. Falling share prices are never pleasant. But they don't concern me too much if the underlying business is performing acceptably **and is continuing to support a stable or increasing dividend.** [My reviews](https://www.rolandhead.com/dividend-newsletters/) of company results from the first half of the year have not flagged up any serious issues and have been broadly reassuring. There are only really two areas of concern that have emerged, in my view: - a small-cap stock covered in my [June portfolio review](https://www.rolandhead.com/portfolio/june-23-dividend-portfolio-update-what-could-go-wrong/) is not evolving in the way I expected. I still think it's a decent business, but I'm not longer sure it's the right type of company for my dividend portfolio. *This position is now under review.* - a well-established FTSE 250 share is being buffetted by external events and is not as profitable as I'd like. However, I think the business is being well run and is moving in the right direction. As I explained [in June](https://www.rolandhead.com/portfolio/june-23-dividend-portfolio-update-what-could-go-wrong/), I'm inclined to remain patient. It may just be a coincidence, but these two stocks are also currently the lowest-scoring shares in my [dividend screen results](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). I hope this may help to validate my use of the screen to help me select stocks. ### Stocks sold during H1 2023 I sold one stock from the model portfolio during the first half of the year, making the same sale from my personal holdings: - **[Direct Line Insurance](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance) (LON:DLG)** \- I reviewed the company's 2022 results and explained why I decided to sell in *"[Should I sell my Direct Line Insurance shares?](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/)"* on 30 March. ### New stocks & top-ups during H1 2023 In keeping with my [slow trading policy](https://www.rolandhead.com/portfolio/portfolio-selling-shares/), I've now selected and added a new stock to the portfolio to replace Direct Line. The new share was added on 30 June 2023. - Subscribers have already received an in-depth review of the company I chose, *"[A high-yield stock to replace Direct Line](https://www.rolandhead.com/portfolio-shares/a-high-yield-stock-to-replace-direct-line/)"* **Dividend reinvestment:** no cash is withdrawn from the model portfolio. This means that after 19 months, accumulated dividend income had left the portfolio with a cash weighting of nearly 15%. This was well above my target level of 5%, so I've recently used some of this virtual cash to top up some existing holdings. *Subscribers will receive a full report on these top ups later in July, but full details are already available on the [portfolio page](https://www.rolandhead.com/dividend-portfolio/).* ### Model dividend portfolio: financial metrics I can't deny the satisfaction I get when an individual share I own soars in value. But in reality, such isolated achievements do not reveal much about the success of a portfolio or an investment strategy. Ultimately, portfolio performance is the only metric that matters, in my view. For this reason, one of the techniques I use to monitor the quality and potential performance of my investments is to calculate *average* financial metrics for the portfolio *as a whole.* This allows me to get a feel for the overall shape of the portfolio, and monitor whether it's likely to be improving or worsening. Here's how my quality dividend model portfolio looked at the end of June 2023 (the March 2023 figures are [here](https://www.rolandhead.com/portfolio/q1-2023-a-big-loss-leaves-me-lagging-the-market/)): | **Median mkt cap** | **TTM ROCE** | **TTM EBIT yield** | **TTM FCF yield** | **Net debt/5yr avg net profit** | **5yr avg div grth** | **TTM div yield** | **F'cast div yield** | **No. yrs div paid** | | ------------------ | ------------ | ------------------ | ----------------- | ------------------------------- | -------------------- | ----------------- | -------------------- | -------------------- | | £1.7bn | 21.6% | 11.1% | 7.7% | 0.1x | 4.8% | 4.9% | 5.0% | 22 | *Data source: SharePad/author analysis 08/07/2023\. Some adjustments were needed; don't take this as gospel.* **The average dividend screen score of the portfolio stocks at the end of June 2023 was 67/100.** Most of these figures are broadly unchanged from the first quarter, but I think there are a few differences worth highlighting. The **median market cap** of the portfolio has fallen from £2bn to £1.7bn. There are two reasons for this – falling share prices and the replacement of Direct Line with a smaller company. The portfolio's average **ROCE** has fallen slightly, from 22.9% to 21.6%, but I think it's more significant to note that **EBIT yield** has risen from 9.8% to 11.1%. This is a valuation measure and reflects the fact that falling share prices have not (yet) been fully reflected in falling profits. In other words, the portfolio looks cheaper, on this measure, than it did three months ago. The portfolio's **free cash flow yield** of 7.7% is almost unchanged. This implies that the trailing **dividend yield** of 4.9% is covered by surplus cash generation, in aggregate. Overall leverage (**net debt/5yr avg profit**) across the companies in the portfolio remains almost zero, reflecting a mix of net cash and net debt positions. Meanwhile, the portfolio's **forecast dividend yield** has improved from 4.5% to 5.0%, reflecting the addition of a high-yielding stock to replace Direct Line. If the **five-year average dividend growth rate** of 4.8% can be maintained, then this suggests a possible total return of almost 10% per year, on a medium-term view. Reassuringly, the average dividend record of the companies in the portfolio is unchanged, at **22 years**. Of course, these attractive averages may mask some unattractive individual metrics. They do not mean that all of the companies in the portfolio are good businesses or that they are attractively valued. To address this risk, I review each company's results in detail at least twice a year and monitor all newsflow from the shares I own. These reviews are all available in my [newsletter archive](https://www.rolandhead.com/dividend-newsletters/). For now, I remain happy with the portfolio and am not planning any changes to my stock selection strategy, or to the system I use for managing the portfolio. As always, thank you for reading and supporting this project. Please feel free to get in touch with any questions or feedback – you can reach me by [email](https://www.rolandhead.com/contact/) or [on Twitter](https://twitter.com/rolandhead?ref=rolandhead.com). All the best, Roland 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! \*Benchmark change: *I previously used the [iShares Core FTSE 100 UCITS ETF GBP (Acc) (LON: CUKX)](https://www.google.com/finance/quote/CUKX:LON?ref=rolandhead.com) as a benchmark. CUKX is effectively the FTSE 100 TR index in an ETF, so the change is merely a simplification and does not affect the performance record of my portfolio against its benchmark.* --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Shares Podcast: IntegraFin with Maynard Paton & Roland Head URL: https://www.rolandhead.com/podcasts/integrafin-with-maynard-paton-roland-head/ Last updated: 2024-01-10T12:46:48.000Z In this month's episode of the [Private Investor's Podcast](https://www.fundyourretirement.com/private-investors-podcast/?ref=rolandhead.com), my good friend [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com) and I have been discussing FTSE 250 share **IntegraFin (LON:IHP)**. This investment platform serves financial advisers only and boasts strong – albeit complex – financials. IntegraFin makes for an interesting comparison with better-known platforms **AJ Bell** and **Hargreaves Lansdown**,and Maynard and I spent some time debating the relative attractions of each business in our discussion. I hope you enjoy listening! - Listen on [Apple](https://podcasts.apple.com/us/podcast/pip013-maynard-roland-analyse-integrafin-aj-bell-hargreaves/id1642393167?i=1000619019583&ref=rolandhead.com) - Listen on [Spotify](https://open.spotify.com/episode/7vvM2P6GLbNNNzO3ZsvLQO?ref=rolandhead.com) - Listen on [Amazon](https://music.amazon.co.uk/podcasts/bf4b8007-5576-41e3-8459-57883df901aa/episodes/7aced52e-2440-401c-bcdb-a083f733e41a/private-investor's-podcasts-pip013-maynard-roland-analyse-integrafin-aj-bell-hargreaves-lansdown-but-which-is-the-best-buy?ref=rolandhead.com) - Listen (and watch!) on [YouTube](https://youtu.be/DH7bdAv5p24?ref=rolandhead.com) The topics we discussed included: - IntegraFin's business model and track record of stable client cash inflows - Owner management and founder Michael Howard - Valuation and yield: is IntegraFin cheap? - IntegraFin's products and client base, including the potential attractions of onshore/offshore bonds... - Fair pricing and a heritage of disruption - Full interest rates on client cash: a refreshingly fair and transparent policy - Could asset management heavyweight **BlackRock** be planning a bid? - Comparing IntegraFin to AJ Bell and Hargreaves Lansdown - Growth opportunities and pressure from rising costs - Would we buy IntegraFin (or AJB or HL) at the current price? Could they get cheaper? - Closing thoughts - our verdict on this interesting business This podcast was recorded on 26 June 2023. I hope you enjoy our discussion. As always, all feedback is very welcome! Roland --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### June '23 dividend portfolio update: foggy outlook URL: https://www.rolandhead.com/portfolio/june-23-dividend-portfolio-update-what-could-go-wrong/ Last updated: 2023-09-28T15:06:01.000Z Welcome back to my dividend portfolio newsletter. In this edition, I'll cover results and updates issued in June by companies in [the model portfolio](https://www.rolandhead.com/dividend-portfolio/). Whereas [May's newsflow was broadly positive](https://www.rolandhead.com/portfolio/may-23-dividend-portfolio-update-mostly-good-news/), June's updates were more of a mixed bag. They include two 7% dividend yields, a profit warning and a rather complex year-end update. I also review a delayed set of results from a company for which I've had high hopes, but must now review with a more critical eye. I think it's fair to say the near-term outlook for many businesses is a little uncertain. But I take comfort from the fact that three of the four companies in this month's report have net cash on their balance sheets. All of them remain profitable. In uncertain times, this alleviates many risks and certainly helps me sleep more easily at night. *As a quick reminder, the model portfolio on this site contains the same companies as my main personal portfolio.* --- Before I get started, here's a round-up of some of the other new dividend share content I've published over the last week or so. ### Dividend notes - 29 June - [short and sweet - Morgan Sindall, James Latham, B&M European Value Retail and Morgan Advanaced Materials](https://www.rolandhead.com/dividend-notes/short-and-sweet-mgns-lthm-mgam-bme/) - 30 June - [farms, fashion & forex - Associated British Foods and Record](https://www.rolandhead.com/dividend-notes/farms-fashion-forex-abf-rec/) --- **Let's take a closer look at last month's portfolio news.** 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). _This post is for paying subscribers only._ ### Dividend notes: farms, fashion & forex - ABF, REC URL: https://www.rolandhead.com/dividend-notes/farms-fashion-forex-abf-rec/ Last updated: 2024-04-26T14:40:01.000Z Welcome back to my dividend notes. Two companies are on the menu today, a family-controlled FTSE 100 stalwart and an interesting small-cap financial with 30% profit margins and a 5% yield. ### Companies covered: - [**Associated British Foods (LON:ABF)**](#associated-british-foods-abf)\- a solid third-quarter update with group revenue up 16% and an upgrade to full-year profit guidance. I think the shares could be a good long-term investment. - [**Record (LON:REC)**](#record-rec)\- I admire this currency management's specialist expertise and impressive profitability. But I'm less sure about its diversification into asset management. I'll continue to watch with interest. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in* [*my screening results*](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) *at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Associated British Foods (ABF) > "Based on current trading conditions,we now expect the Group's adjusted operating profit for the full year to be moderately ahead of last year." Food and fast fashion conglomerate ABF has issued a third-quarter trading statement confirming solid progress across the business. Group revenue rose by 16% to £4,726 during the three months to 27 May, compared to the same period last year. The group's food businesses include British Sugar and grocery brands such as Kingsmill, Twinings and Ovaltine. Revenue in these businesses rose by 18% to £2,728m during the third quarter. ABF also owns budget fashion retailer Primark. This business continues to recover from the pandemic (it doesn't sell online) and saw revenue rise by 13% to £1,998m during the quarter. **Outlook:** management now expect adjusted operating profit to be *"moderately ahead of last year"*. The company's previous guidance with [its interim results](https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/) was for flat profits this year. **My view:** I think this is a good business that benefits from family ownership and a strong, conservative balance sheet. My sums suggest the shares trade on a trailing EBIT/EV yield of about 6.5% at the moment, which seems reasonable to me, if not obviously cheap. ABF has been a reliable performer for many years and has an excellent dividend record. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/abf-dividends-profit-300623.png) I suspect it will remain a rewarding long-term investment. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Record (REC) > "Strong momentum in AUME growth (+6%) driven by net inflows of $9.1bn to close the year at $87.7bn, the highest ever level of AUME to date." Currency management specialist Record reported a strong set of full-year results on Friday. **Results summary:** revenue rose by 27% to £44.7m, while pre-tax profit was up by 34% to £14.6m. Profitability was excellent, too. Record's operating margin rose to 32% (FY22: 31%) and my sums suggest a return on equity of 42%. The group's assets under management equivalent, a measure of the total value of client assets hedged by the group, rose by 6% to a record $87.7bn. Management fees are charged as a percentage of AUME and rose by 12% to £38.3m. Performance fees rose to ~~£5.3m~~ £5.8m *(correction)*, from just £0.5m the previous year. My sums suggest fee margins were stable last year, although it's hard to be sure given the currency translation involved. However, comments from departing chairman (and founder) Neil Record suggest that fee margins have indeed stabilised, after a long period of compression: > "While these mandates can sometimes be large (>$10 billion), we have experienced steady fee compression over the past decade, only now levelling out at very low levels." Record had cash and short-term money market securities totalling £14.5m at the end of March, down from £17.3m one year earlier. The group has no debt. **Dividend:** shareholders will see the ordinary dividend increase by 25% to 4.5p per share and will also receive a special divided of 0.68p per share. That gives a total of 5.2p, implying a yield of 5.3% at current levels. **Trading commentary:** historically, Record's core business has been providing passive currency hedging to institutional investors such as pension funds. This is a large scale business, but fee margins have fallen steadily over the last decade. While they may now be stabilising, I would guess they are unlikely to rise again. To address this problem, Record has been diversifying since CEO Leslie Hill took charge three years ago. The company says it's now seeing attractive growth in providing currency hedging for *"large, international asset managers"*. This work is said to be technically challenging, but attracts *"much better fee rates"* then are earned from pension funds. Alongside this, the group is also developing its own asset management business. This hasn't yet generated a reportable amount of revenue, but is now starting to manage funds. Sectors being targeted appear to include fintech, debt, and infrastructure: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/rec-group-structure-fy23.png) Source: Record FY22 results presentation **Outlook:** CEO Leslie Hill (who is also an 8% shareholder) believes she has now laid the groundwork for the next phase of Record's development. Hill expects to start seeing revenue from the group's new asset management and digital asset businesses. No specific financial guidance is provided, but the company says its confidence in the future is reflected by the 25% increase in the ordinary dividend – the payout has not been cut since 2012 and *"targets progressive and sustainable dividend growth"* with a target payout of 70%-90%. Broker forecasts for the current financial year (y/e 31 March '24) suggest that both profits and revenues will be broadly flat compared to FY23\. After recent share price gains, that leaves the stock trading on about 16x earnings, with a 5.3% dividend yield. **My view:** I think it's clear that Record has specialist currency management skills that are of value to large institutional clients. My impression is that the company has some degree of competitive advantage in this market, despite its relatively small size (market cap £185m). However, I'm less convinced by the company's efforts at diversification into asset management. I'm not sure why Record is likely to have any particular edge when investing in areas such as trade finance, digital assets or infrastructure. I don't have much understanding of currency markets, but I also wonder if it's possible that Record's recent strong growth has been aided by external tailwinds that might ease. Record's profit growth has been inconsistent and often disappointing, historically. The group's profits have never returned to the peak levels seen at the time of its IPO in late 2007: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/rec-shareprice-opprofit-300623.png) Record shares currently trading at 10-year highs despite cautious growth forecasts. I'm inclined to continue watching this interesting business while remaining on the sidelines. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: short and sweet - MGNS, LTHM, MGAM, BME URL: https://www.rolandhead.com/dividend-notes/short-and-sweet-mgns-lthm-mgam-bme/ Last updated: 2023-06-29T11:56:13.000Z Welcome back to my dividend notes. Today I'm covering some short-but-positive updates from companies I've mentioned before in these pages. I'll also take a look full-year results from a company I think is one of the best businesses on the AIM market. ### Companies covered: - **[Morgan Sindall (LON:MGNS)](#morgan-sindall-mgns)** \- this construction group has increased its full-year profit guidance following a strong performance from its Fit Out business. I'm a fan, but remain on the sidelines. - **[James Latham (LON:LTHM)](#james-latham-lthm)** \- an excellent and transparent set of results from this family-led AIM firm. I'm uncertain about the near-term outlook but would be happy to own shares in this business. - **[Morgan Advanced Materials (LON:MGAM)](#morgan-advanced-materials-mgam)** \- half-year update confirms full-year expectations, but I wonder about the group's historic lack of growth. I'm positive, but would need to do more research to form a strong view. - **[B&M European Value Retail (LON:BME)](#b-m-european-value-retail-bme)** \- solid Q1 revenue growth but no change to full-year guidance. The market seems disappointed and I agree that the share price looks up with events, despite my liking for the business. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.* --- ### Morgan Sindall (MGNS) > "the Board now expects full year profit for the Group to be ahead of its previous expectations" A short-but-sweet update from this FTSE 250 construction and infrastructure group, which has upgraded full-year profits forecasts. **Trading update:** the company says that its Fit Out division – which fits out office buildings – is performing well and is expected to report half-year profits 40% above last year. Management have previously guided for a weaker second half, but the order book now appears to be a little stronger than expected. As a result, Morgan Sindall's full-year profits are now expected to be ahead of previous expectations. No explicit financial guidance is provided today, but I'd guess that this wording might suggest earnings c.5% above previous forecasts. Based on consensus earnings estimates of 222.9p per share in SharePad, I guess this might suggest earnings of c.235p per share this year. That would put the stock on a forecast P/E of less than eight, with a dividend yield nearing 6%. **My view:** I've previously covered Morgan Sindall in an [in-depth dividend share review](https://www.rolandhead.com/dividend-shares/is-morgan-sindall-a-dividend-share-to-buy-now/) and, more recently, in [a dividend note in May](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/). Despite my general prejudice against construction and contracting firms, I'm a big fan of this founder-led business. I think it's very well run, with a strong balance sheet and an impressive dividend track record: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/mgns-dividend-netdebt-290623.png) Morgan Sindall scores highly in my [dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) and currently offers a forecast dividend yield of 5.9%. This payout looks well supported to me, especially after today's news. However, the reaction to today's news has been muted. This suggests to me that the market may share some of my concerns about the broader cyclical risks here, especially as they relate to the impact of higher interest rates. Despite these concerns, I can't shake off a niggling feeling that I probably should own this share in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Even so, I'll probably stay on the sidelines for now. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### James Latham (LTHM) > "The Board has declared a **final dividend** of 20.8p per Ordinary Share (2022: 19.0p) plus a **special dividend** of 8.0p (2022: 8.0p) to reflect the exceptional performances both this year and the previous year." [James Latham](https://www.lathamtimber.co.uk/?ref=rolandhead.com) is one of the UK's largest timber merchants, supplying builders merchants, contractors and a wide range of other trade customers. The firm is chaired by family member and former chief executive Nick Latham. The group was founded more than 250 years ago and first floated on the UK stock market in 1965, making it one of the older members of today's cohort. Latham is listed on the AIM market but boasts quality metrics and a consistency of performance that would shame many higher-profile main market businesses. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/lthm-profit-dividend-roce-290623.png) Today's results are typical of the straightforward and transparent reporting provided by this family business. Management commentary is concise, while the accounts are free of adjustments and other face-saving metrics. To its credit, the company doesn't try to hide the fact that profits over the last two years have been exceptional and may not be entirely sustainable. **Results summary:** supply chain conditions are said to have eased last year and gradually returned to normal. Unsurprisingly, rising energy costs affected Latham's operations. More broadly, management said that while like-for-like sales volumes rose by 5.3%, they saw some customers trading down to cheaper products. None of this prevented Latham from delivering another strong set of numbers, with profitability well above historic norms. Revenue for the year rose by 6% to £408.4m, mirroring a 6.5% average increase in the cost price of the group's stock. Pre-tax profit fell by 23% to £44.5m, reflecting broader cost pressures. Shareholders will receive a final dividend of 20.8p per share and a special dividend of 8p, giving a total payout for the year of 36.05p per share. That's equivalent to a yield of 2.8% at the time of writing. This payout is comfortably supported by net cash, which rose to £62.6m last year (FY22: £37m). This increase was driven by cash released as inventories were reduced to more normal levels. My sums show free cash flow of £32m for the year, giving a free cash flow margin on revenue of 7.9%, just below last year's operating margin of 10.7%. Both figures are above the historic norm for the business, reflecting favourable trading conditions and the benefit of last year's inventory unwind: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/lthm-fcf-op-margins-290623.png) Distribution businesses are inherently low margin, due to the large pass-through element of their revenue. In my opinion, distributors' profitability is generally better reflected by return on capital employed. My sums suggest James Latham generated ROCE of 23% last year. This is down from the 35%+ level reported in 2022, but significantly above the medium-term average of c.15%: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/lthm-roce-290623.png) It's worth pointing out that Latham's pension schemes absorbed £4m of cash flow last year – a significant amount. My reading of last year's annual report suggests that payments may fall from 2024\. But in contrast to many (most?) firms, Latham's final salary pension scheme still appears to be active and has merely closed to new entrants. So pension contributions could remain higher than they might be elsewhere. I don't see this as a serious concern though – it's affordable and may help with the retention of experienced staff. **Current trading & outlook:** when supply chain problems peaked in 2021 and 2022, James Latham gained pricing power by being able to fulfill orders from stock when its rivals could not. This advantage now appears to be easing – the company says that it's now seeing *"a more competitive market place",* albeit pricing is still well ahead of pre-pandemic levels. While some customers are trading down to cheaper products, volumes have continued to increase this year. One concern flagged by the business is that the market in Europe is quiet. Management suggest that this might lead European manufacturers to export cheaper product into the UK market, putting pressure on prices. With admirable honesty (I think), the company admits its main focus is now on navigating a return to normal levels of profit in more difficult market conditions: > "The board's challenge is to navigate the business towards what is a more normal and realistic profit achievement which takes into account the market conditions we are operating in and the inflationary overhead pressures that all companies are facing." **My view:** today's results confirm my view that this is an high-quality and well-run business. Based on recent profits, the shares appear exceptionally cheap to me – today's results show a trailing free cash flow yield of 15%. The stock's forecast P/E of eight is also modest, although the dividend yield of 2.8% is less obviously cheap, due to a conservative payout policy. Dividend cover is normally c.3x in more normal times. However, I think it's prudent to price in a further decline in profits. The problem is, I don't have any idea at all how much further – if at all – Latham's profits may fall. James Latham scores well in my screening and I'd be happy to own the shares at some point. For now, it's on the watch list. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Morgan Advanced Materials (MGAM) > "There has been no change in the Board's expectations for the full year, with organic revenue growth expected to be 2-4%." In April [I looked at full-year results](https://www.rolandhead.com/dividend-notes/peak-profits-nwg-mgam/) from Morgan Advanced Materials, which produces thermal ceramics used in industrial applications. My overall impression was positive, although I felt some caution about cyclical risks to demand. **H1 trading update:** today's update covers the six months to June 2023 and confirms revenue is expected to be 2% higher, on an organic basis (i.e. comparable to last year). **Outlook:** full-year expectations are unchanged, with organic revenue growth expected to be 2%-4%. With inflation running at c.8%, that suggests to me that volume growth could be minimal. Broker consensus forecasts in SharePad suggest adjusted earnings of 26.4p per share, with a dividend of 11.5p. At a last-seen price of 270p, that values Morgan Advanced on 10 times forecast earnings, with a 4.2% dividend yield. **My view:** I remain positive about this business, which looks quite reasonably priced to me. However, I can't completely ignore the macroeconomic headwinds, nor the reality that profits (and the share price) have made little real progress over the last decade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/mgam-shareprice-pat-290623.png) I'd need to do more research to understand the reasons for the firm's flat performance – and whether the near-term future is likely to be different. --- ### B & M European Value Retail (BME) > "Group revenue growth in Q1 of 13.5%, in line with our internal expectations" Today's first-quarter update from value retailer B&M appears to confirm the firm's view that last year's results (which I covered [here](https://www.rolandhead.com/dividend-notes/a-b-for-this-selection-bme-boy-bmy/)) can be seen as a new baseline for growth. B&M says that group revenue rose by 13.5% to £1,318m during the period, with UK sales up by 9.2% on a like-for-like basis. That seems positive to me, even if it is only slightly ahead of inflation. Elsewhere, the group's smaller businesses are also continuing to deliver double-digit sales growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/bme-1q24-revenue-1.png) Source: B&M Q1 FY24 trading update **Outlook:** first-quarter trading is said to have been *"in line with out internal expectations"*. There's no other comment on outlook today, so I assume that full-year expectations remain unchanged at this point. Consensus forecasts suggest adjusted earnings of 36.7p per share this year, broadly unchanged from last year's figure of 36.5p per share. That's equivalent to 15 times forecast earings. Dividend forecasts for this year seem to suggest an ordinary payout of 15.8p per share (FY22: 14.6p) plus a possible 4p special dividend (FY22: 20p). These estimates imply a dividend yield of around 3.3%. **My view:** I notice the shares are down by 6% on the day as I write – presumably this reflects a degree of profit taking and – perhaps – disappointment at the lack of an upgrade to guidance. Given the slower pace of earnings growth forecast for FY24 and FY25, I would say the shares are probably up with events at the moment. However, I remain positive about this business, which is more profitable than UK supermarkets and most other big listed retailers, such as [Halfords](https://www.rolandhead.com/dividend-notes/cheap-cyclical-stocks-hfd-bkg/) and Pets at Home. If B&M shares were to pull back below 450p again, I might be quite tempted. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/bme-all-chart-290623.png) 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: a super small cap? XPS, SDY URL: https://www.rolandhead.com/dividend-notes/a-super-small-cap-xps-sdy/ Last updated: 2023-06-23T11:41:00.000Z Welcome back to my dividend notes. In this piece I'm catching up on a few small-cap results from earlier this week. ### Companies covered: - **[XPS Pensions (LON:XPS)](#xps-pensions-xps)** \- a solid set of numbers from this pensions advisory and administration business. Shares offer a useful 4.8% dividend yield and I think this stock could become a reliable source of income. - **[Speedy Hire (LON:SDY)](#speedy-hire-sdy)** \- last year's results show strong revenue growth, but falling margins and poor capital allocation, in my view. The near-8% dividend yield looks a little risky to me. I think there are better choices [elsewhere](https://www.rolandhead.com/dividend-notes/warnings-upgrades-and-a-6-yield-vct-crda-bnzl-vp/) in this sector. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### XPS Pensions (XPS) > "We remain confident in delivering against our expectations for the current year." This specialist pensions advisory and administration group is a new business for me, but my initial impressions are that it could have decent potential as a dividend share. To start building up my understanding of XPS, I've decided to take a look at this week's full-year results and note down some thoughts here. **What does it do?** XPS appears to offer a wide range of pension-related services, including consultancy and adminstration. This is a complex area given the level of regulation involved and the many and varied pension funds that exist in the UK. XPS also appears to be a fund manager, in a small way. The group runs the [National Pension Trust](https://www.xpsgroup.com/what-we-do/dc-master-trust/?ref=rolandhead.com). This has £1.4bn of assets under management and is a DC Master Trust. A master trust [allows companies](https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/master-trust-pension-schemes?ref=rolandhead.com) to consolidate their DC pension schemes into the master trust, effectively outsourcing it. **Results summary:** these results cover the year to 31 March 2023 and represent the sixth consecutive year of growth since the company listed in 2017\. The numbers do seem quite strong to me, with revenue up 20% to £166.6m and operating also up 20%, to £22.7m. *(I'm using the reported profits here. XPS appears to be quite a heavy adjuster, but having looked at the adjusting items my view is that most can fairly be described as regular operating costs – e.g. share-based payments to staff. So I've included them all. That's my choice - others may take a different view.)* Cash generation appears to be pretty strong. My sums suggest free cash flow of £20.6m last year (FY22: £11.7m). This gives a free cash flow yield of 5.7% and represents cash conversion of 130% from after-tax profit. In FY22, the equivalent cash conversion ratio was 125%. Strong numbers. Profitability was fairly good, although not quite as high as I thought it might be. My sums show an operating margin of 13.6% (FY22: 13.7%) and a return on capital employed of 9.4%. Okay, but not outstanding. **Operating summary:** management report strong year-on-year growth in Pensions Actuarial Consulting (+24% YoY) and Investment Consulting (+31% YoY). Growth in pensions administration was respectable, at +10% YoY. XPS says that its business is non-cyclical and is continuing to expand into *"higher margin"* growth areas such as Risk Transfer and DC Consulting. I agree that these seem likely to remain important markets over the coming years. **Dividend:** shareholders will receive a full-year payout of 8.4p per share. This payout gives the stock a yield of 4.8% at current levels and represents 85% of free cash flow, by my calculation. That looks reasonably affordable to me in the context, albeit not bulletproof. XPS has paid steadily increasing dividends since its 2018 IPO, backed by free cash flow. If this record can be maintained, I think it could become an interesting income stock. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/xps-dividend-230623.png) **Outlook:** management believes that with market share still under 10%, XPS has *"continued opportunities to grow, supported by both market and regulatory tailwinds"*. > "We remain confident in delivering against our expectations for the current year." Broker consensus forecasts I can see suggest adjusted earnings will be broadly flat this year, at 12.7p per share (vs. 12.6p in FY23), with a dividend of 8.6p. These estimates price the stock on 14x FY24 forecast earnings, with a prospective yield of 4.9%. **My view:** XPS looks like a decent business to me with the potential to become an attractive dividend stock. Profitability looks respectable to me and is improving, but it's not quite as wonderful as I might have expected. However, I can see the potential for margins to improve as the business continues to grow. Right now, the valuation looks fair to me, given forecasts for limited growth this year. But I'm definitely going to start following XPS more closely. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Speedy Hire (SDY) > "Recent key contract wins and extensions, as well as strong pipeline, gives confidence in meeting our expectations for the coming year" What do you call an equipment hire company that loses £20.4m of *"non-itemised assets"*? Speedy Hire, in this case. This embarrassing mishap now appears to have been resolved and the group has a new finance boss. But this episode doesn't seem like a ringing endorsement of the company's management or internal culture, to me. Notwithstanding this, Speedy Hire's full-year results this week did showcase a fairly respectable performance. *This is the second equipment hire company I've covered recently – the first [was VP](https://www.rolandhead.com/dividend-notes/warnings-upgrades-and-a-6-yield-vct-crda-bnzl-vp/), last week. Suffice to say there is a substantial contrast between the two.* **Financial summary:** revenue rose by 13.9% to £440.6m during the year to 31 March, with adjusted pre-tax profit up 6.6% to £32.1m. Free cash flow managed to turn positive, rising to £10.6m (FY22 saw an £18.5m *out*flow). When revenue growth is greater than profit growth we know that margins have fallen. That's the case here. Excluding the impact of the £20.4m asset write-off, I estimate that Speedy Hire generated an operating margin of 7.0% last year, compared to 9.0% the previous year. Return on capital was 8.5%. I'd guess this is unlikely to be much above the group's cost of capital. Given this, I'm unimpressed by management's decision to use £24m of debt to buyback shares last year. This resulted in a £25m increase in net debt to £92.4m, adding risk without doing anything to make the business more productive or profitable. Although Speedy's net debt is still less than half the £208m book value of the hire fleet (my rule of thumb for this sector), I think buybacks are a rash use of money for a low-margin business whose £70m depreciation charge suggests it needs to replace a third of its fleet every year. I think shareholder returns would be better served by deleveraging and improving the performance of the business. It's also worth noting that most of these shares were probably repurchased at levels above the current share price – not ideal: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/sdy-1y-chart-230623.png) **Dividend:** the full-year dividend has been increased by 18% to 2.6p per share. This provides a tempting 7.8% yield at current levels. However, my sums suggest this payout will cost £12m, swallowing up all of last year's free cash flow and then a little more. I can't see the justification for such a big increase in the payout, given the group's debt level, poor cash conversion, and falling profit margins. Speedy Hire is the third company I've covered this week (following [Halfords](https://www.rolandhead.com/dividend-notes/cheap-cyclical-stocks-hfd-bkg/) and [DS Smith](https://www.rolandhead.com/dividend-notes/packaging-property-and-a-9-dividend-yield-wtb-smds-reci/)) that appears to be trying to placate shareholders whose stock has fallen by offering bumper payouts. **Outlook:** recent contract wins and a strong pipeline *"give confidence"*, but CEO Dan Evans also warns of the *"continuing challenges of the macro-economic climate"*. In its year-end trading update in April, Speedy said it had seen *"some softening of demand in recent weeks".* This comment wasn't repeated in the full year results. Have market conditions stabilised? Broker forecasts suggest a fairly flat year, with adjusted earnings unchanged at 5.2p per share. That prices the shares on a forecast P/E of 6. **My view:** if market conditions remain stable and Speedy Hire can maintain or improve the utilisation of its fleet (which fell from 57% to 54% last year), then I can see the shares could offer attractive value and yield at current levels. Personally, I'm not tempted. I don't think Speedy Hire is a high quality business and I certainly don't see it as a quality dividend stock, despite the high yield. The company's dividend history provides what a reminder of the cyclical risk in this business. When Speedy Hire's dividend yield has peaked at this level previously, the omens have not been positive: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/sdy-dividend-yield-230623.png) If I wanted to invest in this sector I would buy shares in VP. I think this owner-managed business is of much higher quality and benefits from stronger management. The two companies' performance over the last 30 years certainly suggests that VP has been more successful at creating value for investors: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/sdy-vs-vp-all-chart-230623.png) SDY share price (black) vs VP share price (blue) 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: packaging, property, and a 9% dividend yield - WTB, SMDS, RECI URL: https://www.rolandhead.com/dividend-notes/packaging-property-and-a-9-dividend-yield-wtb-smds-reci/ Last updated: 2023-06-22T15:39:35.000Z Welcome back to my dividend notes. Today's companies include two stocks with high dividend yields that are operating in unloved sectors, and a business that's hoping to replicate its long-running UK success in Germany. ### Companies covered: - **[DS Smith (LON:SMDS)](#ds-smith-smds)** \- this packaging group saw a big jump in profits last year as pandemic-era price rises dropped through and boosted margins. I'd like to see debt fall, but I think the shares look affordable at this level. - **[Whitbread (LON:WTB)](#whitbread-wtb)** \- a strong update suggests the Premier Inn model is firing on all cylinders. I like the business, but the share price looks up with events to me at the moment. - **[Real Estate Credit Investments (LON:RECI)](#real-estate-credit-investments-reci)** \- reassuring results show stable net asset value and regular loan repayments. This isn't without risk, but I believe the 9% dividend yield looks safe *(disc: I hold).* --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### DS Smith (SMDS) > "Current trading in line with our expectations" I've thought that the big packaging companies have offered value for some time now, so today's results from FTSE 100 packaging group DS Smith caught my eye. **Financial summary:** DS Smith saw revenue rise by 11% to £8,221m last year, while operating profit rose by 65% to £733m. This big increase reflects the delayed benefit of price increases the company has secured to reflect cost increases seen in 2021/22. Shareholders will receive a final dividend of 12p per share, giving a total payout for the year of 18p per share – an increase of 20%. While I'm sure shareholders will welcome the yield, as with [Halfords, yesterday](https://www.rolandhead.com/dividend-notes/cheap-cyclical-stocks-hfd-bkg/), I'm not sure these results justify such a generous increase. My sums suggest that DS Smith's free cash flow fell by 35% to £244m last year, due to the impact of a sharp fall in energy and paper prices at the end of the company's financial year. I think the company paid for inventory it then had to sell at lower-than-expected prices. This chart shows the price of wood pulp over the last year, from which paper and cardboard are made. Prices appear to have fallen by about 30% during the final quarter of DS Smith's financial year (y/e 30 April). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/kraft-pulp-1y-chart-220623.png) Net debt also rose, due to weaker cash flow and an increase in capital expenditure. I calculate that net financial debt rose by £122m to £1,448m last year. That seems high enough to me, for a business whose annual profits have (probably) peaked for now, at just over £500m. The increased dividend will require 100% of free cash flow, so any deleveraging will rely on reduced spending or improved cash generation this year. One positive from the results was that the tailwind from price increase supported a notable improvement in profitability. Operating margin for the year improved to 8.9% (FY22: 6.1%), while return on capital employed rose to 11.5% (FY22: 7.0%). I reckon last year was the first time since 2016/17 that DS Smith's ROCE topped 10%, based on my unadjusted calculation. **Operating summary:** box volumes fell last year and the company says that overall market demand was *"worse than we originally expected"*. Destocking and weak consumer demand are blamed – DS Smith has a greater exposure to consumer markets than the sector average. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/smds-fy23-market-segments.png) Source: DS Smith FY23 presentation However, the company remains confident that trends such as online retail and sustainability will continue to drive medium-term growth. **Outlook:** trading so far this year is said to be in line with expectations, although box volumes are still *"lower than normal"*. Consensus forecasts on SharePad suggest earnings could fall by 12% to 37.7p per share this year, with the dividend unchanged at 18p. Those estimates put the stock on a forecast P/E of 8 with a dividend yield of 6.3%. **My view:** I'd like to see a reduction in leverage in this business, but fundamentally I don't see too much to worry about here. While DS Smith isn't my top choice in this sector, I think the big packaging firms probably offer good value at the moment and could be a profitable contrarian choice. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Whitbread (WTB) > "With strong trading momentum across the Group, we remain confident in the full year outlook." Premier Inn owner Whitbread says it's benefiting from the steady decline of the independent hotel sector and a lack of growth from branded rivals. I reviewed this company's 2022/23 results [in April](https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/) and concluded that it was a good business, but probably fully priced for now. Does today's Q1 statement alter this view? Today's first-quarter update covers March through May and shows the group making a strong start to the year. UK sales were 16% ahead of the same period last year, or 14% on a like-for-like basis. Revenue per available room (RevPAR) was also 16% higher than last year, with the company seeing strong demand in the regions and London. Whitbread is continuing to roll out the Premier Inn brand in Germany, which management believe offers the same attractions as the UK market in the past; lots of independent operators and a high degree of fragmentation. The group now has 56 hotels in Germany, with a core of 18 more established sites that are said to be performing in line with expectations. Sales in Germany have more than doubled over the last year, as the group has opened new hotels and increased average RevPAR from €35 to €55. **Outlook:** there is no change to financial guidance today. CEO Dominic Paul says is confident about the full-year outlook and expects to report *"a strong first half result".* Broker forecasts put the shares on 20 times forecast earnings, with a 2.3% dividend yield. **My view:** there's no change to my view that this is a very good business, but I still think the share price is up with events. --- ### Real Estate Credit Investments (RECI) > "RECI continued to deliver a stable NAV and attractive annual dividend of 12 pence per share, amid challenging times and volatile markets" I covered this specialist property investment company in May, so for more background on this high yielder please take a look at [my previous update](https://www.rolandhead.com/dividend-notes/underrated-quality-full-price-macf-reci-bez/). Following RECI's Q4 update in May, I bought some shares using some of the unallocated cash in my pension (not part of my main [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/)). So I was interested to see if today's results contain any surprises. First impressions are reassuring. The company ended the year with net assets of £337m (FY22: £344m), giving a net asset value of 147p per share (FY22: 150p). The dividend for the year was unchanged at 12p per share, giving a yield of 9.5% at the last-seen share price of 126p. According to the company's figures, RECI shares provided a total NAV return of 6.2% last year – that's the combination of dividends paid and changes to NAVps. This stability is sharp contrast to the big NAV declines many REITs have reported in recent months. It suggests to me that RECI's policy of investing directly in carefully-chosen development projects is continuing to work well in more challenging markets. Indeed, the company agreed to £155m of new lending during the year, while receiving £159m of repayments and interest. Shareholders received £27.5m of dividend payments. **8%+ interest rates:** Interest payments totalled £32m on average assets of just under £400m, suggesting RECI's loans carried an average interest rate of about 8%. May's Q4 update mentioned opportunities for issuing senior floating-rate loans at 12%+. I expect to see interest income rise over the coming year to reflect higher market rates. **Diversified property:** RECI's portfolio contained 53 positions at the end of the year. These are mainly property development projects where the company is the senior, secured lender and has a direct relationship with the borrower. The largest exposures are in sectors relating to accommodation, but there is quite broad diversification. Last year saw a big increase in the allocation towards residential and co-living property, presumably reflecting rental market conditions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/reci-fy23-sector-exposure.png) Geographically, the majority of the portfolio is located in the UK and France, with the remainder spread across Europe: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/reci-fy23-geography-1.png) The average loan-to-value (LTV) ratio on RECI's developer loans is 59%. This is high relative to most REIT LTVs, but RECI is normally the senior secured lender in these projects. This gives it substantial influence in case of problems. To fund these loans, the company uses about £20 of debt financing for each £100 it invests. Said differently, RECI's balance sheet has gearing of 24%. This leaves a substantial equity buffer to absorb any impairments. However, the company's track record shows that it's usually able to persuade borrowers to inject more equity into projects that are struggling, reducing the risk that RECI will suffer loan losses. **Outlook:** Last year's performance suggests to me that the company is continuing to deliver on its mandate in more difficult market conditions. There's no specific financial guidance, but comments in the firm's Q4 update in May suggested that RECI is benefiting from tighter lending markets and is able to continue lending at attractive margins, despite rising interest rates. The dividend is expected to remain unchanged at 12p per share, giving a yield of 9.5% at the time of writing. **My view:** it's relatively unusual for RECI shares to trade below their book value – apart from the 2020 crash, this hasn't really happened since the aftermath of the financial crisis. While this business is not without risk, my feeling is that RECI's results suggests that its model of investing directly in carefully-selected projects is continuing to work well. I remain happy to hold the shares and collect a 9% yield, although I may sell at some point if the valuation recovers or I need the cash for something else. *Disclosure: Roland owned shares in Real Estate Credit Investments at the time of publication.* 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: cheap cyclical stocks? HFD, BKG URL: https://www.rolandhead.com/dividend-notes/cheap-cyclical-stocks-hfd-bkg/ Last updated: 2023-06-21T20:19:20.000Z Welcome back to my dividend notes. Today I'm looking at contrasting sets of results from two cyclical UK businesses with exposure to consumer spending. ### Companies covered: - **[Halfords Group (LON:HFD)](#halfords-hfd)** \- profits have slumped and cash generation was poor last year. The 11% dividend increase looks unjustified to me. Although I think the firm's strategy is sensible, I'm not tempted by the shares. - **[Berkeley Group Holdings (LON:BKG)](#berkeley-group-bkg)** \- a reassuring set of results from one of the best quality housebuilders on the UK market, in my view. I think the shares probably offer value at current levels. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### Halfords (HFD) > "Final dividend of 7p per share proposed, to be paid in September 2023, resulting in a full year dividend of 10p, an increase of +11% vs FY22." Full-year results from Halfords show that revenue rose by 15% to £1.6bn last year. However, the group's underlying pre-tax profit fell by 42.7% to £51.5m. When Halfords warned on profits in January, pre-tax profit guidance was cut to £50m-£60m (from £65m-£75m previously). So these full-year results are in line with revised guidance, albeit at the bottom end. Despite this, Halfords has lifted its full-year **dividend** by 11% to 10p per share, giving a yield of 5%. This increase is in line with the firm's dividend policy, but I'm not sure it's really affordable, as I'll explain. The market appears to have taken a positive view of the numbers and the shares closed up by 8% on the day. However, I think it's worth putting this in context. Halfords' share price has fallen by 50% over the last two years. The stock is currently trading at a level only previously seen during the 2020 crash and last year's mini-budget calamity: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/hfd-all-chart-210623.png) Do today's results justify a more optimistic stance? Halfords currently appears in the results of [my dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/), so I've been taking a closer look. **Results summary:** Halfords' business is divided into two divisions for reporting purposes, *Retail* and *Autocentres.* Both divisions saw profits slump last year, but for different reasons. **Retail:** *underlying operating profit fell by 35% to £58.6m last year, giving a margin of 6.0% (FY22: 9.0%).* The retail business is split into cycling and motoring. The slump in profits (and margins) seems to have been caused by weakness in cycling sales, which fell by almost 11% on a like-for-like (LFL) basis. Performance was stronger in motoring, where LFL sales were 4% higher. Halfords has made big strides in providing affordable drive-up parts and fitting services for common items like bulbs, wiper blades and batteries. The company is now focusing on brakes, another big consumables market. I see this kind of consumer spending as relatively defensive, as it's needed to keep cars on the road and MOT-worthy. Notably, retail operating costs were flat last year, suggesting inflationary pressures were managed well. **Autocentres:** *underlying operating profit fell by 28% to £10.4m, giving a margin of 1.7% (FY22: 3.8%).* Halfords has been bulking up its Autocentres business with acquisitions of tyre chains. Lodge Tyres was acquired last year, adding 51 garages and 265 vans to the group's network. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/hfd-fy23-garage-services-slide.png) Source: Halfords FY23 results presentation This acquisitive growth put a positive spin on Autocentres revenue last year, which rose by 61% to £614m. But other metrics moved in the wrong direction. The expansion of the lower-margin tyre businesses pushed down gross profit margins, which fell by 5% to 50.4%. Customers switching to cheaper tyre brands and replacing their tyres less often was also said to have added to margin pressure. At the same time, operating costs surged, rising from just under £200m to almost £300m. The company says about two-thirds of this increase was driven by acquisitions. The remainder reflected wage inflation. One of the problems that triggered Halfords' profit warning in January was that it was struggling to recruit enough experienced technicians to meet demand for higher-margin servicing and repair work. The combined effect of last year's cost pressures and the increased weighting towards tyres was that the Autocentres division was barely profitable last year, generating an underlying operating profit of just £10.4m from £614m of sales. Statutory operating profit was even lower, at just £3.1m. In fairness, the business may have faced a perfect storm of rising costs, recruitment problems, and customer cost-cutting. Management expects *"strong profit growth"* from Autocentres in FY24, as cost pressures ease, acquisitions bed in, and garage utilisation improves. **Outlook:** trading so far this year is said to have been *"good"*, with positive LFL sales and increased market share *"across all major categories"*. However, cost pressures are expected to continue. Group profits are expected to rise and management *"are comfortable"* with current consensus forecasts for underlying pre-tax profit of £53.5m. That would represent a 4% increase on last year. Consensus forecasts on SharePad suggest 2023/24 earnings of 18.2p per share, with a dividend of 8.5p per share. If correct, that would represent a 15% cut from this year's dividend payout of 10p. I wouldn't completely rule out the risk of a cut, but at this stage I think this is probably just a quirk in the consensus numbers. **My view:** I think chief executive Graham Stapleton is pursuing a sensible strategy and making reasonable progress. But Halfords' worsening profitability concerns me. The group's statutory operating profit margin fell to just 3.5% last year (FY22: 7.8%), while return on capital employed fell to 6.3% (FY22: 12.3%). That's almost certainly below the group's cost of capital. Free cash flow was also very poor. My sums suggest a figure of £4.9m, *excluding* the £32.6m spent on acquisitions. This clearly isn't enough to cover the c.£20m cost of the annual dividend, even before this year's increase. Halfords started last year with net cash of £46m (excluding lease liabilities), but ended the period with net bank debt of £1.8m. This suggests £48m of cash outflows, reflecting both acquisition spending dividend payments. While this level of debt shouldn't be a problem in itself, the group also has nearly £350m of lease liabilities. Lease payments totalled nearly £90m last year. With profit margins under such pressure, I'd have preferred to see the dividend kept flat (at most) until free cash flow cover improves. Given the cautious outlook for the year ahead and the company's poor cash performance, I think Halfords shares are probably up with events at current levels. While I can see scope for improvements, I suspect that cost pressures and weaker consumer spending could remain a concern in FY24\. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Berkeley Group (BKG) > "Berkeley has delivered pre-tax profits in line with the guidance provided at the start of the financial year, maintained our shareholder returns programme and increased the net cash position." Anyone who bought shares in this FTSE 100 housebuilder 20 years ago is now sitting on a near-10 bagger. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/bkg-chart-all-210623.png) I rate this business highly. Although founder and long-time chairman Tony Pidgley sadly passed away in 2020, [chief executive Rob Perrins](https://www.berkeleygroup.co.uk/about-us/who-we-are/board-of-directors?ref=rolandhead.com) has worked at the busines since 1994 and has been CEO since 2009\. I think Perrins is a pretty safe pair of hands and is unlikely to deviate too far from the long-term regeneration model developed by Pidgley. This week's final results cover the year to 30 April 2023 and look reassuring to me. They've also been produced very punctually. That's a sign of good financial controls, in my view. **Financial summary:** Berkeley's revenue rose by 8.6% to £2,550.2m last year, while pre-tax profit rose by 9.5% to £604m. Strong cash generation supported an improved year-end net cash position of £410m (FY22: £269m). Berkeley ended the year with a net asset value of £31.01 per share, up from £28.18 at the end of April 2022. Shareholder returns totalled £254m during the period, split between buybacks (£155.4m) and dividends (£98.5m). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/bkg-fy23-shareholder-returns.png) Source: Berkeley Group Holdings FY23 results **Profitability:** My sums suggest an operating margin of 20% and a return on capital employed of 10.8% for the 2022/23 financial year. Both are solid figures in my view, given my assumption that we're at a fairly low point in the housing cycle. According to SharePad data, Berkeley's ROCE has averaged 19% since 1987\. I think this highlights the long-term value that's been created for shareholders by the company's careful capital allocation and long-term planning. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/bkg-roce-210623.png) **Operational performance:** Berkeley completed 4,043 homes last year, plus 594 in joint ventures (FY22: 3,750, 872). Of these, 86% were on regenerated brownfield land – developing former industrial sites in London and the South East is a core competency of this business. At the end of the year, the group had £2,136m of cash due on private exchanged sales over the next three years (FY22: £2,171m). The company says that cancellation rates have remained within normal ranges, except during the period around last year's mini-budget. However, CEO Rob Perrins admits that interest rates are affecting buyer activity: > "... the market is likely to lack urgency until there is more certainty over the trajectory of interest rates." Estimated gross margin on current land holdings fell to £7,629m (FY22: £8,258m). However, this is largely related to the reclassification of 5,500 plots from land holdings to the company's long-term pipeline. This is effectively a move backwards in terms of the development status of these plots. Berkeley says this decision was prompted by planning delays – *"the majority of these sites are at appeal or subject to a call-in"*. **Outlook:** at current sales rates, the company expects sales in 2023/24 to be around 20% lower than 2022/23\. This is at the upper end of peer group forecasts at the moment, from what [I've seen so far](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/). The company says its slowed the pace of construction and new investment and has reiterated its profit guidance for the next two years: > "Berkeley reiterates its guidance of delivering pre-tax profits of at least £1.05 billion across its next two financial years (FY24 and FY25) combined, which is likely to be slightly weighted to the FY24, in line with market consensus" Guidance for shareholder returns is unchanged at £283m (£2.63 per share) per year up to 30 September 2025\. This can be made through either dividends or share buybacks. Recent purchases have been weighted towards buybacks, reflecting the relatively low valuation. **My view:** SharePad data suggests to me that Berkeley shares are probably cheap at current levels, on a cyclical view. The shares are trading on about nine times 10-year average earnings and at less than 1.5x book value. That's the lowest price/book multiple since 2010, according to SharePad: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/bkg-pnav-210623.png) The near-term outlook looks uncertain and market conditions may yet worsen. But I think a fair amount of bad news is already priced in. On a medium-term view, I think Berkeley Group shares look decent value at the moment. However, I already own shares in another [high-quality housebuilder](https://www.rolandhead.com/portfolio-shares/cyclical-ftse-250-stock-with-a-6-yield/), so I'm not looking to buy any more right now. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: upgrade + an 8% dividend yield? STEM, NXT, NESF URL: https://www.rolandhead.com/dividend-notes/upgrade-an-8-dividend-yield-stem-nxt-nesf/ Last updated: 2023-06-20T15:27:10.000Z Today I'm covering results from three very different businesses that on my dividend share radar at the moment. I think there could be some opportunities here, but risks remain. ### Companies covered: - **[SThree (LON:STEM)](#sthree-stem)** \- this recruiter reports a small drop in H1 fee income but has plenty of cash and still appears to be robustly profitable. The dividend looks safe to me and I suspect the shares could offer value. - **[Next (LON:NXT)](#next-nxt)** \- the retailer has upgraded its profit guidance after a strong May. But management don't expect this rate of improvement to last and still expect profits to fall this year. The shares look fairly priced to me. - **[NextEnergy Solar Fund (LON:NESF)](#nextenergy-solar-fund-nesf)** \- the renewables investor has issued bullish guidance for an 11% dividend increase in the 2023/24 financial year, suggesting a potential yield of 8.4%. However, I can see some risks, too. I'll watch with interest but won't be investing at this time. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### SThree (STEM) > "Strong balance sheet, with £72 million net cash as at 31 May 2023 (31 May 2022: £48 million)" Recruiters are highly cyclical but can deliver high returns and strong cash generation when times are good. STEM (Science, Technology, Engineering, Mathematics) specialist SThree is a regular presence in my dividend screening results, as is small-cap peer **Robert Walters (RWA)**, which recently issued a profit warning. I'm not too concerned about the warning at Robert Walters; on a medium-term view. I think the most of the bad news is probably priced in. But when I saw a trading update from SThree a few days later, I did wonder if it would also include a profit warning. It didn't. The good news for SThree shareholders is that trading during the first half of this year appears to have been in line with broker expectations. However, like most of this sector, SThree shares have already sold off heavily. Is there an opportunity here? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/stem-chart-5y-200623.png) **H1 highlights:** SThree says that group net fees fell by 2% to £208.6m compared to the same period last year. However, net fees from contract positions were 3% higher at £170.0m, and now represent 81% of group net fees (H1 FY22: 77%). Permanent net fees fell by 19% to £38.6m, reflecting tough conditions in Life Sciences and the company's deliberate focus on contract revenue in some markets. Life Sciences appears to have been a weak point – fee income rose in other key sectors: - Technology: +1% - Engineering: +17% - Life Sciences: -21% Geographically, conditions varied significantly across SThree's three largest markets, which together represent 73% of net fees: - Netherlands: +3% - Germany: -1% - USA: -11% Overall, the contractor order book is said to be unchanged from the same period last year, as *"robust extensions"* offset weaker new placement activity. This suggests to me that we're seeing a degree of slowdown in end markets, but not yet a full-blown recession (when contract workforces are often slashed). **Balance sheet:** net cash has risen from £65.4m at the end of the financial year (30 Nov 22) to £72m at the end of May. This cash pile represents almost 15% of the current market cap, so should provide some margin of safety if market conditions worsen. While the cash position remains strong, I suspect the dividend should also remain safe. **Outlook:** there's no formal outlook statement in this half-year update, but the commentary strikes a mixed tone. While chief exec Timo Lehne remains confident about *"the structural megatrends"* driving STEM growth, he says the business will remain *"reponsive to the macro backdrop and how that plays out"* on recruitment demand. An updated (paid) research note from Radnor Capital today (available on Research Tree) leaves forecasts unchanged. Radnor's analysts suggest earnings of 41.3p and a dividend of 16.5p per share for the year ending 30 November 2022\. That puts SThree on nine times forecast earnings, with a dividend yield of 4.5% **My view:** I don't know how market conditions will play out, but I can't imagine any realistic scenario where demand for STEM expertise will not remain strong over the next decade. Broker forecasts for this year show SThree's dividend being covered twice by earnings and backed by more than 50p per share of net cash. My feeling is that the stock is probably reasonably valued on a cyclical view. I would guess that the shares could do reasonably well from current levels over time, with the caveat that things might get worse before they started to improve. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Next (NXT) > "Trading in the last seven weeks has been materially better than the guidance we issued in May and we are updating the market accordingly." Retailer Next issued an unscheduled trading update this week, after upgrading its profit guidance for the year. I last [commented on Next in May](https://www.rolandhead.com/dividend-notes/super-returns-dom-nxt-05-05-23/), when I noted that the company had left its full-year guidance unchanged and pointed out that profits were expected to fall this year. At the time, I suggested that the share price was up with events. This week's update alters the picture slightly and provides some useful context on UK consumer behaviour, thanks to Next's excellent reporting. So I think it's worth taking a look. Next says that full-price sales during the first seven weeks of the second quarter have been 9.3% higher than the same period last year. The company's previous guidance was for a *fall* over 5% over this period. Management believe there are two reasons for this outperformance: - **Better weather:** the warm weathe is thought to have triggered additional sales after *"a wet and cold April"* - **Annual pay rises:** annual inflation was running at 8.7% in April but monthly inflation was 1.2%, according to ONS data. Next points out that if an individual received a 5% annual pay rise in April, their real income would rise by 3.8% *in that month:* > "We do not think it is a coincidence that sales stepped forward so markedly at a time of year when many organisations make their annual pay awards." **Updated outlook:** Next point out that the initial impact of pay rises is likely to fade fast if inlation remains high: > "This is why we are not anticipating the current performance to continue at the same level going forward" However, £93m of additional full price sales have already been achieved. This has given management sufficient confidence to upgrade full-year sales and profit guidance: > "We are upgrading our full price sales guidance for the full year by £137m and our full year profit guidance by **£40m** to **£835m**." This table shows the impact of these changes on expected performance versus last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/nxt-fy-guidance-190623.png) Source: Next trading update 19/06/23 We can see that full price sales are now expected to rise slightly this year, versus previous guidance for a small fall. *(Full price sales is an adjusted measure that excludes some revenue, but it's fine for our purposes here.)* However, adjusted pre-tax profit is still expected to fall this year, albeit by 4% rather than 8.7%. *(For context, Next reported pre-tax profit of £870m last year and £823m the previous year.)* The company hasn't provided any updated earnings per share guidance, but consensus forecasts I can see suggest a figure of 518p per share. That's an increase from 505p previously, but still around 10% below the previous year's figure of 573p per share. Dividend guidance for an ordinary dividend of 206p appear to be unchanged. This payout forms the base element of the company's annual shareholder returns and is typically supplemented by a special dividend or share buybacks. Based on these estimates, Next shares are trading on about 13x forecast earnings, with a 3% dividend yield. **My view:** this week's update doesn't really change my view on Next. The company enjoyed a post-pandemic profit boost last year as consumers caught up on spending. I don't think the current valuation is unreasonable, and I'm confident the dividend remains safe. But although I think this is an excellent business, I reckon growth is likely to remain challenging. Next shares have proved to be a good investment for buyers who have taken advantage of periodic sell offs. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/nxt-all-chart-200623.png) I plan to wait for the next such opportunity before considering whether to buy the shares. --- ### NextEnergy Solar Fund (NESF) > "Portfolio continues to outperform, 11% dividend target increase, well placed to deliver shareholders attractive, inflation-protected income" Results this week from this solar energy fund caught my eye as after recent falls, NESF shares now offer a dividend yield close to 8%. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/nesf-all-chart-200523-1.png) This isn't an in-depth look at these results. I don't have the time or the sector knowledge to probe too deeply. But I have noted down some factors that seem interesting to me and – in my view – may reflect the mix of risk and possible reward on offer here. **About NESF:** this investment company has a £1.1bn of renewable energy assets, predominantly UK solar farms. In total, NESF has 99 operating assets with an installed capacity of 865MW. Last year, they generated 870GWh of electricity. **Results summary:** NESF's latest results cover the year to 31 March 2023\. Here are some of the main highlights: - Net asset value up up 1% to £674m - Net asset value up by 0.8p to 114.3p per share - Earnings per share of 8.2p (FY22: 21.7p) - Dividend up 5% to 7.52p per share (FY22: 7.16p) - Cash dividend cover of 1.4x (FY22: 1.2x) - Total gearing (inc preference shares): 45% (FY22: 42%) - Weighted cost of capital: 5.7% **Dividend cover:** With this business model, I see cash dividend cover as more important than earnings cover. This is mostly because profits can be heavily affected by non-cash revaluation gains, as with property. Last year's reported cash dividend of 1.4x seems reassuring. I was curious to see how this cash dividend cover is derived, so I delved into the footnotes. In short, cash income is calculated by subtracting non-cash factors from revenue. Operating expenses and preference dividends are then subtracted to arrive at a net cash inflow from which dividend cover is calculated. This all seems fine to me. **Net asset value/investment:** NESF's inbound cash flows appear to have covered the dividend comfortably last year. But this measure of cover does not reflect cash that flowed out of the business into new investments. NESF invested £96m in new assets last year, but its net asset value only rose by £13.5m. Intuitively, this seems a smaller increase than I might have expected, given the group's overall gearing of 45%. Helpfully, the company has provided a breakdown of the factors behind last year's NAV movement. I think this is worth a look, as it highlights the various factors that influence both NAV and future cash generation: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/nesf-fy23-nav-bridge.png) Source: NESF FY23 results It's worth remembering that net asset value is calculated based on *actual* and *expected* cash flows into and out of the business. Looking at the bridge above tells me that c.73% of investment in new assets last year was funded with debt (*"RCF drawdown"*). This is considerably higher than the group average leverage of 45% and above the investment policy limit of 50% that applies to the business as a whole. I suspect this explains the recently announced plan to sell 236MW of UK solar assets to reduce RCF drawings. With the shares trading at a discount to NAV, management believes the market is undervaluing these assets. I have no idea whether this is true, or whether the impact of higher interest rates (reflected in the discount rate increase above) means that these assets are worth less than they might have been previously. **Power price forecasts:** what is clear is that NAV would have fallen sharply last year if NESF had not been able to upgrade its power price forecasts to reflect ongoing expectations for higher energy prices. It's worth remembering that this process may also reverse at some point, if energy prices start to fall. **Outlook:** management have taken a bullish stance on the outlook and are guiding for a chunky 11% dividend increase in the 2023/24 financial year. Presumably this is intended to reflect inflation: > **"11%**dividend target increase to **8.35p** per ordinary share for the financial year ending 31 March 2024" This implies that NESF shares could offer a prospective yield of 8.4% at the last-seen price of 99p. **My view:** as I write, NESF shares are trading around 13% below their reported net asset value of 114p. I think it's *possible* that this discount is justified by the group's rising leverage and the potential impact of higher interest rates on investment returns. However, there are a lot of moving parts here that could influence future valuations and cash generation. I'm going to file this on the *too hard* pile for now. I think the 8% yield could offer an opportunity, but not without risk. I'm not interested in buying the shares now, but I will watch developments with interest. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: renting space - IOM, SAFE URL: https://www.rolandhead.com/dividend-notes/renting-space-iom-safe/ Last updated: 2023-06-16T20:36:19.000Z In this dividend note I'm looking at two quite different companies that both depend on renting out specialised space to their customers. ### Companies covered: - **[Iomart (LON:IOM)](#iomart-iom)** \- this cloud services provider looks a decent business to me, but I'd like to see evidence that profitability is stabilising alongside organic (not acquisitive) growth. - **[Safestore Holdings (LON:SAFE)](#safestore-holdings-safe)** \- self-storage has been a booming business in recent years and Safestore doesn't look a bad option. But worsening operational metrics and macro risks mean I'm not tempted right now. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### Iomart (IOM) > "The first two months of the new financial year are in line with internal expectations, reporting revenues ahead of the equivalent prior period, with a mix of organic and acquisitive growth." Cloud computing services group Iomart is a regular presence in my dividend screening results and has been listed on London's AIM market for more than 20 years. Founder Angus MacSween stepped down from the CEO position in 2020 but still has a 15% shareholding, suggesting his eye remains on the business. His replacement, Reece Donovan appears to be sharpening the group's commercial performance and increasing its focus on higher-growth managed services (versus higher-margin but slower growing self-managed infrastructure). This week's final results delivered decent revenue growth, although profits fell again. However, the company's cash generation has caught my eye, so I've decided to take a closer look at the numbers. **Financial summary:** these results cover the 12 months to 31 March 2023. Revenue for the period rose by 12% to £115.6m. Breaking this down, Iomart says electricity costs rose by £7m and were passed onto the company's customers. Stripping this out suggests that organic revenue growth was more modest at 5%. This doesn't t seem much given the level of inflation last year, but it's a welcome return to positive territory after two years' of revenue falls: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/iom-revenue-opprofit-160623.png) Pre-tax profit for the period fell by 30% to £8.5m. Excluding a one-off £0.8m relating to an error by the company's energy broker (!), the pre-tax profit would have fallen by 24% to £9.3m. Adjusted earnings for the period were down 9% to 10.9p per share, but the more inclusive statutory earnings dropped 26% to 6.4p. This provided 1.8x earnings cover for the dividend, which was cut by 10% to 5.44p per share (FY22: 6.02p). Broker finnCap believes this will be *"the nadir of the dividend trajectory"*. Shareholders will certainly hope so. Iomart's dividend has now been cut by 27% from its pre-pandemic high of 7.5p per share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/iom-dividend-160623.png) Iomart's strong cash generation suggests to me that it may be fair to expect the payout to stabilise at this level, although not necessarily rise immediately. Operating cash flow fell by 4.4% to £33.9m last year. From this, I estimate free cash flow of £16m, excluding a £10.3m acquisition. This measure of free cash flow gives a FCF yield of 8.8%, which seems quite affordable to me. Net debt for the year fell slightly to £39.8m, representing 5.6x net profit – higher than I like to see. While net borrowings only equate to a comforting-sounding 1.1x EBITDA, I'm not sure we can ignore depreciation in a business of this kind – equipment must be upgraded and replaced regularly to maintain the level of performance and reliability that's expected by customers. Depreciation charges totalled £16m last year, including £11m on data centre and computer equipment. Capex was c.£9m, highlighting the regular expense that's required. **Operating highlights:** the group's operations are broken down into three core divisions. Reassuringly, all three generated revenue growth last year: - **iomart cloud managed services** (revenue +15% to £64.1m): the group's flagship service, provides *"fully managed, complex bespoke designs"* - **Self-managed infrastructure** (revenue +7% to £30.4m): provides dedicated, physical self-service servers for customers, hosted in the company's owned data centres - **Non-recurring revenue** (revenue +32% to £9.4m): on-premise equipment, software reselling, consultancy projects. Seen as an entry-level proposition that can lead to the sale of higher-level services **Outlook:** trading since the start of April is said to be inline with expectations, with revenue ahead of the comparable period. Full-year expectations appear to be unchanged at this time, suggesting adjusted earnings will be flat this year at c.10.3p, with an unchanged dividend of 5.4p. Those estimates put Iomart shares on a forecast P/E of 16 with a dividend yield of 3.3%. **My view:** this looks like a reasonable business to me, but I'm a little concerned about the decline in profitability in recent years. While operating margins still look reasonable to me, return on capital employed has fallen more sharply as acquisitions have piled goodwill onto the balance sheet: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/iom-roce-opmargin-goodwill-160623.png) I'd like to see some evidence of profitability stabilising and starting to improve. I think this is quite likely, as the company continues to deliver on its strategy. On balance, I don't see anything much wrong here, but I don't think Iomart offers quite enough value and quality right now for me to consider this dividend share as a potential buy. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Safestore Holdings (SAFE) > "At present, Adjusted Diluted EPRA earnings per share for the full year is anticipated to be broadly in line with consensus." Self-storage has been a structural growth market in recent years. The growth in the residential rental sector suggests to me that demand is likely to remain strong. However, supply has increased considerably too, as operators such as Safestore, Big Yellow and others have added new capacity. The latest results from Safestore cover the six months to 30 April and suggest to me that a more cautious outlook may be justified, at least temporarily. **Financial summary:** revenue rose by 8.9% to £110.1m and operating profit before property revaluation gains rose by 16.2% to £67.6m. On an adjusted basis, EPRA earnings per share rose by 5.3% to 23.7p, in line with consensus forecasts for a full-year figure of 48.5p per share. The interim dividend was increased by 5.3% to 9.9p, reflecting EPS growth. However, while accounting earnings improved, free cash flow fell by 37% to £31.9m. The slump in cash generation was partly due to higher finance costs, but mainly the result of a £19.8m working capital outflow. Management say this was *"primarily associated with the settlement of employed related taxes"* linked to the maturity of three- and five-year bonus schemes. I haven't looked into these schemes, but if that was the tax bill, then presumably the value of the shares awarded must have been significant. Nice work if you can get it *(update: the CEO and CFO appeared to have been awarded 3.5m nil-cost shares between them in December, worth c.£32m at today's share price)* **Balance sheet:** Safestore's loan-to-value ratio at the end of April was 25.3%, up slightly from 24.8% one year earlier. Interest cover was 10.8x (2022: 10.0x). 84% of drawn debt is said to be hedged, with an average interest rate of 2.77%. Weighted average maturity on drawn debt was 5.4 years at period end. This all looks reasonably safe to me for now. **Operating metrics:** the improvement in accounting profit was not entirely reflected in Safestore's operating metrics, in my view. - Closing occupancy let: -1% to 6.124m sq ft - Closing occupancy as a percentage of maximum lettable area: -4% to 76.7% - Revenue per available square foot: -1% to £28.28 - Average storage rate (revenue/sq ft let): +4.1% to £30.58 These numbers suggest that occupancy fell on both an absolute and relative level. Although the company did achieve 4% revenue growth on the space that was let, falling occupancy suggests to me that further price increases may be difficult. **Outlook:** enquiry levels in May are said to have been ahead of pre-pandemic levels but lower than last year. There's been some improvement in June and in continental Europe, enquiry levels have been ahead of last year. For now, adjusted EPRA earnings per share for the full year are expected to be *"broadly in line with consensus"*. Consensus estimates I can see are for earnings of 48.5p per share this year, with a dividend of 30.9p. That puts Safestore on 18.5 forecast earnings, with a 3.4% yield. However, I'd note that use of the word *"broadly"* is often seen as code for *"slightly below"*. **My view:** I don't see anything fundamentally wrong with this business. But with consumer spending under pressure, I think Safestore could find it hard to reverse its declining occupancy without holding back prices. Rising finance and investment costs may mean that profits stay under pressure. It's possible that demand will recover more quickly than I expect, but it's not something I'd bet on at the moment. With Safestore shares trading at c.920p at pixel time, they're still at a slight premium to their EPRA net asset value of 909p. Self-storage operators have operated at a premium to NAV in recent years to reflect their strong profitability and growth rates. But there's a risk to this business model, too – they must borrow long and rent short in order to make superior profits. Tenants can come and go with minimal commitment, so self-storage operators could see occupancy fall more quickly than with other types of commercial property. For now, I think Safestore's valuation are up with events. I'd want a cheaper entry point or a much stronger outlook before I'd consider this stock. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: warnings, upgrades and a 6% yield - VCT, CRDA, BNZL, VP URL: https://www.rolandhead.com/dividend-notes/warnings-upgrades-and-a-6-yield-vct-crda-bnzl-vp/ Last updated: 2023-06-15T16:38:35.000Z In today's dividend notes I'm catching up on on some items I've missed recently, including two profit warnings and a UK small cap offering a tempting 6% dividend yield. ### Companies covered: - **[Victrex (LON:VCT)](#victrex-vct)** \- this plastics specialist warns on profits, as I predicted in May. I'm starting to see some potential value here, though. - **[Croda International (LON:CRDA)](#croda-international-crda)** \- another profit warning triggered by destocking from big chemicals group. Bad news for now, but I wonder if an opportunity could be emerging for me to buy shares in this quality business at a more reasonable price. - **[Bunzl (LON:BNZL)](#bunzl-bnzl)** \- this distributor bucks the trend with a (slight) upgrade to margin guidance for the year. I remain a fan of this well-run business. - **[VP (LON:VP)](#vp-vp)** \- a solid set of results from this equipment hire group, albeit with some signs of worsening credit performance from construction customers. The 6% yield looks tempting to me and a trade sale remains a possibility. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### Victrex (VCT) > "latest indicators suggest these current headwinds will now continue over the summer and at least until the end of FY 2023 in September." In May, [I reviewed Victrex's half-year results](https://www.rolandhead.com/dividend-notes/warnings-and-uncertainty-vct-dlg-mslh-09-05-23/) and commented that the outlook relied on an improvement in H2 that might not materialise. Less than a month later, we have a profit warning. Victrex says that the *"ongoing macro-economic weakness and industrial customer destocking"* seen during H1 are now expected to continue until at least the end of September. Although the group's medical business is making *"good progress"*, industrial headwinds mean that group volumes are now tracking down in excess of 20%. For context, volumes fell by 14% during H1\. Trading still appears to be worsening. For Q3 alone, volumes are expected to be c.800 tonne, 40% below last year's level of 1,323 tonnes. I wonder if there's scope for another warning in Q4 if trading doesn't stabilise. As a result of this weak start to H2, Victrex has cut its full-year guidance. - Full-year revenue is expected to be down 6%-10% at the current run rate (previously consensus was broadly flat vs FY22 at c.£340m) - Adjusted pre-tax profit for the year is expected to be £80m-£85m (previously flat vs FY22 result of £95.6m) **My view:** I estimate Victrex shares may now be trading on c.16x FY23 forecast earnings, with a possible dividend yield of 4%. However, I'm unsure just how safe this outlook is at the moment – in particular, whether the risk of a dividend cut is mounting. I'm still interested in learning more about this business, which has a record of good cash generation and high-teens returns on equity. But I'm not in a rush to invest at the moment and will await further results. The next scheduled update is the Q3 statement on 6 July. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Croda International (CRDA) > "customer destocking in consumer and industrial end-markets now expected to continue into the second half year" Victrex isn't the only London-listed chemicals group issuing profit warnings. I missed this last week due to time constraints, but FTSE 100 firm Croda issued a near-identical warning to Victrex just one week earlier, on 9 June. Croda produces specialty chemicals used in a wide range of markets including life sciences, consumer care, agriculture and industry. The group is reporting destocking across the board: - **Consumer care:** sales volumes are down a *"double-digit percentage"* compared with the same period last year as a result of customer destocking. - **Life sciences:** crop protection started the year well but is *"now experiencing rapid customer destocking"* that was not expected until later in the year. Sales to pharmaceutical customers are also lower, due in part to lower sales for Covid-19 applications. - **Industrial markets:** customer destocking is now expected to continue into the second half **Outlook:** 2023 pre-tax profit is now expected to be between £370m and £400m. From what I can see, previous consensus estimates were c.£450m. **My view:** I think Croda is a high-quality business and don't see any reason why this should change. But as with Victrex, I wonder if further downgrades may be likely later this year. Profit warnings often come in threes and widespread destocking makes me think that demand in these companies end-user markets may be weakening. Croda's share price was down more than 10% yesterday and the stock has now halved from its pandemic peak of over £10, when it was boosted by sales of vaccine ingredients. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/crda-5y-chart-150623.png) With the shares now trading on c.24x earnings and offering a yield of c.2%, Croda is getting closer to the level where I might be interested. For now, it's another stock for my watch list. --- ### Bunzl (BNZL) > "operating margin over the first six months of the year expected to remain well ahead of historical levels and driving an upgrade to our full year expectations" When I saw a trading update from FTSE 100 distribution group Bunzl in the RNS feed this morning I wonder if it might be another warning. But it wasn't. According to CEO Frank van Zantern, it's an upgrade to full-year guidance. Bunzl specialises in not-for-resale consumables such as cleaning products, PPE and disposable foodservice items. The group had a very good pandemic as demand for many of its products rocketed. This means that current-year results are coming off these record highs, so I think it's reasonable to expect some moderation in revenue growth. **Outlook:** However, today's update suggests an outright fall in revenue can be avoided. Half-year revenue is expected to increase by 4%-5% at actual exchange rates, or +1% constant currency. This growth is being driven by acquisitions, but underlying revenue is still expected to be flat. Operating margins are now expected to be slightly below last year's level, which appears to be a modest upgrade from previous guidance of *"slightly higher than historical levels"*. Consensus forecasts prior to this update suggested adjusted earnings for the year may still be marginally below last year's level, pricing the stock on 17x forecast earnings with a 2.2% yield. **My view:** my feeling is that any actual upgrade here is marginal, but I'm not arguing. I think this is an excellent and very well-run business with some interesting characteristics. One possible slight headwind for the group is that it uses a fair amount of debt – net debt excluding lease liabilities was £1,160m at the end of last year. While this isn't a problem in itself, rising borrowing costs could lead to a modest reduction in the profitability of acquisitions over time. My dividend portfolio already includes one distributor and I probably wouldn't add Bunzl unless the shares became unusually cheap. But if the shares fell back to last summer's lows of c.£25, I think I might start to get tempted. 💡 My paid service provides full access to my model dividend portfolio, plus coverage of portfolio company results and full details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). --- ### VP (VP) > "High quality of earnings highlighted by the return on average capital employed" The quote above doesn't contain any numbers, but I think its very existence at the top of equipment hire group VP's recent results reflects well on the management of this business. VP is controlled by founder and chairman Jeremy Pilkington, who owns just over 50% of its stock. Its shares are currently trading at c.650p, which is a level seen previously during the 2020 crash, and prior to that, in 2016\. Last week's final results suggest to me that the shares may have been oversold, barring a major recession. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/vp-chart-all-150623.png) These results cover the year to 31 March 2023\. Let's take a look at the main highlights. Revenue for the year rose by 6% to £371.5m, but operating profit fell by 8.7% to £39.3m due to the impact of £5m of exceptional (cash) costs. Even so, VP generated a respectable operating margin of 10.6% and a return on capital employed of 10.4%. Operating cash flow of £66.3m converted into free cash flow of £11.9m, according to my calculations. This is an improvement from last year but reflects the significant cash costs of fleet renewal and growth faced by businesses such as these: - FY23 expenditure on equipment for hire: £59.9m - *Depreciation of rental equipment: £40.9m* - Cash proceeds from sale of property, plant and equipment: £24.9m Cash flow was impacted by an increase in working capital last year, which the company says reflects revenue growth during the year and *"a slight worsening of the external credit market, particularly in the construction sector"*. According to management, VP's customers took an average of 59 days to pay their bills last year, up from 55 in the previous year. I don't think this indicates a serious issue, but it's a metric that's worth monitoring. SharePad data suggests that trade debtors as a percentage of turnover are now at the highest level seen since 2007 – possibly not a positive trend: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/vp-trade-debtors-turnover-150623.png) With this slight caveat, I don't see anything untoward in the group's financials. VP's profitability and balance sheet seem fine to me. Broadly stable revenue and underlying profit is a reassuring result in the context of the last year, in my view. **Dividend:** the full-year dividend has been lifted 4% to 37.5p per share. This represents 2x adjusted earnings cover, although my sums suggest the payout was not quite covered by free cash flow. **Outlook:** VP says markets remain stable and the company continues to invest for future growth. A *"supportive infrastructure market outlook in the UK"* is expected after a flat 2022. Broker forecasts suggest earnings of 80p per share and a dividend of 39.5p in 2023/24\. That puts the stock on a P/E of 8 with a 6% yield. **My view:** VP looks reasonably priced and in good health to me, with a slight caveat about the apparent worsening of market conditions in the construction market. I would be comfortable owning the shares at current levels. There's also some potential upside if the business is sold. VP tried to find a trade buyer last year but was unsuccessful. Presumably Mr Pilkington would like to retire, but only at the right price. I'd guess a sale will be made eventually. In the meantime, I rate this as the best of the small-cap equipment hire companies on the UK market. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Shares Podcast: Investor's Roundtable with Maynard Paton, Mark Simpson, Bruce Packard and Roland Head URL: https://www.rolandhead.com/podcasts/investors-roundtable-with-maynard-paton-mark-simpson-bruce-packard-and-roland-head/ Last updated: 2024-01-10T12:46:58.000Z I recently took part in a new podcast format with fellow investors [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com) ([my regular podcast co-host](https://www.rolandhead.com/podcast/)), [Mark Simpson](https://smallcapslife.substack.com/) and [Bruce Packard](https://knowledge.sharescope.co.uk/bruce-packard-2/?ref=rolandhead.com). In the first episode of the Investor's Roundtable we discussed the attractions and risks of investing in **Bellway (BWY)**, **Luceco (LUCE)**, and **Superdry (SDRY)**. The owner of each share explained why they'd bought the business, followed by a lively four-way debate about the business. We finished off the episode with a discussion about our (very different) approaches to portfolio sizing, diversification, top slicing, and much more. - Listen on [Apple](https://podcasts.apple.com/us/podcast/irt001-investors-round-table-podcast-with-maynard/id1642393167?i=1000616494205&ref=rolandhead.com) - Listen on [Spotify](https://open.spotify.com/episode/2QHJZRfTB04IpWzr1eVi09?ref=rolandhead.com) - Listen on [Amazon](https://music.amazon.co.uk/podcasts/bf4b8007-5576-41e3-8459-57883df901aa/episodes/d9961c1c-a604-42f8-b456-6b8f0434e663/the-private-investor's-podcast-irt001-investor%E2%80%99s-round-table-podcast-with-maynard-paton-roland-head-mark-simpson-bruce-packard?ref=rolandhead.com) - Listen (and watch!) on [YouTube](https://youtu.be/xFZIxn49MTA?ref=rolandhead.com) ### Timestamps **1:45** \- Why Roland bought Bellway (BHY) **3:45** \- A four-way discussion about the housing market and the investment potential of Bellway (BHY) **16:15** \- Why Mark bought Luceco (LUCE) **21:15** \- A four-way discussion about the lighting industry and the investment potential of Luceco (LUCE) **34:00** \- Why Bruce bought Superdry (SDRY) **36:00** \- A four-way discussion about the investment potential of Superdry (SDRY) **48:30** \- A four-way discussion about how many shares we own, our largest holdings, and our best buys. This podcast was recorded on 8 June 2023 and was produced in association with [Fund Your Retirement](https://www.fundyourretirement.com/?ref=rolandhead.com). I hope you enjoy listening! As always, all feedback is very welcome. *Disclosure: Roland owned shares in Bellway at the time of recording.* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Portfolio shares: a high-yield stock to replace Direct Line URL: https://www.rolandhead.com/dividend-shares/a-high-yield-stock-to-replace-direct-line/ Last updated: 2024-05-09T16:46:09.000Z In March I decided to [sell UK insurer Direct Line Insurance](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/) from my model dividend portfolio and my own personal holdings. In line with my quarterly [trading schedule](https://www.rolandhead.com/portfolio/portfolio-selling-shares/), it's now time to add a new stock to the portfolio to replace Direct Line. The company I've chosen has been in business for 145 years and has generated an average return on equity of just under 15% since 2008\. Its shares currently offer a forecast dividend yield of more than 6%. This business also has an unbroken dividend record stretching back 37 years with only one cut – during the pandemic – that's since been reversed: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/newstock-dividend-080623.png) I think it's cheap, too. Based on valuation measures I use for cyclical businesses, the shares currently look cheaper than at any time since 2008. Of course, this business isn't perfect. There are some problems that could affect near-term earnings. But I think the dividend will be safe and I believe the long-term outlook is strong, with the potential for significant share price gains. 💡 My paid service provides full access to my model dividend portfolio, plus coverage of portfolio company results and full details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). The company I've chosen is FTSE 250 merchant banking group **Close Brothers (LON:CBG)**. **In this piece I'm going to explain why I've selected Close Brothers to** [**replace Direct Line Insurance**](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/) **in my** [**quality dividend portfolio**](https://www.rolandhead.com/dividend-portfolio/)**.** ### Close Brothers: crunching the numbers **Description:* a FTSE 250 merchant bank providing business lending, savings, wealth management and stockbroking services.* | **Close Brothers(LON:CBG)** | **Quality Dividend score: 67/100** | **Forecast yield: 6.9%** | | --------------------------- | ---------------------------------- | -------------------------- | | Share price: 960p | Market cap: £1.5bn | *All data at 07 June 2023* | ***Latest accounts:*** [*half-year results for six months to 31 January 2023*](https://www.londonstockexchange.com/news-article/CBG/half-year-results-for-six-months-to-31-1-2023/15873658?ref=rolandhead.com) In the remainder of this review, I'll take a look at Close Brothers' history, business model and recent trading. I'll then step through the different stages in my [**dividend screening system**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) to explain why Close Brothers scores well in my systema and why I've decided to add this stock to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Unless specified otherwise, the financial data I use in this process is drawn from SharePad. **Disclosure:* I already own shares in Close Brothers as part of a historic holding. I will be buying more CBG shares for my personal portfolio at the same time and price as I add them to the* [*model portfolio*](https://www.rolandhead.com/dividend-portfolio/)*.* --- ### Table of contents This is a long report, so here's a link to each section (I'm aware these links don't work in some email clients - apologies). - [History: a Gold Rush pioneer](#history-gold-rush-pioneer) - [What does Close Brothers do?](#what-does-close-brothers-do) - [Recent trading - a mixed picture](#recent-trading-a-mixed-picture) - [Valuation - why I think the shares look seriously cheap](#valuation-i-think-the-shares-look-very-cheap) - [Dividend culture - very strong](#dividend-culture-very-strong) - [Dividend safety - good](#dividend-safety-good) - [Dividend growth - taking a pause](#dividend-growth-taking-a-pause) - [Dividend yield - high](#dividend-yield-high) - [Profitability - above average](#profitability-above-average) - [Conclusions - I'm buying](#conclusions-im-buying) --- ### History: Gold Rush pioneer Close Brothers' core banking business is built around providing asset-backed lending and other forms of finance to small and medium-sized businesses. Today the company has a reputation for accurately pricing risk and generally being fairly prudent. But like most entrepreneurs, founders William Brooks Close and his brothers Fred and James took bigger risks in the early days of their partnership. The company was founded in 1878 as a London-based partnership. But William Close was based on the USA at that time, exploring the opportunities on offer in this frontier market. Reports suggest his early deals involved bulk-buying land in the mid-west and then reselling it lucratively to settlers arriving from the UK. In 1897 he secured the rights to build a railway from Skagway in Alaska into the Yukon, at the height of the [Gold Rush in this region](https://www.loc.gov/collections/meeting-of-frontiers/articles-and-essays/alaska/gold-rush/?ref=rolandhead.com). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/skagway-white-pass-railway-sm.jpg) Today this railway still operates as the White Pass & Yukon Railway, mostly for tourists. Even now, it's clear what a bold undertaking this must have been in 1897\. Credits: By ThreeIfByBike - Flickr: In to the Tunnel, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=17847759 When William Close died in 1923 his will stipulated that Close Brothers should be wound up and a new company formed to continue the business. The company subsequently spent time as part of the Consolidated Gold Fields business, before being taken private in a management buy-out in 1978 and floated on the LSE in 1984\. Since then, the company has evolved into the business that exists today, expanding through a mix of organic growth and acquisitions. --- ### What does Close Brothers do? The company's tagline is *"Modern Merchant Banking"*. It's not a clearing bank (does not offer current accounts) but it does provide a wide range of other services. These are divided into three divisions: **Banking:** Close Brothers' banking business generates the majority of group profits and has three main lines of activity. - The firm is a [**specialist lender**](https://www.closebrothers.com/what-we-do/lending?ref=rolandhead.com)to small and medium businesses. It typically lends against asset backing such as equipment or vehicle fleets, or provides services such as invoice factoring and bridging loans for property transactions. - Close's [**Customer Finance**](https://www.closebrothers.com/what-we-do/customer-finance?ref=rolandhead.com) business is a major provider of motor finance to dealers and brokers across the UK and Ireland. For example, many used car dealers arrange finance for buyers from Close Brothers. Premium finance is another key area (allowing customers to pay insurance by monthly instalments). - [**Savings**](https://www.closebrothers.com/what-we-do/savings?ref=rolandhead.com) \- the bank provides savings products for personal and business customers. These are typically fixed-term or notice accounts, providing reliable and relatively cheap funding for the bank's lending operations. At the end of April, savings deposits totalled £7.4bn – almost two-thirds of the group's £11.9bn funding base. The interest rates on offer seem very competitive to me. One attraction of this model for me is that it's far more profitable than the majority of UK banks. Close Brothers' net interest margin was 7.8% over the last year, compared to around 3% for **Lloyds Banking Group**. Net interest margin reflects the difference between interest charged on lending and interest paid on deposits. Close achieves higher margins on lending by serving specialist sectors that attract higher interest rates, while carefully managing its funding costs. A higher net interest margin should support higher returns on equity and help generate surplus capital for dividends. Of course, there's a risk that this strategy could lead to higher levels of bad debt in a recession. However, Close has a long history of pricing risk accurately and lending profitably through the cycle – this is a bank that maintained its dividend through the 2008 financial crisis. Unless I start to see evidence this core competency is weakening, I'm comfortable with the risks here. [**Wealth Management**](https://www.closebrothers.com/what-we-do/wealth-management?ref=rolandhead.com)**:** Close entered the asset management market in 1987\. This business has expanded steadily since then. [Close Brothers Asset Management](https://www.closebrothersam.com/?ref=rolandhead.com) (CBAM) now has £16bn of assets under management and provides a range of private client and investment services [**Stockbroking**](https://www.closebrothers.com/what-we-do/securities?ref=rolandhead.com)**:** in 1993, Close acquired [Winterflood Securities](https://www.winterflood.com/?ref=rolandhead.com). This brokerage provides market-making, dealing and custody services to institutions, retail stockbrokers and wealth managers. Winterflood covers a full range of UK equities and fixed income but from what I understand, it has particular strength in AIM and small caps. This business also provides an element of counter-cyclicality, as its profits are heavily dependent on trading activity. During the pandemic, Winterflood's profits surged from £20m in FY19 to £61m in FY21\. This helped to offset weaker profits from banking during this time. --- ### Recent trading: a mixed picture The company's latest accounts cover the half year to 31 January 2023 and showed a broadly stable picture. On an adjusted basis, operating profit fell by 2% to £174.8m for the half year and the bank's CET1 capital ratio edged lower to 14.0% (H1 '22: 14.6%). The bank's loan book fell by 1% to £9.0bn, while total client assets rose 2% to £16.9bn. In an early sign of a possible recession, the bank reported an increase in arrears in its motor finance business. This led to an underlying bad debt ratio of 1.1% annualised, up from just 0.2% one year earlier. This trend appears to be in line with the performance seen during the last recession: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-bad-debt-trend-hy23-1.png) Source: Close Brothers HY23 presentation However, the chart above also highlights an exceptional loss this year relating to the Novitas Loans business. This is a disappointing event that I need to explain. **Novitas:** in 2017, Close Brothers bought a litigation financing business called Novitas Loans. Unfortunately this business has unravelled badly. Novitas was closed to new lending in 2021 and is currently being wound down. In a series of impairment charges over the last 12 months or so, Close has written off the majority of the Novitas loan book. The half-year results included a £90m provision for further losses, taking the total amount booked to £183m. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-hy23-novitas.png) Source: Close Brothers HY23 presentation Current chief executive Adrian Sainsbury was in charge of the banking division at the time of this deal. In my view, he appears to have jumped on a trendy bandwagon without proper due diligence. This is disappointing, but it appears to be a rare mistake from this business. Sainsbury has now promised to resume the group's *"track record of earnings growth and returns by focusing on disciplined growth, cost efficiency and capital optimisation."* Fortunately, it looks like Close Brothers' strong balance sheet can absorb the Novitas losses while maintaining the dividend. The Novitas fiasco is a black mark against Adrian Sainsbury, in my view. But if I'm right – and there are no other serious problems – then I think the sell-off we've seen this year may have left the stock trading at an unusually attractive valuation. --- ### Valuation: I think the shares look very cheap We've grown used to seeing the big high street banks trading at a discount to their book value since 2008\. This has reflected their sub-par profitability and other problems. However, these are not issues that have affected Close Brothers, which has only traded at a discount to book value twice in the last 30 years – in 2008, and right now: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-price-navps-090623.png) Superior profitability and double-digit returns on equity mean that these shares have generally been valued at a premium to book value, even during more difficult periods. As I write, the shares are trading at around 960p, about 10% below the bank's book value of 1,068p per share. This discount is unusual and in my view, a sign of cyclical value. Another valuation metric that looks very attractive to me at the moment is the cyclically-adjusted price to earnings ratio, or CAPE. This measure compares the current share price with 10-year average earnings. It can be a useful tool to value cyclical businesses whose profits tend to swing up and down through the business cycle. Close Brothers' CAPE is currently at the lowest level seen since the financial crisis, according to SharePad data: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-cape-090623.png) Taking a slightly different approach, the data suggest that Close Brothers' *profitability* may also be at a cyclical low: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-roe-090623-1.png) I think there's a strong case for thinking that this banking group's shares are already priced for recession. Assuming the group's business model remains robust and continues to perform as it has done in the past, I think Close Brothers' shares could look very cheap at current levels when economic conditions improve. While I'm not a chartist, the long-term trend on the share price chart also seems to support this view: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-chart-trend-all-090623.png) With that in mind, let's move on to take a look at how Close Brothers scores in my dividend screening system. --- ### Dividend culture: very strong Close Brothers has always had a strong commitment to its dividend. Until 2020, had maintained an unbroken record of dividend payments without a cut since 1987. The pandemic achieved what the 2008 financial crisis did not and forced the board to cut the payout – but it's rapidly been rebuilt and is expected to exceed its pre-pandemic level this year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-dividend-090623.png) I'm confident Close Brothers has a strong dividend culture. **Close Brothers scores 5/5 for dividend culture in my screening system.** --- ### Dividend safety: good In my experience, companies with a long history of dividends tend to have reasonably conservative payout ratios. There's a good reason for this. Earnings will inevitably fluctuate over long periods. Very few companies achieve straight-line profit growth for more than a few years at a time. Only by maintaining a margin of safety in dividend payouts can a company deliver reliable dividends over many years or – as here – decades. Close Brothers is a good example of this. Although we can see that the payout ratio has risen during recessions (when bank earnings dip), the long-term average payout has been around 50% over the last 30 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-payout-ratio-090623.png) The payout ratio is a useful general guide to dividend safety, in my experience. But it's not perfect. As it is measured against accounting earnings, it does not provide a direct comparison with free cash flow (non-financial stocks) or surplus capital (banks and insurers). The main regulatory measure of surplus capital used by banks is the Common Equity Tier 1 (CET1) ratio. This is relevant to income investors because dividends reduce a bank's surplus capital – cash is being taken out of the business. Close Brothers' CET1 was 14.0% at the end of April. This ratio has fallen slightly over the last couple of years, but remains comfortably above the regulatory minimum of 8.5% that applies to this bank. In my view, Close should remain comfortably able to maintain its dividend this year, despite the hit to earnings from the Novitas fiasco I discussed earlier. **Close Brothers scores 3.6/5 for dividend safety in my screening system.** --- ### Dividend growth: taking a pause Ultimately, I believe dividend growth needs to be reflected by underlying growth in the productive assets of a business. Otherwise the payout will eventually become unsustainable. My screen scores stocks for dividend growth based on two metrics: - five-year average dividend growth - five-year average net asset value per share growth (NAVps) Close's dividend has not risen since 2016 and has only just regained its pre-pandemic level. So the shares score badly in this regard. But when I take a longer view, I can see that this banking group has generated exactly the kind of consistent NAVps and dividend growth I'm looking for over the last 30 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-divps-navps-090623.png) Naturally, there have been some periods when growth has paused. But the overall trend is exactly what I'm looking for in a bank. Barring the risk of mismanagement, I don't see any reason why this long-term record shouldn't be extended over the coming years. **Close Brothers scores 1.5/5 for dividend growth in my screening system.** --- ### Dividend yield: high This isn't a growth stock; returning surplus capital to shareholders each year is part of the business model. I'd expect a reasonable level of dividend yield at any point in the cycle, but Close Brothers' current yield is the highest seen since the 2008 crash: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-divyield-090623.png) Based on my assessment that the dividend remains sustainable, I see the stock's current high yield as a strong indicator of value. More cautiously, I would also argue that this yield suggests the near-term outlook for the UK economy isn't great. **Close Brothers scores 4/5 for dividend yield in my screening system.** --- ### Profitability: above average I score financial stocks for profitability based on the return on equity ROE they generate. My scoring system combines five-year average ROE and trailing 12-month ROE. I do this to try and get a balanced view of a company's performance, reflecting both typical and recent actual profitability. It's not perfect, but I find it a useful approximation for sorting and ranking stocks. Banking profitability tends to be cyclical, of course. The chart below shows Close Brothers' return on equity over the last 30 years. Three clear cycles are visible, in my view, with low points in 2003, 2010 and 2022: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/cbg-roe-090623.png) I've already shown that Close's CAPE ratio, price/NAV and dividend yield are at the lowest levels seen since the 2008 financial crisis. So too is the bank's profitability (excluding 2020). I think this is a further sign that the shares are priced at a cyclical low and likely to offer medium-term value. Of course, this doesn't mean that further problems won't lie ahead. Nor does it rule out the risk that the quality of this business is slowly deteriorating. However, my view is that the bank's franchise and business model remain attractive. SharePad data suggests a long-term average return on equity of about 14% since 2008\. I don't see any reason why this record can't be maintained over the next decade or so. **Close Brothers scores 2.7/5 for profitability in my screening system.** --- ### Conclusions: I'm buying **My quality dividend screening system awards Close Brothers an overall score of 67/100 at the time of writing (June 2023).** I aim to have a mix of defensive and cyclical stocks in my dividend portfolio. While the consistency of high-quality defensive shares is an attraction from an income perspective, this tends to come at a price. Lower yields, and sometimes quite slow growth. My experience suggests that I should be able to boost returns over time by adding good quality, dividend-paying cyclical stocks when they're attractively valued. In other words, when their valuations are at cyclical lows. This strategy isn't without risk: - my timing may be wrong and trading may get much worse - if I'm not careful, I could fall victim to style drift and end up with a portfolio of value stocks, not quality dividends However, I think a measure of opportunism is a necessary element of investing. I've followed Close Brothers' progress carefully for several years. As I mentioned earlier, I already hold some CBG shares as part of a legacy position. While the Novitas Loans episode is very disappointing, this group does have a long and fairly consistent record of NAV growth, dividend progression, and double-digit profitability. In my view, it scores highly enough for quality to merit a place in my portfolio. Right now, the valuation looks historically cheap to me on several measures. By buying the shares at a (rare) discount to book value and a high dividend yield, I'm comfortable with the balance of risk and reward. If this investment works out in the way I hope, then I believe Close Brothers shares should benefit from re-rating to a higher valuation as the group's performance recovers. The shares have traded 50% higher in the recent past. If things don't go so well, my hope is that the current valuation provides some margin of safety. **Decision: I'm going to add Close Brothers to my model dividend portfolio.** In line with [my policy for selling and replacing shares](https://www.rolandhead.com/portfolio/portfolio-selling-shares/), I'll add them to the model portfolio at the end of this quarter, on **30 June 2023**. **I will also buy additional CBG shares for my personal real-money portfolio at the same time.** *Disclosure: Roland owned shares in Close Brothers at the time of publication.* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: a contrarian bargain? RWS, RESI, WHR URL: https://www.rolandhead.com/dividend-notes/a-contrarian-bargain-rws-resi-whr/ Last updated: 2023-06-09T07:31:45.000Z Today I'm looking at three companies that are all facing headwinds of various kinds. Despite this, I reckon one of them could be worth further research and *might* even be a genuine contrarian bargain. ### Companies covered: - **[RWS Holdings (LON:RWS)](#rws-holdings-rws)** \- this patent translation specialist scores well in my screening, but these half-year results do little to address growth concerns. Despite this, I feel RWS could offer value at current levels. - **[Residential Secure Income (LON:RESI)](#residential-secure-income-resi)** \- high occupancy and stable rental income isn't necessarily enough to offset a high LTV and rising debt costs. I think a dividend cut is likely. - **[Warehouse REIT (WHR)](#warehouse-reit-whr)** \- this urban logistics specialist reports a similar story of uncovered dividends. Leverage is lower, but I can see additional risk from near-term refinancing needs and shorter lease durations. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### RWS Holdings (RWS) > "... full year outlook is expected to be in line with latest guidance and current market expectations" AIM-listed RWS Holdings specialises in providing translation services for patent owners and other related services. The group has an enviable 19-year record of unbroken dividend growth. **Results summary:** these half-year results cover the six months to 31 March 2023\. The numbers don't seem that impressive, although the share price rise on the day suggests the market may have been expecting worse. - Revenue up 2.5% to £366.3m - Pre-tax profit down 13% to £28.7m - Earnings per share down 11% to 5.4p per share - Cash conversion of 85% (H1 22: 104%) - Net cash: £57.8m (FY22: £71.9m) - Operating cash flow was unchanged at £60m, but an increase in spending and a small acquisition resulted in a c.£15m reduction in free cash flow, reflected in the net cash balance. - *H1 operating margin fell to 8.4% (H1 22: 9.6%)* **Trading commentary:** new business wins and retention were said to be strong across all divisions. However, given the stagnant revenue and falling profits I'm not sure how to read this. Is competition heating up? Is demand weak? A new AI Data Services service, TrainAI, was launched and achieved some early wins. Development also continued in the targeted growth areas of eLeaning and Linguistic Validation. **Dividend:** the interim dividend is increased by 7% to 2.4p per share. **Outlook:** Full-year results are expected to be in line with expectations, albeit with profits weighted to the second half of the year. One reason for this might be the unitary patent – see below – but an atypical H2 weighting could also increase the risk of a profit warning. For now, broker forecasts suggest adjusted earnings of 24.6p per share this year, a slight reduction from 26.6p per share last year. A full-year dividend of 11.9p per share is expected. These estimates price RWS shares on 10 times forecast earnings, with a yield of 4.8%. ### Possible headwinds RWS shares have fallen by more than 50% over the last couple of years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/rws-3y-chart-080623.png) In addition to the earnings slowdown, I can see several structural factors investors might want to consider as possible headwinds to growth: **EU Unitary Patent:** this is a new system that came into force on 1 June. It allows patent applicants to secure a single patent that's valid throughout the EU, rather than one in each country. This has obvious attractions for RWS clients but will surely mean a significant drop in the amount of intra-EU translation work for RWS. *However, in the short term, RWS believes there's a backlog of work that's been held back until 1 June that could now be released. I assume this is one factor behind the company's guidance for an H2 weighting to profit.* **Russia:** the war has meant the closure of the group's Russian office and the loss of most Russian translation work. Operations in Ukraine have also been disrupted. **AI:** RWS is already a big user of specialised AI systems. The company says that generalised systems like ChatGPT will not provide the sophistication and accountability patent clients need. I can believe this. But I have to wonder whether more affordable AI services will make inroads into some of RWS's business. ### My view I think this is a good business with a pretty solid track record. However, the group appears to have suffered a long-running decline in profitability over the last 20 years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/rws-ebit-navps-roce-080623.png) Management hope to find further acquisitions to bolster future growth and have also announced a £50m share buyback. I think the valuation is firmly in contrarian territory and could be attractive. But I'd need to do further research into this business to understand its operations in more depth before adopting a firm stance on this stock. For now, I'd file RWS under *interesting* and *worth a closer look*. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Residential Secure Income (RESI) > "and will then revisit the appropriate level for a fully covered and progressive dividend." A lot of property stocks and REITs are holding onto generous dividends at the moment. I think some of these will have to go. I've previously written (mostly) favourably about [British Land](https://www.rolandhead.com/dividend-notes/value-or-not-blnd-expn-bt-a/), [Tritax Big Box](https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/) and [Derwent London](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/). Today I want to take a quick look recent numbers from two property stocks where I think dividend cuts are far more likely, starting with Residential Secure Income. **RESI:** Residential Secure Income owns a portfolio of social housing and retirement accomodation. The name suggests an ultra-reliable dividend, but I'm not sure that's true anymore. This week's half-year results from RESI included the following comment in the chairman's statement: > "We are considering selective disposal of certain non-core assets, to reduce floating rate debt levels, and will then revisit the appropriate level for a fully covered and progressive dividend." I think shareholders should be prepared for the possibility of a dividend cut. Although RESI's net rental income rose by 8% to £8.8m and collection rates stayed at 99%, adjusted earnings fell 8% to 2.2p. This was due to higher energy costs in communal areas of retirement housing, plus higher interest costs on the company's floating rate debt. As a result, dividend cover by earnings fell to 86% (H1 2022: 96%). At the same time, RESI's loan-to-value ratio rose to 52% (FY22: 47%) to reflect a 16% fall in EPRA net asset value to 89p per share. RESI's floating rate debt is only about £20m (10%) of its total borrowing of c.£200m, the remainder of which has long-term fixed rates. But this expensive short-term debt appears to be putting pressure on cash flows. Falling property prices mean that one of these floating rate facilities is also now close to its covenant LTV limit. Management hope to sell some properties to repay RESI's floating rate debt and rebuild dividend cover. This would reduce the company's earnings base, but should also reduce total borrowing costs and improve earnings visibility. ### My view Management are keen to stress the reversionary potential of RESI's portfolio – in other words, rents would be higher today if the properties became vacant and were re-let. However, my impression is that many of RESI's tenants stay put for a long time. Realising this reversionary value could be a slow process. I don't know exactly how the numbers will work out, but I think it would be prudent to expect a dividend cut from RESI. For buyers at today's prices, that might not be too painful. At 69p, a 20% dividend cut would give a yield of 6%, with scope for future growth. Personally, I'm going to wait and see how the situation evolves. But if there are no further cuts to property valuations, then I think the shares could be fairly priced at current levels. --- ### Warehouse REIT (WHR) > "We were not immune from the rapid rise in interest costs, which impacted both our valuation and our earnings" This industrial property REIT has a portfolio of urban logistics warehouses, located close to major towns and cities. Like RESI, WHR boasts strong occupancy numbers and 99% rent collection rates. Like-for-like rents also rose by 5.3% last year, with rents on new lettings running 29% ahead of previous contracted rents. Although WHR's loan-to-value ratio of 33.9% is well below RESI's 52% figure, WHR is still being hit by the rising cost of variable rate debt. As a result of higher interest costs, last year's dividend of 6.4p per share was uncovered by adjusted earnings of 4.7p. To address this shortfall, management have been selling properties in the hope of repaying the most expensive debt. They're also focused on *"continuing to capture the reversion embedded in the portfolio"*. This might be quicker here – the weighted average remaining lease term is relatively short, at 5.5 years. ### My view As with RESI, I think there's a risk that a dividend cut will be needed at WHR to find a sustainable balance between borrowing costs and rental income. Valuers cut the value of WHR's portfolio by 18% last year, resulting in a 29% drop in NAV per share, which fell to 122.6p. The shares are trading at about 90p as I write, providing a further 25% discount to this reduced book value. As with RESI, even a 20% dividend cut would still produce an attractive 6% yield from this level. However, WHR needs to refinance the majority of its loans (c.£330m) in the next two years. Its shorter lease lengths also carry risk as well as opportunity – if the economy slows, rental rates could soften again. As with RESI, my plan is to stay on the sidelines here and watch how things unfold. If I wanted to invest in logistics property today, I'd choose a larger and more conservatively financed REIT, such as BBOX or perhaps Segro. Personally, I don't think there's any rush to buy into this sector right now. The pandemic party is over and it's not quite clear to me how bad the hangover will be. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: reassuring updates - PAG, GHH URL: https://www.rolandhead.com/dividend-notes/reassuring-updates-pag-ghh/ Last updated: 2023-06-06T16:50:57.000Z In today's dividend notes I discuss reassuring-sounding updates from two very different companies. ### Companies covered: - **[Paragon Banking (LON:PAG)](#paragon-banking-pag)** \- a reassuring set of results showing strong performance in the group's core BTL and SME finance markets. Still some macro risk, but I think PAG could be worth considering at current levels. - **[Gooch & Housego (LON:GHH)](#gooch-housego-ghh)** \- today's half-year results suggest to me that this optical specialist is getting back on track after a difficult period. I think the shares could prove to be good value at current levels. --- *These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *As always, my comments represent my view only and are not advice or recommendations.* --- ### Paragon Banking (PAG) > “We are delighted to deliver another strong financial and operational performance, achieving record interim operating profits, alongside robust growth in our loan book." Specialist lender Paragon provides buy-to-let mortgage lending and loans for SME business customers. The FTSE 250 group's latest results sent the shares up c.8%, suggesting that the numbers calmed investor fears that the bank could face either a sharp rise in bad debts or a slump in new lending. The numbers certainly seem fairly positive to me. The bank's underlying profit rose by 22.2% to £128.98m, lifting underlying earnings by 28% to 42.5p per share. This increase was driven by growth in lending and more competitive funding costs. Total new lending rose by 6.9% to £1.59bn, taking the total loan book to £14.6bn. This growth was mostly driven by a £1.0bn (19%) increase in mortgage lending. Of this, 98.6% went to professional landlords, underlining the group's focus on this sector. While Paragon does have some residential mortgages in its portfolio, these are in run-off mode. Funding costs for new loans benefited from higher interest rates. These allowed Paragon to attract an additional £2bn of cash from savers. Total deposits rose by 20% to £11.9bn. **Profitability:** Deposit funding can be one of the cheapest ways for banks to fund their lending. Paragon says its funding costs are now *"sub-SONIA"* – in other words, below wholesale interbank rates. (SONIA is the replacement for scandal-hit LIBOR.) As a result, Paragon's net interest margin rose to 2.95% during the half year (H1 2022: 2.57%). The bank now expects to report a figure of c.3% for the full year. Underlying return on tangible equity of 18.7% for the half year (H1 2022: 15.5%). Management expect a figure above 15% for the full year. **Balance sheet & impairments:** Paragon's CET1 ratio remains very healthy at 15.6%, although that's down slightly from 16.3% at the end of the last financial year in September 2022. Arrears remain low, though. Additional impairment charges totalled just £7.5m during the half year and total provisions across the group's loan book remain low at £68m (H1 2022: £55.2m). The bank ended the period with net tangible assets of 535p per share, broadly in line with the share price at the time of writing. **Dividend:** the interim dividend was increased by 17% to 11p, putting the bank on track for a full-year payout of 33p, based on consensus estimates. That's equivalent to a 6% yield at current levels. An additional £50m share buyback was also announced, taking the total underway to £100m. **Outlook:** guidance of new mortgage lending and margins have been edged up slightly, but there are no significant changes. Broker forecast put Paragon shares on a P/E of 6 with a yield of 6%. That could be cheap if this level of profitability can be maintained. **My view:** these results contain some isolated signs of weaker conditions in both commercial and residential property markets. The mortgage lending pipeline is down and redemption rates have risen slightly. Commercial property development lending has slowed dramatically. However, credit quality remains good and Paragon looks in good financial shape to me. I think things would have to get significantly worse for a dividend cut to be needed. I don't have any insight into the economic outlook, but if predictions of a relatively minor slowdown are correct, I think Paragon could be a decent buy at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Gooch & Housego (GHH) > "Full year expectations are unchanged" This industrial group is a specialist in photonic engineering – the group produces specialist opticial components and systems. Markets include industrial lasers, semiconductor manufacturing, defence, healthcare and aerospace. It's a highly-specialised business with a long pedigree – the group was [founded in 1948](https://gandh.com/our-history?ref=rolandhead.com) and has been listed on the London market since 1997\. Unfortunately progress has stalled in recent years, with a sharp reduction in profitability. This culminated in a profit warning last August that's left the stock trading at 10-year lows. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ghh-opmargin-shareprice-060623.png) Today's results reiterate full-year expectations and suggest to me that the business could be getting back on track. **Financial highlights:** revenue for the half year rose by 31.7% to £71.3m, while adjusted pre-tax profit was 26% higher, at £4.5m. Cash flow from operations rose by c.50% to £6m despite increased inventories, allowing free cash flow to turn positive by c.£1m. Although net financial debt rose by £7m to £12.9m duing the half year, I don't see any serious concerns here. The impression I get from the accounts is that the performance of the business is recovering and it remains in sound financial health. The interim dividend rose by 0.1p to 4.8p per share. That puts the group on track for a payout of 13p this year, resuming a 25-year growth trend: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ghh-dividends-060623.png) **Operational summary:** Gooch & Housego saw *"record levels of order intake"* during the second half of last year, but this wasn't unvarnished good news. The surge in orders was caused by customers *"overdriving their supply chains"* to try and offset supply problems and get ahead of price inflation. As a result, GHH was left with an order book it couldn't fulfil in a timely way. Production rates have increased and the company says that lead times are now coming back to more normal levels. After some initial difficulty, the company appears to be negotiating this situation successfully, albeit with some after effects. One problem is that after panic-buying last year, some of the company's customers are now scaling back their ordering. The firm says its book-to-bill ratio fell to 0.8x during the first half of this year. The value of the order book fell from £148m in September 2022 to £124m at the end of March. The other challenge I can see is that Gooch & Housego is having to absorb some cost inflation on orders booked last year. The company has passed on wage increases to its staff and accepted higher raw material costs. But GHH's own price increases are only being implemented with a lag – presumably this is because they can't be applied retrospectively to the order backlog. This *could* result in a surge in profitability next year, assuming new order levels remain healthy. But it's a point worth monitoring in the meantime, I think. **Outlook:** management say that the current order book is sufficient to underwrite full-year expectations, which are unchanged. Broker forecasts suggest earnings of 29.2p per share for the year ending 30 September 2023\. That puts the stock on a forecast P/E of 20, but this multiple is expected to fall to 15 in FY24 as margins recover and growth resumes. **My view:** I think there's still some uncertainty about the trajectory of the order book over the next 18 months. But my impression from today's results is that the company is back on track and doing all the right things. I think it's reasonable to expect a steady recovery in margins and profits over the next couple of years. As such, the shares might not be expensive at current levels. Indeed, SharePad data suggests Gooch & Housego stock is currently trading at its lowest level relative to book value since the 2008 financial crisis: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ghh-cape-pnav-060623.png) I think this could be worth further research. On this initial inspection, I'm inclined to think that the shares could offer a buying opportunity at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### May '23 dividend portfolio update: mostly good news URL: https://www.rolandhead.com/portfolio/may-23-dividend-portfolio-update-mostly-good-news/ Last updated: 2023-06-03T09:37:08.000Z Welcome to my quality dividend portfolio update for May 2023. Last month proved a busy one for results from the companies in my dividend portfolio, despite a record number of UK bank holidays. No fewer than six firms issued full-year results or made interim reports. My full review of these is included below. It's a long read, so I've included a short summary for each company at the top with links to the relevant section. *As a quick reminder, the model portfolio on this site contains the same companies as my personal portfolio.* Before I get started, here's a round-up of some of the other new content I've published over the last week or so. ### Dividend notes - Wed 31 - [a B+ for this selection - B&M, Bodycote and Bloomsbury Publishing](https://www.rolandhead.com/dividend-notes/a-b-for-this-selection-bme-boy-bmy/) - Sat 03 - [the same but different - Impax Asset Management and Premier Miton](https://www.rolandhead.com/dividend-notes/the-same-but-different-ipx-pmi/) ### Podcast The latest edition of the [Private Investor's Podcast](https://www.fundyourretirement.com/private-investors-podcast/?ref=rolandhead.com) hit the wires last weekend. I co-host this podcast with [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com). Once a month, we take an in-depth look at a company of interest to us. In May's podcast, [we discussed housebuilder Bellway (LON:BWY)](https://www.rolandhead.com/podcasts/bellway-with-maynard-paton-roland-head/). You can see full details of all our previous episodes on my [podcast page](https://www.rolandhead.com/podcast/). _This post is for paying subscribers only._ ### Dividend notes: the same but different - IPX, PMI URL: https://www.rolandhead.com/dividend-notes/the-same-but-different-ipx-pmi/ Last updated: 2023-06-03T09:53:40.000Z In this edition of dividend notes I'm taking a look at the latest results from two fund managers that are among the highest-ranked stocks in my dividend screening results. Both offer attractive dividend yields, but they have very different valuations and profiles. Asset managers remain under pressure for a variety of cyclical and structural reasons, as these numbers show. But I think there could be some value in this sector at the moment. ### Companies covered: - **[Impax Asset Management (LON:IPX)](#impax-asset-management-ipx)** \- this sustainability specialist has de-rated sharply, but remains highly profitable and continues to attract new money. I think it's an interesting business. - **[Premier Miton (LON:PMI)](#premier-miton-pmi)** \- falling AUM has combined with a reduction in fee margins to trigger a collapse in profits. A dividend cut has become necessary, but this situation *might* reverse quickly when market improve. --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* --- ### Impax Asset Management (IPX) > "Positive net inflows of £1.1 billion during the Period, well diversified by channel and geography." Last week's [half-year results](http://www.investegate.co.uk/announcement/7551484?ref=rolandhead.com) from sustainable investment specialist Impax Asset Management triggered a sharp sell off: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-ytd-chart-030623-1.png) Were the numbers (or the outlook) really that bad? I've admired this group's progress and exceptional profitability for years, but have generally felt priced out. But at current levels, I can see some possible attractions, including a 4%+ dividend yield. Let's take a look. **Results summary:** Impax saw positive net inflows to its funds of £1.1bn during the half-year to 31 March 2023\. Investment gains and currency effects added a further £3.3bn. As a result, total assets under management to £40.1bn, up from £35.7bn at the end of September. These inflows were almost entirely into listed equity products: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h23-aum-movements.png) Source: Impax H1 FY23 results Despite this steady performance, revenue was broadly flat and profits fell sharply: - Revenue of £88m (H2 2022: £86.8m) - Adjusted operating profit down 19.7% to £27.3m - Reported pre-tax profit down 34.5% to £21.4m - Adjusted earnings down 18.4% to 17.2p per share - Interim dividend unchanged at 4.7p per share The fall in profits was driven by two factors: **Operating costs:** Impax is adding headcount and investing in its operations to support future growth. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h23-headcount.png) Source: IPX H1 2023 presentation Adjusted operating costs rose from £54.7m to £60.6m, with the increase including £4.6m of additional staff costs: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h23-adjopexp.png) Source: IPX H1 2023 presentation This extra headcount has contributed to a reduction in staff productivity, at least temporarily: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h23-aum-per-staff.png) Source: IPX H1 2023 presentation **Finance costs:** the other factor that depressed profits was listed as finance costs. However, the accounting footnotes show that this relates to foreign exchange translation losses on intercompany loans and cash balances. I'd guess that the majority of these may have been non-cash accounting entries only: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h23-aum-movements-1.png) Source: Impax H1 FY23 results **Profitability:** I think it's fair to say that many of the factors that held back profits during the first half were temporary external factors or else a result of the company investing in its continued growth. However, they have had a big impact on operating margins over the last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h23-operatingmargins-runrate.png) Source: IPX H1 2023 presentation Even so, this business remains far more profitable than most other UK-listed asset managers. Fee margins have also remained stable and competitive (see PMI below), suggesting profits could rebound when markets become more supportive: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h22-fee-margins.png) Source: IPX H1 2023 presentation My sums suggest a trailing 12-month operating margin of 33.2%, with a TTM return on equity of 42.8%. Still pretty good. **Outlook:** CEO (and 7.2% shareholder) Ian Simms says that despite a challenging macro background, pressures such as cost inflation, supply chain issues and energy prices are all easing. This could bring some relief for businesses *"in the near term"*, he says. Simms believes that company is well positioned to benefit from policy and regulatory factors such as the US Inflation Reduction Act and similar measures in Europe and Asia. No new financial guidance was provided, but consensus forecasts have been tweaked slightly lower. The latest broker estimates I can see suggest earnings of 37p per share this year, with a dividend of 27.3p. Those numbers price Impax shares on 18 times forecast earnings, with a 4.2% yield. ### My view I remain impressed by Impax's performance and profitability. The company's investment focus on sustainability is not just an ESG tick-box exercise – rather, my impression is that it focuses on investments with the ability to make a positive contribution to modern, sustainable infrastructure and societies. Here's how AUM was split across different strategies at the end of H1: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/ipx-1h23-aum-strategy.png) Source: IPX H1 2023 presentation One shortcut to understand the type of companies held by Impax is to look at the top portfolio positions for listed investment trust **Impax Environmental Markets (LON:IEM)**. At present, these include FTSE 100 firms **Croda International** (chemicals) and **Spirax-Sarco Engineering** (steam management systems). Impax shares remain relatively expensive, on 18 times forecast earnings or 2.2% of AUM. However, I think a pricier rating could be justified here. This group is highly profitable and continuing to attract meaningful inflows, unlike some rivals. I'm inclined to see this as a differentiated business with good long-term potential. Although I can see some near-term downside risk, I don't think the current valuation is unreasonable. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Premier Miton (PMI) > "As confidence returns to markets and to investors, we are well placed to return to growth." Like Impax, Premier Miton's results last week were also met with a share price slump. But in this case, I think the reasons are more obvious – and perhaps more justified. This generalist fund manager had £11.0bn of assets under management at the end of March, up by 4% from £10.5bn at the end of September. However, this level of AUM is well below the £12.8bn seen one year earlier. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/pmi-1h23-aum-mix.png) Source: Premier Miton H1 2023 presentation Fortunately, net outflows have slowed, dropping to just £32m during the period, compared to £400m during H1 last year (and £1bn during FY22). This performance translated into a sharp fall in profits, with adjusted pre-tax profit for the half year dropping 46% to £7.9m. Interestingly, profits didn't fall because of higher costs. Whereas Impax is hiring and investing for the future, Premier managed to cut its operating costs during the period. **Profitability slump:** Premier Miton's profits fell because of a sharp fall in net revenue, which fell by 20% from £43.7m to £35.0m during the period. This table shows the breakdown of the numbers and highlights the two reasons for this revenue slump: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/06/pmi-1h23-netrevenue.png) Source: Premier Miton H1 2023 results This is a classic example of (reverse) operating leverage in action; a double whammy of lower AUM *and* lower fee margins. My sums suggest the £8.7m fall in net revenue would have been reduced to £7.4m if fee margins had remained unchanged. That extra £1.3m could have lifted adjusted pre-tax profit to more than £9m and might have prevented a dividend cut. This kind of situation is not unusual for fund managers in a downturn (although Impax's fee margins have remained far more stable). I think the question for investors is whether the reduction in fee margins will persist or if pricing power will return in stronger markets. Given the competitive pressure on generalist fund managers, I'm not sure we'll see fee margins rising anytime soon. It's also interesting to note that Premier Miton's fee margins of 0.625% is still significantly higher than Impax's figure of 0.45%. **Dividend:** PMI's profit slump prompted a dividend cut that was needed to keep the payout with its targeted range of 50%-65% of adjusted earnings. The interim dividend was cut by 19% to 3.0p per share, representing 68% of adjusted half-year earnings of 4.4p per share. **Outlook:** Broker forecasts suggest a full-year earnings of 7.3p per share, with a dividend of 7p per share. This would represent 95% of forecast earnings, so I'm not sure how likely it is, but I can see that it might be possible. These estimates price PMI shares on 11 times forecast earnings, with an 8.2% yield. ### My view Like Impax, Premier Miton faces short-term headwinds that are largely outside its control. But as a small-cap and generalist fund manager in a competitive market, I can't help feeling that this group lacks differentiation – and perhaps scale. On the other hand, Premier Miton shares certainly look cheap to me at the moment. The shares currently trade on 11 times forecast earnings, or 1.1% of AUM – half Impax's valuation. PMI's forecast dividend yield of 8% is also tempting, assuming it's sustainable. My inclination at the moment is that Impax represents a more attractive long-term investment than Premier Miton. But I could be wrong. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: a B+ for this selection - BME, BOY, BMY URL: https://www.rolandhead.com/dividend-notes/a-b-for-this-selection-bme-boy-bmy/ Last updated: 2023-10-26T15:13:03.000Z Today I'm looking at results and trading updates from three (very different) companies that all have names beginning with B... ### Companies covered: - [**B&M European Value Retail (LON:BME)**](#b-m-european-value-retail-bme)\- solid results from this this value retailer, which now claims to have established a new post-pandemic baseline for future growth. I have a positive view on the shares. - [**Bodycote (LON:BOY)**](#bodycote-boy)\- 2023 guidance is unchanged, despite a strong start to the year. Management warns of macro uncertainty. Long-serving CEO has decided to retire. - [**Bloomsbury Publishing (LON:BMY)**](#bloomsbury-publishing-bmy)\- a quick look at a strong set of results from the publisher of Harry Potter (and much else). With the shares down 16% from record highs last year, is there an opportunity here? --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* --- ### B & M European Value Retail (BME) > "We expect to grow sales and profits in FY24, despite economic uncertainty." A solid set of numbers sent shares in value retailer B&M up by 5% this morning. I've admired the progress of this well-run business since its 2014 IPO. B&M is now adjusting to post-pandemic life, having received an exceptional boost to profits during the Covid years, but I think the shares remain worth considering. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bme-profit-shareprice-310523.png) Today's results cover the 52 weeks to 25 March 2023\. Chief executive Alex Russo believes this period *"can be viewed as the Group's new underlying revenue and profit base level from which we grow from"*. To put this in context, sales of £4,983m were 31% ahead of pre-pandemic levels, while operating profit of £479m was 44% above the £333m achieved in FY20\. The group now operates 1,140 stores in the UK and France, compared to 1,050 at the end of March 2020. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bme-fy23-stores.png) Source: B&M FY23 presentation **FY23 results summary:** profits and the ordinary dividend fell last year, as cost pressures mounted and sales growth slowed compared to the pandemic years. But cash generation improved as stock levels fell, and the business looks in decent health to me. - Revenue up 6.6% to £4,983m - Pre-tax profit down 17% to £436m - Free cash flow of £430m (FY22: £164m) - Earnings per share down 17.6% to 34.7p - Ordinary dividend down 11.5% to 14.6p per share - Special dividend of 20p per share (FY22: 25p per share) - Net debt exc. lease liabilities fell to £724m (FY22: £790m) Against a backdrop of double-digit inflation, sales growth of 6.6% suggests a modest fall in volumes, in my view. Especially as new stores were opened last year. Management don't comment on volumes and only say that like-for-like growth was positive in all businesses last year, including inflation and mix effects. However, performance seems to have varied across the group. **B&M UK:** the core UK business accounts for 80% of sales, but seems to have seen a modest decline in volumes last year as shopping patterns returned to normal: - H1 LFL -3.9% - H1 LFL +5.1% - Full-year LFL sales +0.7% **Other divisions:** Heron Foods (a discount grocer specialising in frozen/chilled/ambient branded goods) and B&M France account for c.11% and c.9% of group sales, respectively. Both of these smaller businesses reported revenue growth of c.20% last year, including the impact of new store openings which resulted in c.5% increases to average sales area. These numbers suggest to me that both Heron and France saw modest LFL volume growth, in addition to inflation-linked price increases. **Profitability:** cost inflation and slowing sales growth put some presure on profit margins last year. But B&M's business model remained far more profitable than that of UK supermarkets. My sums suggest the following figures, based on last year's reported profits: - Operating margin: 10.8% (FY22: 13.1%) - Return on capital employed: 19.0% (FY22: 21.2%) - Return on equity: 47.5% (FY22: 57.1%) **Dividend cut:** a dividend cut is always disappointing, but B&M makes its dividend policy clear in today's results. > "an ordinary dividend pay-out ratio of between 30 to 40% of net income on a normalised tax basis" Surplus cash is used in the following order of priority: 1. the rollout of new stores with a strong payback profile; 2. ordinary dividend to shareholders; 3. mergers & acquisition opportunities; 4. returns of surplus cash to shareholders. I prefer this discplined and transparent approach to the opaque fudges sometimes employed by companies when balancing dividends and growth investment. **Strategy:** more generally, B&M's clear and disciplined strategy is one of the things I like about this business. The commentary in today's results seems reassuring to me - I've extracted some of the main points: - Competitive positioning alongside Aldi and Lidl (Limited Assortment Discounters, or LADs) - B&M's branded offer is complementary to their own-lable focus. Where co-located, B&M stores *"tend to trade exceptionally well"*. Said to be true in France and UK. - In general merchandise, made an effort to improve quality as well as price positioning in recent years. I can agree with this to some extent. I bought some garden furniture during pandemic that's lasting well and was very good value. - Newer stores tend to be larger and often have a garden centre area. The company's previously stated target of 950 UK stores (FY23: 707) is said to be *"conservative",* but even so represent a 35% increase on current estate. The implication is that core UK sales could rise by more than 35% over time, due to new openings. **Management**:B&M was founded in 1978, but the company's transformation from minor retailer to FTSE 100 company really started when it was acquired by Simon and Bobby Arora in 2004\. At that time, B&M had just 21 stores. I think it's fair to say that much of the success of the business is down to skilled and consistent management. Simon Arora was chief executive for 19 years, but stood down last year. Should shareholders be worried about a loss of direction? My impression from today's results is that current CEO Alex Russo seems a fairly safe pair of hands. He's an experienced retail executive and worked with Simon Arora for two years as CFO, prior to taking charge. In some ways, I'm more concerned about the prospect of [Bobby Arora](https://www.bandmretail.com/about-us/corporate-governance/management-team?ref=rolandhead.com) stepping down. He's not a board member, but is the group's trading director. In other words, he's ultimately responsible for all purchasing and supply chain management. B&M's stock is a clever mix of everyday groceries and household products, mixed with seasonal ranges that change regularly. I think it's fair to say that Bobby Arora's ability to choose, source, and stock the right items at the right time – and the right price – has played a big role in B&M's growth. I'd hope that he's built up a team that can take over this role, but I still see a degree of key person risk here. **Outlook:** CEO Russo expects to report like-for-like sales growth from existing stores in FY24\. New store openings are expected to continue, with plans for c.30 new B&M UK stores, c.10 B&M France stores and c.20 Heron Food stores. Further special dividends may be possible: > "in the absence of acquisitions opportunities for batches of stores, we will look to return excess cash to shareholders at the appropriate time" In the first 9 weeks of FY24, B&M UK LFL sales have run at 8.3%. Full-year adjusted EBITDA is expected to be ahead of FY23 levels. Broker forecasts ahead of today's results suggested a further 5% fall in adjusted earnings this year, to 35.1p per share. That puts B&M on a forecast P/E of 14, with a prospective yield of 4%. **My view:** B&M's performance last year seems acceptable to me in the circumstances. I think the group's profitability and cash generation are impressive. I can see continued growth potential for the business in the UK and France. An estimated run-rate of c.£350m for free cash flow would give the shares a free cash flow yield of c.7%. This looks potentially attractive to me, as does the stock's ordinary dividend yield of c.4%. I think it's reasonable to assume that FY24 will be a low point for B&M (assuming that FY23 wasn't the low point). For me, the shares could be worth considering at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Bodycote (BOY) > "Guidance for the full year remains unchanged" FTSE 250 firm Bodycote is an industrial heat treatment specialist. Its services improve the strength and corrosion resistance of metal parts such as aircraft landing gear and engine components. Key market sectors include aerospace, defence and automotive manufacturers. Today's update covers the first four months of 2023. I looked at Bodycote in an [in-depth piece for Stockopedia](https://app.stockopedia.com/content/bodycote-lon-boy-a-quality-stock-at-a-reasonable-price-956825?ref=rolandhead.com) in early November 2022 and concluded that the shares look potentially attractive. The stock has risen since then, so I'm interested to see if trading so far this year supports a continued positive view. **Trading highlights:** revenue rose by 22.1% to £281m during the four-month period, but this figure was boosted by currency effects and energy price surcharges applied to customer invoices. Excluding these factors, the company says that revenue growth at constant currency was +9.5%. Still a respectable performance. Energy surcharges are said to have declined steadily, in line with broader energy price trends. > **"Guidance for the full year remains unchanged."** Trading performance was positive across all key market sectors, but some potential risks were noted: - **Aerospace & Defence (revenue +9.4% exc. surcharges)**: growth led by civil aerospace (revenue +11% exc. surcharges) as OEM customers ramp up build rates to clear the backlog of aircraft orders. But supply chain risks remain a challenge for *"several of our customers"* - **Automotive (revenue +8.8% exc. surcharges)**:stronger performance against a weak comparative last year. Supply chain issues have largely cleared but the outlook remains *"sensitive to the macro environment and consumer spending"* - **General industrial (revenue +9.9% exc. surcharges)**: slower growth in some sectors offset by *"very strong growth in Oil & Gas during Q1 driven by specific project related activity".* Also *"good demand"* from medical markets. **Outlook:** management remain confident of full-year guidance but recognise *"near-term macroeconomic uncertainties".* The company continues to expect volumes to grow ahead of its underlying markets, suggesting market share gains. Profit margins are expected to improve as cost surcharges moderate. Looking further ahead, *"the Board remains confident in the Group's prospects for continued profitable growth".* Broker forecasts for 2023 suggests adjusted earnings could rise by 6% to 45.3p per share this year. That would put the stock on a forecast P/E of 14, with a 3.4% dividend yield covered twice by earnings. **CEO change:** Bodycote's long-serving chief executive, Stephen Harris, has decided to retire next year. Harris has been in the role since 2009\. The decision to retire seems logical enough, but I'm always conscious that successful CEOs tend to have good timing. Is this as good as it's going to get, for a while? **My view:** Bodycote is essentially an outsourcer. By serving multiple customers, its facilities can run at high levels of scale and utilisation compared to manufacturers' in-house facilities. This aspect of the business is key to understanding the growth opportunity – management believe that more of this work will be outsourced in the future. Today's trading statements reads pretty much as I would expect. The business has started the year well, but there's not yet sufficient confidence to justify upgraded guidance. One possible indicator of a looming industrial slowdown is a build-up of unsold stock. When I checked Bodycote's balance sheet inventories, I was initially a little concerned about how elevated they appeared to be at the end of last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/boy-wip-310523.png) However, when I compared inventories with cost of sales, I didn't see a repeat of the spike that heralded profit slumps in 2008 and 2015: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/boy-wip-cost-of-sales-310523.png) While I'm still cautious, I think it's possible that much of the increase in balance sheet inventory value last year reflected the higher cost of inventories - raw materials and energy use. If the outlook for the global economy turns out to be better than expected, then Bodycote could outperform from here. Personally, I'm not optimistic enough to believe this. I think that it's sensible to price in some downside risk at the moment. On balance, I think Bodycote's share price is probably up with events at current levels. ### Bloomsbury Publishing (BMY) > "Record sales and profit ahead of recently upgraded expectations. Final dividend up 10%." Bloomsbury is best known as the publisher of Harry Potter books. The first was published 26 years ago, astonishingly. But the company (and its shareholders) are always keen to remind us that the group also has a sizeable non-consumer business. Fair enough. This business has certainly performed well in recent years. Bloomsbury now has an (almost) unbroken dividend growth record stretching back 28 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bmy-dividends-310523.png) Today's results were said to be ahead of expectations, but they left the share price unmoved. Let's take a look at why this might be. **Financial highlights:** chief executive Nigel Newton says that *"readers are turning to books"* in these challenging economic times. The group's latest numbers show a decent level of growth last year: - Revenue up 15% to £264.1m - Organic revenue (exc. acquisitions) up 9% to £231.6m - Pre-tax profit up 15% to £25.4m - Earnings per share up 21% to 24.5p - Dividend up 10% to 10.3p per share - Net cash up 25% to £51.5m (FY22: £41.2m) Profitability was broadly unchanged from last year (my calculations): - Operating margin: 9.7% (FY22: 9.7%) - Return on capital employed: 13.4% (FY22: 12.3%) Free cash flow fell last year, due to a big increase in inventories and other unfavourable working capital movements. But I don't see any serious concerns here: - Free cash flow: £15.7m (FY22: £25.1m) **Trading highlights:** the business is divided into two main segments, consumer and non-consumer (academic/professional publishing). **Consumer revenue** rose by 12% to £166.7m, generating a pre-tax profit of £17.8m. Of this, children's books generated 65% of sales and 97% of profit. *S*ales of children's author Sarah J. Maas' titles rose by 51% last year. Harry Potter was also said to have delivered a *"strong"* performance. Adult books were barely profitable, generating just £0.6m of pre-tax profit on £57.8m of sales. **Non-consumer revenue** rose by 19% to £97.4m, generating a pre-tax profit of £8.2m. According to CEO Nigel Newton, this growth was driven by the Bloomsbury Digital Resources (BDR) unit. BDR owns and acquires academic and professional titles that generate repeat revenue at attractive margins. The key to success in these markets is owning titles with captive audiences who must make regular repeat purchases. Revenue from academic and professional titles rose by 28% to £75.7m last year (FY22: £59.3m). However, prior-year acquisitions are said to have contributed £21.5m of revenue. This represents 36% of prior year revenue, so seems to imply that organic sales may have fallen last year, unless I'm missing something. Within this, BDR generated revenue of £27.2m, a 41% increase. The company says that this included 18% organic revenue growth, with the remainder coming from acquisitions. The non-consumer business amortised nearly £5m of acquired intangible assets last year. This suggests to me that some of these acquired assets may need continued investment to prevent a decline in performance. **Outlook:** trading so far in 2023/24 has been in line with consensus expectations. These are specified as revenue of £272.1m and adjusted pre-tax profit of £32.2m. Based on this outlook, sales and profit growth is expected to be about 3.5% this year. This subdued outlook doesn't entirely seem to reflect the company's narrative that *"readers are turning to books",* but it might explain why Bloomsbury's share price has fallen by nearly 20% from the record highs seen last year. **My view:** in broad terms, I think this is a good business. But I can't escape the feeling that Bloomsbury is still heavily reliant on profits from Harry Potter. While the non-consumer business is growing steadily, my feeling is that a lot of growth is being driven by acquisition spending. I also note that more than 10% of revenue (£68.9m) came from a single customer last year. A similar performance was reported in FY22\. I don't know who this is or how much profit it represents, but such concentration often carries an element of risk. I admit that I've only taken a fairly cursory look at Bloomsbury. There's more to unpack here and I may be missing some key elements. It would be interesting to spend some more time on this, and I may do so at some point. However, my initial conclusion is that Bloomsbury's share price is probably up with events at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Shares Podcast: Bellway with Maynard Paton & Roland Head URL: https://www.rolandhead.com/podcasts/bellway-with-maynard-paton-roland-head/ Last updated: 2024-01-10T12:47:06.000Z In this month's episode of the [Private Investor's Podcast](https://www.fundyourretirement.com/private-investors-podcast/?ref=rolandhead.com), my good friend [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com) and I have been discussing FTSE 250 housebuilder **Bellway (LON:BWY)**. - Listen on [Apple](https://podcasts.apple.com/us/podcast/pip012-maynard-roland-discuss-uk-housing-market-behemoth/id1642393167?i=1000614690350&ref=rolandhead.com) - Listen on [Spotify](https://open.spotify.com/episode/3mTWlSgtZybWs2d8KgMyhs?ref=rolandhead.com) - Listen on [Amazon](https://music.amazon.co.uk/podcasts/bf4b8007-5576-41e3-8459-57883df901aa/episodes/007cb42c-46a5-40d4-951a-3faa2679db15/the-private-investor's-podcast-pip012-maynard-roland-discuss-uk-housing-market-behemoth-bellway-are-bellway-shares-a-good-buy?ref=rolandhead.com) - Listen (and watch!) on [YouTube](https://youtu.be/unYjozXw%5FA8?ref=rolandhead.com) The topics we discussed included: - My purchase of Bellway shares at £17 - Bellway's 77-year history - The company's track record as a dividend stock in a highly cyclical sector - My hopes for a 10% annualised total return from my shareholding - How house prices (and Bellway's profits) have changed since the 1980s... - What happened to Bellway in 2008 ... and could it happen again now? - Bellway's balance sheet, cash flow, and land bank - Management quality and experience - A disturbing trend in the top execs' incentive packages - Bellway's shrinking order book and falling profit forecasts - Our views on valuation and whether the shares are cheap enough to buy - The outlook for the UK housing market This podcast was recorded on 17 May 2023. I hope you enjoy it. As always, all feedback is very welcome! Roland *Disclosure: Roland owned shares in Bellway at the time of the recording.* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: contrasting approaches - PETS, AJB, HILS, IHP URL: https://www.rolandhead.com/dividend-notes/contrasting-approaches-pets-ajb-hils-ihp/ Last updated: 2023-05-27T15:49:16.000Z In this edition of dividend notes I've looked at results from two investment platforms with contrasting approaches to their clients' cash. I also consider the latest numbers from two FTSE 250 business which appear in my dividend screening results. ### Companies covered: - **[Pets at Home Group (LON:PETS)](#pets-at-home-pets)** \- a decent business, but the outlook looks a little weak to me and the valuation seems up with events. I'm not tempted at this time. - **[AJ Bell (LON:AJB)](#aj-bell-ajb)** \- a very strong set of numbers, with H1 pre-tax profit up by 61%. Interest income on client cash balances is driving the gains, although customer numbers also rose by 7%. A quality business, in my view. - **[Hill & Smith (LON:HILS)](#hill-smith-hils)** \- profit guidance for the current year has been upgraded. This engineering group looks like a quality business to me, although I'm slightly concerned by the long-running CEO vacancy. - **[IntegraFin Holdings (LON:IHP)](#integrafin-ihp)** \- a stable set of numbers from this adviser platform, which enjoys 40% operating margins. Clients benefit from pass-through interest rates on cash. --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Pets at Home (PETS) > "We attained a market share of 24%, taking 5-year gains to c600bps, as we continue to grow our share of the growing UK petcare market." Pets at Home is not a business I've paid that much attention too, but perhaps I should have done. The group's focus on providing a total petcare service has proved successful as pet ownership has boomed. Pets at Home now captures £24 of every £100 spent on pet care in the UK, up from £18 in 2018\. This gives PETS a similar market share to **Tesco** in groceries (27%). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/pets-shareprice-opprofit-260523.png) Pets at Home's recent full-year results cover the 12 months to 31 March 2023 and show continued progress. Group revenue rose by 6.6% to £1,404m, with like-for-like revenue up by 7.9%. Pre-tax profit fell by 17.7% to £122.5m. Management says this was due to the cost of setting up a new distribution centre and the sale of the group's specialist business in FY22\. On an underlying basis, pre-tax profit rose by 4.8% to £136.4m. PETS is divided into two divisions, Retail and Vet Group. **Retail:** this business generates about 90% of revenue faced cost headwinds last year. Although retail sales rose by 6.6% to £1,278.7m, retail profit fell by 2.5% to £98.8m, on an underlying pre-tax basis. That implies a margin of 7.7% (FY22: 8.4%). **Vets:** unsurprisingly, pricing power appears to be much stronger in the vet division. This is one area where Amazon and supermarkets can't compete. Revenue from the vet business rose by 13.3% to £122.8m, while underlying pre-tax profit rose by 18.3% to £50.9m. That gives a margin of 41.5%, up from 39.8% last year. **Profitability:** Scrolling down to the statutory accounts, my sums suggest an operating margin of 9.7% for the whole group, with a return on capital employed of 9.3%. These don't seem bad numbers to me for a business of this kind, and highlight the benefit of the group's higher-margin vet offering. **Cash flow:** the group's operating cash flow was broadly flat last year at £251.2m (FY22: £248.1m). Free cash flow rose slightly to £98m (FY22: £95m), but this included the benefit of £22m of lease incentives (i.e. rent rebates). Excluding these, PETS' free cash flow would have fallen to £76m last year due a £20m increase in capital expenditure, which rose to £75.7m. Presumably this reflects spending on the new distribution centre. Now this is open, the company expects its logistics-related costs to fall as it consolidates its delivery operations. Year-end net cash was £54.7m (excluding £421.4m of lease liabilities). **Dividend:** PETS' dividend rose by 8.5% to 12.8p per share last year, giving a trailing yield of 3.7%. **Outlook:** strong momentum from last year is said to have continued into the first few weeks of the new financial year. However, cost inflation remains a source of pressure. Management expect FY24 revenue to rise by c.7%, and *"are comfortable"* with consensus forecasts for underlying per-tax profit of c.£136m. That profit figure is unchanged from £136.4m in FY23, so PETS appears to be expecting a reduction in profit margins this year (higher sales vs flat profits). Broker forecasts suggest adjusted earnings could fall by 9% to 20.8p per share this year (I always assume broker eps estimates are calculated on the same basis as company-adjusted earnings). This prices the shares at 17 times forecast earnings. **My view:** I think this is quite a decent business, but I'm not sure it has all of the quality attributes I'm looking for. Prior to this week's results, PETS shares scored just 46/100 in my [quality dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). The shares also seem quite fully valued to me, given the weaker outlook this year. I'll continue to monitor results, but I think there could be better opportunities elsewhere. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### AJ Bell (AJB) > "Another period of growth for the platform business, with customer numbers up by 7% in the first half to 455,008" DIY investment platform AJ Bell has put out a strong set of half-year results. - Revenue rose by 37% to £103.6m - Pre-tax profit climbed 61% to £41.9m - *Pre-tax margin of 40.4% (HY22: 34.6%)* - Interim dividend up 26% to 3.5p - Customer numbers up 7% to 455,008 - Platform assets under administration (AUA) up 7% to £68.6bn, including net inflows of £2.0bn. - Customer retention rate unchanged at 95.5% You may wonder about the rapid growth in revenue and profit, given that private investor activity has become more subdued over the last year. The answer (mostly) is that like its larger rival **Hargreaves Lansdown**, AJ Bell is benefiting from a huge increase in interest income from cash held in client accounts. The company hasn't provided a detailed breakdown of cash interest income, but says that its revenue margin rose from 0.20% to 0.29% during the first half. Revenue margin represents the revenue as a percentage of assets under administration. This chart from the half-year presentation makes it clear that the increase in revenue margin is derived from what the company annoyingly describes as ad valorem charges - in English, this means revenue derived as a percentage of AUA: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/ajb-hy23-revenue-analysis.png) Source: AJ Bell HY23 presentation The company [currently pays](https://www.ajbell.co.uk/isa/charges-and-rates?ref=rolandhead.com) a maximum interest rate of 1.65% on cash balances in a Stocks and Shares ISA. Adviser clients do slightly better, receiving interest of between 1.66% and 2.32% on their cash, at the time of writing. With the Bank of England rate at 4.5%, it's not hard to see why the company's net interest income has soared. The company just says that it pays *"a market-competitive rate"* on cash balances, but as we'll see further down, some rivals take a more transparent approach. **Outlook:** chief executive Michael Summersgill expects cash balances to moderate during the second half of the year, as investors put some of their dry powder to work. However, full-year revenue margins are expected to be *"similar to those achieved in the first half"*, as higher interest rates offset lower cash balances. Broker forecasts suggest earnings could rise by 32% to 15.0p per share this year. The dividend is expected to rise by 28% to 9.5p. These estimates price the shares on 21 times forecast earnings with a 3% yield. That doesn't seem too expensive to me, for a cash-generative business with 40% profit margins. **My view:** AJ Bell only floated on the London market in 2018, so it doesn't have the long listed track record I usually look for in a portfolio share. However, I think this is a high-quality business that could deliver attractive long-term returns from current levels. It could be worth a closer look. --- ### Hill & Smith (HILS) > "Strong start to the year ahead of expectations" This FTSE 250 engineering business produces a wide range of (mostly) steel products used for transport infrastructure and other similar applications. For example, the company's [products](https://hsgroup.com/what-we-do/product-map/?ref=rolandhead.com) include structural steel for bridges, lighting columns, safety barriers and security fencing. The business was originally founded as an ironworks in 1824, but has grown into an international group with operations in the UK, USA, India and Australia. **FY23 guidance upgraded:** in this week's AGM trading update, management reported a strong start to the year. Revenue rose by 18% (constant currency) during the four months to 30 April, with record revenue and profit from its Engineered Solutions and Galvanizing divisions. Both of these strong performances seem to have been driven by strong US demand, including (I think) for energy-related infrastructure. As a result, full-year operating profit is now expected to be ahead of the top end of expectations. Helpfully the company specifies this, citing a range of analyst forecasts from £105.2m-£110.2m. This suggests the company expects operating profit to be above £110m this year. To put that in context, the comparable figure last year was £97.1m – so an increase of at least 13% is on the cards, probably a little more. Bear in mind though that this is adjusted operating profit – reported operating profit was £20m last year, at £78.5m. A quick look suggests the underlying figure excludes amortisation and impairment charges – I'd probably use the reported figure to be prudent. **CEO vacancy update:** the company also issued a directorate change notice advising the market that chairman Alan Giddins has formally assumed the role of executive chair for an expected period of 12-18 months. Giddins is a former investment banker and private equity executive who has chaired the board since 2017. Hill & Smith's previous chief executive, Paul Simmons, stepped down in July 2022 *"with immediate effect"* and was placed on gardening leave. We don't know why he left in this manner, but perhaps the departure wasn't planned or entirely amicable. The company has been hunting for a new chief exec since last July but has still not found one. The formal appointment of Giddins as executive chair seems to suggest that recruitment could take another year or more. The problem seems to be that none of the applicants are measuring up to the company's standards: > "Since July 2022, the Board has undertaken an extensive search process that has identified many strong candidates who have been excited by the Group's prospects. However, the Board was not able to find a candidate that met its criteria at the current time." I don't think there's anything amiss here. But the situation seems slightly unusual and I wonder if there is some kind of odd dynamic at work in the boardroom. **My view:** Hill & Smith generates decent low-teens returns on capital employed and has always looked like a good quality business to me. Many of the company's products are sold into heavily-regulated sectors. This should make it harder for new entrants to compete and reduce the cyclicality of the business. Share price and profits have moved steadily higher over the last 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/hils-shareprice-profit-260523.png) Upgraded forecasts price the shares on 15 times forecast earnings, with a 2.6% dividend yield. That looks about right to me, but this is certainly a share I might consider buying in the next market sell off. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### IntegraFin (IHP) > "Net inflows to the Transact platform were over 6% of opening period FUD and we now serve a record 228k clients, and 7.6k registered advisers." This FTSE 250 firm floated in 2018 and provides platform services for financial advisers – it provides both an investment platform and an *"adviser practice management solution"*. The company says it had a 19% share\* of adviser platform net inflows and a 9.7% share of UK adviser platform funds at the end of the half-year period. *\*Corrected 27/05/23 - my original comment suggested IHP had a 19% share of UK adviser platform funds. This was incorrect.* Founder [Michael Howard](https://www.integrafin.co.uk/michael-howard/?ref=rolandhead.com) remains a non-exec and has a 9.7% shareholding. **Results summary:** Client numbers rose by 4% to 228,000 during the six months to 31 March, compared the same period one year earlier. This supported a net inflow of £1.6bn. At the end of the period, funds under direction (FUD) stood at £54bn. Average daily FUD was £52.6bn (HY22: £53.0bn). Revenue for the half year was broadly flat at £66.5m (HY22: £67.0m), while pre-tax profit fell by 12% to £27.9m. This appears to reflect higher staff costs and the small drop in average FUD during the period. If we compare these numbers to those for AJ Bell above, there's one glaring difference – IntegraFin does not appear to be benefiting from the interest on client cash in the way that AJ Bell and Hargreaves Lansdown are. The results presentation confirmed why – IntegraFin says that interest earned on client cash (3.8% in April) is *"fully paid onto clients"*. I would imagine this transparent approach is a useful marketing and client retention tool at the moment. However, a comparison with AJ Bell suggests that IntegraFin is not necessarily cheaper, overall. In its half-year presentation, IHP specifies a revenue yield (equivalent to AJ Bell's revenue margin) of 0.244%. The equivalent figure for AJ Bell's adviser platform was 0.218% in H1, according to its interim results presentation. IntegraFin appears to take a slightly bigger slice of client funds each year. So perhaps charges elsewhere are higher, offsetting the lack of interest income. IntegraFin's half-year operating profit margin of 39% compares to a figure of 40.4% for AJ Bell and suggests a very attractive level of profitability, even in more subdued markets. My sums suggest a trailing 12-month return on capital employed of 21% and a return on equity of 23.5% – both very attractive figures. **Outlook:** broker forecasts suggest earnings could fall by 18% to 13.3p per share this year. Although a flat dividend would exceed the company's target 60% payout ratio, I suspect the dividend would be held at 10.2p in this scenario, given the group's £184m net cash position. These estimate price the shares on 20 times forecast earnings, with a 3.8% yield. **My view:** IntegraFin looks like a good quality business to me, with steady long-term growth potential. The group is the third-largest adviser platform on the UK market, with a 10% share of funds under advice (AJ Bell is fifth). My feeling is that IntegraFin shares look reasonably priced at current levels, albeit not cheap. I've only taken a quick look at this business so far, but my initial impressions are positive. I may return to it in more depth over the coming weeks and months. --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: 8% yield, industrial headwinds - AV, RS1 URL: https://www.rolandhead.com/dividend-notes/8-yield-industrial-headwinds-av-rs/ Last updated: 2023-05-26T09:01:16.000Z Welcome back to my dividend notes. In this update I'm looking at an unloved high yielder and an industrial business that performed very well last year but might be facing a slump in demand. ### Companies covered: - **[Aviva (LON:AV.)](#aviva-av)** \- a solid first-quarter update didn't generate much enthusiasm in the market, but I'm struggling to see any serious concerns. The 8% yield on offer here looks good value and fairly safe to me. - **[RS Group (LON:RS1)](#rs-group-rs1)** \- weak industrial markets could put a drag on earnings this year. But a strong set of FY23 numbers suggests to me that this stock could be worth watching as a possible long-term buying opportunity. --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Aviva (AV.) > "On track to meet or exceed Group targets" FTSE 100 insurer Aviva just doesn't seem to get much love from UK investors. Despite chief executive Amanda Blanc delivering a successful turnaround and some attractive shareholder returns, the shares have remained stubbornly cheap, in my opinion. I last [reviewed this stock in January](https://www.rolandhead.com/dividend-shares/can-aviva-keep-on-delivering/) and concluded that it looked well run and potentially cheap. Has anything changed since then? Wednesday's first-quarter update saw the shares fall 5% but did not contain any bad news, as far as I could see. **Trading highlights:** The group reported a positive performance across all of its decisions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/1q23-segments.png) Source: Aviva Q1 2023 trading update Areas of strong growth highlighted in the commentary included bulk annuities, workplace pensions and private healthcare. In general insurance, gross written premiums were up 11% at constant currency with a combined operating ratio of 94.5%. That sounds healthy enough to me, given inflationary pressures on claims costs. It's certainly a stronger performance than at [my former holding Direct Line](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/). **Financial summary:** Aviva's balance sheet continues to look well supported, with a Solvency II cover ratio of 196% (FY22: 212%) and centre liquidity of £2.1bn (Feb '23: £2.2bn). In both cases the reduction so far this year relates to dividend payments and buybacks. I don't see anything to be concerned about. One area of concern for life insurance companies has been the falling value of long-dated bonds and commercial property. Aviva says its bond portfolio is *"performing well",* with less than £20m of bond assets downgraded out of a portfolio valued at £20.8bn. No corporate bonds have been downgraded below investment grade. In commercial property, the company says its mortgage portfolio has an average loan-to-value ratio of 54% based on the nominal value of the loan. **Outlook:** the company is on track to meet its £750m cost saving target by 2024 and management expect to beat its guidance for cash remittance of £5.4bn between 2022 and 2024. Dividend guidance for 2023 is £915m, suggesting a payout of 33p per share. That's equivalent to a yield of 8.3% at a share price of 400p. My sums suggest the group could generate a return on equity of perhaps 12% this year. Not the best in the sector, but perfectly acceptable in my view. **My view:** As I discussed in my [in-depth review in January](https://www.rolandhead.com/dividend-shares/can-aviva-keep-on-delivering/), Aviva shares continue to rank well in my dividend screening system. At present they boast a dividend quality score of 70/100. It's possible that I'm underestimating the risks to Aviva's future profits from a slowing economy or the transition to higher interest rates. It's also true that Aviva lacks the consistent long-term record of some rivals. But for my money, Aviva shares looks good value and could be an attractive choice for a high-yield income. I'd certainly consider owning the stock, I if I didn't already own shares in a direct rival. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### RS Group (RS1) > "we are comfortable with current consensus profit expectations for 2023/24, albeit with performance more weighted to the second half." This FTSE 100 company was previously known as Electrocomponents. Electronics buffs may recognise the [RS Components](https://uk.rs-online.com/web/?ref=rolandhead.com) branding as one of the group's best-known operating businesses. Once known as Radio Spares, today this group is a major distributor of electronic components in markets all around the world. RS has often looked expensive to me, but I've often admired its strong quality metrics and cash generation. The shares are now down by nealy 40% from their pandemic highs and are starting to look more reasonably priced to me. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/rs1-5y-chart-240523.png) RS has also risen to become one of the highest-ranked shares in my quality dividend screen, with a score of 75/100. This week the group published its final results for the year ended 31 March 2023 – the first set of numbers under brand-new chief executive Simon Pryce. **Financial highlights:** the group's broad geographic reach and good stock availability helped to drive a strong performance last year. Margins were well supported, despite cost inflation and supply chain challenges. Revenue for the year rose by 17%, or 10% on a like-forlike basis, excluding acquisitions (2%) and currency benefits (5%). Operating profit for the year was 24% higher, at £383m (+17% LFL). Earnings for the year rose by 24% to 60.4p per share, while the dividend was lifted 16% to 20.9p per share. Net debt was minimal at £113m, while cash generation and profitability remained strong. I've calculated the following numbers from the firm's accounts: - Free cash flow exc. acquisitions: £241.7m - Free cash flow conversion from net profit: 85% - Free cash flow margin: 8.1% - Operating margin: 12.8% - Return on capital employed: 24.9% **Record stock levels could pose some risk:** Free cash flow was held back by continued investment in inventory last year. Inventories ended the period at a record £616m. This investment helped the company provide a good service to its customers last year, but it could pose some risk if industrial demand slows this year. RS says it is actively managing its working capital position and will be restricting investment in inventory to products *"which we know, from utilising data from our customers' website searches, will sell quickly"*. I'd hope to see some evidence of inventory levels falling in the half-year numbers. **Outlook:** the company says it is continuing to outperform in the industrial market, especially in EMEA. However, trading during the first weeks of the 23/24 financial year has reflected *"a slowing in industrial growth"* and *"continued weakness and aggressive competition in electronics"*. The company remains comfortable with consensus forecasts for 2023/24, but warns that performance will be *"more weighted to the second half"*. Helpfully, RS includes consensus estimates in its results, specifying revenue of £3,116m, adjusted operating profit of £390m and adjusted pre-tax profit of £379m. In addition, the company's [website](https://www.rsgroup.com/investors/analyst-coverage?ref=rolandhead.com) specifies FY24 consensus forecast earnings of 59.6p per share. That prices the stock on 13.2 times forward earnings, with a possible dividend yield of c.2.7% by my estimate. **My view:** based on last year's results, RS shares trade with a trailing free cash flow yield of 6.5% and an EBIT/EV yield of 10%. I think this valuation could be attractive if a similar level of performance can be achieved this year. However, a second-half profit weighting is very often an early warning sign that expectations could fall. The company's comments on slowing industrial demand seem to support this view. I'm encouraged by these results and the group's high-quality financials. I think RS shares could be reasonably priced at current levels. However, with elevated inventories and an uncertain outlook, I'm not sure there's any rush to invest. The shares are now on my watch list. I may look into them in more depth over the coming weeks and months. --- **Disclosure*: Roland owns General Accident preference shares (General Accident is a subsidiary of Aviva).* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Making changes at rolandhead.com URL: https://www.rolandhead.com/newsletter/making-changes-at-rolandhead-com/ Last updated: 2024-06-01T10:59:25.000Z Welcome back to my weekly newsletter. I hope the markets are treating you well. Reports suggest that private investor interest in UK shares has dropped off this year. I suspect this is true, given the mixed performance of many popular stocks. However, for long-term investors, I think that sitting out the current uncertainty could to some missed opportunities. Personally, I'm finding it much easier to find attractive buying opportunities for my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) than I was for much of last year. This week I want to share some important news; I've decided to introduce a paid membership tier on rolandhead.com. Read on for full details of what's on offer... ### What I do: systematic dividend investing In December 2021 [I launched my model dividend portfolio](https://www.rolandhead.com/portfolio/welcome-dividend-system/). This portfolio reflects my own long-running personal portfolio and is built using shares selected from my [quality dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/). I'm a passionate advocate of using a systematic approach to provide consistent exposure to the investing factors I think are most important. Since I launched the model portfolio, I've published monthly reviews of results from my portfolio stocks and quarterly performance reviews. For example, here's [my monthly review from July 2022](https://www.rolandhead.com/portfolio/july-2022-dividend-share-news/) and here's my [2022 portfolio review](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/). (The full newsletter archive is [here](https://www.rolandhead.com/dividend-newsletters/).) Naturally, I've also published detailed reports any on stocks I'm planning to buy or sell from the portfolio, in addition to [reviews of existing holdings](https://www.rolandhead.com/tag/portfolio-shares/). Most recently, I explained [why I decided to sell](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/) **Direct Line Insurance**. In addition to this portfolio coverage, I've also produced regular [dividend share reviews](https://www.rolandhead.com/tag/dividend-shares/) looking at companies I don't own that might be of interest to me. Recent examples have included: - [Is Spirent Communications a quality compounder?](https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/) \- a closer look at this highly profitable network test and assurance specialist *(May '23)* - [Is Morgan Sindall a top dividend share to buy now?](https://www.rolandhead.com/dividend-shares/is-morgan-sindall-a-dividend-share-to-buy-now/) \- why I think this FTSE 250 construction group could be a rare quality business in this sector *(Apr '23)* - [Is new GSK a quality dividend share?](https://www.rolandhead.com/dividend-shares/is-new-gsk-a-quality-dividend-share/) \- have recent changes (and a dividend cut) solved the pharma group's long-running growth problems? *(Feb '23)* - [Savills: why I think this property firm is a good dividend share](https://www.rolandhead.com/dividend-shares/savills-is-this-property-firm-a-good-dividend-share/) *(Dec '22)* ### Expanding coverage: dividend notes My portfolio content and dividend share reviews form the core of my investment coverage here. But I've always been aware that there's a lot of material I'm not sharing. Each weekday morning, I spend a fair amount of time studying company results and trading updates. Typically, these are companies that already appear in the results of my dividend screen or may do in the future. I thought it would be useful for me – and perhaps interesting for others – if I started to building up a record of my thoughts on these businesses. With this in mind, I've recently started publishing [**dividend notes**](https://www.rolandhead.com/tag/dividend-notes/) several times a week. These shorter-format posts look at newsflow from dividend shares I don't currently own, but which are in my investable universe and of interest to me. Over the last week, I've covered 10 UK dividend shares, eight of which I have not previously written about here: - Mon 15: [a fair price for quality? Diploma and Tritax Big Box REIT](https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/) - Tue 16: [reliable performers - Renew Holdings and Britvic](https://www.rolandhead.com/dividend-notes/reliable-performers-rnwh-bvic/) - Thu 18: [value or not? British Land, Experian and BT Group](https://www.rolandhead.com/dividend-notes/value-or-not-blnd-expn-bt-a/) - Fri 19: [a hidden profit warning? TP ICAP, Savills, Smiths Group](https://www.rolandhead.com/dividend-notes/a-hidden-profit-warning-tcap-svs-smin/) ### Free vs paid: what will you get? My dividend notes are free to read and will remain that way. So will my quarterly performance summaries and my regular reviews of [dividend shares](https://www.rolandhead.com/tag/dividend-shares/) that interest me. But from today, I'll be adding a paid tier covering all content related to my portfolio shares. The following features will only be available to paid subscribers: - access to my systematic model dividend portfolio - full coverage of all interim and annual results from portfolio holdings in my monthly newsletter - in-depth reviews covering all portfolio buy and sell decisions - full access to my newsletter archive I'm excited by the progress I've made over the last year. I'm looking forward to expanding my dividend share coverage and continuing to develop the screening system I use to help run my dividend portfolio. The last 18 months have been a difficult time for UK investors, but I think we're at the start of a new period of opportunity for dividend income. While I'm emphatically not offering a share-tipping service, I will be documenting in full the management and progress of my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). This model portfolio mirrors my own real-money portfolio, so I hope that it may be of interest and educational value to other investors. ### What's the cost? **My subscription price will be £20 per month, or £200 per year.** However, anyone subscribing before my first subscriber-only report goes live on **3 June 2023** will be able to **lock in a 40% saving** and subscribe for **just £12 per month, or £120 per year**. As part of my commitment to you I guarantee that **the price you pay will be fixed for the duration of your subscription**. *There will be no price rises for existing subscribers, ever.* ### When does it start? The first subscriber-only post will be my May '23 portfolio review, which will be published on 3 June. This will be followed on 10 June by a **buy report** reviewing the stock I've chosen to replace Direct Line in the portfolio. If you've found my work interesting so far, I hope you'll join me on for the next stage and sign up as a paid subscriber. In the meantime, thank you for your support – and good luck in the markets. Roland --- **Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: a hidden profit warning? TCAP, SVS, SMIN URL: https://www.rolandhead.com/dividend-notes/a-hidden-profit-warning-tcap-svs-smin/ Last updated: 2023-05-27T07:09:38.000Z Welcome back to my dividend notes. Today I'm going to take a brief look at some trading updates from the past week that have caught my interest. ### Companies covered - **[TP ICAP (LON:TCAP)](#tp-icap-tcap)** \- Q1 performance was aided by currency tailwinds but looks pretty reasonable. A difficult business for outsiders to understand, but still looks cheap to me, with a tempting 7.9% yield. - **[Savills (LON:SVS)](#savills-svs)** \- was this week's AGM update a profit warning in disguise? I think it's pretty likely, but I remain positive about this business and think the valuation could be appealing, on a long-term view. - **[Smiths Group (LON:SMIN)](#smiths-group-smin)** \- a third consecutive upgrade to FY23 guidance is encouraging and I like the business, but I'm reserving judgement on this industrial group until I see fresh accounts and FY24 guidance. . --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### TP ICAP (TCAP) > "We remain well positioned and expect interest rates to remain at elevated levels throughout the year; at the same time, the benefit of the recent strong US Dollar is now moderating." Back in May 2022 I took an [in-depth look at interdealer broker TP ICAP](https://www.rolandhead.com/dividend-shares/tcap-8pc-dividend-yield-buy/). I concluded the shares – then yielding 8% – could offer value. But I warned that the business was hard to understand and had a mixed track record. I wasn't sure if recent improvements were sustainable. A year later, where are we now? TP ICAP shares are trading a little higher and have outperformed the FTSE 250 over the last year. But the yield is still close to 8%. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-vs-mcx-chart-1y-190523.png) TP ICAP (black) vs FTSE 250 (blue) **Trading update:** this week's update was only and AGM update so did not contain much detail. But management did provide a summary of divisional performance and a short strategic update. Here are the main highlights, covering revenue for the three months to 31 March 2023: - **Group revenue** up 9% to £606m (+2% constant currency) - **Global broking** up 9% (+3% constant currency) - *"all asset classes generated low to mid-single digit growth".* TP ICAP is the market leader in interdealer broking, with a market share of more than 40%. - **Energy & Commodities** up 10% (3% constant currency) - there was growth in European Gas & Power, but a flat performance from oil. - **Parameta Solutions** up 15% (7% constant currency) - this data analytics division is targeting *"double-digit constant currency growth in adjusted EBIT"*. - **Liquidnet** up 3% (down 3% in constant currency) - this equity and fixed income trading network serves institutional clients and was acquired for $575m in 2021, but performance has been disappointing so far. A new divisional CEO has been parachuted in – we'll have to see if performance improves. The underlying theme tying TP ICAP's divisions together is that they provide liquidity by facilitating transactions between market participants. The broking business does this the traditional way – building relationships and dealing over the phone. The other divisions take various different approachs. Data business [Parameta Solutions](https://parametasolutions.com/?ref=rolandhead.com) generated a divisional operating margin of nearly 45% last year and is also the fastest-growing business. It's recently been certified by the European regulator to act as a benchmark administrator for OTC (over-the-counter - i.e. not traded on an exchange) benchmarks and indices. I'm not sure what the commercial potential of this is, though. Last year, an activist investor suggested Parameta [could be worth £1.5bn](https://news.sky.com/story/city-investors-press-tp-icap-for-1-5bn-parameta-windfall-12706405?ref=rolandhead.com) – more than TP ICAP's £1.3bn market cap – but I wonder if some of the value of the business depends on its inclusion in TP ICAP's data ecosystem. **Outlook/my view:** At a group level, TP ICAP still seems to be performing reasonably well, although management warn that the currency tailwind from the strong US dollar is now easing. Consensus forecasts are unchanged and suggest earnings growth of less than 5% this year, on an adjusted basis. However, the shares trade on just six times forecast earnings and still offer a 7.9% yield, which looks well covered. This business remains complex and difficult to understand for someone who hasn't worked in the industry. I don't know how market trends are likely to affect future earnings. However, TP ICAP shares continue to look very affordable to me, so I'm going to keep on following this story. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Savills (SVS) > "the range of potential outcomes for the year as a whole has widened since year-end" This international real estate services group is currently one of the higher-scoring shares in my dividend screening results. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/svs-screen-score-190523.png) Savills scores 72/100 in my dividend screen (19/05/23) I looked at Savills' impressive long-term record in an [in-depth review in December](https://www.rolandhead.com/dividend-shares/savills-is-this-property-firm-a-good-dividend-share/), so I'd recommend starting there for a more detailed discussion of this business. This week's trading update was seen by some commentators on Twitter as a profit warning in disguise. > [#SVS](https://twitter.com/hashtag/SVS?src=hash&ref%5Fsrc=twsrc%5Etfw&ref=rolandhead.com) warns…but in classic estate agent speak🙄 [https://t.co/eYhhL6JyYr](https://t.co/eYhhL6JyYr?ref=rolandhead.com) [pic.twitter.com/76ol41jzwc](https://t.co/76ol41jzwc?ref=rolandhead.com) > > — Rhomboid1🇺🇦 (@rhomboid1MF) [May 17, 2023](https://twitter.com/rhomboid1MF/status/1658717573012234240?ref%5Fsrc=twsrc%5Etfw&ref=rolandhead.com) I've got some sympathy with this view. I think this week's AGM update contained some pretty clear hints that the rest of the year could be more difficult than previously hoped for. **Trading commentary:** management says that global capital transaction volumes so far this year have been *"at the lowest levels seen for a decade"*: > "this has clearly impacted the Group's Commercial transaction business in the early part of the year" Profits from commercial property transactions fell by 38% to £33.4m in 2022\. I wonder if an even larger fall is likely this year? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/svs-fy22-commercial-adv-profit.png) Source: Savills FY22 presentation Fortunately, prime residential transactions are said to have held up better, although volumes are lower than last year. Despite its diversification in recent years, Savills' largest business is still *"transaction advisory" –* or what most of us would call estate agency. This slide from the 2022 results presentation shows how profits from this business slumped last year. A further fall seems likely this year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/svs-fy22-segments-slide.pdf-1.png) Source: Savills FY22 presentation Fortunately, Savills leasing and non-transactional businesses are said to be performing better. **Outlook:** the outlook for the remainder of the year does not seem very positive to me: > "In the year to date, global commercial investment volumes have either reached or approached their lowest levels in many years. As a result, at this early stage, the range of outcomes for the year as a whole has widened..." The timing of a recovery is *"impossible accurately to predict"*, but... > "we remain optimistic that markets will start to improve in the second half and we are seeing early signs of this in some areas. Confidence in the ongoing recovery and level of transactional velocity through the latter part of the year will be key to supporting our view that 2024 will show transaction volume growth in most markets." I think it's hard to avoid the conclusion that management are simply keeping their fingers crossed that things will improve soon enough to prevent a profit warning. I'm not entirely convinced. However, this slump may give Savills – which has a strong balance sheet – an opportunity to acquire businesses and key personnel at attractive prices: > "In the meantime, we continue to pursue opportunities to develop our business both through targeted recruitment and selective acquisition." **My view:** as I've discussed in recent coverage of **[British Land](https://www.rolandhead.com/dividend-notes/value-or-not-blnd-expn-bt-a/), [Tritax Big Box](https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/)**,and **[Derwent London](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/)**, it's not clear to me how close we are to the bottom of the commerical property slump. However, the collapse in commercial transaction volumes suggests to me that markets have not yet adjusted to the reality of higher interest rates. My feeling is that there's an element of denial at work, with market participants hoping that rates will quickly reverse. Personally, I'm not sure that's likely. I note that financial firm TP ICAP ([above](#tp-icap-tcap)) also expects interest rates to remain high for at least the rest of this year. What does seem clear to me is that Savills' shares look quite cheap on a historic view. In situations like this, I like to use the CAPE ratio. This modified P/E ratio compares the current share price with 10-year average earnings. It can be a useful tool for working out when cyclical businesses are cheap on a through-cycle view. According to SharePad data, Savills' CAPE of 10.8 is the lowest seen since 2011\. The shares are not quite at the distressed level seen in 2008, but I think they're certainly cheaper than they've been for a decade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/svs-cape-1980523.png) **Broker forecasts price the stock at 12 times 2023 forecast earnings, with a 3.8% dividend yield.** City analysts are still pricing in a recovery in earnings in 2024 that could push the forecast P/E down to 10x. I don't know how likely this is. But I think that at c.900p, Savills shares are probably getting down to a level where they offer value as a long-term buy. Mind you, the stock traded as low as 750p in September last year. That price would lift the dividend yield to nearly 4.5%. A better opportunity could be just round the corner. Or perhaps the optimists are right, and the current slowdown will pass without too much pain. I don't know. But I remain positive about the long-term outlook for this market-leading business and might consider buying at current levels. --- ### Smiths Group (SMIN) > "Continued strong growth and increased FY2023 guidance" Smiths Group is a engineering conglomerate that owns four fairly specialised businesses. Products include airport security scanners and electronic components used in figher jets, for example. The company's [website has more information](https://www.smiths.com/what-we-do?ref=rolandhead.com). In amongst the gloom and uncertainty, it's good to see a UK industrial company upgrading its guidance for the year. In fact, it's Smith's third consecutive upgrade. Friday's Q3 trading update covered the nine months to 30 April. Management say that the strong trading seen in H1 has continued, triggering an upgrade to full-year guidance: > "we are raising FY2023 guidance to around 10% organic revenue growth with moderate margin improvement." This guidance follows an upgrade to *"8% organic revenue growth"* in March and *"at least 7%"* in January. The company's original guidance for the current year (ending 31 July) was *"4%-4.5% organic revenue growth with moderate margin improvement"*. This success perhaps isn't such a surprise though, if you consider that core market sectors for the firm include oil and gas, aerospace and airport security. All of these markets have benefited from increased activity levels over the last year. **My view:** Smiths' share price is unchanged at the time of writing on Friday, suggesting that a strong results was already priced into the stock. Broker consensus forecasts suggest earnings of 90.6p per share, with a dividend of 42.3p. That's equivalent to a P/E of 19 and a 2.5% yield. That may not seem obviously cheap, but this business has generated consistent double-digit operating margins in the past (until 2020). Based on the improving performance trend suggested by the results, I don't think the shares are necessarily too expensive. However, past accounts have showed quite high levels of adjustment. I'm also a little wary that the sector tailwinds Smiths has benefited from over the last 12 months could ease – or at least normalise – over the coming year. I'll probably wait for the full-year results and FY24 guidance before looking at this business again. But it's certainly a company that's on my radar as a possible long-term buy at the right price. --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: value or not? BLND, EXPN, BT-A URL: https://www.rolandhead.com/dividend-notes/value-or-not-blnd-expn-bt-a/ Last updated: 2023-05-27T07:10:00.000Z Welcome back to my dividend notes. The theme of this post seems to be value – or the lack of it. Let me know what you think. ### Companies covered: - [**British Land (LON:BLND)**](#british-land-blnd) \- the FTSE 100 REIT has reported a big slump in property values but looks fairly safe and probably cheap, in my view. - **[Experian (LON:EXPN)](#experian-expn)** \- this financial information specialist delivered a solid if unspectacular performance last year. I like the business, but it's too expensive for me at current levels. - **[BT Group (LON:BT-A)](#bt-group-bt-a)** \- this FTSE 100 stalwart can't stem the cash outflows. Debt rose again last year and the dividend looks unaffordable to me – although I suspect it will continue. One to avoid, in my view. --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### British Land (BLND) > "we have delivered a good operational performance despite the challenging macroeconomic backdrop" British Land is one of the UK's biggest listed REITs, with FTSE 100 membership and a market cap of £3.5bn. Its portfolio is broadly split between prime London office space and major retail parks and multi-use sites, although the company is now diversifying somewhat. You can find full retails of [British Land's portfolio here](https://www.britishland.com/our-places?ref=rolandhead.com). These full-year results show a sharp fall in asset values last year, but a more resilient rental performance. While I have some concerns, I can't help but feel the shares probably offer decent value at the current price of c.360p. **Financial highlights:** here's a brief summary of some of the main financial metrics from the year ended 31 March 2023. The company's letting performance appears to have been quite strong: - Underlying profit up 6.9% to £264m *(essentially, this is profit from rental income, excluding the impact of valuation changes)* - Underlying earnings per share up 4.8% to 28.3p - Dividend per share up 3.3% to 22.64p, maintaining >1.2x cover by underlying earnings - Estimated Rental Value (ERV) of portfolio up by 2.8% However, British Land's portfolio of profits suffered a sharp loss of value last year: - EPRA net tangible asset value down 19.5% to 588p per share - Statutory net assets down 18.4% to £5,525m - Statutory **loss** after tax of £1,039m (FY22: after-tax **profit** of £965m) – *this loss mainly reflects the impact of valuation changes* - Loan-to-value (LTV) ratio up at 36% (FY22: 32.9%) Higher interest rates mean that property values must fall and/or rental income must rise in order to allow landlords to make a profit. It's not yet clear where this balance will settle, although British Land says it's seeing *"early signs of yield compressions for retail parks"*. **What could go wrong?** I can see two main risks for equity holders. **Property values:** One is that the value of British Land's properties could continue to fall until its loan-to-value ratio breaches lenders' covenants. According to the company, the group could withstand a further 36% fall in values across the portfolio *"prior to taking any mitigating actions"*. A further fall on this scale seems unlikely to me, given the quality of the group's properties. **Dividend cut:** the other risk is that rental income will not rise quickly enough to cover higher financing costs. This could result in a reduction in the cash profitability of the business and lead to a dividend cut. There are a lot of moving parts here. But we do know that the British Land has a weighted average interest rate of 3.5% at present, with 97% of debt hedged for the year to 31 March 2024\. Beyond this, *"76% of projected debt is hedged on average over the next 5 years"*. The impact of higher interest rates will hit big corporate borrowers like British Land gradually, as their debt portfolio gradually rolls over. My feeling from making rough estimates is that the weighted average rate could rise to at least 4.5% without any serious risk to the dividend. I should emphasise this isn't a detailed or reliable calculation, just a guesstimate. But it's one factor informing my view on this stock (and sector) at the moment. **My view:** equity investors can buy £1 of British Land assets for 61p at the time of writing. Although I can't rule out the risk that asset vales will fall further, I'm fairly confident that the shares do offer some value at current levels. I think British Land offers an opportunity for investors to benefit from a revaluation closer to NAV over the next few years. In my view, the 6% yield looks *reasonably* safe too, although I would probably price a small cut into any models to be prudent. On balance, I see British Land as a buy for value at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Experian (EXPN) > "We delivered very strong results in FY23, reflecting a combination of new business wins, new products and expansion into higher growth markets" Experian is known as a credit reference agency in the UK, but prefers to style itself as *"the global information services company"*. This is a business I view as a high-quality compounder, but I've always struggled with the valuation. These results don't do much to change that view. Last year saw revenue rise by 5% to $6,619m, while pre-tax profit fell by 19% to $1,174m. My calculation suggests free cash flow excluding acquisitions fell to $960m last year (FY22: $1,324m), so there's good alignment with profit. Management prefer a more heavily adjusted 'benchmark EBIT' figure, which last year excluded more than $500m of (mostly) non-cash charges. However, given the free cash flow alignment, I prefer to rely on statutory profits. Trading appears to have been fairly strong, with organic revenue growth of 7% on a constant currency basis. Revenue from business customers rose by 6%, while consumer revenue was 11% higher. Experian says it how has 168 million free consumer members globally. I'm not sure how many paid consumer customers there are, although of course I imagine the data provided by free customers probably feeds into services that are sold to business customers. Experian's profitability remains strong, although down slightly from last year. The company reports a Benchmark EBIT margin of 27.4% and ROCE of 16.5%. My sums, based on statutory profits, give an operating margin of 19.1% and ROCE of 14.5%. Net debt of $4bn equates to 1.8x EBITDA or four times free cash flow. I don't see much to worry about, given the profitability and cash generation of the business. **Outlook:** the company expects to see organic revenue growth of 4-6% during the coming year, with *"modest margin improvement"*. Broker forecasts ahead of the results suggested adjusted earnings of $1.46 per share, putting the stock on a forecast P/E of 23 with a 1.9% dividend yield. **My view:** I haven't been through Experian's results in any detail, because it's not really priced at a level where I'd consider investing. My calculations suggest Experian is trading on a FCF/EV yield of 2.9%, with an EBIT/EV yield of 3.6%. While this might not be an outrageous valuation for a high-quality business, it's not cheap enough for me. However, my view of this business as a buy-and-hold investment remains positive. If the dividend yield rose to somewhere above 2%, I might consider buying. --- ### BT Group (BT-A) > "We have delivered our outlook for FY23" In these dividend notes I'm trying to focus on companies I have at least some interest in owning. But I couldn't resist the lure of looking at BT's latest results. The telecom group's latest numbers triggered a 5% slump in the firm's already battered share price. It's not hard to see why. **Financial highlights:** BT's revenue fell by 1% to £20,681m last year, while the group's pre-tax profit dropped 12% to £1,729m. By my reckoning, revenue has now fallen every year since 2017. BT's net financial debt rose by £1.3bn to £13.5bn, for reasons I'll explain shortly. The operating margin of 12.7% and return on capital employed of 6.3% were almost unchanged from last year. While the operating margin looks reasonable, I would guess that ROCE of 6% is barely enough to cover the group's cost of capital. In other words, BT may be running to stand still. One bright spot was that net cash inflow from operating activities rose by 14% to £6,724m. However, most of this was swallowed up by capital expenditure of £5,056m. Excluding spectrum, this figure was 5% higher than last year. The dividend was held unchanged at 7.7p, giving a 5.5% yield. **Operating highlights:** chief executive Philip Jansen says that *"Openreach is competing strongly and it's clear that customers love full fibre"*. They probably do. But while customers are signing up for full fibre services, they're also abandoning their legacy copper lines. Meanwhile, competition from altnet fibre networks is increasing. As a result, BT's pricing power does not seem to be improving – hence another year of falling revenues. **Free cash flow & dividend:** BT's normalised (adjusted) measure of free cash flow fell by 5% to £1,328m last year. This was at the lower end of the company's guidance, but even so, I don't think it tells the full story. Looking through the cash flow statement, my sums suggest that BT suffered a free cash outflow of c.£290m last year, *before* payment of the £751m dividend. In other words, a cash outflow of c.£1,040m in total. This also aligns with the £1.2bn increase in net financial debt last year. The outflow was driven by the £994m pension deficit contribution and the additional £700m of capex last year. But we could also argue that the outflow was also driven by a dividend that remains unaffordable, given the company's spending commitments. Paying dividends out of borrowed money makes no sense to me, given the other priority demands on the company's cash flows. But I'd imagine the payout might continue for a while yet, to prevent ructions amongst the group's shareholders and any further share price collapse. **Pension**: BT's pension deficit rose by £2bn to £3.1bn last year, *despite* the company paying £1bn into the scheme. The company says that the increase in the deficit was linked to *"negative asset returns mainly due to higher real gilt yields".* However, I think there's a second factor we need to consider. Borrowing the method used by my friend and [podcast partner](https://www.rolandhead.com/podcast/) Maynard Paton, I looked up the annual benefits paid by BT's pension scheme. We don't have this year's annual report yet, but in FY21 and FY22, annual benefits paid totalled about £2.8bn. Today's results show that BT's pension scheme assets were valued at £38.7bn at the end of March 2023\. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bt-pensions-fy23.png) Paying out £2.8bn sustainably from £38.7bn of assets would require a 7.2% return. That seems unlikely to be achievable with typical pension scheme assets such as government bonds. For this reason, I suspect BT's pension scheme is likely to remain a cash black hole. Forecasts in last year's annual report show cash contributions of at least £600m per year until 2030, with a provision for additional contributions if needed. **My view:** BT looks uninvestable to me. I don't think there's much likelihood that the company will create any value for shareholders for the foreseeable future. For investors wanting a reliable 5.5% dividend yield, I think there are many better choices elsewhere. --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: reliable performers - RNWH, BVIC URL: https://www.rolandhead.com/dividend-notes/reliable-performers-rnwh-bvic/ Last updated: 2023-05-27T07:10:33.000Z Two solid performers with very different business models have issued interim results today. Both firms score quite well in my [dividend screen](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) and are stocks I'd consider owning at the right price. ### Companies covered: - **[Renew Holdings (LON:RNWH)](#renew-holdings-rnwh)** \- a solid set of half-year results from this specialist construction group, showing strong returns and free cash flow. I'm impressed, but slightly outpriced at the moment. - **[Britvic (LON:BVIC)](#britvic-bvic)** \- a good performance, with improved profit margins and a modest recovery in volumes during the second quarter. The shares look up with events to me at the moment, but I remain attracted to this business. --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Renew Holdings (RNWH) > Continued outperformance and strong organic growth; Board confident in its full year expectations I mentioned this specialist infrastructure construction group in [my recent in-depth review of **Morgan Sindall (MGNS)**](https://www.rolandhead.com/dividend-shares/is-morgan-sindall-a-dividend-share-to-buy-now/). While Renew's dividend yield is a little low for me at the moment, I've been impressed by the apparent quality and dividend track record of this business. Renew Holdings also scores well in my dividend screening results, with a score of 76 out of a possible 100: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/rnwh-screen-score-160523.png) Today's half-year results cover the six months to 31 March 2023 and show further progress. **Financial highlights:** Revenue for the half year rose by 13.9% to £471.8m, while pre-tax profit for the period was 20.9% higher at £26.3m. Free cash flow for the half year was £19.0m, giving a 95% cash conversion rate from after-tax profits of £20.0m. Shareholders will receive an interim dividend of 6p, an increase of 5.8%. Profitability and cash conversion are strengths of this business. While operating margins are relatively low – 5.7% for the half year – Renew's capital-light operations means it generates high returns on capital employed. I calculate a trailing 12-month ROCE of 32.3% from these results – an excellent figure. Renew ended the half-year with net cash of £17m, excluding lease liabilities. **Operating highlights:** the company's focus is on regulated markets with clear long-term spending commitments and multi-year contracts. Major markets include roads, rail, nuclear power and water. During the half year, Renew secured new rail framework contracts with Wales & Western for the 2024-2029 regulatory control period (CP7) and continued to see good opportunities in highways and water. Management also reported continued organic growth in the group's aviation business, which has a contract to provide electro-mechanical and civil engineering services at Manchester Airport. In nuclear power, Renew contiues to operate on a number of long-term frameworks at Sellafield and has recently secured further positions. The group has worked in UK civil nuclear facilities for 75 years and says that decommissioning spend at Sellafield could top £90bn over the next *120* years. Renew is also aiming to develop relationships outside Sellafield and believes new opportunities could arise if the the UK builds new nuclear power stations as part of its net zero strategy. **Outlook:** trading is said to have started well in the second half. Management remain confident that the full year will be in line with expectations. Although inflationary headwinds continue, Renew says that its variable cost-plus contracts help mitigate cost pressures. Broker consensus forecasts suggest earnings of 57.4p per share and a dividend of 18.2p this year. That prices the stock on 13 times forecast earnings, with a 2.5% yield. **My view:** annualised free cash flow of c.£40m gives Renew shares a free cash flow yield of around 7%. That's not unattractive in my view, for a business that's also generating 30%+ returns on capital employed. I continue to think Renew Holdings looks like a rare quality business in a sector that's known for low margins and mishaps. The shares have rallied strongly since November and are currently trading at c.730p. However, the share price chart suggests regular bouts of volatility and the stock traded as low as 550p in October last year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/rnwh-2y-chart-160523.png) I wouldn't be surprised to see further opportunities to buy over the coming year. I'll continue to watch Renew with interest. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Britvic (BVIC) > "Consumer demand for our brands remains strong - Q2 volumes in growth" This soft drinks group is well known for [brands](https://www.britvic.com/our-brands/?ref=rolandhead.com) such as *Robinsons*, *Fruit Shoot*, *J2O* and *Tango.* It also produces PepsiCo brands such as *Pepsi, 7UP* and *Lipton Ice Tea* under licence in the UK. Britvic is the largest supplier of branded still drinks in the UK and the second-largest supplier of carbonated branded drinks. In addition, Britvic has direct operations in France and Brazil and sells through franchises and exports into many other countries. In the years directly before the pandemic, Britivic was going through a period of elevated capital expenditure to invest in its operations. The pandemic then hit, resulting in a big reduction in out-of-home sales. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bvic-capex-opprofit-160523.png) Inflation has added extra pressures but in broad terms, I think the business is back to normal now and should be demonstrating its defensive qualities. Let's see if the firm's half-year results support this view. **Financial highlights:** Britvic's latest accounts cover the six months to 31 March 2023\. They suggest a decent start to the year, with increased sales and improved profit margins. Revenue for the half year rose by 7.9% to £794m, while operating profit was up 21.5% to £80.7m. That equates to a margin of 10.2%, up from 9.3% during the same period last year. Earnings rose by 22.3% to 21p per share, while the interim dividend was increased by 5.1% to 8.2p per share. My sums suggest Britvic achieved a healthy return on capital employed of 17.6% over the last 12 months – an attractive performance. Net financial debt adjusted for hedges rose to £593m, compared to £533.8m at the same point last year. Some seasonality is normal in this business as Britvic builds inventories for the busy summer season. This cash outflow then unwinds during the second half of the year – net debt fell by £59m during H2 last year, for example. However, management appears to expect the cash performance of the business to improve over the next 12 months. In addition to the 5% dividend increase, they've commences a further £75m share buyback to run over the next 12 months. My sums suggest this buyback and the full-year dividend will cost at least £150m. That would exceed last year's free cash flow of £129m. With leverage at 2.2x EBITDA, I would prefer to see shareholder returns running below free cash flow, to allow some room for debt reduction as well. I don't think this is a dangerous situation, but Britvic is slightly more geared than I'd like to see. **Operating highlights:** Price rises linked to inflation mean that most businesses are reporting rising revenue, even if volumes are falling. Britvic does provide some clarity on this. The company says volumes fell modestly during the first half of the year, but rose by 0.6% during the second quarter. This suggests to me that the company's decision to go early with price increases this year could pay off, as customers return to more normal buying habits during the summer season. In brand terms, *Pepsi MAX* and *Tango* were said to be standout performers in H1\. *Robinsons* products were relaunched to promote new flavour concentrate products. **Outlook:** Britvic did not explicitly confirm that it expects to meet expectations this year, but in his outlook statement, chief executive Simon Litherland said he was confident of further progress *"this year and into the future"*. I think it's reasonable to interpret these results as being in line with forecasts, which suggests Britvic shares are currently trading on 16.5x forecast earnings, with a prospective dividend yield of 3.2%. **My view:** Long-term shareholder returns at Britvic have been attractive, outperforming the FTSE 250 over the last 18 years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bvic-vs-mcx-all-chart-160523.png) BVIC (black) vs FTSE 250 (blue) In terms of valuation, last year's free cash flow of £129m gives the stock a free cash flow yield of 5.4%. That seems up with events to me, for a business whose operating profit has risen by an average of 5.8% per year over the last decade. Looked at differently, Britvic's 10yr average dividend growth rate is 5%. Add this to the current yield of 3% and I get an expected total return of 8% per year. That's in line with the long-term average from the UK market. I'd prefer to buy at a slightly lower valuation, given the single stock risk (versus the index) and Britvic's current leverage, which is slightly higher than I'd like to see. Having said that, Britvic is certainly a stock I could see myself owning if a suitable opportunity arose. --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: a fair price for quality? DPLM, BBOX URL: https://www.rolandhead.com/dividend-notes/a-fair-price-for-quality-dplm-bbox/ Last updated: 2023-05-27T07:11:16.000Z Welcome back to my dividend notes. Today I've covered two companies, both of which could of interest to me as income investments. ### Companies covered: - **[Diploma (LON:DPLM)](#diploma-dplm)** \- I'm a fan of this buy-and-build business, which is also a Fundsmith shareholding. Strong H1 trading has prompted management to inch up full-year guidance. Not cheap, but a quality stock, in my view. - **[Tritax Big Box REIT (LON:BBOX)](#tritax-big-box-reit-bbox)** \- One of the larger UK REITs, currently with a useful 5% yield. However, the logistics sector overheated during the pandemic and I think there's still some risk over financing costs and asset values. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Diploma (DPLM) > "Strong first half, upgrading full year guidance" Diploma is an industrial group operating in three sectors - controls, seals and life sciences (medical equipment). Customer sectors include healthcare, aerospace, defence and energy. Interestingly, Diploma's [history](https://www.diplomaplc.com/about-us/company-history/?ref=rolandhead.com) is in some ways similar to that of [Spirent Communications, which I looked at in more depth over the weekend](https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/). Both of these UK businesses were founded in the 1930s and have restructured to focus on higher-growth sectors over the last 20 years or so. However, Diploma's more consistent growth has resulted in far superior shareholder returns. The stock has been a 39-bagger over the last 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/dplm-vs-spt-20yr-chart-150523.png) DPLM share price (black) vs Spirent (blue) In my view, Diploma is a high-quality business. I'd like to own the shares, but the firm's attractions are hardly a secret and the valuation has prevented me from buying in recent years – rightly or wrongly. Today's half-year results cover the six months to 31 March 2023 and contain an upgrade to full-year profit guidance. However, the shares have only gained 2% at the time of writing, suggesting the good news was already in the price. Let's take a look. I've also included a brief overview of the business below to help me build a reference point for when I next look at this stock. **Financial highlights:** Revenue rose by 30% to £582.8m during the half year. Excluding the impact of acquisitions and foreign exchange, organic revenue was 10% higher. Operating profit for the period rose by 59% to £92.5m, giving an operating margin of 15.8%. This was converted into £52.8m of free cash flow. Adjusted earnings rose by 26% to 59.1p per share, while the interim dividend was lifted 10% to 16.5p per share. Net debt fell to £154m with the benefit of £233m of cash generated from the recent placing (some was also used to fund an acquisition). **Operating summary:** Diploma is continuing to diversify in order to drive growth and reduce its dependency on individual market sectors. **[Controls](https://www.diplomaplc.com/about-us/our-sectors/controls/?ref=rolandhead.com)** (revenue +13% to £278.8m):the group's largest division generated 63% of operating profit during the first half and boasts 20%+ operating margins. Products include wiring, connectors, control devices and other elements for *"technically demanding applications"*. Key customers are aerospace, defence and energy. About half of all controls revenue comes from [Windy City Wire](https://www.smartwire.com/?ref=rolandhead.com), which maintained double-digit sales growth in H1\. **[Seals](https://www.diplomaplc.com/about-us/our-sectors/seals/?ref=rolandhead.com)** (revenue +8% to £198.4m): the seals business supplies products that are typically used in heavy mobile machinery and fluid power products. In other words, expensive machines that can be immobilised for want of a replacement seal. Diploma's customer offering is built around service quality as well as product quality, offering high stock availability and fast deliveries. Seals generated 32% of operating profit at a margin of just under 15% in H1\. Management report strong trading in North America, the UK and Australia. **[Life sciences](https://www.diplomaplc.com/about-us/our-sectors/life-sciences/?ref=rolandhead.com)** (revenue +4% to £105.6m): this business supplies a range of consumables and equipment to healthcare customers. It generated an operating profit of £16.7m at a margin of 15.8% during H1. The company says growth is recovering after the pandemic caused a reduction in routine surgical and operating procedures. I've seen similar comments from other healthcare businesses, so don't have any reason to doubt this. Management describe an *"exciting outlook"* as governments act to address healthcare backlogs and increase funding of capital projects. **Outlook:** management say the second half has started positively, although they warn that last year's strong Q3 performance will make for a tough comparison. Diploma has issued the following updated full-year financial guidance today: - Organic revenue growth of c.7% with a further c.7% growth from acquisitions (previously "mid-single digit and c.6% respectively) - Adjusted operating margin at c.19% (previously 18%-19%) - Free cash flow conversion of 90%, reducing leverage to under 0.4x, excluding any further acquisitions **Acquisitions:** Diploma is something of a buy-and-build story, making regular smallish acquisitions to diversify its products and gain market share. Since September 2022, the group has acquired eight businesses for a total of £98m. The largest of these was Tennessee Industrial Electronics, for £76m. So we can see the remainder were fairly small and should be easily integrated. A quick inspection of the company's historic returns on capital and operating profit growth suggests to me that the majority of acquisitions have indeed added value. But I'd want to do more research into these numbers before considering a purchase: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/dplm-opprofit-roce-150523.png) **My view:** I'm attracted by Diploma's strong history of growth and high profitability and apparent track record of successful expansion. The company's reported a return on average tangible capital employed (ROATCE) of 17.8% for the half year. My more conservative and unadjusted measure of ROCE suggests a trailing 12-month (TTM) figure of 16.9% – still an attractive result. In terms of valuation, I estimate a TTM EBIT yield of about 4.4% and a trailing free cash flow yield of just under 5%. Current earnings forecasts suggest a P/E of about 25, with a dividend yield of c.2%. These numbers are slightly above what I'd want to pay, especially as I'm looking for dividend income. But I see Diploma as a quality stock for which I would pay some premium. These shares have traded as low as 2,090p over the last 12 months. If Diploma fell back towards that level again, I would certainly take a closer look. --- ### Tritax Big Box REIT (BBOX) > "We continue to make positive progress delivering our strategy despite a more challenging economic backdrop." The structure of most REITs means they're optimised for income and may be unlikely to deliver much capital growth. But I still have some interest in this sector as a potential source of reliable high yields. Tritax Big Box is one of the larger UK REITs focusing on logistics property – warehouses. This is a sector that became somewhat overinflated during the pandemic, in my view. However, the BBOX share price has now returned to pre-pandemic levels, having fallen by 40% from its pre-pandemic highs. With the stock now trading below its Dec '22 net asset value of 179.25p per share, is this £2.7bn REIT starting to offer value? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bbox-shareprice-nav-150523.png) **Trading update:** today's covers the calendar year to date. - Occupational demand said to remain healthy, with 6.6m square feet taken up in Q1, in line with a five-year average of 6.8m sq ft - *"Prime headline rents"* have increased across all regions, typically by 2%-3% - £150m of disposals so far this year, in line with Dec '22 valuations. An additional £100-£200m of sales targeted for 2023 - Recent acquisition of Junction 6 Industrial Park (near Birmingham) for £58.5m. This is an urban logistics estate, potentially a stronger market at present than out-of-town big box locations. This purchase was priced to give a net initial yield of 4.5%, with an opportunity to increase this to 6.7% as lease renewals become due over the next 2.5 years. - Average remaining lease length to expiry is 12.4 years **Balance sheet/debt:** REITs are essentially a financial structure created to arbitrage institutional funding costs with commercial rents and produce an income for shareholders. The recent sharp rise in interest rates and the risk of an economic slowdown has changed the calculation, triggering a fall in commercial property values. The financial metrics today appear healthy enough to me as they stand now: - Debt fixed at an average rate of 2.6% with a five-year average maturity. Earliest refinancing December 2024 - Loan-to-value at end Q1 2023 of 30.0% - 6%-8% yield on cost expected for new schemes currently under development - £600m of available liquidity at end Q1 2023 For potential REIT investors like me, there are three key questions: - will occupier demand and rental rates for the REIT's property portfolio remain stable? - do property valuations have further to fall? (BBOX's NAV fell by -19% in 2022) - what interest rates will BBOX have to pay when it refinances its current debts? **Together, these factors will determine whether the BBOX dividend remains safe.** **My view:** Right now, I'm not sure anyone really knows the answers to these questions. I don't, at least. However, my feeling is that some of the better-quality REITs, with modern property and lowish LTV ratios are starting look potentially attractive. I think Tritax Big Box *could* be a good example of this. If the company's current guidance and trading performance is sustainable, then my rough sums suggest that the current dividend could remain supportable. In this case, I suspect the main risk might be that occupier demand falls below expectations over the next 12-18 months as fresh supply comes on the market. The logistics property sector got quite overheated during the pandemic. This leaves me wary about the risk of a corresponding hangover as market conditions rebalance. Even so, if I was looking for a pure income investment, I think that earning a 5% dividend yield on a portfolio of modern warehouse property might not be a terribly bad idea. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Is Spirent Communications a quality compounder? URL: https://www.rolandhead.com/dividend-shares/is-spirent-communications-a-quality-compounder/ Last updated: 2023-05-27T07:07:48.000Z My dividend portfolio is a mix of slower-growing high yielders and stocks with lower yields that I believe can deliver above-average long-term growth. This week I'm looking at a company I hope could fit into the latter category – a possible quality compounder. The company in question is FTSE 250 tech group Spirent Communications. This is a £1.1bn electronics and software business that provides [test and assurance solutions](https://www.spirent.com/solutions?ref=rolandhead.com) for network operators. Right now, Spirent's growth is being driven by the global rollout of 5G mobile, which the company describes as *"the enduring driver"* Spirent's profits have risen by an average of around 20% per year since 2017\. It's debt free and boasts double-digit profit margins. The company's record in recent years suggests to me that it could have decent compounding potential. But the shares have sold off hard since the start of this year, leaving Spirent's P/E ratio at its lowest level since 2008: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-pe-sp-opprofit-110523.png) Spirent Communications is currently one of the higher-scoring stocks in my [quality dividend share screen](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). | **Spirent Communications(LON:SPT)** | **Quality Dividend score: 70/100** | **Forecast yield: 3.5%** | | ----------------------------------- | ---------------------------------- | ------------------------- | | Share price: 179p | Market cap: £1.1bn | *All data at 11 May 2023* | The shares currently offer a dividend yield at the top end of the company's historic range. I'm wondering if this could be an opportunity for me to buy a quality stock at a reasonable price. **In this piece I'm going to consider whether Spirent Communications could be a suitable share to [replace Direct Line Insurance](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/) in my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/).** --- *Before I start, just a quick note to share that I've expanded my coverage of dividend stocks recently in a new *[dividend notes](https://www.rolandhead.com/tag/dividend-notes/)* format. This looks at newsflow from dividend shares I don't currently own, but which are in my investable universe and of interest to me.* I [covered Spirent's Q1 update](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/) in my dividend notes on 4 May. Over the last week, I've covered: - Tue 9: [warnings and uncertainty - Victrex, Direct Line Insurance and Marshalls](https://www.rolandhead.com/dividend-notes/warnings-and-uncertainty-vct-dlg-mslh-09-05-23/) - Wed 10: [no recession here - Custodian REIT, Compass Group and H&T Group](https://www.rolandhead.com/dividend-notes/no-recession-here-crei-cpg-hat-10-05-23/) - Thurs 11: [big spenders - Airtel Africa and Grainger](https://www.rolandhead.com/dividend-notes/big-spenders-aaf-gri-11-05-23/) - Fri 12: [underrated quality/full price - Macfarlane, RECI and Beazley](https://www.rolandhead.com/dividend-notes/underrated-quality-full-price-macf-reci-bez/) Let's move on and take a more in-depth look at Spirent Communications. --- ### Table of contents - [History](#history) \- few traces remain of the original business founded in 1936 - [Business overview](#business-overview) \- making 5G networks hum - [Long-term performance](#disappointing-long-term-performance) \- disappointing - [Quality niggles](#quality-niggles) \- signs of short-term thinking? - [Recent trading & 2023 outlook](#recent-trading-2023-outlook) \- a mixed picture - [Conclusion](#conclusion-not-for-me) \- not for me? ### History On paper, Spirent's [history](https://corporate.spirent.com/company/our-history?ref=rolandhead.com) is a tale of British innovation and engineering that stretches back to 1936\. In reality, not so much. The company we see today is largely a product of multiple restructurings and M&A activity over the last 25 years. The only real constant through the group's history is that it's always been involved in electronics. Here's a quick timeline to set the scene: - **1936**: Jack Bowthorpe founded Goodcliffe Electrical Supplies in London with £2,000\. Goodcliffe's aim was to find and fill niches in the electric and electronic market – a strategy that continued until the 1990s. - **1955**: the group enjoyed success with wiring products for aircraft during WWII and expanded significantly. In 1955, Bowthorpe, as it was then called, listed on the London Stock Exchange. - **1978**: following Bowthorpe's death, Goodcliffe's first employee, Ray Parsons, became chairman. He led the firm on a journey to become a diversified conglomerate, albeit still with a focus on niche products. - **1997**: Bowthorpe had more than 100 subsidiary companies by the mid-90s, but in 1997 the group decided to change its strategy to focus on high-tech markets with strong growth potential. Communications test and assurance was identified as a likely market and a new round of acquisitions began. At the same time, the group began to sell some of its older subsidiaries. - **2006**: Bowthorpe renamed to Spirent in 2000 and then to Spirent Communications in 2006\. At this stage the business reorganised into two core divisions, performance analysis and service assurance. A third, non-core division making motor controllers for electric vehicles remained until 2013, when it too was [sold to US group Curtiss-Wright](https://www.cw-industrial.com/en-gb/about/legacy-brands/pg-drives-technology?ref=rolandhead.com). - **2013:** the company *"embarked on a fresh long-term growth strategy, reorganizing under new leadership"*. Investment was increased in product development, with R&D spend rising from c.$80m per year to over $100m according to SharePad data. ### Business overview Spirent's current business is divided into two divisions. **Lifecycle service assurance:** the company says it is a *"global leader"* in lab-based testing solutions for 5G networks and Wi-Fi devices. Spirent's products are said to provide *"actionable insights and automated troubleshooting to radically simplify turn-up and assurance of 5G networks and services, reducing time and cost."* So in short, this business is about providing hardware and software tools for network operators to setup and fine tune 5G networks to make them run as reliably as possible. **Networks & Security**: this business is focused performance testing high-speed data networks and navigation satellite systems. The company says it's focused on opportunities in positioning, navigation and timing. These are all increasingly important areas - modern computer systems are increasingly distributed (located in multiple places), location aware and operating in real time. This combination creates many challenges that didn't really exist 30 years ago. **Core & growth markets**: the global rollout of 5G networks remains the key driver of Spirent's profits. But the company is also targeting other complementary areas of technology such as edge computing, Open RAN and high-speed 800G Ethernet deployments. One sector being targeted (and included in executive's bonus targets) is the hyperscaler market. This is a reference to large cloud service providers such as Amazon AWS and Google Cloud. This seems a logical choice to me, given the scale, complexity, and broad geographic footprint of these highly-networked operations. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Disappointing long-term performance Spirent's performance since 2016 has been fairly impressive, in my view: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-rev-profit-opmgn-roce-120523.png) The company's focus on 5G tools seems to have paid off, with operating margins rising and return on capital employed topping 20%. However, a true compounder needs to deliver over much longer timeframes. And here, Spirent disappoints. Looking back over Spirent's long-term performance as a listed company, what strikes me is that the company's strategy shifts in 1997, 2006 and 2013 were followed by multi-year slumps in profit: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-pbt-eps-120523-1.png) Perhaps the company's management at these times rescued it from imminent problems that weren't apparent in its reported profits. But what the chart tells me is that pre-tax profit today is lower than it was 25 years ago. I think that one way to interpret this chart would be to suggest that each time Spirent's management have had a bright new idea for growth, they've actually set the business back several years. Having said that, anyone buying the shares in 2003 – after the TMT crash – could have done well over the last 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-mcx-20y-chart-120523.png) However, share price returns over the last decade – since the 2013 restructuring – have merely matched the FTSE 250, but with far greater volatility: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-mcx-10y-chart-120523.png) I wonder what this business might be worth today if it had stayed with its original strategy of focusing on niche electronics. ### Quality niggles In fairness, Spirent's current CEO, Eric Updyke, only took the reins in 2019 and was not responsible for the 2013 rejig. I do also believe that the company's current strategy, if well executed, should have the potential for long-term profitable growth and market leadership. However, my review of [Spirent's board of directors](https://corporate.spirent.com/company/board-of-directors?ref=rolandhead.com) did highlight a few other points I'd like to include here. - The majority of board members appear to have big corporate backgrounds. In my opinion, there's a disappointing lack of entrepreneurial experience and heavyweight technical expertise. - Mr Updyke collected total remuneration of £2.9m in 2022\. That's nearly double the £1.6m pocketed by his predecessor Eric Hutchinson in 2019\. - In contrast to this, Updyke's Spirent shareholding totalled just 643k shares at the end of March 2023\. I estimate this to be worth around £1.2m – less than six months' pay in 2022\. **Question mark over R&D spending:** I also wonder if the boardroom's corporate backgrounds account for Spirent's apparent reluctance to increase spending on research and development. The chart below suggests that Spirent's R&D spending as a proportion of turnover peaked when the company announced strategy shifts (2006 and 2013) before declining steadily again. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-r-d-turnover-120523.png) Last year's reported R&D spend of $111m is lower (in real terms) than the $115m figure show in SharePad for 2014\. This doesn't seem ideal to me. After all, sales have risen by around 30% over the same period. Rust never sleeps... On the other hand, R&D spending does seem to have increased since Mr Updyke took charge as CEO in 2019\. The proportion of revenue spend on R&D – about 18% – is also reasonably high, I think. Shareholders will certainly have to hope that a focus on short-term margins doesn't leave Spirent on the back foot again at some point in the coming years. ### Recent trading & 2023 outlook Spirent's share price fall prompted me to wonder whether there's an opportunity here for a long-term buyer like me to pick up the stock at an attractive level. The company's 2022 results and recent Q1 update left me with a mixed view. On the one hand, the group's financial performance was pretty strong last year. Revenue rose by 5% to $607.5m, while pre-tax profit climbed 11% to $114.6m. Earnings per share rose by 12% to 16.5 cents, providing ample cover for the dividend of 7.57 cents per share. Profitability remained strong, with an operating margin of 18.6% and return on capital employed of 21.9%. Cash generation was also good. The group ended the year with net cash of $209.6m, an increase of 20% from 2021. However, while the order book climbed 7% to $288m in 2022, order intake fell by 2% to $625.7m. This seems to suggest that there was no underlying growth in demand last year – or that Spirent failed to expand its market share. **Balance sheet & inventories**:Spirent's balance sheet remained in good shape in 2022\. The group ended the period with net cash of almost $210m and a current ratio of more than 2x, suggesting very little risk of liquidity or solvency problems. However, the inventory position did give me pause for thought, with stock levels rising sharply: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-inventories-costofsales-130523.png) My sums suggest the average number of days required to turnover stock rose from 58 to 70 days in 2022\. With sales expected to flatline in 2023, this build-up of unsold good does not seem ideal to me. Rising inventories are a common warning sign of a cyclical slowdown. **Cash flow:** one clear attraction of this business for me is its cash-generative nature. 2022 was no exception. Spirent converted $112.7m of operating profit into $117.8m of operating cash flow last year, a conversion rate of 104%. Free cash flow generation was also strong. My sums suggest a full-year FCF figure of $79.2m, a conversion rate of 79% from net profit. If I exclude $22.9m of share purchases for the employee share ownership trust, then free cash conversion rises to more than 100%. In any case, the dividend was covered at least twice by last year's free cash flow. When combined with support from the net cash position, a dividend cut seems very unlikely to me. **Trading commentary & outlook:** The outlook for 2023 seems more measured. Last year's sharp rise in inventories comes as the company reports some reluctance by customers to commit to new orders. Management says that while customer budgets are *"mostly intact",* spending is now requiring *"scrutiny at more senior levels".* These comments suggest to me that Spirent's order intake could slow this year. While the company left its full-year guidance unchanged in its Q1 update, CEO Eric Updyke warned us that: > "trading performance will be significantly more weighted to the second half of the year than usual". In my experience, statements like this are often an early warning that full-year results will end up falling below expectations. The company's current guidance is for *"revenue to decline slightly"* in 2022, with gross margins maintained. Broker consensus forecasts have translated this outlook to suggest 2% to £595m this year, with earnings falling by over 15% to 15.5 cents per share. The dividend is expected to be held flat at 7.6 cents per share. These estimates price Spirent shares on 14 times forecast earnings, with a 3.4% yield. This does not seem too demanding to me, for a cash-rich business generating 20% returns on capital employed. ### Conclusion: not for me I don't often do this, but I'm going to draw this review to a close here. I've already decided that I'm not going to buy shares in Spirent for my dividend portfolio at this time. The attraction of Spirent's 87-year history and recent trading performance is negated for me by its inconsistent strategy and shifting focus over the last 20 years. I don't see any evidence of a successful *long-term* strategy and reliable shareholder value creation. Real quality compounders tend to have done the same thing for many decades, consistently building market share and brand equity. Having reviewed Spirent's latest results, I also think there's a risk of more bad news in pipeline this year – although I admit this might already be priced in to the shares. This remains a very profitable business, after all. I will keep an eye on Spirent's progress, but I think there are better choices elsewhere for me. --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: underrated quality/full price - MACF, RECI, BEZ URL: https://www.rolandhead.com/dividend-notes/underrated-quality-full-price-macf-reci-bez/ Last updated: 2023-05-27T07:11:53.000Z Welcome back to my dividend notes. Here's what's on the menu at the end of another shortened week. Thanks for reading - and enjoy the weekend. ### Companies covered: - **[Macfarlane (LON:MACF)](#macfarlane-macf)** \- this small-cap packaging business appears to be making good progress and looks reasonably valued to me. I think it could be worth a closer look. - **[Real Estate Credit Investments (LON:RECI)](#real-estate-credit-investments-reci)** \- this specialist lender has a good record of providing regular income and currently trades at a small discount to NAV, providing an impressive 9% yield. I'm tempted at this level. - **[Beazley (LON:BEZ)](#beazley-bez)** \- a solid Q1 update from this insurer, which is benefiting from strong rates in property and cyber insurance. I'm not convinced by the value on offer, though. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *This is a condensed review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Macfarlane (MACF) > "Macfarlane has made a solid start to 2023, with Q1 sales and profits ahead of the same period in 2022." This small cap packaging group has been churning out steady growth for a number of years now. This week's AGM update confirmed that progress continued during the first quarter of 2023. Macfarlane said that sales and profit were ahead of the same period in 2022 during the quarter, helped by a contribution from acquisitions. No revenue numbers were provided, but the company said that revenue in from packaging distribution business rose by 4%, while manufacturing revenue rose by 14%, *"aided by good recovery in certain industrial markets"*. The packaging distribution business contributed 80% of revenue and 90% of profit last year, so this drives the majority of earnings. The manufacturing business is smaller but serves an attractive niche, in my view, providing bespoke packaging for industrial customers in sectors such as aerospace and electronics. Net bank debt fell from £3.4m to £0.1m during the first quarter, showing continued good cash generation. **Outlook:** expectations for the full year are unchanged. Broker forecasts suggest earnings will rise by 20% to 11.8p per share this year, with a dividend of 3.6p. That prices the stock on 10 times forecast earnings, with a 3.1% yield. **My view:** Macfarlane appears to be performing well and quite reasonably priced, for a business that generates 15% return on capital and has minimal debt. An economic slowdown in the UK could hit earnings later this year, but for now this business seems reasonably priced and in good health to me. Although the dividend yield isn't especially high, Macfarlane's profitability and consistency mean that it also ranks quite well in [my dividend screen](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/), with a score of 69/100\. --- ### Real Estate Credit Investments (RECI) > "The company expects to deploy its currently available cash resources in near-term commitments and continues to see a growing pipeline of senior loans at attractive floating rates" Real Estate Credit Investments has a £289m market cap and specialises in making senior bilateral (direct) loans to property developers. RECI is managed by [Cheyne Capital](https://www.cheynecapital.com/?ref=rolandhead.com), an asset manager that was setup in 2000 to focus on opportunies in credit and real estate. RECI's appeal for investors is its very high and (so far) stable dividend yield. The company targets a payout of 7% of NAV and has paid quarterly dividends without a cut since 2013\. However, the stock's current discount to NAV means that RECI offers a prospective yield of more than 9% at current levels. Based on the group's track record since the financial crisis, I think this could be a buying opportunity. **Quarterly update:** RECI has just published a monthly factsheet and quarterly update from this specialist lender. I'm not going to attempt a detailed analysis here, but I would like to highlight some of the main points. *As this is a fairly specialist and perhaps higher-risk investment, I would recommend anyone interested should review the company's [excellent and regular reporting](https://realestatecreditinvestments.com/investors/?ref=rolandhead.com) for themselves.* - NAV per share on 30 April 2023 was 148p (31 Dec 22: 148.2p) - RECI's loan portfolio has minimal or zero exposure to shopping centres, seconday offices and logistics - sectors where management expect further problems - the company is continuing to rotate bond portfolio into *"funding existing strong senior loans with attractive returns"* - Portfolio loan-to-value of c.59% - very high compared to a typical REIT, but RECI's senior bilateral loan model means it has a direct relationship with the borrower that can be used for *"returns optimisation and financial flexibility".* - Company net leverage of 20% – there's a substantial equity buffer to absorb any losses So where does RECI invest? The company's loan portfolio is heavily biased towards residential and short-term accommodation, plus mixed-use property. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/reci-q1-portfolio-sectors.png) Source: RECI Q1 2023 presentation Geographically, more than half the firm's properties are in the UK, with the remainder in Western Europe: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/reci-q1-portfolio-geog.png) Source: RECI Q1 2023 presentation **Market opportunity:** RECI believes that tighter conditions in credit markets will provide good lending opportunities: > "The present macroeconomic backdrop is set to continue through 2023, resulting in further constraints in bank lending and alternative sources of capital. The opportunity to provide senior loans at low risk points, for higher margins, is increasingly evident" The company says that the current market environment is offering opportunities to make: > *"low-risk senior loans yielding 12%+ (and of a floating rate nature)"* **My view:** I'm not an expert on this sector and have not done any detailed research into the company's property investments or the nature of its borrowers. But I have followed this business for several years and have been consistently impressed by the clarity and accuracy of its reporting and the reliability of its returns. RECI's strategy is to pay out its total return in dividends to shareholders, so share price returns are likely to be minimal. But the dividend has provided a steady c.7% return on average since 2013. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/reci-sp-tr-nav-120523-1.png) With the yield now standing at more than 9%, I think RECI looks attractively valued – unless we're heading for a severe recession and 2008-style meltdown. If this was to happen, then I'd expect to see the company's NAV rapidly eroded and – most likely – the dividend cut. With such high LTV lending, the risk for lenders is that their loans will be written down more quickly than in a lower-LTV scenario. Although RECI appears to have a sizeable equity buffer on its balance sheet, this would be required to absorb lending losses. To a large extent, this investment depends on the continued expertise and good execution of RECI's investment managers. I have bought RECI shares below book value in the past with good results. I can't be sure the firm's model will continue to work so well in a higher interest rate environment, but so far, I don't see any reason to doubt this. I'm considering buying some shares again using some of the unallocated cash in my pension (not part of my [main dividend portfolio](https://www.rolandhead.com/dividend-portfolio/)). 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Beazley (BEZ) > "We remain confident in our growth guidance of mid teens gross premium written and mid 20s net premium written for 2023 full year." This is only a brief comment to lay down a marker on this well-established FTSE 250 insurer. Beazley [offers insurance](https://www.beazley.com/en-001/products?ref=rolandhead.com) for risks such as cyber attack, commercial property, and aircraft. It's a specialist business that can be quite cyclical. Trading appears to be in a strong upcycle at the moment, with premiums written, insurance rates, and investment returns all rising: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bez-1q23-highlights.png) Source: Beazley Q1 2023 update Management says a strong first-quarter was underpinned by growth in property, where gross premiums written rose by 56% to $347m during the period. The other strong performer was cyber insurance, where premiums rose by 24% to $280m, compared to the same period last year. **My view:** I plan to leave a more detailed review of Beazley until its next accounts are published. I think this is probably a good business at the right price, but the shares have doubled from their 2020 lows and now offer a yield of just 2.4%. I'm not an expert on this sector and I don't know how the current cycle will pan out. But I can see that historically, the best time to buy Beazley shares has been when the stock has been trading close to NAV. Right now, the shares are trading at almost twice their last-reported NAV of 326p per share: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/bez-nav-sp-yield-tr-120523-1.png) The long-term average return on equity of this business is about 14%, according to SharePad. I'm not sure that's high enough to justify paying 2x NAV for the stock. I may well be wrong, but I'm not sure there's much value on offer right now. --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: big spenders - AAF, GRI (11/05/23) URL: https://www.rolandhead.com/dividend-notes/big-spenders-aaf-gri-11-05-23/ Last updated: 2023-05-27T09:39:04.000Z Welcome back! Today I'm covering results from two capital-intensive – but very different – businesses. Both impress, but with some caveats. ### Companies covered: - **[Airtel Africa (LON:AAF)](#airtel-africa-aaf)** \- a good set of numbers, highlighting the strengths and the risks inherent in this business. I remain impressed with progress. - **[Grainger (LON:GRI)](#grainger-gri)** \- this venerable rental property specialist is benefiting from strong market conditions that could continue for some time. My initial impressions are positive. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *This is a condensed review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Airtel Africa (AAF) > "Total customer base grew by 9.0% to 140.0 million, as the penetration of mobile data and mobile money services continued to rise" FTSE 250 group Airtel Africa is the second-largest mobile operator in Africa. It has 140m customers, including more than 50m data users and over 30m mobile money customers. The group's operations are spread across 14 markets in sub-Saharan Africa: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/aaf-africa-ops-map-110523.png) Source: Airtel Africa website This is a stock I've held previously in another portfolio and followed with interest since its listing on the London market in 2019. Today's full-year results cover the year to 31 March. The company says that trading conditions remained good, with customers numbers up 9% to 140m. The number of data users on the group's networks rose by 16.9% to 54.6m, while mobile money users rose by 20.4% to 31.5m. When compared to the stagnant results achieved by Vodafone and BT, Airtel's latest numbers show the benefits of operating in countries with low levels of market saturation, limited fixed line infrastructure, and poor access to banking services. **Financial highlights:** Group revenue rose by 11.5% to $5,255m, while operating profit climbed 14.5% to $1,757m. Reported earnings per share rose by 5% to 17.7 cents. Shareholders will received a full-year dividend of 5.45 cents per share, an increase of 9%. That's a yield of c.3.8% at a share price of 114p. Profitability remained impressive, with an operating margin of 33.4% (FY22: 32.5%) and a return on capital employed of 23.6% (FY22: 21.1%). Although after-tax profit fell by 0.6% to $750m, this was due to $248m of currency and derivative losses. Local currencies in *"most of"* the firm's markets suffered devaluation against the dollar last year, resulting in big translation losses. This volatility is unavoidable given the company's end markets, but I think it should reduce in the future. Airtel is gradually retiring its USD holding company debt and replacing it with local currency operating company debt. This should mean that currency translation effects are no longer amplified by debt servicing costs. My calculations suggest that underlying free cash flow fell by 25% to $958m last year, giving a free cash flow yield of 11%. The reduction was due to a rise in capex, including a whopping $500m spent on 4G and 5G spectrum. Net debt rose by nearly $600m to $3,524m. The company says this represents a modest-sounding net debt-to-EBITDA multiple of 1.4x. However, this doesn't tell me much about Airtel Africa's ability to service or repay its debt, while continuing to invest in its network. For example, here's a breakdown of Airtel Africa's EBITDA from last year: - "Underlying EBITDA": $2,575m - *Depreciation and Amortisation: $818m* - Operating profit: $1,757m - *Finance costs: $752m* - Pre-tax profit: $1,034m In terms of leverage and debt service, Airtel Africa's cash interest costs of $400m represented 23% of operating profit last year, giving interest cover of 4.4x. Year-end net debt of $3,534m was equivalent to 5.3x net profit, my preferred measure. These figures are a little more highly-leveraged than I'd generally look for, but I can live with them in a telco or utility business. **Ownership:** Airtel Africa is a FTSE 100 member, so minority investors should get more protection than those of soon-to-be delisted AIM stock iEnergizer (IBPO). But I think it's worth noting AAF's ownership structure. This business was spun out of India's Bharti Airtel group in 2019\. However, Bharti entities still control 67% of the shares. Free float is small, at just 22%. So to some extent, minority shareholders are just along for the ride. **Outlook:** no new guidance has been provided for the year ahead. But broker forecasts prior to today's results suggested adjusted earnings of 18.4 cents per share and a dividend of 6.4 cents per share for FY24. *These estimates price the shares on about eight times forecast earnings, with a 4.3% dividend yield.* **My view:** I'm impressed by Airtel Africa's continuing double-digit revenue growth and profitability. In my view, the group's expansion could continue at this pace for some time yet. I think it's worth noting that while telecoms is always going to be a capital-intensive business, the mobile money division allows Airtel Africa to enhance the returns from its investment. Mobile money generated an operating profit of $318m last year at a margin of 46%. Capex is low compared to telecoms network spend. This means that financial services provide a significant improvement to the group's returns on capital employed. However, I think the business does carry some risks. It's a pure play on Africa, with a dominant majority shareholder, and a only a short history as a UK-listed business. On balance I'd say I'm interested, but still cautious. I won't be adding this company to [my dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) just yet, but I will be following its progress. --- ### Grainger (GRI) > "planned doubling of EPRA earnings over next 4 years" FTSE 250 REIT Grainger is the UK's largest listed landlord in the build-to-rent sector, with a £3.1bn portfolio of c,10,000 homes. Today's half-year results cover the six months to 31 March 2023 and look pretty solid – as we might expect given the current strength of the UK rental market. Grainger's net rental income rose by 12% to £48m, driven by a 6.8% increase in like-for-like rents and a contribution from new properties. Occupancy remained very high, at 98.1%. However, a reduction in profits from property sales and some higher costs meant that this growth only translated into a 2% rise in adjusted earnings, which climbed to £47.1m. Grainger says the value of its portfolio fell by £47m to £3,705m (310p per share) during the period, equivalent to a reduction of 1.3%. Falls were greater in London (-2.6%) and much smaller (-0.4%) in regional locations. Net debt rose by £132m to £1,394m as the group funded its development pipeline. However, the average cost of debt remains low, at 3.2%, with debt costs said to be *"fixed in the mid-3%s for the next six years"*. With a loan-to-value ratio of 36.1%, I don't see any immediate concerns here. **Dividend:** the interim dividend has been increased by 10% to 2.28p per share. Broker forecasts suggest a full-year payout of 6.3p, which would give a yield of c.2.5%. **Outlook:** Grainger is expanding steadily and says it has a £1.6bn pipeline that will deliver c.6,000 new properties. Chief executive Helen Gordon says that projects and financing are secured that should double EPRA earnings per share over the next four years. Broker forecasts suggest adjusted earnings of 10.3p per share this year, putting the stock on a forecast P/E of 25\. In terms of asset value, Grainger shares are trading around 15% below EPRA NTAV of 310p per share at the time of writing. **My view:** given the structural challenges in the housing market, Grainger's growth plan seems logical to me. I think the question for investors is whether the company will be able to maintain its current level of profitability as it expands. This business was founded in 1912 and has been listed since 1986\. It seems to be prudently financed with a clear, focused business model and has been a strong performer for long-term investors: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/gri-all-chart-110523.png) I'm not very familiar with Grainger and would need to do more research to form a strong view. But my initial impression is that I don't see any reason why Grainger can't continue to perform well as it expands. In terms of valuation, I think the shares are probably priced about right at current levels. Property prices may yet continue to fall and I estimate the business is valued at around 19x earnings, assuming annualised adjusted earnings of c.£100m. The 2.5% dividend yield is too low for me to be interested, but I have a positive impression of this business and will continue to follow its progress. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: no recession here - CREI, CPG, HAT (10/05/23) URL: https://www.rolandhead.com/dividend-notes/no-recession-here-crei-cpg-hat-10-05-23/ Last updated: 2023-05-27T09:39:43.000Z Welcome back to my dividend notes. Today I'm looking at three very different businesses, all of which claim to be trading very well. ### Companies covered: (click on the link to scroll to the relevant section) - [**Custodian Property Income REIT**](#custodian-reit-crei) (LON:CREI) - a very solid Q4 and full-year update, in my view. I think this regional commecial property specialist looks well-run and fairly valued. - **[Compass Group (LON:CPG)](#compass-group-cpg)** \- a strong update from this FTSE 100 catering outsourcer. I remain a fan, but it's just too expensive for me. - **[H&T Group (LON:HAT)](#h-t-group-hat)** \- this pawnbroking and high-end watch retail business continues to perform well and is trading in line expectations. The shares look reasonably valued relative to forecast profit growth. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Custodian REIT (CREI) > "strong leasing momentum driving income and supporting fully covered dividend" This £400m REIT specialises in regional commercial property and was founded by Ian Mattioli, the founder and CEO of AIM-listed wealth manager Mattioli Woods. Both Mattioli and MTW are significant shareholders in CREI. The trust promises to provide NAV growth and *"high and stable dividends"*. Let's take a look. **Q4 update:** today's trading update covers the three months ended 31 March 2023, which is the end of Custodian's financial year. The numbers seem fairly positive to me, given wider market conditions. Here are the main financial highlights: - EPRA earnings per share of 1.4p (Q3: 1.5p) and 5.6p for FY23 (FY22: 5.9p). - Q4 dividend of 1.375p giving a full-year dividend of 5.5p per share, 102% covered by EPRA earnings - £2.5m of new rental income secured during the quarter, 5% ahead of ERV (estimated rental value) - NAV of £437.6m, orr 99.3p per share (31 Dec 2022: £440.0m/99.8p) - 24.7% loan-to-value (31 Dec 22: 27.1%), with weighted cost of debt of 3.4% - Occupancy: 90.3% (31 Dec 22: 89.9%) - 84% of vacant property is being refurbished or under offer to let According to the REIT's investment manager, *"property pricing has reacted quickly to the new interest rate environment"* and *"valuations have largely stabilised during the quarter"*. Custodian says it is continuing to invest in refurbishing its properties to improve energy efficiency ahead of new regulations, a theme also [mentioned by Derwent London last week](https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/). The trust says that the value of its portfolio fell by 11.8% over the 12 months to 31 December, outperforming a 17% decline in the wider UK commercial property sector. Management say this is due to a focus on diverse regional property and income returns. The latest [portfolio breakdown](https://custodianreit.com/property-portfolio/?ref=rolandhead.com) shows around half of assets are industrial units, with the remainder split across classes. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/crei-portfolio-breakdown-310323.png) Source: Custodian REIT Q4 FY23 update - "**Other**" comprises drive-through restaurants, car showrooms, trade counters, gymnasiums, restaurants and leisure units. The portfolio's current rental yield is 5.8%, but management says that this has the potential to rise to 7.3% if the portfolio can be fully let at estimated rental values. I'm not sure how realistic this state of letting nirvana might be, but I think it's fair to say there is room for some uplift as leases are renewed and vacant properties let. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/crei-portfolio-yields-310323.png) Source: Custodian REIT Q4 FY23 update *(There's a useful glossary to property jargon on the [British Land website](https://www.britishland.com/glossary?ref=rolandhead.com))* **Outlook:** sounds confident: > “We remain confident that our ongoing intensive asset management of the portfolio, which still offers a number of wide-ranging opportunities to add value, will maintain cash flow and support consistent returns. Coupled with the strength of the Company’s balance sheet, this will continue to support our high income return strategy.” Broker consensus forecasts ahead of today suggested FY24 earnings of 5.9p per share and a dividend of 5.6p, giving a yield of 5.9%. The market appears to remain confident in the value and profitability of this REIT – the shares trade at a discount to NAV of just 7% as I write. **My view:** I looked at Custodian REIT elsewhere last year and was impressed. I remain very positive after reviewing this update. As far as I can see, the trust has a coherent strategy, a sound balance sheet and decent management. The main risk I can see is that the UK economy takes a turn for the worse and suffers a more severe slowdown than expected. That could have a knock-on impact some of CREI's tenants. However, at current levels, I would say these shares look fairly valued and potentially attractive as an income play. This is a REIT I would consider owning. --- ### Compass Group (CPG) > "Strong half-year results, raising FY 2023 guidance and announcing > a further share buyback of up to £750m" The FTSE 100 catering outsourcer had a torrid pandemic, but has bounced back very strongly. Profits are now back at pre-Covid levels, as is the group's share price: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/cpg-shareprice-vs-profit-100523.png) Today's half-year results included details of strong trading so far this year: - Revenue up 36% to £15.8bn - Operating profit up 37.6% to £878m - Operating margin: 5.6% (H1 2022: 5.5%) - Earnings per share up 36.3% to 36.4p - Underlying free cash flow up by 63.9% to £590m - Net debt/EBITDA reduced to 1.1x - Interim dividend up 59.6% to 15.0p per share Management says that market conditions remain positive: - 5% of revenue from net new business - First-time outsourcers contributed c.45% of new business, driven by big savings available on food costs due to Compass's economies of scale - *"strong client retention rate"* **Segmental results:** Compass operates in a wide range of sectors, serving meals in offices, factories, schools, hospitals, leisure venue, defence installations and remote mining camps. There's no breakdown of these sectors in today's results, but what's clear is that Compass's success is driven by its operations in North America. These are larger and more profitable than any other region and generated 80% of underlying profit during H1: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/cpg-1h23-segments.png) Source: Compass Group H1 FY23 results Perhaps unsurprisingly, the company plans to change its reporting currency from pounds to US dollars next year. FTSE 100 investors should probably be thankful the company is not thinking of moving its listing to the US as well. **Upgraded FY23 outlook:** Compass has upgraded its guidance for the year to 30 September 2023: - Underlying operating profit growth *"towards 30%"* (previously *"over 20%"*) - Organic revenue growth of *"around 18%"* (previously *"around 15%"*) - Underlying operating margin of 6.7%-6.8% (previously *"above 6.5%"*) Compass shares have hardly moved today despite this news, which suggests to me that a rosy outlook was already priced into the stock. I estimate a forecast P/E of c.22x earnings and a 2.1% dividend yield. **My view:** prior to the pandemic, I'd admired Compass's progress for many years, without owning the stock. This high-achieving business always looked too expensive to me and it still does, with an EBIT/EV yield of under 4%. In my view, Compass shares are already priced for good news and could slip on any disappointment. I'd look to buy these shares in a market sell-off. However, I could be missing out. Compass's capital-light business model generates high returns on equity despite its low margins. If the company can maintain a decent rate of growth, the shares could continue to perform well. --- ### H & T Group (HAT) > "The Board confirms that it expects trading and performance to continue in line with market expectations." H&T is the UK's largest pawnbroker and is also an established retailer of new and secondhand jewellery/high-end watches. I might not normally cover this small cap, but H&T currently appears in my [dividend screen](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) results with a respectable score and a near-5% yield. So I'm keen to keep tabs on performance in case it becomes a portfolio candidate. Today's AGM update confirms performance in-line with expectations and reports strong trading: - strong demand for pawnbroking, January and March were record months for lending - Pledge book was £106.5m at the end of April, up from £100.7m at the end of last year - Retail sales (jewellery and watches) to the end of April were up by 13% year-on-year - However, the retail business is seeing some margin pressure and also notes *"change of sentiment of some customers towards value"*. This is apparently affecting demand for *"certain higher value watch brands"*. - Gold purchase volumes as expected, with scrap margins benefiting from rising gold price **Outlook:** the board confirms that the business is trading in line with expectations. According to broker consensus forecasts, this suggest 2023 earnings of 55p per share, a 48% increase from last year. Analysts expect a dividend of 20.9p per share, an increase of 40% from last year. These estimates price H&T shares on a 2023 forecast P/E of 8.0, with a 4.7% dividend yield. **My view:** H&T is a market-leading business in its sector and appears to be performing well. Inflation and cost-of-living pressures are likely to be positive for the pawnbroking business, although perhaps more mixed for H&T's retail operation. Although the shares are trading close to record highs, this is a larger business than it once was. Based on broker forecasts, the stock's valuation could be at the lower end of its historic range: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/hat-div-ebit-yield-pe-100523.png) If H&T can continue to deliver on expectations, I think the shares could still offer value at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: warnings and uncertainty - VCT, DLG, MSLH (09/05/23) URL: https://www.rolandhead.com/dividend-notes/warnings-and-uncertainty-vct-dlg-mslh-09-05-23/ Last updated: 2023-05-27T09:40:12.000Z Another shortened week begins with a mixed bag of news, including poorly-received updated from three FTSE 250 dividend stocks in my coverage universe. ### Companies covered: (click links to scroll to the relevant section) - **[Victrex (LON:VCT)](#victrex-vct)** \- a good business that I've admired for a while. But falling volumes and elevated inventories suggest some risk of a cyclical slowdown. Victrex remains on my watch list for further research. - **[Direct Line Insurance Group (LON:DLG)](#direct-line-insurance-dlg)** \- a discouraging Q1 trading update that leaves me feeling relieved that I sold my DLG shares earlier this year. - **[Marshalls (LON:MSLH)](#marshalls-mslh)** \- today's profit warning was triggered by worsening trade forecasts, says the company. However, today's statement creates as many questions as it answers, in my view. I'm staying on the sidelines for now. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- *This is intended to be a condensed review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* --- ### Victrex (VCT) > "Consequently, compared to a record FY 2022, full year volumes are still tracking to be down by a double-digit percentage." FTSE 250 group Victrex produces a high-performance polymer (plastic) called PEEK. This business has many of the characteristics I look for in a quality dividend stock, such as strong profitability and good cash generation. Recent years have seen the company investing in *"mega-programmes"* to develop new products made from PEEK and move higher up the value chain. This seems a logical strategy to me to help ward off growing competition. However, progress has been slow and the group's profits peaked in 2018\. Today's commentary suggests the company may now be facing a broader cyclical downturn. However, Victrex's balance sheet still looks healthy to me and the valuation looks more reasonable than it has done for several years. I'm wondering whether a buying opportunity might be emerging here. **H1 2023 highlights:** today's results cover the six months to 31 March 2023\. They show a slump in volume and a slightly smaller reduction in profit: - Group sales volumes down 14% to 1,941 tonnes (H1 2022: 2,264 tonnes) - Revenue up 1% to £162.2m (down 5% in constant currency) - *H1 operating margin: 24.2% (H1 2022: 27.5%)* - Pre-tax profit down 10.3% to £39.1m - *TTM return on capital employed 15.3% (FY22: 15.9%)* - Diluted earnings down 11.1% to 38.5p per share - Interim dividend unchanged at 13.42p per share Profitability remains attractive, in my view, with a return on capital in excess of 15%. However, margins do appear to be under pressure and the company reports contrasting trading conditions across its different customer markets: **Industrial:** revenue down 2% to £129.7m (down 8% constant currency). The company says that performance in this division was split: - Electronics, energy, industrial and value-added resellers: *"macro weakness"* - Aerospace & automotive: *"good growth"* Collectively, the outlook for the company's industrial markets (all of the above) is cautious, if not gloomy: > *"Victrex typically sees a strong bounce back once end-markets improve and we remain well positioned for an upturn in the global economic environment. However, volumes continue to track down double-digit on a full year basis, compared to the record volumes of FY 2022."* **M** **edical:** the group's smaller but more perhaps less cyclical medical business appears to be trading well: - Medical: *"record half"*, revenue up 17% to £32.5m (+6% constant currency). Growth driven by new applications for PEEK. **Balance sheet/cash flow:** Victrex has maintained a net cash balance for at least a decade, but this fell to just £5.4m over the last six months as the company spent £30.5m increasing its inventory to £117.3m (FY22: £86.8m). The company says this stock build was done to *"support security of supply for customers"* and to offset the impact of planned engineering work in the UK. However, many companies seem to be reporting that supply chain concerns are easing. I wonder if this is a case of shutting the stable door after the horse has bolted. Management expects inventories to remain *"elevated"* at the end of the financial year. I'm a little concerned by this, as high inventories are sometimes an early sign of a cyclical downturn in industrial businesses. My sums sugest Victrex's inventories now represent 34% of trailing 12-month revenue. According to SharePad data, this level has only been seen twice before, in 2008/9 and during the market crash at the start of the pandemic: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/vct-stock-turnover-090523.png) Inventories aside, Victrex's balance sheet looks healthy enough to me. I don't see any serious cause for concern at this time. **Outlook:** today's guidance suggests that profits will fall below expectations, unless demand improves during the second half of the year (my bold): > Delivering a PBT performance in line with FY 2022 and current expectations **assumes a step up in demand during the latter part of the second half**, driven by macro-economic conditions. In other words, Victrex is relying on profits being weighted to the second half in order to meet current forecasts. In my experience, this if often an early sign that a profit warning is becoming more likely. Broker forecasts prior to today suggested earnings of 93.9p per share and a dividend of 60.5p. After today's slump (-7% to 1,539p at pixel time), that prices Victrex shares on 16 times forecast earnings, with a dividend yield of 3.9%. **My view:** I think there could be a little more bad news to come. But Victrex shares are trading close to 10-year lows. Is value starting to emerge? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/vct-10yr-chart-090523.png) On a trailing 12-month basis, my sums suggest the stock is now trading on a EBIT/EV yield of around 6%. For me, that's reasonable, but still a little way below the 8% I'd target for strong value. Victrex's strong profitability and market leadership in PEEK are attractive to me. But falling volumes suggest to me that the second half may not be better than the first. I'm also a little unsure how successful some of the company's product-based growth programmes are. The majority of revenue is still generated from selling commodified raw PEEK (pellets), for which there is more competition. For now, Victrex is on my watch list for further research. I'll be following its progress with interest. --- ### Direct Line Insurance (DLG) > "2023 earnings outlook continues to be challenging" I sold Direct Line from my model dividend portfolio and my personal holdings at the end of March. I explained why in a detailed review of the group's results [here](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/). In short, I thought there was a good chance earnings would disappoint this year, and I had lost confidence in management. I had also started to wonder if the group's direct business model is not as strong as it once was. Direct Line's Q1 update did nothing to change my views. **Trading:** a focus on margins resulted in a 19% increase in motor renewal premiums in Q1\. Unsurprisingly, this had an impact on volumes – the number of in-force motor policies fell by 2.5% during the quarter. Home and breakdown policy counts were stable, while commercial policy numbers rose slightly despite hefty price increased. At a group level, gross written premium rose by 9.7% to £805.7m, but the number of own-brand in-force policies fell by 1.5% to 7.1m. My conclusion from the numbers is that the motor business is continuing to lose market share. The group's other businesses are performing better, but aren't big enough to offset motor's decline. **Claims costs:** once again (!), the company said it had been surprised by higher costs for motor and commercial damage claims during the first quarter. As I feared, these costs are expected *"to put pressure on earnings in 2023"*. **Balance sheet:** management say the insurer's capital solvency ratio was *"broadly unchanged compared with year end"*, but do not provide an updated figure. Expected capital tailwinds resulting from external market conditions are *"now expected to be recognised over the remainder of 2023"*. My reading of this is that they didn't materialise in Q1\. Self-help measures are also being considered. I wonder if one of these might end up being a rights issue or equity placing. **Outlook:** acting CEO Jon Greenwood's outlook statement seemed vague and cautious to me: > Whilst 2023 earnings outlook continues to be challenging, the Group has many strengths, and we continue to take the actions required to drive business performance. Our ambition over time to generate a net insurance margin of above 10% remains. **My view:** I didn't find this update very reassuring. In my view, there's a good chance Direct Line may need to issue another profit warning this year. If the hoped-for capital market tailwinds materialise, the group may be able to strengthen its capital buffer without needing to raise funds. But I think Direct Line is unlikely to pay a dividend this year. I'm also a little surprised that the company still hasn't managed to appoint a new chief executive, nearly four months after Penny James departed. This also does not reassure me. The only possible bright spot I can see is that a trade buyer might see value in the business at current levels, given its large market share and well-known brands. I don't know how likely this is – but for an industry expert it might be worth considering. --- ### Marshalls (MSLH) > "the Board now expects to deliver a result that is lower than its original expectations" Building materials supplier Marshalls says that a slowdown in new-build housing is the main reason for today's profit warning. In addition, the company also warns of a reduction in discretionary RMI (repair, maintenance and improvement) spending in areas such as landscaping. Although revenue rose by 12% to £227m during the quarter, this reflects last year' £535m acquisition of Marley Roofing Products. Stripping out this deal, Marshall's revenue for the quarter was 14% below the same period last year. What struck me about today's update was the contrast with recent commentary from the big housebuilders. Marshalls says that today's profit warning is based on the latest construction output forecasts from the Construction Products Association (CPA). Marshalls says that since January, the CPA has cut its forecasts for new-building housing by a further 6%, taking the **total year-on-year reduction to 17%**.This change is what's prompted today's warning, according to management. In contrast to this, recent updates from [Taylor Wimpey and Persimmon](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/) have pointed to a 30%-40% reduction in expected completions this year. Obviously these big housebuilders are not necessarily a direct proxy for the whole new-build housing market. But I should think they're probably a reasonable indicator. I'm not sure how to interpret the discrepancy between the CPA forecasts and the housebuilders' guidance. **My view:** Marshalls' share price has now fallen by around 70% from its pre-pandemic highs of over 850p. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/mslh-chart-all-090523.png) If things don't get too much worse, I suppose there could be some value here. However, the company didn't provide any specific financial guidance for the rest of the year in today's update, so we're left guessing about the likely fall in profits. I'd also note that the Marley acquisition has left Marshalls with increased net debt of £220m, just as its core markets seem to be slowing. Given the level of uncertainty here, my view is that it's probably sensible to stay on the sidelines until a clearer picture emerges – or the shares get cheaper. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: super returns - DOM, NXT (05/05/23) URL: https://www.rolandhead.com/dividend-notes/super-returns-dom-nxt-05-05-23/ Last updated: 2023-05-27T09:40:58.000Z Friday was a quiet day for company news, so I've caught up with a couple of items I missed from earlier in the week. Enjoy the bank holiday weekend! *This is a review of the latest results from UK dividend shares that are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* ### Companies covered: (click links to scroll to the relevant section) - **[Domino's Pizza Group (LON:DOM)](#dominos-pizza-group-dom)** \- this takeaway group appears to be performing well and is due to receive a £79m cash windfall shortly. - **[Next (LON:NXT)](#next-nxt)** \- solid numbers and excellent reporting can't disguise falling sales volumes and an expected decline in earnings. A good business, but the price is up with events in my view. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Domino's Pizza Group (DOM) > Record Q1 orders and app customers driving growth in sales and continued market share gains Domino's struck an upbeat tone in its first-quarter update. I've been optimistic that this business will remain a relatively affordable and popular treat despite the impact of inflation. I think the firm's latest numbers largely support this view: - Like-for-like system sales up 10.7% (excluding VAT change) - 18.0m orders, up 2.8% - Active app users up 27% to 6.8m versus Q1 2022 - Collection orders up 23.0%, delivery orders down 4.9% (positive for DOM's labour costs) - Strong start to Q2 with LFL orders up 10.9% and total orders up 5.9% during first four weeks of the quarter The company has been waging a post-pandemic campaign to switch customers from delivery to collection. It looks like it's succeeding, which helps alleviate cost pressures and labour shortages. Targeted offers such as the £8/£10/£12 deal are said to have helped drive new sales growth during the quarter. New store openings are also accelerating, with both store openings and the new store pipeline running ahead of last year. **Share buyback:** Domino's has launched a further £20m share buyback, citing its target leverage range of between 1.5x and 2.5x EBITDA. The group's year-end net financial debt of £253m represented a multiple of 3.1x FY22 net profit. That's towards the upper end of my prefered range, but given the cash-generative nature of the business, I don't see too much risk at this time. In any case, a significant cash windfall is due soon. **Germany sale should bring £79m cash inflow in Q2:** the sale of the group's German business is expected to complete in June for £79m, or 18.8p per share. Cash from this deal will be *"flowed through the capital allocation framework"* at that point. We should get an update in the half-year results. **Outlook:** full-year guidance is unchanged from the FY22 results. Broker forecasts suggest earnings of 16.7p per share with a 10p dividend. That's equivalent to a P/E of 18 and a 3.2% yield. **My view:** given the cash due from the Germany disposal, I would hope for a modest increase to the ordinary dividend this year. But management seem to prefer buybacks over extra dividends, perhaps because of the boost they can provide to earnings per share... Apart from this niggle, I remain positive about Domino's. The group generated an operating margin of 18% in 2022, with an impressive return on capital employed of 28%. Both figures are typical for this business. Free cash flow last year was £79m, with a similar figure expected this year. That gives the stock a free cash flow yield of around 6% – not unattractive, in my view, and comfortably covering the dividend. --- ### Next (NXT) > We are maintaining our sales and profit guidance for the full year, with profit before tax forecast to be **£795m** and Earnings Per Share (EPS) of **501.9p.** Next's trading updates are always a pleasure to read for their clarity and educational value. I've learned quite a bit about retail over the years from the detail in this company's statements. Management guidance is also typically very accurate, with a good seasoning of prudence. That's the case here: - Full price sales for the 13 weeks to 29 April were down 0.7% versus last year, compared to guidance of -2% - Q2 sales forecast has been adjusted *down* to -5% to leave H1 forecast unchanged. - The company justifies this caution by pointing out that Q2 last year benefited from pent-up demand (from the pandemic) and warm weather. We can't rely on a repeat this year. **Finance income:** Next's customer credit business contributes about 20% of trading profits and is a big driver of earnings. Higher interest rates appear to be having a beneficial effect so far. There's a risk that bad debt may increase, but that doesn't seem to be an issue yet. Finance income rose sharply during the quarter, partially offsetting lower sales: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/nxt-sales-breakdown-1q23-1.png) Source: Next Q1 FY24 statement **Outlook:** Full-year guidance is also unchanged at this point in the year, with pre-tax profit forecast at £795m (-8.6% vs FY22) and earnings per share of 501.9p (-12.5% vs FY22). **Shareholder returns:** Next expects to end the year with £220m of surplus cash *after* the ordinary dividend and other costs. The company says it will use this to fund share buybacks or the acquisition of equity stakes in potential clients for its Total Platform online marketplace service. **My view:** Next is a class act, with excellent profitability and wonderful reporting. Returns on capital employed have averaged 32% over the last five years and I expect this to continue. But the reality appears to be that sales volumes are falling and that full-year earnings per share are expected to be more than 10% lower than last year. The dividend yield is unremarkable, too, at 2.9%. Given the growth challenges facing this business, I think the shares are up with events at current levels. A stock to buy in the next market sell-off, perhaps? 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: classy contenders despite uncertainty - DLN, MGNS, SPT (04/05/23) URL: https://www.rolandhead.com/dividend-notes/classy-contenders-dln-mgns-spt-04-05-23/ Last updated: 2023-05-27T09:41:37.000Z A busy day on the RNS feed today, so I've just picked a few more interesting/less frequently covered stocks to look at, rather than trying to look at everything. *This is a review of the latest results from UK dividend shares that I don't own but which are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* ### Companies covered: (click links to scroll to the relevant section) - **[Derwent London (LON:DLN)](#derwent-london-dln)** \- this London office REIT has a good quality portfolio and trades at a big discount to NAV. I think the shares could offer value. - **[Morgan Sindall Group (LON:MGNS)](#morgan-sindall-group-mgns)** \- today's update reveals a stable order book and strong cash position. I remain a fan of this well-run business. - **[Spirent Communications (LON:SPT)](#spirent-communications-spt)** \- Q1 in line, but *"continued to see customer order delays"*. H2 profit weighting is a risk, but the shares have already de-rated heavily. I'm interested. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Derwent London (DLN) > London, particularly the West End, is busy and people are back in the office. This FTSE 250 REIT owns 5.5m square feet of commercial property in central London. The company's [portfolio](https://www.derwentlondon.com/properties?ref=rolandhead.com) was valued at £5.4bn at the end of 2022, which it says makes it the largest office-focused REIT in London. Derwent specialises in buying run-down buildings in impoving locations and then carrying out comprehensive redevelopment or refurbishment. Most of the firm's properties are in the West End of London and the Tech Belt area (e.g. Shoreditch/Whitechapel/Clerkenwell). Today's Q1 business update seems quite positive to me: **New lettings:** Q1 letting activity totalled £17.1m at an average of 6.6% above December 2022 ERV (estimated rental values). New tenants included Uniqlo (flagship retail unit on Oxford street), asset manager PIMCO (pre-let, under development) and engineering consultancy Buro Happold. **Occupancy:** management says that the EPRA vacancy rate in the portfolio was 4.9% at the end of March, improved from 6.4% at the end of 2022. **Leverage:** Derwent's EPRA loan-to-value ratio (LTV) fell by 0.8% to 23.1% during the first quarter (Dec 2022: 23.9%). Disposal proceeds of £53.6m offset capital expenditure of £29.1m. Net debt fell to £1,225.1m (Dec 2022: £1,257.2m). **My view:** office property prices are under pressure at the moment, due to investor concerns about reduced demand (WFH) and new environmental rating requirements. However, I think Derwent London is better-positioned than most rivals to succeed in this environment. The firm's properties are carefully chosen and its strategy of redevelopment means that it can add value and ensure properties meet current sustainability standards. Management say that the portfolio is already 85.7% compliant with 2027 MEES legislation (EPC C or above) and 65.3% compliant with expected 2030 rules requiring EPC B or above. At a last-seen price of 2,322p, Derwent London trades at a 36% discount to its December 2022 EPRA NTAV of 3,632p per share. This NAV figure fell by 8% last year and it's possible that it will fall further this year. But this is the stock's biggest discount to NAV since 2008, according to SharePad data: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/dln-sp-pnav-040523.png) My feeling is that Derwent London shares are probably good value at this level, on a medium-term view. The dividend yield is quite low, at 3.5%. But if the shares return to trade at book value over the coming years – as they have in the past – then they could offer 50% upside from current levels. --- ### Morgan Sindall Group (MGNS) > Trading since the start of the year has been as expected and the general market conditions coming into 2023 have continued to ease, with inflation falling in certain areas. I recently covered construction and regeneration group Morgan Sindall in [an in-depth stock review](https://www.rolandhead.com/dividend-shares/is-morgan-sindall-a-dividend-share-to-buy-now/). Although this is a sector I normally avoid, I can't help but be impressed by this company's strong record. Today's update is only an AGM statement, but I think it's interesting for what it reveals about trading conditions and the company's outlook. **Inflation:** rising material and labour costs have hit construction groups, but the company says they are now starting to ease. **Order book:** Morgan Sindall's secured workload was £8.8bn at the end of March, 2% higher than at the same point last year. Construction orders are up 9% versus the prior year (£4.9bn), while regeneration work is down 6% versus the prior year (£3.9bn). **Divisional performance:** the construction business appears to be performing well and is expected to deliver revenue growth at target margins. Fit Out (office space) is seeing *"very strong"* trading, with encourgaging enquiry levels. Housing seems to be the weak spot. In partnership housing, sales activity remains well below prior-year levels but has improved since the start of the year. This reflects recent updates from housebuilders that I've covered here ([PSN](https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/), [TW](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/), [BDEV](https://www.rolandhead.com/dividend-notes/cash-producers-bp-bdev-lloy-03-05-23/)). The property services business also appears to have run into problems relating to *"disappointing contract delivery"*. Profit margins are expected to be lower, despite rising revenue. This kind of problem is a perennial risk with low-margin contractors and outsourcers, hence why I tend to avoid them. However, in this case I think it's unlikely to have a big impact at group level – property services only contributed 3% of adjusted profit last year. **Balance sheet/cash:** Morgan Sindall's reporting (and balance sheet) are second-to-none in this sector, in my opinion. Today we learn that average daily net cash from 1 January to 2 May was £281m – almost unchanged from £278m during the same period last year. **My view:** I'm a long-term fan of this business, which has a track record of generating high returns on capital employed (and plenty of cash). At current levels, the stock offers a 6% dividend yield covered twice by forecast earnings *and* free cash flow. Given the stable outlook and the group's long record, I think Morgan Sindall is worth considering. --- ### Spirent Communications (SPT) > Full year expectations unchanged FTSE 250 firm Spirent Communications provides "*automated test and assurance solutions for next-generation devices and networks".*The rollout of 5G mobile and Low Earth Orbit satellite networks are key growth markets for the group. This business isn't immune to cyclical spending patterns and depends on major telcos for much of its growth. The shares hit record highs during the pandemic. But after management struck a cautious note in a January update, the stock has re-rated to pre-pandemic levels: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/spt-5yr-chart-040523.png) I've been watching this de-rating with interest, as I think this business could be the kind of long-term compounder that might fit well in my portfolio. **Q1 trading:** Today's first-quarter update confirms *"important 5G and Positioning wins in the period".* However, revenue for the quarter was 20% below a *"very strong comparator period"* last year. The orderbook also *"declined slightly"* from the year-end position of $288m, although frustratingly no value was provided. Spirent says it continues to secure *"many large 5G contract wins"* and that this remains a structural driver for growth. **Buyback:** the company also reminds us of the £56m share buyback plan announced in April. Spirent reported a 2022 year-end net cash position of $210m, so this doesn't seem unreasonable to me. **Outlook:** it's clear there are still some potential headwinds (my bold): > As expected, and consistent with wider industry dynamics, **we have continued to see customer order delays** but remain confident that customer momentum will pick up later in the year. While the company has left full-year guidance unchanged at this point, management expect a *"materially heavier weighting to second half"*. I'm not sure how much visibility the company has of customer spending plans, but I think it's sensible to assume there's a material risk that full-year performance will miss current forecasts. **My view:** Spirent has plenty of cash and doesn't appear to be in any danger of losing money. I think the company can afford to continue investing and hopefully stay aligned with customer needs, in preparation for future spending rounds. My guess is that we could see a mild profit warning later this year, but I think some of the risk is already priced into the shares. Spirent shares offer an 8% free cash flow yield based on last year's results, with similar cash generation expected this year. The stock's forecast P/E of 14 and 3.4% dividend yield seem reasonable to me, for a debt-free company that's historically generated a 20% return on equity. My main concern is that the business could lose share to key rivals, or perhaps fail to keep pace with network operators' requirements. But as things stand, I'm interested in Spirent and am considering the stock as a possible investment. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes: cash producers - BP, BDEV, LLOY (03/05/23) URL: https://www.rolandhead.com/dividend-notes/cash-producers-bp-bdev-lloy-03-05-23/ Last updated: 2023-05-27T09:42:16.000Z Solid numbers from three popular big caps today, but each recognises some uncertainty in the outlook ahead. *This is a review of the latest results from UK dividend shares that I don't own but which are in my investable universe and may appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/).* *[Dividend notes](https://www.rolandhead.com/tag/dividend-notes/) is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* ### Companies covered: (click links to scroll to the relevant section) - **[BP (LON:BP)](#bp-bp)** \- Q1 results show this cash gusher remains an impressive fossil fuel business. However, the valuation looks up with events to me on a cyclical view. I also fear that charges of cakeism and greenwashing may be deserved. - **[Barratt Developments (LON:BDEV)](#barratt-developments-bdev)** \- a solid update from this housebuilder, showing the expected recovery in sales rates since the start of the year. Good balance sheet and one of my top sector picks. - **[Lloyds Banking Group (LON:LLOY)](#lloyds-banking-group-lloy)** \- a solid set of numbers with some wiggle room for later in the year. 6% dividend yield looks decent value and fairly low risk, in my view. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### BP (BP) > underlying replacement cost profit\* for the first quarter was $5.0 billion, compared with $6.2 billion for the same period of 2022 BP says it is *"performing while transforming"* itself into an integrated energy company (IEC) with a presence in the green transition. Many market participants are sceptical about BP's green credentials. I fear the firm's Q1 results may not help this perception. The main operational highlights flagged up in this week's statement were: - Startup of Mad Dog Phase 2 - a $9bn oil project in the Gulf of Mexico - Final stages of commissioning KGD6-MJ deepwater gas field offshore India - Forming a joint venture with ADNOC *"focused on gas development"* - Concept selection for Kaskida oil field in the Gulf of Mexico - Evaluating Greater Tortue Ahmeyim (GTA) phase 2 - an LNG project offshore Africa. Progress on projects that *don't* involve producing fossil fuels was limited to the acquisition of US motorway services chain TravelCenters of America, and involvement in some hydrogen and carbon capture and storage (CCS) projects in the UK and Spain. Despite being largely unproven, CCS is popular with fossil fuel producers because it offers the propect of **[cakeism](https://dictionary.cambridge.org/dictionary/english/cakeism?ref=rolandhead.com)** *–* i.e. being able to continue using fossil fuels while negating emissions. Critics suggest greenwashing and – on balance – I fear they may be correct. **Q1 2022 financial highlights:** plenty more of the good stuff here. While profit and cash generation are down from last year's record levels, they remain considerable: - Underlying replacement cost (RC) profit: $5.0bn (Q4 2022: $4.8bn) - Surplus cash flow: $2.3bn (Q4 2022: $5.0bn) - Share buybacks: $2.5bn (Q4 2022: $3.2bn) - Net debt: $21.2bn (Q4 2022: $21.4bn) - Dividend (Q1): 6.61 cents per share (unchanged from Q4) **Outlook:** BP expects *"oil prices to remain elevated"* following the recent OPEC+ decision to cut production. Gas/LNG prices are also expected to be firm as Chinese demand recovers and European buyers restock ahead of winter. Broker consensus forecasts suggest adjusted earnings could fall by around 30% to $1.04 per share this year, with dividend growth of 10%. These estimates price BP shares on six times 2023 forecast earnings, with a 4.4% dividend yield. **My view:** BP and its rivals are continuing to mint cash as they benefit from strong energy prices and the financial discipline of recent years. The group's balance sheet looks in good shape to me – stronger than for many years. However, profits are still close to record highs and I think it's worth remembering that this is a cyclical, low-growth business. At least, it always has been. At current levels, BP shares are trading on more than ten times 10-year average earnings (CAPE), compared to a long-term average CAPE of about seven. In my opinion, BP's CAPE ratio gives us a more accurate guide to the valuation of the business. I don't think the shares are especially cheap on a cyclical view, although I accept that BP may continue to perform well for a while yet. --- ### Barratt Developments (BDEV) > we expect to deliver full year adjusted profit before tax in line with current market expectations Just a short note on Barratt Developments to complement my dividend notes on [Persimmon](https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/) and [Taylor Wimpey](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/) last week. Barratt is one of my top picks in this sector and today's trading update confirms the company has performed well this year. Reservation rates have recovered from 0.30 net private reservations per active outlet per average week at the end of last year, to a rate of 0.65 across the period 1 January - 23 April. This compares to an exceptional sales rate of 0.93 during the same period last year. Barratt is fully sold for the year to 30 June and expects financial results to be in line with consensus forecasts. Management expect to report a £900m net cash balance at year end and confirm the group's debt facilities have not been used during the current financial year. Broker estimates I can see suggest earnings of 66p per share for FY23, with a dividend of 33p. That prices the stock on eight times forecast earnings, with a 6.5% yield. **My view:** taking a cyclical view, as with BP above, Barratt is trading on around eight time 10-year average earnings and at around 1.1x tangible book value. The shares aren't quite the bargain they were at the end of last year, but I think they look reasonably priced for income investors. I remain positive on a medium-term view and would be happy to buy or hold at current levels. --- ### Lloyds Banking Group (LLOY) > Financial guidance maintained Lloyds's first-quarter results were slightly better than expected, but the banking group opted to leave its full-year guidance unchanged. My reading of this is that macroeconomic uncertainty remains a potential concern. By getting a strong set of numbers in the bank now but leaving guidance unchanged, Lloyds has a little more flexibility for the remainder of the year. Having said that, today's numbers did not flag up any obvious concerns. Net income for the quarter was £4.7bn, 15% higher than during the same period last year. This gain was driven a rise in net interest income, thanks to higher interest rates. However, net interest income of £3,535m was 3% lower than during the final quarter of 2022\. The bank's net interest margin of 3.22% was unchanged, but Lloyds is guiding for a full-year figure of *"at least"* 3.05%, perhaps suggesting that margins have peaked. The company noted that mortgage margins are under pressure, as lenders compete for new business in a slowing market. Customer deposits also fell slightly, presumably as customers moved their cash to take advantage of higher interest rates available elsewhere. Combatting this flow could also put pressure on Lloyds' NIM. Bad debt charges rose to £243m during the period (Q1 2022: £177m) but were well below the £465m booked in Q4 last year. There does not yet seem to be any sign of credit quality problems. **Outlook:** unchanged. Broker consensus estimates ahead of today suggested that Lloyds will reported earnings of 7.6p per share this year and pay a 2.8p dividend. That's equivalent to a P/E of six and a 6% dividend yield. **My view:** Lloyds is trading nearly 10% below its tangible net asset value of 49.6p and offers a well-supported 6% dividend yield. As with [NatWest](https://www.rolandhead.com/dividend-notes/peak-profits-nwg-mgam/) and [Barclays](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/) last week, I think Lloyds shares look reasonable value at current levels, despite the uncertain outlook. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Shares Podcast: James Halstead with Maynard Paton & Roland Head URL: https://www.rolandhead.com/podcasts/shares-podcast-james-halstead-with-maynard-paton-roland-head/ Last updated: 2023-10-27T14:43:50.000Z In this new episode of the Private Investor's Podcast, my good friend [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com) and I discuss the 45-year dividend record and other attractions of **James Halstead (LON:JHD)**, the AIM-listed floorcovering specialist. - Listen on [**Apple**](https://podcasts.apple.com/us/podcast/pip011-maynard-roland-discuss-a-cash-rich-no-debt/id1642393167?i=1000611176044&ref=rolandhead.com) - Listen on [**Spotify**](https://open.spotify.com/episode/3M8idcPj4VQf3vp2XJvhlv?ref=rolandhead.com) - Listen on [**Amazon**](https://music.amazon.co.uk/podcasts/bf4b8007-5576-41e3-8459-57883df901aa/episodes/adc1c694-958e-456c-81a2-6da61b818397/the-private-investor's-podcast-pip011-maynard-roland-discuss-a-cash-rich-no-debt-family-run-business-which-has-increased-dividends-for-45-years?ref=rolandhead.com) - Listen on [**YouTube**](https://www.youtube.com/watch?v=qNsJKEPCXBc&ref=rolandhead.com) The topics we discussed included: - the stunning returns enjoyed by long-term shareholders - James Halstead's market-leading products - the company's remarkable 45-year dividend record and 4% yield - why we believe this 108-year-old business has a lasting competitive advantage - how – and why – James Halstead splashed out £50m from its cash reserves last year - the quirky boardroom setup ... - the benefits – and risks – of family management - the unusual ownership profile of the company's shares - our view on James Halstead's latest results and dividend outlook - would Maynard or I buy James Halstead shares today? - ... and what price would we be willing to pay? This podcast was recorded on 25 April 2023. I hope you enjoy it. As always, all feedback very welcome! Roland --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest only. Nothing I say should be taken as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Apr' 23 dividend portfolio update: expanding coverage URL: https://www.rolandhead.com/portfolio/apr-23-dividend-portfolio-update-expanding-coverage/ Last updated: 2023-05-20T12:04:45.000Z Welcome to my quality dividend portfolio update for April 2023. I normally only cover interim and full-year results from the companies in my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) in these updates. But after a deluge of results in February and March, the portfolio only provided a sprinkling of trading updates in April. Some of these provide interesting commentary on trading conditions, so in a break from my normal programming I will be covering trading updates this month. *As a quick reminder, the model portfolio on this site contains the same companies as my personal portfolio.* ### Dividend notes Before I get started, I'd like to flag up a new occasional format I'm trying out to cover results from dividend-paying companies I follow but don't own in my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). Last week I published three [dividend notes](https://www.rolandhead.com/tag/dividend-notes/) covering the following stocks: - Wed 26: [The road to recovery? ABF, WTB, GSK & PSN](https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/) - Thurs 27: [Optimism vs uncertainty - TW., SBRY, BARC, SXS](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/) - Fri 28: [Peak profits? NWG, MGAM](https://www.rolandhead.com/dividend-notes/peak-profits-nwg-mgam/) My aim is to make these more concise, although I haven't entirely succeeded yet! *Please let me know what you think. All feedback very welcome – good or bad. Just hit reply or leave a comment.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** --- ### In this month's report: Here's a summary of the companies covered in April's review, with a link to each section: _This post is for paying subscribers only._ ### Dividend notes (28/04/23): peak profits? NWG, MGAM URL: https://www.rolandhead.com/dividend-notes/peak-profits-nwg-mgam/ Last updated: 2023-05-27T09:42:38.000Z Bank results continue to flow, with NatWest's Q1 numbers out today. I'm also looking at a FTSE 250 industrial group that looks potentially interesting to me, but may carry some cyclical risk. *This is intended to be a brief review of the latest results from UK dividend shares that are in my investable universe and are likely to appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *This is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* ### Companies covered: (click links to scroll to the relevant section) - **[NatWest Group (LON:NWG)](#natwest-group-nwg)** \- gains from higher interest rates are flattening out, but this UK-focused bank looks in good shape to me. - **[Morgan Advanced Materials (LON:MGAM)](#morgan-advanced-materials-mgam)** \- a solid set of numbers, but a cyber attack will hit 2023 profits and I wonder about cyclical risks. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### NatWest Group (NWG) > Q1 2023 attributable profit of £1,279 million and a return on tangible equity of 19.8% *Disclosure: I own NatWest shares as part of my [SIF portfolio at Stockopedia](https://app.stockopedia.com/columns/stock-in-focus-15?ref=rolandhead.com). NatWest is *not* part of the [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) I run on this website.* NatWest shares are not as cheap as those of Barclays, which [I looked at yesterday](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/). But I think the greater simplicity of the company's retail-only banking model has some attractions. Today's [Q1 results](https://investegate.co.uk/natwest-group-plc--nwg-/rns/nwg-plc-q1-2023-interim-management-statement/202304280700077892X/?ref=rolandhead.com) appear to confirm this. Profit attributable to ordinary shareholders rose by 52% to £1,279m, compared to the same period last year. Most other key metrics were also positive: - Return on tangible equity (RoTE): 19.8% (Q1 2022: 11.3%) - Net interest margin: 3.27% (Q1 2022: 2.45%) - Total interest-earning assets: £360bn (Q1 2022: £335bn) - Cost-to-income ratio: 49.8% (Q1 2022: 57.1%) - Tangible net asset value per share: 278p (Q1 2022: 269p) - CET1 ratio: 14.4% (Q4 2022: 14.2%) Bad debts appear to remain minimal. The bank booked an impairment charge of just £70m for the period, half the £144m reported for the final quarter of 2022. However, while NatWest's Q1 results were significantly ahead of the first quarter of 2022, they didn't show much improvement from the fourth quarter (i.e. the preceding period). Profit and other performance metrics were broadly flat in Q1, when compared to Q4 2022\. My feeling is that the easy money gains from rising interest rates are now in the bank's results – and perhaps also priced into its shares. **Outlook:** the bank has left its 2023 guidance unchanged from the time of its 2022 results. Broker consensus forecasts price the stock on about six times 2023 forecast earnings, with a dividend yield of 6.5%. **My view:** as I mentioned in yesterday's [review of Barclays' Q1 numbers](https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/), I think banks could come under some pressure to pass on higher interest rates to savers. NatWest's instant access Cash ISA and Flexible Saver [savings accounts](https://www.natwest.com/savings.html?ref=rolandhead.com) both currently offer interest rates of just 1% on balances under £25,000\. Fairly derisory, when 3%+ is easily available elsewhere. I wonder whether the big banks could come under pressure to offer more competitive (fair!) rates to savers. This could mean that net interest margins – and perhaps profits – are approaching a peak. We could also see a rise in bad debts if the UK economy slows further. Even so, I think NatWest looks in good health and reasonably priced at current levels. As I write, the stock is trading at about 260p, just below its tangible book value of 278p. This valuation seems fair to me, given the 6%+ dividend yield on offer and the bank's improving profitability. NatWest shares probably aren't the bargain they were a year ago. But the stock still looks attractive to me, from an income perspective. --- ### Morgan Advanced Materials (MGAM) > Customer demand remains robust. This FTSE 250 industrial group can trace its roots back to 1865, when it started making crucibles – ceramic containers used for pouring molten metal in iron foundries. The business was previously known as Morgan Crucible, but its current name more accurately reflects the diversified business of today. MGAM produces a [wide range of specialist ceramics](https://www.morganadvancedmaterials.com/en-gb/what-we-do/?ref=rolandhead.com) that are used in industrial, energy, transport and healthcare settings. Let's take a look at today's results. - **2022 highlights:** today's [final results](https://investegate.co.uk/morgan-adv.materials--mgam-/rns/full-year-results-for-the-period-ended-31-dec-2022/202304280700067838X/?ref=rolandhead.com) cover the 2022 calendar year and appear to be in line with forecasts. - Revenue up 17% to £1,112.1m (+11.2% at constant currency) - Adjusted operating profit +21.3% to £151m (+14.7% at constant currency) - Adjusted earnings per share up 24.3% to 33.8p - Free cash *out*flow: £46.9m (2021: free cash flow of +£66.2m) - Net debt: £200m (2021: £96.5m) - Full-year dividend up 32% to 12.0p per share **Profitability:** trading appears to have been positive across the group's operating divisions and it seems that the company has been able to pass on higher costs. MGAM's adjusted operating margin increased slightly to 13.6% last year. The group cites a return on invested capital of 22.4% (2021: 20.5%), which is an adjusted metric. But my standard calculation of return on capital employed comes out at 19.8%, which is still very attractive, in my view. **Free cash flow & net debt:** last year saw a free cash *outflow* of £46.9m, which sounds alarming at first glance. The outflow was explained by three items: - £67m one-off contribution to UK pension scheme - no further payments due - £35m increase in working capital to support inventory availability - £29m capital expenditure SharePad data suggests that annual capital expenditure of around £30m is fairly typical, so I'm not prepared to overlook this. But I do accept that the working capital and pension costs are probably unusual, if not exceptional. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgam-capex-workingcapital-280423.png) Interestingly, the chart above suggests that working capital has only previously been this high ahead of a recession or slowdown (2000, 2009, 2012). Excluding working capital changes and pension costs from last year gives me an estimated underlying free cash flow of £55m. That represents 57% cash conversion from last year's net profit of £96.7m. Not brilliant, but for a capital-intensive business with a £30m annual depreciation charge, perhaps not too bad either. MGAM paid a £31.6m dividend last year. Combining this with the free cash outflow gives a total cost of £78.6m. This appears to have accounted for the majority of last year's £104m increase in net debt. While I think leverage remains comfortable at 2x net profits, I'd prefer not to see any further increase this year. **2023 outlook:** MGAM suffered a major cyber attack in January. The resulting disruption to production has now mostly been resolved, but [the company expects](https://investegate.co.uk/morgan-adv.materials--mgam-/rns/update-on-trading-and-cyber-security-incident/202302070700040905P/?ref=rolandhead.com) to report a 10-15% hit to adjusted operating profit this year as a consequence. Broker consensus forecasts ahead of today showed adjusted earnings falling by c.15% to 27.5p per share. The dividend is expected to be unchanged. These estimates price MGAM shares on 11 times forecast earnings, with a 4% dividend yield. **My view:** this business has exposure to many different industries and market sectors, with varying levels of cyclicality. A positive spin on this would be to say that weakness in some areas will be offset by stronger demand elsewhere. For example, clean energy may continue growing, regardless of what might happen in the fossil fuel sector. A more cautious view might be to suggest that the several of the group's major customer sectors are interdependent and might all suffer in a recession. For example, foundries and the automotive and aerospace industries. I'm not sure which view is correct, but Morgan Advanced Materials does currently score quite well in my [dividend screening](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) results. The shares don't look too expensive to me, either, given the above-average profitability of the business. I'm not yet convinced that the shares are a long-term buy for me, but I think MGAM could be worth a closer look. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes (27/04/23): optimism vs uncertainty - TW, SBRY, BARC, SXS URL: https://www.rolandhead.com/dividend-notes/optimism-vs-uncertainty-tw-sbry-barc-sxs/ Last updated: 2023-05-27T09:42:49.000Z Results and trading updates are continuing to flow from the dividend-paying companies I follow. In today's update there's mostly good news – albeit with some caveats. *This is intended to be a brief review of the latest results from UK dividend shares that are in my investable universe and are likely to appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point.* *This is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* ### Companies covered: (click to scroll to the relevant section) - **[Taylor Wimpey (LON:TW)](#taylor-wimpey-tw)** \- this housebuilder appears to be performing a little better than Persimmon, which I covered yesterday. - **[J Sainsbury (LON:SBRY)](#j-sainsbury-sbry)** \- a solid set of results, but low profitability suggests to me that the shares are fully priced at current levels. - **[Barclays (LON:BARC)](#barclays-barc)** \- good progress with few signs of problem. Good value at current levels, in my view. - **[Spectris (LON:SXS)](#spectris-sxs)** \- good but a little pricey for me right now 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Taylor Wimpey (TW) > "We have seen continued recovery in demand from the low levels experienced towards the end of 2022" In [yesterday's report](https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/) I looked Q1 figures from housebuilder **Persimmon**. Today we have an AGM update from rival group Taylor Wimpey covering the year to 23 April. I thought it might be interesting to compare the two firms' performance so far this year. **Sales rate:** Taylor Wimpey's management says that net private sales have fallen by 23% to 0.75 per outlet per week so far this year, including bulk deals. Sales rates appear to have improved steadily through March and April – TW's full-year results reported net private sales rate of 0.62 for the year to 26 February. Taylor Wimpey also appears to be outselling Persimmon, which reported a net private sales rate of 0.52 for the year to 26 February, and a rate of 0.62 for the first quarter. However, the improving trend reported by both firms could mean that Persimmon's performance in April will have lifted its sales rate closer to that of Taylor Wimpey. We don't know. **Target completions:** this week's guidance from each company makes it clear that Persimmon is expecting a bigger fall in new home completions this year than Taylor Wimpey: | Company | 2022 completions | 2023 target | % fall (mid) | | ------------- | ---------------- | ------------ | ------------ | | Taylor Wimpey | 14,154 | 9,000-10,500 | \-31% | | Persimmon | 14,868 | 8,000-9,000 | \-43% | Of course, we don't yet know how market conditions will develop later this year. Persimmon's greater caution may prove justified. So far, though, the combination of lower sales rates and a bigger fall in targeted completions leads me to conclude that Persimmon is not performing as well as Taylor Wimpey in the current environment. One reason for this could be TW's higher average selling price (ASP) and a slightly different customer demographic: - Persimmon 2022 ASP: £248,616 - Taylor Wimpey 2022 ASP: £313,000 **Build cost inflation:** both companies have seen costs rise by a similar amount, but TW appears to be more optimistic: - Taylor Wimpey: 9-10%, *"beginning to moderate"* - Persimmon: 8-9%, *"limited signs of easing"* **Dividend:** Like most of the big housebuilders, Taylor Wimpey's financial position remains strong. The company's dividend guidance is for an annual payout of 7.5% of net assets, or a minimum of £250m. Management say this policy has been stress tested against a 20% fall in house prices and a 30% fall in volumes. The volume decline is in line with expectations for this year, but thus far house prices have been more resilient. We'll have to see how market conditions evolve, but this payout does seem reasonable to me given the group's 2022 year-end cash balance of £863m. Based on last year's balance sheet, my sums suggest a dividend yield of between 5.5% and 7.5% this year, based on a 125p share price. Broker forecasts show a payout of 8.9p per share, equivalent to a yield of 7.1%. **Outlook:** Taylor Wimpey strikes a cautiously optimistic tone. But the company doesn't seem to expect sales rates to improve, and suggests they could fall from current levels (my bold): > Customer interest has continued to recover from the weak conditions experienced in the final quarter of 2022\. We continue to expect 2023 completions to be in the range of9,000 to 10,500, broadly equivalent to an **annual net sales rate assumption of 0.5 to 0.7**, with completions more weighted to the second half. An H2 profit weighting is sometimes the forerunner of a downgrade. I think that's a risk here, as with many other businesses at the moment. However, both Taylor Wimpey and Persimmon have healthy balance sheets that should withstand a crash, in my opinion. I don't expect any serious financial problems. As I've said previously, I believe UK housebuilders offer value at the moment, with many trading at or below their tangible net asset values. I would choose Taylor Wimpey in preference to Persimmon, but neither of these is [the housebuilder I've bought for my dividend portfolio](https://www.rolandhead.com/portfolio-shares/cyclical-ftse-250-stock-with-a-6-yield/). --- ### J Sainsbury (SBRY) > ... delivering results at the top end of expectations Sainsbury's shares are a perennial favourite with investors for their high dividend yield and strong cash generation. [Today's results](https://investegate.co.uk/sainsbury-j--plc--sbry-/rns/final-results/202304270700066136X/?ref=rolandhead.com) cover the both confirm these attractions, but also highlight one reason why I don't hold this stock. Let's start with a look at the financial summary for the **52 weeks ended 4 March 2023**. **Financial highlights:** - Retail sales: (inc. VAT, excl. fuel): up 2% to £28,644m - Underlying pre-tax profit: down 5% to £690m - Retail free cash flow: up 28% to £645m - Dividend: 13.1p (unchanged) - Net cash excl. leases: £144m (2022: net debt of £285m) - *Retail underlying operating margin: 2.99% (2022: 3.4%)* - *Company-adjusted ROCE: 7.6% (2022: 8.4%)* With retail sales up by just 2% and underlying pre-tax profit down by 5%, we can immediately deduce that Sainsbury's has either absorbed some cost inflation or lost market share. The answer appears to be the former. Chief executive Simon Roberts tells us that Sainsbury's has *"spent over £560 million keeping our prices low over the last two years"*. The company doesn't say how much it's absorbed over the last year alone, though. According to the latest data from market research specialist Kantar, [Sainsbury's market share](https://www.kantarworldpanel.com/grocery-market-share/great-britain/snapshot/19.03.23/20.03.22?ref=rolandhead.com) fell by 0.3% to 14.8% over the period covered by today's results. I don't think that's too bad, in the circumstances, given the pressure on consumer incomes. **Cash generation:** as Sainsbury's also includes a bank, I think the company's own measure of *retail free cash flow* is a useful guide to the free cash flow produced by the grocery business. Retail free cash flow rose to £645m last year, from £503m in 2021/22\. This increase was largely driven by a £174m reduction in working capital as the impact of Covid-19 dropped out of the numbers. Management expect retail free cash flow to fall back to *"at least £500m"* during the current year. It looks to me like £500m is more of a baseline figure we can rely on. At the current share price, this gives a free cash flow yield of 7.5% – potentially attractive. **Profitability:** Sainsbury's cash generation may be attractive relative to its share price, but the business requires £30bn of turnover and £14bn of capital employed to achieve this. As a result, profitability is slim. - Retail free cash flow margin: 2.3% Even the company's own *adjusted* profitability metrics are fairly unexciting. Both worsened last year: - *Retail underlying operating margin: 2.99% (2022: 3.4%)* - *Company-adjusted ROCE: 7.6% (2022: 8.4%)* On a statutory basis, I estimate ROCE at 4.0% using statutory operating profit, or 6.9% using adjusted operating profit. Sainsbury's specifies a pre-tax cost of capital of 9.1% in today's results. So these ROCE figures tell me that the business is unlikely to be covering its cost of capital. In other words, it's not creating any equity value for shareholders and may be destroying it. The company says it's more profitable than before the pandemic and I'm sure that's true. But taking a longer view, we can see that the group has needed to continually add more assets over the last 30 years to generate the same level of profit: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/sbry-nav-netprofit-270423.png) This might explain why the share price trend over the same period has been downards: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/sbry-all-chart-270423.png) **Balance sheet:** Sainsbury's balance sheet equity value is distorted slightly by the impact of a large and ever-changing pension surplus. Stripping this out (it will never be available to shareholders), I can see that the group's book value rose from £6,140m to £6,264m last year, or 266p per share. That's a better results than I was expecting, given that the company booked a £281m impairment charge against its store estate during the year to reflect higher financing costs. The pension situation looks under control to me, but I think a couple of points are worth emphasising. - despite the surplus, cash pension contributions are running at c.£45m/year - the group's final salary pension scheme had £6.9bn in assets and £5.9bn in liabilities at the end of the year. The scheme's large size means that a small change in valuations can lead to a big swing in the surplus/deficit. Future funding requirements could remain significant. **Outlook:** at this early stage of the year, the company expects underlying pre-tax profit of between £640m and £700m in 2023/24\. To me, this suggests a modest fall from last year's level of £690m. As I mentioned, retail free cash flow is expected to fall to *"at least £500 million"*. Consensus forecasts ahead of today's results suggested adjusted earnings per share could fall by around 10 % this year. That might put the dividend under pressure, based on the 60% payout ratio policy – broker consensus is for the payout to fall to 12.1p, although I guess Sainsbury's might be able to hold it. **My view:** Sainsbury's appears to be performing well, but the shares look fully valued to me on 14 times forecast earnings, with a 4.6% yield. The company's low profitability mean that – as far as I can see – it will continue to struggle to create any lasting value for shareholders. If I was going to invest in Sainsbury's, I would want to buy the shares at a discount to their book value. All else being equal, this would increase my dividend yield and boost my effective return on equity\*. I calculate a book value of 266p per share from today's accounts. The shares have often traded below this level in recent years – I suspect they may do again at some point: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/sbry-5yr-chart-270423.png) For now, my view is that Sainsbury's offers its customers a better deal than its shareholders. *\*(Accounting return on equity is based on a company's balance sheet equity. Buying shares at a discount to this book value effectively increases an investor's personal return on equity.)* --- ### Barclays (BARC) > Barclays ... remains on track to deliver its 2023 targets My comment above about return on equity also applies to many UK banks at the moment. Barclays' Q1 results gave the shares a 5% lift, but the bank's share price of 162p still offers a 45% discount to its tangible net asset value of 301p per share. In theory, buying the shares at this level would transform last year's 10% return on tangible equity into a more appealing return of 19%. While the macro and sector outlook for banks isn't without risk, today's Q1 results do not suggest any fresh concerns to me. - Pre-tax profit up 16% to £2.6bn (Q122: £2.2bn) - Q1 return on tangible equity (RoTE) of 15.0% (Q122: 11.5%) - Cost: income ratio 57% (Q122: 63%) - Tangible net asset value per share: 301p (FY22: 295p) - CET1 ratio: 13.6% (FY22: 13.9%) - Credit impairment charges: £524m (Q122: £141m) In the retail bank and credit card divisions, gains linked to higher interest rates appear to be offsetting a modest rise in bad debt and a reduction in consumer lending. Barclays' corporate and investment banking division is also benefiting from higher interest rates, both on corporate deposits and through increased credit activity. **Outlook:** Barclays' expects to achieve a RoTE of greater than 10% this year, which suggests the bank doesn't expect much improvement from last year's figure of 10.4%. Credit losses are expected to remain modest. **My view:** Barclays stock currently trades at a 45% discount to book value despite being on track to deliver double-digit RoTE this year. The forecast dividend yield of 5.8% looks easily affordable to me and is a further attraction. One risk I can see is that net interest income will peak and perhaps fall as market pressure forces banks to improve deposit rates. There's also the broader risk that a recession in the US or UK will put more pressure on borrowers than is currently the case. Even so, I think it's fair to say that Barclays shares are probably cheap at current levels. --- ### Spectris (SXS) > Continued strong trading momentum in the first quarter This FTSE 250 precision measurement specialist is a stock I've wanted to own but missed out on buying on a few occasions – most recently last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/sxs-5yr-chart-270423.png) Today's first-quarter update suggests the business is performing well and clearing its order backlog as supply chains return to normal: - 24% organic sales growth - Book-to-bill ratio of 1.03x (i.e. new orders are slightly outpacing completed orders) - Net cash of £278.4m at 31 March 2023 - *"Investing for growth through elevated R&D and targeted M&A"* **Outlook:** management remain confident of delivering 6-7% organic sales growth this year, with improved profit margins. Clearly this is well below the 24% organic sales growth figure posted in Q1\. This reflects the way the group is clearing its order backlog – the second half is expected to see a more normalised performance. As a result, profit weighting to the first half of the year is expected to be *"higher than normal"*. **My view:** I remain a fan of this business and have no serious concerns. But the outlook guidance does suggest to me that there's some risk of disappointment in H2, if the economic outlook weakens. Spectris's H1 results are likely to benefit from the clearance of last year's backlog. But once this is gone, the group will be more exposed to the normal economic cycle. Broker forecasts I can see suggest that adjusted operating profit this year will be broadly flat on 2022\. That gives the stock an EBIT/EV yield of around 6%, by my calculation. Consensus estimates suggest a forward P/E of 20 with a 2.2% dividend yield. Spectris looks fairly valued to me at current levels. On a long-term view the shares might not disappoint, but I'm hoping to find a cheaper entry point. --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Dividend notes (26/04/23): the road to recovery? ABF, WTB, GSK, PSN URL: https://www.rolandhead.com/dividend-notes/on-the-road-to-recovery-abf-wtb-gsk-psn/ Last updated: 2023-07-26T16:08:30.000Z Welcome to the first of my dividend notes updates. This is intended to be a brief review of the latest results from UK dividend shares that are in my investable universe and are likely to appear in [my screening results](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) at some point. *This is a new format I'm experimenting with, so any feedback would be particularly welcome - please feel free to comment below or [contact me directly](https://www.rolandhead.com/contact/).* ### Companies covered: - [Associated British Foods (LON:ABF)](#associated-british-foods) - [Whitbread (LON:WTB)](#whitbread) - [GSK (LON:GSK)](#gsk) - [Persimmon (LON:PSN)](#persimmon) 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ### Associated British Foods This FTSE 100 group is unusual for a whole range of reasons. It's family controlled and it's an old-fashioned conglomerate, owning a range of food and agricultural businesses in addition to the Primark clothing chain. For dividend investors I think there's potentially a lot to like. Prior to the pandemic, ABF had not cut its dividend for more than 30 years. It navigated the pandemic without needing to raise funds the payout is expected to return to pre-pandemic levels this year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/abf-dividends-260423.png) Let's take a look at the latest numbers: **Results highlights:** This week's [interim results](https://investegate.co.uk/assoc.british-foods--abf-/rns/interim-results-announcement/202304250700082990X/?ref=rolandhead.com) covered the 24 weeks ended 4 March 2023 (ABF has an unusual mid-September year end). > *"Strong growth in group sales. Very good footfall and margin better than expected at Primark."* - Revenue: up 21% to £9,560m - Operating profit: down 3% to £663m - Net cash (exc. lease liabilities): £586m (Sept '22: £1,488m) - Earnings per share: up 11% to 67p - Interim dividend: up 3% to 14.2p per share - *TTM operating margin: 6.2%* - *TTM return on capital employed (ROCE): 7.8%* ABF's half-year commentary struck a positive tone. But the numbers showed the impact of the company's decision to absorb some cost increases in Primark in order to keep prices competitive. One notable change in the figures above was net cash, which fell by almost £900m during the half year. The company says this fall was driven by elevated inventories at Primark and the Illovo sugar business, plus some cost increases. Much of this outflow is expected to reverse in the second half, as inventories fall. I don't see this as a major concern, assuming full-year results reflect this guidance. **Outlook:** The company says that full-year profits from its Food businesses are expected to be *"modestly ahead"* of last year. However, a poor UK sugar beet harvest means that profits from the AB Sugar division are expected to fall this year. At Primark, management *"remain cautious about the resilience of consumer spending"*. Product costs remain elevated although the company is starting to see savings on energy and shipping costs. Overall, Primark's adjusted operating margin is expected to be 8.3% this year, compared to 9.8% last year. At a group level, expects its full-year adjusted earnings to be *"broadly in line"* with last year. Broker consensus forecasts suggest adjusted earnings of 130p per share this year, versus 131.1p last year. **My view:** ABF's conglomerate model often means that stronger performance in one area is offset by weaker performance elsewhere. In my view, this is part of the appeal of this investment – this diversity tends to lead to more stable earnings and dividend performance over long periods. The group's profitability is slightly below historic average levels at the moment, but I suspect this will improve over the next 12-18 months. I estimate that ABF shares offer an EBIT yield of around 7% at current levels, based on trailing 12-month profits. In P/E terms, the stock is trading on 15 times forecast earnings, with a dividend yield of 2.3%. At this level I'd say the shares are fairly valued, although not quite the bargain they might have been last year. My positive view on ABF is unchanged. I think this is a well-run business with good long-term prospects. --- ### Whitbread > Significant profit uplift to above pre-pandemic levels, driven by Premier Inn UK that continues to outperform the UK midscale and economy ('M&E') market. This week's [full-year results](https://investegate.co.uk/whitbread-plc--wtb-/rns/preliminary-results-announcement/202304250700082930X/?ref=rolandhead.com) from the owner of Premier Inn cover the 52 weeks to 2 March 2023\. This means they're the first set of results unaffected by Covid-19 for three years. Inevitably, this means that comparisons made against last year's numbers look quite favourable. To present a more neutral view, Whitbread has included comparison figures from the financial year which ended on 27 February 2020\. **I've used these FY20 comparators in the summary below:** - Revenue up 27% to £2,625m - Adjusted pre-tax profit up 15% to £413m - Adjusted earnings per share down 2% to 162.9p - Net cash exc. leases £171m (FY20: net debt of £323m) - Dividend per share: 74.2p (FY20: 32.7p - due to the cancellation of the final payout) - *Operating margin: 19.1%* - *ROCE: 5.6% (company-adjusted ROCE: 10.5%)* The numbers seem solid enough to me. Management say that Premier Inn performed well last year and continued to gain market share in its target sectors of the UK market. The group's return on capital is somewhat depressed by my statutory measure, but the company's adjusted metric presents a view that's more in line with medium-term guidance. Having taken a quick look at the adjustments, my feeling is that my estimate of real underlying ROCE would probably be somewhere between the two figures above. One reason for surpressed returns maybe the ongoing investment in the group's German business. Whitbread is rolling out Premier Inn in Germany and now has 51 hotels open. The German business generated a £50m pre-tax loss last year, but management are confident that over the long term, it will generate 10%-14% returns on the £1bn of capital that's been committed thus far. The Germany hotel market is highly fragmented, like the UK market was 10-20 years ago. So there is potentially a significant opportunity for a well-positioned brand to take share, if Premier Inn can adapt its offering to suit German preferences. **Premier Inn UK:** In the UK, Premier Inn occupancy rose to 82.7% last year, compared to 76.3% in the FY20 financial year. Average revenue per available room was 27% higher, at £59.45, although I'm not sure this is very meaningful, given the impact of inflation. Perhaps more interesting is that food and beverage sales have not yet returned to pre-pandemic levels. On a like-for-like basis, F&B was down 7% last year. **Outlook:** the company says its confident in the outlook for FY24 but does not provide any fresh profit guidance. Broker consensus forecasts I can see suggest adjusted earnings of 148p per share for FY24, which seems to imply a 9% fall from the FY23 figures. I'm not sure if this is correct – I'll keep an eye out for updated forecasts over the coming days. The company does provide a useful insight into profit sensitivity to changes in sales, though: - 1% change in UK accommodation sales = £15m impact on pre-tax profit - 1% change in UK F&B sales = £4m impact on pre-tax profit **My view:** At this point, my feeling is there's still some uncertainty about the likely path of profits this year. However, I remain a fan of this business, which I see as well run and well positioned in its core UK market. The balance sheet looks healthy to me, with a net cash position excluding leases and £4.6bn of tangible assets – the group holds the freehold for 54% of its hotels. The shares now trade on around 20 times trailing earnings and yield 2.3%. My sums suggest an EBIT yield of 5%, which is below the level I'd normally look for in a new investment. My feeling is that Whitbread shares are fully priced, given the uncertain outlook. But I don't think shareholders have anything much to worry about. --- ### GSK I published an in-depth review of FTSE 100 pharmaceutical **GSK** recently, when I asked [if the newly-separated group is a quality dividend share](https://www.rolandhead.com/dividend-shares/is-new-gsk-a-quality-dividend-share/). This week's first-quarter results do not change my view that the company is most likely a steady dividend payer, but still needs to prove that it can deliver improved rates of growth and innovation. **Outlook:** GSK reiterated its full-year guidance for 2023, which suggests adjusted earnings should rise by 12%-15%. The full-year dividend is expected to be 56.5p per share. This guidance prices the stock on around 10x 2023 forecast earnings, with a 3.8% yield. **My view:** The group's 2023 guidance has been left unchanged, but profits are expected to be weighted towards the second half of the year. My general impression was the the outlook was still a little uncertain. I think GSK is probably reasonably valued at current levels and would not be a terrible thing to buy. But my view remains neutral for now. --- ### Persimmon Housebuilder Persimmon raised investor hopes on Wednesday that the worst of the housing slump might be over. The FTSE 100 firm reported a 37% fall in new reservations during the first quarter, compared to the same period last year. But management said that if sales remained stable at current levels, they might be at the top end of expectations for this year. > If sales rates continue at the levels seen year to date, we would expect full year 2023 volumes to be toward the top end of the previously indicated range of 8,000 to 9,000 completions. If this is to be achieved, Persimmon would need to deliver a sharp increase in completions for the remainder of the year. Q1 completions fell by 42% to just 1,136, which the company says reflects its reduced order book: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/psn-1q23-highlights.png) Most of Persimmon's peers have only reported results to the end of December 2022 so far, so it will be interesting to see if their results show the same pattern of reduced completions in Q1. **Outlook:** the company says that the combined impact of build cost inflation and lower completions is having *"a significant impact on the Group's profit margins"*. Although Persimmon is managing to achieve *"modest increase"* in average selling prices, this is not enough to offset higher costs and lower volumes. Broker forecasts for the year suggest adjusted earnings could fall by c.60% to 93p per share this year as a result. Dividend guidance for a minimum payout of 60p per share this year gives the stock a forecast yield of around 5%. **My view:** I'm not sure I read Persimmon's Q1 update quite as bullishly as some other commentators. I think there could be a little more pain to come. However, I am fairly bullish on housebuilders on a longer-term view. In my opinion, many of these shares look good value on a cyclical view at the moment. Persimmon isn't my top choice in this sector, but I think the shares probably are reasonably priced at the moment. *I added a different UK housebuilder to my portfolio last year. You can [read my September 2022 buy report](https://www.rolandhead.com/portfolio-shares/cyclical-ftse-250-stock-with-a-6-yield/) on the company concerned here.* 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Is Morgan Sindall a top dividend share to buy now? URL: https://www.rolandhead.com/dividend-shares/is-morgan-sindall-a-dividend-share-to-buy-now/ Last updated: 2023-05-27T07:09:07.000Z The company I'm going to look at today has generated a total return (inc. dividends) of 305% for its shareholders over the last 10 years. On an annualised basis, that's an average annual return of 15% per year. That's roughly twice the long-term average return from the UK market. These kind of returns are not what I'd normally expect from a construction and contracting business. This sector tends to have low margins and be somewhat accident prone. However, I think that FTSE 250 group **Morgan Sindall (LON: MGNS)** could be a notable exception to this general rule. This founder-led construction and regeneration group operates in a range of UK markets and has an impressive record. Morgan Sindall has trounced the FTSE 250 over the last decade: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgsn-vs-mcx-10yr-190423.png) MGNS (black) vs FTSE 250 (blue) The group's stock has also outperformed all of its listed competitors over the same period, except critical infrastructure specialist Renew Holdings, whose dividend yield is too low to interest me right now. Morgan Sindall is currently one of the highest-scoring stocks in my quality dividend share screen and offers a tempting dividend yield of almost 6%. **In this piece I'm going to consider whether Morgan Sindall could be a suitable share to [replace Direct Line Insurance](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/) in my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/).** 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Table of contents - [History](#history-owner-management) \- an owner-managed firm - [Recent trading and outlook](#recent-trading-and-outlook) \- stable but with economic headwinds - [Crunching the numbers](#morgan-sindall-crunching-the-numbers) \- how does Morgan Sindall score in my screening system? - [Dividend culture](#dividend-culture-excellent) \- an 27-year record of shareholder payouts - [Dividend safety](#dividend-safety-very-good) \- I'm impressed by prudent levels of cover - [Dividend growth](#dividend-growth-lumpy-cash-flow) \- sustainable but inconsistent - [Dividend yield](#dividend-yield-improving) \- a cyclically high yield suggests a possible buying opportunity - [Valuation](#valuation-affordable) \- good value unless profits are about to collapse - [Profitability](#profitability-good) \- high returns and disciplined management - [Fundamental health](#fundamental-health-very-strong) \- daily cash reports provide solid foundations - [Conclusions](#conclusions-a-good-business) \- my verdict ### History: owner management Morgan Sindall was formed in 1994 when Morgan Lovell merged with William Sindall. Current chief executive John Morgan co-founded Morgan Lovell in 1977 and has a 7.4% shareholding in MGNS. The group is divided into five operating segments: - **Construction & Infrastructure** (37% of profit) - public sector and commercial buildings, road, rail, energy and water infrastructure - **Fit Out** (37% of profit) - office and education fit out - **Property Services** (3.1% of profit) - social housing property repairs - **Partnership Housing** (26.9% of profit) - social housing and mixed-tenure projects - **Urban Regeneration** (13.6% of profit) - mixed-use projects *(Profits are quoted as a percentage of 2022 adjusted operating profit and exclude group costs and exceptional items)* I'm not going to get into too much depth here. There's plenty of information available on [the group's website](https://www.morgansindall.com/businesses?ref=rolandhead.com) for anyone who wants to know more about the group's individual operating businesses. Morgan Sindall says that its mix of operations creates a virtuous circle that can strengthen both profitability and growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-virtuous-circle-web-200423.png) Source: [morgansindall.com/about](https://www.morgansindall.com/about?ref=rolandhead.com) This structure reminds me a little of the way that **Legal and General** (disc: I hold) [uses interlinked businesses](https://www.rolandhead.com/portfolio-shares/legal-general-7pc-yield-too-cheap/) to generate additional value. While I'm not convinced the synergies are so strong in this business, Morgan Sindall does seem to have a strong financial record. My previous research on this business has also led me to believe that it is very well managed, with excellent financial controls and bidding discipline – essential in this sector. I don't think it's any coincidence that John Morgan and finance boss Steve Crummett have worked together in their current roles since 2013\. ### Recent trading and outlook Trading remained strong last year. The group reported record revenue of £3.6bn and adjusted pre-tax profit of £136.2m. MGNS ended the year with an impressive secured workload of £8.5bn, albeit down by 2% on the prior year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-fy22-order-book.png) Source: Morgan Sindall 2022 results presentation Average daily net cash was £256m (2021: £219m) and the dividend was increased by 10% to 101p per share, giving a trailing yield of 5.8%. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-dividendps-yield-190423.png) Although John Morgan admits that the economic outlook has become *"more challenging"*, I wonder if the 35% share price drop since August 2021 has created a buying opportunity. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-shareprice-5yr-210423.png) After all, this business has not needed to raise new equity for at least 20 years. It also maintained dividend payments throughout the 2008 financial crisis, albeit with a cut. MGNS shares now offer a forecast yield approaching 6%. This payout is expected to remain twice covered by earnings this year. Unless the outlook for the UK economy becomes very much worse, I think the shares might be attractively priced at current levels. ## Morgan Sindall: crunching the numbers ***Description:*** *a construction and regeneration group operating in sectors including infrastructure, urban regeneration and housebuilding.* | **Morgan Sindall Group(LON: MGNS)** | **Quality Dividend score: 75/100** | **Forecast yield: 5.8%** | | ----------------------------------- | ---------------------------------- | ----------------------------- | | Share price: 1750p | Market cap: £837m | *All data at 20 January 2023* | ***Latest accounts:*** *[results for the year ended 31 December 2022](https://investegate.co.uk/morgan-sindall-grp--mgns-/rns/final-results/202302230700087855Q/?ref=rolandhead.com)* In the remainder of this review, I'll step through the different stages in my **[dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)** and explain whether I think Morgan Sindall could be a suitable addition to my quality dividend portfolio . Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: excellent I estimate that chief executive John Morgan received £3.6m in dividend payments last year – nearly double his total remuneration of £2.0m. The presence of owner management may help explain why Morgan Sindall has been able to maintain a more reliable record of dividend payments than many of its peers. According to SharePad records, Morgan Sindall now has an unbroken 27-year record of continuous dividend payments: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-dividends-200423.png) In my view, it's clear that this company attaches significant importance to maintaining a sustainable dividend. **Morgan Sindall scores 5/5 for dividend culture in my screening system.** ### Dividend safety: very good The main criteria I use to asses the safety of a dividend are earnings cover and free cash flow cover. I this case we can see that dividend cover has remained in a range between 2x and 3x earnings for most of the last 25 years. Free cash flow cover has been more variable, due to the nature of the business. But I think it's reasonable to say that in aggregate, payouts have been comfortably supported by surplus cash generation. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-divcover-fcfcover-200423.png) Looking ahead, broker forecasts suggest the 2023 and 2024 dividends should each be covered 2.2x by earnings. While there's no guarantee this will happen, it would be consistent with past performance. I don't see much to be concerned about here. **Morgan Sindall scores 4/5 for dividend safety in my screening system.** ### Dividend growth: lumpy cash flow Rising dividend payments are of limited appeal to me if their growth means that they become less affordable. This is why my dividend growth score is intended to test the affordability of a company's dividend growth. My approach to doing this is to compare dividend growth with changes in a company's net asset value (NAV) and free cash flow. For this review I'm trying a new chart format that shows the **annual percentage** **change** in Morgan Sindall's dividend and NAV. I've excluded free cash flow because it's too volatile and makes the chart unreadable: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-divps-navps-growth-200423.png) What we can see here is that Morgan Sindall's NAVps has grown by around 8% per year over the last five years. Not a bad result, in my view. Dividend growth has been more volatile, but the trend has been positive (except for 2020). I don't think these numbers are bad for this business, given the events of recent years. But this chart doesn't show the smooth, progressive growth that I'm really looking for. In short, I would say that the company's dividend growth has been sustainable but inconsistent. My dividend growth score is a reflects this, I think. **Morgan Sindall scores 2.7/5 for dividend growth in my screening system.** 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Dividend yield: improving Morgan Sindall's dividend yield is above its historical average level at the moment. In general, the yield has only been this high previously at times when the UK construction sector was facing difficult conditions. One reason for the current high yield is that as happened in 2008, the shares have fallen sharply from previous record highs: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-div-yield-shareprice-200423.png) Is this a buying opportunity, or a warning of a more difficult period ahead? It's not clear to me what is most likely to happen, but I think a measure of caution is probably prudent. Purely in terms of dividend yield, MGNS earns a middling score in my screen. The reason for this is that while the current yield is high, my score reflects five-year average dividend yield in addition to forecast yield. Morgan Sindall's buoyant share price in recent years has depressed the five-year average yield, hence the lower score. **Morgan Sindall scores 2.7/5 for dividend yield in my screening system.** ### Valuation: affordable I prefer to view valuation from a business or owner's perspective, rather than a per-share basis. So I don't use P/E in my screen (although I do use it more generally). Instead, I use EBIT yield and free cash flow yield. Both metrics use enterprise value as their denominator, rather than market cap. This means that any any net debt or net cash position is factored into the valuation, rather than being ignored. Using EBIT instead of earnings also neutralises the impact of different mixes of debt and equity, as it excludes finance and tax costs. As a rule of thumb, I tend to think that an EBIT yield of 8% may be good value, assuming the underlying profits are sustainable. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-ebit-fcf-yield-200423.png) Morgan Sindall's trailing EBIT yield of 16% is significantly above this level, and has been so since 2016. One point that's worth making is that this calcution is based on statutory operating profit, which was £88m last year. This figure was depressed by a £48.9m exceptional charge for building safety remediation. This provision should hopefully be final, in which case EBIT could rise to c.£130m this year if results are consistent with 2022\. That would imply an EBIT yield of 24%. That's either staggeringly cheap, or a warning that a cyclical downturn is looming. This depends on your macro view and whether Morgan Sindall can continue to replenish its order book. The stock's overall score for valuation is held back by its more volatile free cash flow yield, which dipped last year. However, using a base case assumption that profits should be broadly sustained, I'd have to conclude that Morgan Sindall shares look good value at current levels. **Morgan Sindall scores 3.5/5 for valuation in my screening system.** ### Profitability: good I've always been impressed by the profitability of this business whenever I've looked at it. Morgan Sindall's return on capital employed was depressed last year due to the building safety charge. Without this, I estimate it would have been 22%, consistent with 2021: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-roce-navps-200423.png) Happily, this is not what I'd call an acquisitive business. John Morgan prefers to focus on delivering organic growth. But the company did take advantage of the fallout from the financial crisis to pick up some distressed assets from rivals: - 2007: acquired AMEC's construction division - 2010: acquired Connaught's social housing maintenance division out of administration I assume these deals explain the appearance of goodwill on the group's previously pristine balance sheet. This has had the effect of increasing balance sheet assets and hence reducing return on capital employed: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-roce-goodwill-200423.png) I don't have any concerns about the profitability of this business. **Morgan Sindall scores 3.4/5 for profitability in my screening system.** ### Fundamental Health: very strong The main factors I'm interested in here are debt and leverage. In my experience, there are a couple of things to watch out for here that seem to particularly affect companies in this sector: - Net cash isn't surplus cash – very often a strong cash position is needed to win contracts. Clients need to be confident that their prime contractors can fund the start-up of new projects and complete them without running out of cash. - Many construction companies report year-end net cash, but this annual snapshot can be window-dressed, masking use of debt during the year. A growing number of companies are reporting average month-end net cash, but Morgan Sindall reports *average daily net cash*. Management even included this wonderful chart in its 2022 results presentation, showing average daily net cash for the last three years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-fy22-daily-net-cash-balance.png) Source: Morgan Sindall 2022 results presentation Let's wrap up this section with another lovely chart. This one shows the group's 27-year track record of year-end net cash and the number of shares in issue over the same period. While there have been some share issues, dilution has been pretty minimal over the last 20 years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/mgns-netdebt-numbershares-210423.png) My view is that Morgan Sindall's fundamental health is as strong as we're likely to find in this sector of the market. **Morgan Sindall scores 5/5 for fundamental health in my screening system.** ## Conclusions: a good business **My quality dividend system awards Morgan Sindall an overall score of 75/100 at the time of writing (April 2023).** I'm confident Morgan Sindall is a well-run business, with strong finances and a reasonably stable outlook. Broker consensus forecasts suggest that the group's earnings will continue to edge higher over the next couple of years, supporting a P/E of 8 and a dividend yield approaching 6%. **My view:** Morgan Sindall's 27-year dividend track record and strong profitability suggest to me that this business does enjoy some enduring competitive advantages. I think these derive from its scale, diversification, and strong management. This impression was supported by comments made by John Morgan in a recent interview with trade publication *[Construction News](https://www.constructionnews.co.uk/contractors/morgan-sindall/john-morgan-turnover-is-not-what-drives-us-24-02-2023/?ref=rolandhead.com)*: > "We do the odd large job, but that’s not what gets us out of bed in the morning. We like repeat jobs and long-term workstreams." > "We don’t want a £200m job \[…\] We don’t do mega jobs and don’t do jobs that lose mega money. We are fairly risk-averse and very selective.” One example of this is the group's focus on partnership or social housing projects, rather than private housing. Partnership housing tends to have *"very strong government support"*, according to the firm, with projects that can span several years. I don't think we can rule out the risk that poor economic conditions will lead to a slowdown in new projects. But I think Morgan Sindall is probably better equipped to handle such risks than most of its rivals. This sector wouldn't be my first choice for my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). But I have a favourable impression of Morgan Sindall and I would be comfortable enough buying the shares at current levels. I'll leave Morgan Sindall on my short list for now. But it is a stock I could consider adding to my quality dividend portfolio. *Disclosure: At the time of publication, Roland did not own shares of Morgan Sindall.* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Q1 2023: a big loss leaves me lagging the market URL: https://www.rolandhead.com/portfolio/q1-2023-a-big-loss-leaves-me-lagging-the-market/ Last updated: 2023-06-29T15:13:12.000Z UK markets started this year with a burst of optimism before the banking crisis delivererd a reminder that rising interest rates could have consequences. My own [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) did not escape unscathed, although in this case the damage can't really be linked to the impact of rising interest rates. Instead, it was just old-fashioned mismanagement ([in my opinion...](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/)). However, the beauty of a reasonably diversified portfolio is that it allows you to absorb the inevitable mishaps of investing and keep moving forwards. During this quarter I'm looking forward to adding a new stock to the model portfolio and reinvesting dividend income that has accumulated over the last year. ## Portfolio performance To recap, the portfolio I'm discussing here is my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/), which is run using my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). The model portfolio was launched on 1 December 2021, but it contains largely the same shares as my personal portfolio, which has been run on a similar basis for a number of years. One key difference is that the model portfolio is based on a single lump sum, rather than regular investments. This makes it much simpler to track performance. Here are the performance figures for the first quarter of 2023. **Q1 2023:** - Model portfolio total return: -1% (including **1.1% dividend income**) - FTSE 100 total return: +3.5% (including **1.1% dividend income**) This chart shows the portfolio's performance against its [FTSE 100 tracker benchmark](https://www.google.com/finance/quote/CUKX:LON?ref=rolandhead.com) since its inception on 1 December 2021\. **Both lines show total return (capital return + dividends):** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/qdmp-vs-uks-tracker-010423.png) Model dividend portfolio total return (orange) vs FTSE 100 tracker accumulation units (blue) The model portfolio largely held onto the gains made during the autumn. But it did not manage to catch up with the FTSE 100\. This was due in part to big gains for a blue chip heavyweights such as **Flutter Entertainment**, **BT**, **Rolls-Royce**, **BAE Systems**, and **Tesco** during Q1\. As a market-cap weighted index, gains for big companies have a disproportionate impact on the FTSE 100\. That's not true in a typical share portfolio, where position weighting is independent of market cap. Another factor that weighed on my portfolio was the 40% fall in **Direct Line'**s share price. I estimate this could have caused a drag of nearly 2%. As a FTSE 250 stock, Direct Line's slump didn't affect my FTSE 100 index tracker benchmark. As always, however, portfolio movements usually mask a much wider range of individual share price movements. This chart shows how the stocks in the model portfolio rose and fell during Q1 2023: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/04/qmdp-1q23-shareprice-change.png) Quality dividend model portofolio Q1 2023 share price movements **Subscribers can see full details of all portfolio shares [here](https://www.rolandhead.com/dividend-portfolio/).** One quarter is too short a period to draw any conclusions. My hope remains that over time, the above-average profitability and cash generation of the companies in my portfolio will result in attractive long-term gains. I reviewed results from the majority of companies in the portfolio during [February](https://www.rolandhead.com/portfolio/feb-23-dividend-portfolio-update-defensive-quality/) and [March](https://www.rolandhead.com/portfolio/march-23-dividend-update-better-than-expected/). While there are some headwinds and uncertainties ahead, I'm broadly happy with the performance and outlook for these remaining businesses. In the remainder of this review, I'll explain the changes I made to the portfolio during the second quarter and take a look at the portfolio's key quality metrics. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ## Stocks sold during Q1 2023 One stock was sold from the portfolio during the first quarter: - **[Direct Line Insurance](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance) (LON:DLG)** \- I reviewed the company's 2022 results and explained why I decided to sell in *"[Should I sell my Direct Line Insurance shares?](https://www.rolandhead.com/portfolio-shares/should-i-sell-my-direct-line-insurance-shares/)"* on 30 March. ## New stocks in Q1 2023 I did not add any new stocks to the portfolio during the first quarter of 2023. The delay of the [EMIS](https://www.rolandhead.com/dividend-portfolio/#emis-group) takeover due to a [CMA phase two investigation](https://investegate.co.uk/emis-group-plc--emis-/rns/acquisition-update/202303310709199151U/?ref=rolandhead.com) means that I still hold these shares, somewhat against expectations. So I don't need to replace this stock just yet. If the deal fails altogether, as now seems possible, I'll be happy to continue holding EMIS, all else being equal. However, the sale of Direct Line means that the portfolio is now reduced to 19 shares. I plan to add a new stock during the next quarter to return to the portfolio to my target size of 20 stocks. I will publish a detailed review of the new stock on the website ahead of my purchase. ## Quality dividend model portfolio: financial metrics The performance of individual stocks is fascinating and can be very satisfying. But the perfect stock doesn't exist and all investments will have strengths and weaknesses. Ultimately, the only thing that really matters in investment terms is the performance of the portfolio. For this reason, one of the techniques I use to monitor the quality and expected performance of my investments is to calculate average financial metrics for the portfolio *as a whole.* This allows me to get a feel for the overall shape of the portfolio, and monitor whether it's likely to be improving or worsening. Here's how my quality dividend model portfolio looked at the end of March 2023 (the Dec 2022 figures are [here](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/)): | **Median mkt cap** | **TTM ROCE** | **TTM EBIT yield** | **TTM FCF yield** | **Net debt/5yr avg net profit** | **TTM div yield** | **5yr avg div grth** | **F'cast div yield** | **No. yrs div paid** | | ------------------ | ------------ | ------------------ | ----------------- | ------------------------------- | ----------------- | -------------------- | -------------------- | -------------------- | | £2.0bn | 22.9% | 9.8% | 7.6% | 0.0x | 4.5% | 6.3% | 4.5% | 22 | *Data source: SharePad/author analysis 05/04/2023\. Some adjustments were needed - don't take this as gospel.* Let's start with the not-so-good news. The portfolio's **trailing 12-month dividend yield** of 4.5% is the same as its **forecast yield** of 4.5%. All else being equal, this implies that the total dividend income from the portfolio won't rise this year. In practice, this reflects the loss of the Direct Line dividend (which hasn't yet been replaced) and – to a lesser extent – the temporary suspension of [another dividend in the portfolio](https://www.rolandhead.com/portfolio/september-2022-dividend-share-news/). I will replace Direct Line in due course, possibly with another high yielder from the financial sector. My hope is that this will return the portfolio to a position where it should provide annual dividend growth. Reassuringly, the **five-year average dividend growth** of the stocks remaining in the portfolio looks attractive to me, at 6.3%. Over the medium term, I'd expect this to be sufficient to stay ahead of inflation. Dividend growth aside, I think the portfolio metrics continue to show most of the qualities I'm hoping to see. Average **return on capital employed** of 22.9% is well above the market average. Hopefully this means that my companies have the potential to deliver compound gains over time. The portfolio's trailing **EBIT yield** and **free cash flow yield** reflect attractive valuations, in my view. The free cash flow yield of 7.6% is also comfortably above the average **dividend yield** of 4.5%. This indicates that in aggregate, my companies' dividends are covered by their surplus cash generation. Finally, across the portfolio, the average level of gearing is ... zero. Of course, I should point out that attractive averages can mask many unattractive individual metrics. These figures do not necessarily mean that all the companies in my portfolio are good businesses or sensibly valued. There's always some risk, but on balance I'm happy with the shape of the portfolio at the moment. Please let me know whether you think this portfolio average technique is useful in the comments – or share any other thoughts you have about my efforts. As always, thank you for reading and supporting this project. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! *Disclosure: at the time of publication, Roland owned shares in EMIS.* **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Shares Podcast: ITV with Maynard Paton & Roland Head URL: https://www.rolandhead.com/podcasts/itv-with-maynard-paton-roland-head/ Last updated: 2024-01-10T12:47:18.000Z I recently recorded a podcast on FTSE 250 television group **ITV (LON: ITV)** with my friend and fellow private investor [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com). - Listen on [YouTube](https://youtu.be/WMffijO8Ogg?ref=rolandhead.com) - Listen on [Spotify](https://open.spotify.com/show/4r3mQlM4ymZbuTVvmpxDZm?ref=rolandhead.com) - Listen on [Apple](https://podcasts.apple.com/us/podcast/the-private-investors-podcast/id1642393167?ref=rolandhead.com) In this [new podcast](https://www.fundyourretirement.com/podcasts/pip010-share-review-of-itv-and-the-investment-potential-of-commercial-television/?ref=rolandhead.com), we talked through my investment case for the business and discussed the stock's modest valuation and 6% dividend yield. As usual, Maynard applied his forensic skills to ITV's accounts and revealed one or two potential pitfalls for investors. The topics we discussed included: - Why ITVX attracts far more UK viewers than any of the big streaming services - Why I don't think the big US streamers can ever kill UK television - ITV's mixed financial track record and recent dividend cuts - The international growth potential of the ITV Studios production business - How you can advertise on ITV from just £6! - ITV's ongoing transition from broadcast TV to digital streaming, plus the surprise profit performance of BritBox - Whether the company's Planet V digital advertising platform could become a valuable source of additional earnings - Why I'm convinced the market is undervaluing ITV - ITV's hefty legacy pension scheme and its ongoing deficit - Is ITV's current strategy the right approach to the challenges it's facing ...? - ... and is the pay package of Dame Carolyn McCall fairly linked to company performance? - Finally, would Maynard or I buy ITV shares today? This podcast was recorded on 29 March 2023. *Disclosure: Roland owns shares in ITV.* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest only. Nothing I say should be construed as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### March '23 dividend portfolio update: better than expected URL: https://www.rolandhead.com/portfolio/march-23-dividend-update-better-than-expected/ Last updated: 2023-05-20T12:05:21.000Z Welcome to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) update for March 2023\. With earnings season in full swing, March was a busy month for news from my portfolio stocks. This bumper update will cover companies in my model portfolio that published full-year or interim results during the period. ***Companies covered include Legal & General (LON: LGEN), Direct Line Insurance (LON: DLG), EMIS (LON: EMIS) plus five subscriber-only stocks.*** *My monthly portfolio reports are only available to subscribers. I'd strongly recommend signing up – you'll also get full access to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and detailed reviews of all portfolio trades.* *The model portfolio contains the same shares I hold in my own portfolio.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** --- _This post is for paying subscribers only._ ### Should I sell my Direct Line Insurance shares? URL: https://www.rolandhead.com/dividend-shares/should-i-sell-my-direct-line-insurance-shares/ Last updated: 2023-08-17T09:20:36.000Z In this piece I'm going to review the 2022 annual results from FTSE 250 insurer **Direct Line Insurance (LON: DLG)** and explain what I've decided to do with this problem stock in my model [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). I'd normally leave this review until my month-end roundup. But with shares in this business now trading below their 2012 IPO level, I think this holding warrants a more in-depth look. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-chart-all-240323.png) Direct Line Share price 2012 - March 2023 (Source: SharePad) - [The story so far](#the-story-so-far) - [Dividend score & summary of my concerns](#direct-line-insurance-group) - [2022 financial review](#financial-review) - [Dividend update](#dividend) - [DLG 2023 outlook commentary](#2023-outlook) - [My concerns](#my-concerns) - [My decision](#decision-time) --- ## The story so far To recap briefly, I [added Direct Line shares to the model portfolio](https://www.rolandhead.com/portfolio-shares/direct-line-big-dividends/) in late 2021 to benefit (I hoped) from the high dividend yield. My view was that this well-known business was well positioned to benefit from a cyclical uplift, following a tough period for insurers. At the time, I saw Direct Line as a market-leading business with strong brands and a solid track record of profitability. Unfortunately, things haven't worked out that way. In 2022, soaring inflation, supply chain problems and a series of *"weather events"* caused claims costs to soar. [In January](https://www.rolandhead.com/portfolio/direct-line-dividend-cut-dec22-results/) 2023, Direct Line issued a major profit warning and cancelled its final dividend for 2022\. Although I think some pressure on profits was inevitable, not all of the company's rivals performed so badly. I think that some of Direct Line's problems could have been avoided with more better management. Chief executive Penny James left [with immediate effect](https://investegate.co.uk/direct-line-ins-grp--dlg-/rns/directorate-change/202301270700050490O/?ref=rolandhead.com) shortly after January's profit warning, and the company is looking for a replacement. In the meantime, acting chief executive Jon Greenwood fronted the release of the company's results on 13 March. I've now had time to review the numbers and watch the full management presentation. In the remainder of this piece I'll review Direct Line's 2022 results and explain what I've decided to do with the shares. **Disclosure:* Roland owned shares in Direct Line Insurance at the time of publication.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** --- ## Direct Line Insurance Grou*p* ***Description:*** *A FTSE 250 company that's one of the UK's largest motor, home and commercial insurers. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance).* | **Direct Line Insurance(LON: DLG)** | **Quality Dividend score: 42/100** | **Forecast yield: uncl.** | | ----------------------------------- | ---------------------------------- | --------------------------- | | Share price: 141p | Market cap: £1.9bn | *All data at 24 March 2023* | ***RNS release:*** *[preliminary results for the year ended 31 December 2022](https://investegate.co.uk/direct-line-ins-grp--dlg-/rns/preliminary-results-year-ended-31-december-2022/202303130700066626S/?ref=rolandhead.com)* Direct Line does not appear to be in any danger of going bust. It's also avoided (so far) the need for an equity raise. I think this might now be avoided altogether, although we won't be certain until a new permanent chief executive is appointed. However, the company's full-year results made it clear that 2022 was a very bad year indeed. It also became more clearly apparent how heavily Direct Line depends on motor insurance to drive profits, despite its diversification into home, commercial, and breakdown cover. The conclusion I've come to is that a number of company-specific factors made last year's problems worse than they should have been. Unfortunately, I think these issues could continue to affect performance in 2023 – and perhaps beyond. **Should I keep hold of this stock for an eventual recovery, or is it time to cut my losses?** ## Financial review Direct Line's operating profit from continuing operations fell by 95% to £32m (2021: £590m) last year, as soaring claims costs led to underwriting losses in both home and motor insurance. The situation was worsened by a slump in new business. This led to a fall in policy numbers and a reduction to gross written premium. - In-force polices (own brands): -3.8% to 7.25m - Gross written premium (own brands): -5.5% to £2,087m A mixed bag of restructuring and finance costs added to the damage and the group reported an after-tax loss of £40m. In addition to underwriting losses, impairments to the value of commercial property and loans held in the company's investment portfolio contributed to a sharp fall in surplus capital: - **Solvency capital ratio**: 147% (Dec '21: 160% - adjusted for comparability) - *DLG target range 140% - 180%* It was this decline in the group's surplus capital that forced management to cancel the dividend – Direct Line simply didn't have enough spare cash for a payout. To understand these results in a little more detail, I've included a segmental breakdown from the results presentation, with additional comment on each operating segment below it. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-2022-segmental-results.png) Source: DLG 2022 results presentation **Combined operating ratio:** this insurance industry metric shows insurance claims costs and operating expenses as a percentage of premiums written. A combined ratio under 100% indicates profitable underwriting, whereas a figure over 100% indicates an underwriting loss. In other words, a figure of 100% means the company has used up all of its premium income and has needed to draw on its own funds to meet costs. Motor insurance is Direct Line's largest business and contributed the majority of last year's underwriting loss. Let's start there. **Motor:** Like all motor insurers, Direct Line faced rampant claims inflation last year. The cost of almost everything went up: - used car prices - parts costs - labour and energy costs There was a second problem, too – supply chain problems slowed down the repair process, clogging up repair shops with cars awaiting parts. Across the industry, repair times rose by 60%. In Direct Line's own DLG Auto Services business, repair times rose by 30%. Perhaps more worrying for me was that Direct Line's multi-year IT investment programme did not appear to provide any benefit last year. The company has spent heavily on new systems intended to improve pricing and thus profitability. In August 2022 [we were told](https://investegate.co.uk/direct-line-ins-grp--dlg-/rns/half-year-report-2022/202208020700095328U/?ref=rolandhead.com): > In Motor we have delivered significant pricing capability during H1 with the launch of our new risk pricing models which are materially more advanced than anything we have had before and critical in navigating a changing market. Management said these new pricing models had delivered an encouraging early impact: > "an estimated 5 to 7 percentage point improvement in our written loss ratios". However, the full-year results showed that motor loss ratios **worsened by 18% last year**. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-fy22-motor-loss-ratio-walk.png) Source: DLG FY22 presentation - motor loss ratio walk My suspicion is that Direct Line's IT investment has not worked as well as hoped. In the 2022 results presentation, interim CEO Jon Greenwood said that the company is now: > "increasing resources deployed to build pricing models and enhance risk model sophistication". This seems at odds with the company's comments last August, which suggested this work had already been done. The reality is that Direct Line's pricing and inflation estimates were behind the curve for most of last year. Although new business pricing was increased by 29% over the full year, the majority of this came quite late in the year. As a result, new business pricing only rose by an average of 10%. Meanwhile, renewal premiums fell by 6% as Direct Line discounted its prices in an effort to retain customers and protect its market share. Lower-than-expected volumes of new business meant that the higher premiums paid by new customers did not offset the impact of the fall in renewal premiums. The overall result was that average motor premiums fell by 3% last year, despite the inflationary environment: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-fy22-motor-average-premiums-p8.png) Source: DLG 2022 results presentation In fairness, it was a tough year for motor insurers. The combination of rapid inflation and [regulatory pricing reforms](https://www.fca.org.uk/publications/policy-statements/ps21-11-general-insurance-pricing-practices-amendments?ref=rolandhead.com) created challenging conditions. But as one of the largest general insurers in the market, I think Direct Line should have managed better than it did. **Home:** the other loss-making division was Home insurance. Claims costs soared due to a succession of weather events, culminating in December's big freeze. As a result, the company saw £149m of weather claims from home and commercial customers last year – the highest since its 2013 IPO. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-fy22-weather-events-p5-1.png) Source: Direct Line 2022 results presentation Last year's claims do seem to be exceptional. It's probably unfortunate that this coincided with an exceptional year for motor claims - otherwise the home claims would have been more readily affordable. **Commercial & Rescue:** Direct Line's other two business lines performed well enough last year, but they aren't large enough to have been able to offset the losses in motor and home. ## Dividend The 2022 final dividend was cancelled. Shareholders received an interim dividend of 7.6p per share last year, giving the stock a trailing yield of 5.6%. Direct Line has promised an update on the outlook for dividend payments with its half-year results in August. ## 2023 outlook The company's outlook statement for 2023 was brief and did not fill me with confidence. It contained three main points: **2023 earnings:** many of last year's motor policies were effectively written too cheaply, at prices below expected claims inflation. This means that profits from motor insurance will remain under pressure in 2023. **Balance sheet:** the company expects to see an improvement in its solvency capital ratio due to management actions and various market effects. The range of guidance given in the presentation suggested a minimum increase of 7% this year, with remaining improvements uncertain: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-fy22-capital-mgt-guidance.png) Source: DLG 2022 results presentation **Lower profitability target?** this year will see UK insurers switch to a new accounting standard, IFRS 17\. This will result in a change in reporting metrics, including the replacement of the combined ratio (COR) with *"net insurance margin" (*NIM). The company says it will target a weather-normalised NIM of 10% over the medium-term. In the results presentation, management indicated this was equivalent to a COR of 96%. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-fy22-ifrs4-ifrs17-cor-nim-bridge.png) Source: DLG 2022 results presentation *A higher NIM value is better, whereas a lower COR is better.* Previous guidance in January was for a medium-term COR target of 95%. This seems to suggest that the NIM target of 10% may be less ambitious than the previous profitability target. CFO Neil Manser was questioned about this after the results presentation, but didn't give a very clear answer. My impression is that Direct Line's early emphasis on the new metric is possibly being used to gloss over a slight reduction in its profitability target. ## My concerns The company's recovery plans seem sensible enough to me, as far as they go. But I was concerned by some of the comments made during the results presentation – and by some of the topics management seemed keen to avoid. **New business shortfall:** It wasn't made clear why new business fell short of expectations last year. I wonder if the explanation may be linked to the fact that (according to Direct Line) 90% of new business in motor insurance is sold through price comparison websites (PCW). While Direct Line is active in PCW through its Churchill and Darwin brands, PCW is still secondary to the group's direct model. I wonder if the core Direct Line franchise is in danger of losing market share in this market. Management were asked about this in the Q&A, but I felt the answer was slightly evasive. **Target profitability:** as I discussed above, my feeling is that profitability targets for the business has been cut since January. **2023 earnings warning:** CFO Neil Manser repeatedly emphasised the risk to 2023 earnings from last year's underpriced motor insurance policies. This left me with the impression that there's a meaningful risk that profits could fall below expectations this year. **Pricing model/IT spend:** the company is still having to direct extra spending into its new motor pricing models. These appear to have failed to deliver the hoped-for benefits last year. I'm a little concerned that this long-running and expensive project appears to have been unsuccessful, so far at least. **Investment portfolio:** Like most insurers. Direct Line invests some of its premiums in bonds and other assets, in the hope of boosting overall returns. However, I wonder if the company may have taken on too much risk in so doing. At the end of 2022, the investment portfolio included a 10% weighting to commercial property loans and direct property holdings, as well as 6% in high yield debt (presumably sub-investment grade, also known as junk bonds). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-fy22-investment-portfolio.png) Source: DLG FY22 results presentation The value of many of these assets fell sharply last year as interest rates rose. As the group's bonds mature and are repaid, there should be some recovery in asset values due to the pull-to-par effect (they are repaid at face value, even if they're trading below face value). The risk is that interest rates coud rise further or that some of the group's investments could perform badly. I've no way of knowing how likely this is. But according to credit rating agency Moody's, Direct Line's investment portfolio is more exposed to longer-term debt than some of its main peers: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/03/dlg-moodys-jan23-duration-comment.png) Source: [DLG/Moody's credit rating update Jan '23](https://www.directlinegroup.co.uk/content/dam/dlg/corporate/images-and-documents/investors/debt-investors/credit-ratings/Credit%5FOpinion-Direct-Line-Insurance-Group-19Jan2023.pdf?ref=rolandhead.com) Longer duration can be a disadvantage when interest rates are rising, as asset values tend to fall further to discount the impact of higher rates. ## Decision time I don't think Direct Line is in any danger of becoming financial distressed. But I do think any dividend paid in 2023 is likely to be minimal. I also think there's a risk that the company's franchise strength could be weakening, and that it might continue to lose market share. In addition, wider economic conditions may mean that rebuilding a comfortable solvency capital ratio is harder or slower than expected. On the other hand, I recognise that this business has historically generated attractive mid-teens returns on equity, together with plenty of surplus cash. Direct Line remains one of the largest motor insurers in the UK and is expected to benefit from a 15% increase in motor premiums when its contract with Motability kicks in later this year. The group's Commercial business also looks promising to me, although it's more capital intensive than some other types of insurance. At current levels, Direct Line shares could certainly be cheap. My problem is that I'm not sure whether the company's historic business model is still working as well as it used to. **Holding on for a recovery might make sense, but I've decided to sell.** I'm concerned that more bad news will slip out as the year progresses – or when a new permanent CEO is appointed. On balance, I think there's a material risk that profits will be lower than expected this year. Although I recognise the turnaround potential on offer, I think there are higher-quality choices elsewhere for dividend income. **I'll be selling Direct Line from the model portfolio in the next week. I'll also sell my own shares at the same time.** I'll confirm the total loss to the portfolio in my month-end report for subscribers and will reveal a new share to replace Direct Line in due course. **Please let me know what you think about Direct Line in the comments below. Am I underestimating the strength of the group's brand franchise?** **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Feb '23 dividend portfolio update: defensive quality URL: https://www.rolandhead.com/portfolio/feb-23-dividend-portfolio-update-defensive-quality/ Last updated: 2023-05-20T12:05:38.000Z Welcome to my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) update for February 2023. With earnings season gathering pace, there has been plenty of news over the last month. In this update, I'm going to cover results from five portfolio stocks, including **[Unilever](https://www.rolandhead.com/portfolio-shares/is-unilever-a-quality-dividend-stock/)**, **[PZ Cussons](https://www.rolandhead.com/portfolio-shares/will-my-patience-pay-off-at-pz-cussons/)** and [**Dunelm**](https://www.rolandhead.com/portfolio-shares/is-dunelm-good-cheap-dividend-stock/). I'll also be looking at the latest numbers from two members-only stocks in the portfolio; [a FTSE 100 share](https://www.rolandhead.com/portfolio-shares/underrated-ftse100-dividend-stock/) and a small cap financial. *My monthly portfolio reports are only available to subscribers. I'd strongly recommend signing up – you'll also get full access to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and detailed reviews of all portfolio trades.* *The model portfolio contains the same shares I hold in my own portfolio.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** --- _This post is for paying subscribers only._ ### Podcast: Telecom Plus (LON:TEP) with Maynard Paton & Roland Head URL: https://www.rolandhead.com/podcasts/telecom-plus-shares-maynard-paton-roland-head/ Last updated: 2024-01-10T12:47:27.000Z I've just recorded a podcast about FTSE 250 dividend share **Telecom Plus (LON: TEP)** with my friend and fellow private investor [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com). Telecom Plus owns the Utility Warehouse business and has an enviable 25-year track record of growth. The company's recent performance has been very strong, but the share price has now fallen by 25% from December's record high of £24\. Is now the right time to buy? You can also listen to this recording on the [Private Investor's Podcast](https://www.fundyourretirement.com/private-investors-podcast/?ref=rolandhead.com) website or using the following links: - [Apple](https://podcasts.apple.com/us/podcast/the-private-investors-podcast/id1642393167?ref=rolandhead.com) - [Spotify](https://open.spotify.com/episode/0ZQTKeEM6qtbS4grKpMQnQ?ref=rolandhead.com) In this recording, Maynard and I discuss a number of important topics for investors who might be thinking about buying the stock: - The multi-level marketing business model that lies behind Utility Warehouse's 25-year growth story - Why Utility Warehouse is **not** a pyramid scheme! - TEP's 12-bagging history of share price growth – and the stock's recent 25% slump - 24% annualised customer growth and profits up almost 50%... - Management are targeting one million extra customers in five years – is this realistic? - A dividend that's risen by 14% per year since 2007 and could provide a 5% yield next year - An £84m founder share sale just as the market peaked in December... - The stock's current valuation and the price at which I might buy - Plus... is the Utility Warehouse business model about to change? - ... and would either of us buy Telecom Plus shares today? *This podcast was recorded on 28 February 2023.* **I hope you enjoy listening.** As always please let me know what you think in the comments below or by getting in touch with me on [**Twitter**](https://twitter.com/rolandhead?ref=rolandhead.com)or [**LinkedIn**](https://uk.linkedin.com/in/rolandhead?ref=rolandhead.com). *Disclosure: at the time of publication, Roland did not own shares in Telecom Plus.* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Is new GSK a quality dividend share? URL: https://www.rolandhead.com/dividend-shares/is-new-gsk-a-quality-dividend-share/ Last updated: 2023-05-27T09:10:24.000Z Like **[Aviva](https://www.rolandhead.com/dividend-shares/can-aviva-keep-on-delivering/)**,I've always felt that FTSE 100 pharmaceutical giant **GSK (LON: GSK)** *should* be a good dividend investment. However, the evidence has not really supported this view in recent years. GSK's share price is at a level first seen 25 years ago, while its dividend has just been cut. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-shareprice-dividends-all-100223.png) GSK shares have also underperformed FTSE 100 rival **AstraZeneca** to an extent that can only be described as chronic: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-vs-azn-all-chart-100223.png) GSK (black) vs AZN (blue) Although investors supported CEO Dame Emma Walmsley's decision to spin out GSK's consumer healthcare business (now **Haleon**), Walmsley has faced criticism for failing to deliver change quickly enough. Cancer allegations against heartburn medicine Zantac added to investor concerns last year. However, [a US court ruling in December](https://investegate.co.uk/gsk-plc--gsk-/rns/statement--zantac--ranitidine--litigation/202212070700028794I/?ref=rolandhead.com) seemed to suggest major penalties are now less of a risk. Meanwhile, the company's recent results suggest that progress is being made in the core pharma business. Revenue from continuing operations rose by 13% to £29bn last year, while adjusted earnings were 15% higher, on a constant currency basis. A growing proportion the group's revenue now comes from its targeted growth areas. Specialty medicine and vaccine sales now account for 62% of revenue, up from 46% in 2017, when Walmsley became CEO. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-fy22-sales-chart-1.png) Source: GSK 2022 results presentation Key growth products now account for 42% of sales, up from just 7% in 2017: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-fy22-growth-drivers-2017-22.png) Source: GSK FY22 results presentation Although GSK still needs to prove that it can deliver a regular supply of successful new medicines, this progress seems encouraging to me. I think there's a reasonable chance that the changes GSK has set in motion since 2017 – including the dividend cut – could make this an attractive income investment once again. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! GSK's 2022 results were published on 1 February, so I've now been able to download the group's latest numbers from SharePad into my screen. **I'm currently looking for a new dividend stock to [replace EMIS](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/)in my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/), so in this piece I'm going to consider whether GSK could be a good choice for the portfolio.** ### Table of contents - [GSK: history and recent organisational changes](#from-pharmacy-to-ftse-100-in-308-years) - [Crunching the numbers](#gsk-crunching-the-numbers) \- how does GSK score in my screening system? - [Dividend culture](#dividend-culture-excellent) \- 30 years without a break - [Dividend safety](#dividend-safety-improving) \- improving after a difficult patch - [Dividend growth](#dividend-growth-poor) \- poor, but new policy looks promising - [Dividend yield](#dividend-yield-not-as-good-as-it-was) \- no longer a high-yield share? - [Valuation](#valuation-reasonable) \- looks very reasonable to me - [Profitability](#profitability-mixed-picture) \- decent overall, with one caveat - [Fundamental health](#fundamental-health-in-recovery) \- improving following Haleon split - [Conclusions - my view](#conclusions-good-but-not-compelling) ## From pharmacy to FTSE 100 in 308 years GSK's origins can be traced back to the Plough Court Pharmacy in London, in 1715\. From this location, apothecary Silvanus Bevan offered *"medical advice and medicinal products"*, according to [GSK's heritage website](https://www.gsk.com/en-gb/company/history-and-heritage/?ref=rolandhead.com). In 1856, Plough Court became Allen & Hanburys and was later acquired by Glaxo Laboratories. Around that time, companies were being formed on both sides of the Atlantic that eventually became Smith, Kline & Co, Beecham, and Burroughs Wellcome & Co. Collectively, these businesses were responsible for helping to commercialise insulin and penicillin in the UK. They then went on to develop more effective antibiotics. GSK predecessors also developed some of the first drugs used to treat malaria, leukaemia and asthma, along with early polio vaccines. In 1984, Burroughs Wellcome & Co scientists discovered a treatment for HIV. Further drugs have followed since, and HIV remains a core part of GSK's business, through its ViiV joint venture with **Pfizer** and Japanese firm **Shionogi**. The 1980s also saw the first of a string of mega-mergers that created the company we know today: - **1989:** SmithKline Beckman merged with Beecham Group to form SmithKline Beecham. - **1995:** the Wellcome Trust sold its remaining shares in Wellcome plc to Glaxo plc, forming Glaxo Wellcome. - **2000:** Glaxo Wellcome merged with SmithKline Beecham to form GlaxoSmithKline. - **2022:** GlaxoSmithKline separated its consumer healthcare division (*Sensodyne*, *Panadol, Nicorette*, etc) into a new business, **[Haleon](https://www.haleon.com/?ref=rolandhead.com)**. The remaining biopharma business was renamed GSK. Today, GSK's portfolio is divided into three main areas. **Vaccines (2022 sales: £7.9bn) -** the company is one of the world's largest vaccine producers, with 2m doses of its vaccines administered every day. Jabs in GSK's portfolio include polio, flu, meningitis and measles. Shingles vaccine *Shingrix* is one of the group's newest blockbusters, achieving sales of £3bn last year. **Specialty medicines (2022 sales £11.3bn) -** this is a key growth area, focusing on medicines that are prescribed by specialists. Therapeutic areas targeted by GSK include cancer, HIV, and other immune conditions such as lupus. **General medicines (2022 sales £10.1bn) -** this is the slowest-growing of the group's divisions. It produces medicines typically prescribed by GPs. These include antibiotics and inhalers for respiratory conditions, such as COPD and asthma. For many years, asthma drug Advair was a key moneyspinner for GSK. However, this former blockbuster has now lost its patent protection, opening the market to cheaper generic alternatives. GSK is clearly a sizeable and very profitable business that's not going to disappear. However, this isn't necessarily enough to make it a good investment for me. With that in mind, I'm going to move on to take a closer look at GSK's financials. ## GSK: crunching the numbers ***Description:*** *FTSE 100 pharmaceutical group, one of the world's largest vaccine producers. Focus on four therapeutic areas: infectious diseases, HIV, oncology and immunology.* | **GSK (LON: GSK)** | **Quality Dividend score: 60/100** | **Forecast yield: 3.7%** | | ------------------- | ---------------------------------- | ----------------------------- | | Share price: 1,502p | Market cap: £61.5bn | *All data at 9 February 2023* | **Latest accounts:* [results for the year ended 31 December 2022](https://investegate.co.uk/gsk-plc--gsk-/rns/final-results/202302010700074922O/?ref=rolandhead.com)* In the remainder of this review, I'll step through the different stages in my **[dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)** and explain whether I think GSK could be a suitable addition to my quality dividend portfolio . Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: excellent I score companies for dividend culture based on how many consecutive years they've paid dividends, regardless of any cuts. GSK scores well here, with an unbroken record of 31 years according to SharePad. However, the flat 80p per share payout of recent years should probably have been cut sooner than it was, in my view. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-dividends-100223.png) Nevertheless, I think there's no question that this business is committed to dividend payments. **GSK scores 5/5 for dividend culture in my screening system.** ### Dividend safety: improving This is why GSK's dividend should probably have been cut sooner. The payout has looked stretched against earnings and free cash flow for some years now. Free cash flow cover – ultimately the most important – has been particularly weak: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-fcf-div-cover-100223-1.png) Last year's results represented the best level of cover for some time. Further improvement seems likely in 2023, based on the company's new policy of maintaining a 40%-60% payout ratio through the cycle. GSK's guidance is for a payout of 56.5p per share in 2023, giving a total dividend of £2.3bn. According to SharePad, consensus forecasts for 2023 show a net profit of £6bn, with free cash flow of £4.9bn. The dividend has looked precarious in recent years. I think it should now be on a more secure footing, even if 2023 results fall below expectations. **GSK scores 2.9/5 for dividend safety in my screening system.** ### Dividend growth: poor I score stocks for dividend growth based on historic free cash flow growth and net asset value per share growth. My aim is to measure the *sustainability* of past dividend growth. Unfortunately, GSK hasn't delivered any dividend growth since 2014 and has just cut its payout. This suggests the previous payout wasn't sustainable. Admittedly, last year's cut was a planned move to reflect the disposal of the consumer healthcare business. However, a cut had been an obvious risk for a number of years, due to insufficient free cash flow: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-div-fcf-navps-100223-1.png) The fall in net asset value between 2009 and 2018 is also a concern. There are lots of moving parts here. But in broad terms, I think the decline in NAVps reflects weaker earnings, rising net debt, an expanded pension deficit, and the impact of some asset disposals. Perhaps a simpler way of looking at things is that from 2014, GSK regularly paid dividends that weren't covered by earnings. The shortfall ate into the company's retained profits (black line), eroding its balance sheet equity: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-dps-eps-retprofit-netdebt-100223.png) Current consensus forecasts on SharePad suggest that the improvement seen over the last year is expected to continue: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-sharepad-forecasts-140223.png) Source: SharePad These forecast numbers imply a free cash flow yield of 8% for 2023, rising to 10% in 2024\. If GSK can hit these numbers, I would argue that the stock could be attractively priced at current levels, with good potential for progressive dividend growth. Based on recent performance, however, I'm afraid my system awards GSK a deservedly poor score for dividend growth. **GSK scores 0.3/5 for dividend growth in my screening system.** ### Dividend yield: not as good as it was GSK has enjoyed a reputation as a high yield stock over the last decade. The new reality for the stock seems likely to be that it will offer a lower but more sustainable yield, with growth potential. This is shown in the chart below (the paler bars show forecast yield through to 2025: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-div-yield-140223.png) GSK's historic high yield status means that it scores well in my screening system, but I think the forecast yield is a more realistic indicator of the income shareholders can expect for the next few years. **GSK scores 4/5 for dividend yield in my screening system.** ### Valuation: reasonable I score stocks for valuation based on their trailing 12-month EBIT yield and free cash flow yield. My calculations compare EBIT and FCF to a company's enterprise value (mkt cap + net debt), so debt is included. This gives a more holistic view and helps to neutralise the impact of difficult debt/equity mixes. GSK looks quite reasonably valued to me based on its 2022 results. EBIT yield is around 8%, according to SharePad data, while free cash flow yield is c.6%. These figures are fairly typical of recent years – GSK has looked cheap for a while, arguably: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-ebit-fcf-yield-160223.png) Based on these measures, GSK trades at a very substantial discount to FTSE 100 rival AstraZeneca: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/azn-ebit-fcf-yield-160223.png) At current levels, I'd argue that GSK's valuation looks undemanding and could be attractive, if the company can deliver expected rates of growth. **GSK scores 3.5/5 for valuation in my screening system.** ### Profitability: mixed picture GSK has high profit margins. The group reported an continuing operating margin of 21.9% for 2022\. However, the business does not score so well using my preferred measure of return on capital employed. My sums suggest GSK generated a ROCE of 13.9% last year, which is close to SharePad's figure of 13%. We can see from the chart below that while the group's operating margin and ROCE used to be closely aligned, ROCE has fallen away while margins have stayed high. As with [**Savills** a few weeks ago](https://www.rolandhead.com/dividend-shares/savills-is-this-property-firm-a-good-dividend-share/), I think this diverging trend can be at least partly explained by a growing amount of goodwill from acquisitions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-ebit-margin-roce-goodwill-160223.png) Does this matter? I prefer to include goodwill in ROCE because it represents capital allocation decisions by management. As a potential investor, I want to see how these investments have affected the returns generated from the company's assets. The counter argument to this view is that if the same assets had been developed in house, there would be no goodwill. All else being equal, that would make ROCE higher. This view is also correct, but for me the key thing is that these assets weren't developed in house. Perhaps they couldn't have been. Or perhaps management thought it would be cheaper or quicker to acquire them. In any case, acquired assets are purchased at an upfront price based on expectations of future returns. I want to see how those decisions have panned out, in terms of ROCE. The other key metric I use to score stocks for profitability is net asset value per share growth. I do this to help me gauge the sustainability of the dividend and of any recent profit growth. For example, if a company is generating stable returns (ROCE) on a shrinking asset base, then mathematically profits are likely to be falling. This could put the dividend under pressure. Conversely, rising net assets and stable ROCE imply that profits are rising. In turn, this should provide a sustainable base for dividend growth. On that basis, I'm reassured to see that GSK's NAVps returned to growth in 2019, after a nine-year period of decline: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-roce-navps-160223.png) **A frustrating exclusion:** it's useful to look at GSK's profitability at a group level. But the company is composed of three divisions operating in different markets. It would be interesting to know the profit margins of each division, which have historically varied. Until last year, GSK did report the operating profit for each of its three divisions: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-fy21-segmental-profits-1.png) Sadly, the company has used the disposal of its consumer healthcare business as an excuse to rejig its segmental reporting to provide much less transparency. For reporting purposes, GSK now divides its operations into two segments, *Commercial Operations* and *Research and Development*. This seems very odd to me, as R&D is presumably always likely to be loss making when isolated in this way. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-fy22-segmental-profits.png) Commercial Operations includes Vaccines, Specialty Medicines and General Medicines. We do get a revenue breakdown of *sales* across these businesses, but *profits* are no longer split out. This means we can't compare the profit margins of each business line. I'm not sure what the intent of this change was, but its effect is to obscure the different levels of profitability across the business. Frustrating. **GSK scores 2.6/5 for profitability in my screening system.** ### Fundamental health: in recovery For this final score, my main concern is debt. I consider the leverage of the business and how easily its able to service its debt costs. One concern with GSK in recent years was that its debt burden had become stubbornly high. The spin-off of the consumer healthcare division into Haleon included a £7.2bn debt repayment, which has helped somewhat. This enabled GSK to reduce net debt by £2.6bn to £17.2bn last year, despite spending £3.1bn on acquisitions, £3.5bn on dividends and losing £1.4bn due to adverse exchange rate movements (ouch). The chart below shows fixed charge cover also gradually improving, together with the welcome reduction in leverage. To clarify, I measure leverage here using the multiple of **net debt to 5yr average net profit** *.* In this case, the falling multiple represents both lower net debt and higher profit. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/02/gsk-fixchgcov-leverage-160223.png) As a rule of thumb, I prefer to see my measure of leverage below 5x, preferably under 4x. GSK scrapes under my threshold but remains quite heavily geared, compared to the majority of companies in my portfolio. I don't expect the group's debt to become problematic, but I do think there's a risk it could continue to constrain GSK's flexibility to invest in growth. **GSK scores 2.7/5 for fundamental health in my screening system.** ### Conclusions: good but not compelling? **My quality dividend system awards GSK an overall score of 60/100 at the time of writing (Feb 2023).** My feeling is that GSK is likely to be a better business as a pure pharma group than it was in its previous conglomerate format. Although the firm has yet to prove that it can deliver a reliable stream of big winners, progress is certainly being made. The company is also on an improved financial footing and appears to be generating stable and improving cash flow. Fortunately, it looks like the legal risks associated with the Zantac case have largely receded. Broker forecasts for the year ahead suggest that revenue will be broadly flat, but that adjusted earnings per share will rise by 7% to 149p. That puts the stock on 10 times forecast earnings, with a 3.7% dividend yield. **My view:** I think that GSK looks like a reasonably priced, reasonably healthy FTSE 100 business. I'd be more tempted to invest if debt levels were lower still, but I don't see any particular cause for concern. I'm not convinced that the shares are a compelling buy, but I wouldn't be too unhappy about owning them. *If* things go well, I think there could be decent upside from here. But I'm not sure how likely this is. For this reason, I prefer to invest in companies that only need to repeat their past performance to be a good investment. That always seems a less risky prospect to me. For now, I'll put GSK on the short list of possible replacements [for EMIS in my portfolio](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/). However, I suspect I'll end up choosing a different stock. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! *Disclosure: At the time of publication, Roland did not own shares of GSK.* --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Jan '23 dividend portfolio update: mixed news URL: https://www.rolandhead.com/portfolio/jan-23-dividend-update-mixed-news/ Last updated: 2023-02-09T10:17:09.000Z Welcome to my January portfolio update. Accident-prone insurer **Direct Line Insurance Group (LON: DLG)** fell by 20% in January. I'll comment on the latest news from this troubled business shortly. I'll also take a look at a portfolio stock that **gained 20%** last month. However, my main focus in these updates is on portfolio companies that have published half-year or full-year accounts during the month. There was only one of these last month – a FTSE 250 share – so I'll start with that. *My monthly portfolio reports are only available to subscribers. I'd strongly recommend signing up – you'll also get full access to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and detailed reviews of all portfolio trades.* *The model portfolio contains the same shares I hold in my own portfolio.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** --- _This post is for paying subscribers only._ ### Podcast: Bioventix with Maynard Paton & Roland Head URL: https://www.rolandhead.com/podcasts/bioventix-with-maynard-paton-roland-head/ Last updated: 2024-01-10T12:47:32.000Z I've just recorded a podcast about AIM-listed antibody specialist [**Bioventix**](https://www.rolandhead.com/dividend-portfolio/#bioventix) **(LON: BVXP)** with my friend and fellow shareholder [Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com). In this recording we explain why Bioventix has such high profit margins and discuss how the potential market for Alzheimers testing could transform this business. Maynard also shares some of the surprising insights he gleaned when he attended December's AGM. You can also listen to this recording on the [Private Investor's Podcast](https://www.fundyourretirement.com/private-investors-podcast/?ref=rolandhead.com) website or using the following links: - [Apple](https://podcasts.apple.com/us/podcast/the-private-investors-podcast/id1642393167?ref=rolandhead.com) - [Spotify](https://open.spotify.com/episode/5Wda4XZvGVyjU7Aswz19Tt?ref=rolandhead.com) Some of the other topics we covered included: - How Bioventix is now Maynard's largest shareholding - My Bioventix purchase (the stock is also a member of my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/)) - Bioventix's impressive profit margins and dividend growth record - Diagnostic antibodies, blood testing, and how successful products can provide profits on auto-pilot for more than 20 years - The stock's current valuation and dividend yield - are the shares too expensive at £40? - The company's dependence on Vitamin D testing and other risks - How Alzheimer's testing could lead to a big increase in future earnings - but not yet - AGM protest votes - Would we ever sell Bioventix? Our thoughts on the future. This podcast was recorded on 26 January 2023\. I hope you enjoy it! As always, any feedback would be welcomed - just drop a comment below. *Disclosure: Roland owns shares in Bioventix.* ### Dividend shares: can Aviva keep on delivering? URL: https://www.rolandhead.com/dividend-shares/can-aviva-keep-on-delivering/ Last updated: 2023-05-27T09:11:52.000Z Throughout my time as an investor, FTSE 100 dividend share **Aviva (LON: AV)** has been a popular pick for income with retail investors. This insurer is best known in its home market for offering products such as home, motor, travel and life insurance. Sadly, Aviva has also gained a reputation for failing to deliver growth and cutting its dividend on a regular basis. As a result, Aviva's share price today is pretty much unchanged from 20 years ago: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-chart-20yr-170123.png) However, since CEO Amanda Blanc took charge in 2020, the business has been transformed. Ms Blanc has dramatically simplified the group and returned the its core operations to growth. These are the highlights from last year's half-year results: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-1h22-seg-results.png) [Aviva](https://www.aviva.com/investors/presentations/?ref=rolandhead.com): H1 2022 segmental results Shareholders have also benefited from a rejuvenated dividend and £4.5bn of one-off cash returns. With a coherent strategy and a strengthened balance sheet, I think the current **7% dividend yield** might represent a buying opportunity for income investors. **In this piece, I'll look at Aviva's track record and recent trading and consider whether this stock might be a suitable candidate for my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/).** 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ## A 327-year history According to [Aviva's website](https://www.aviva.com/about-us/our-heritage/?ref=rolandhead.com), more than 750 companies have contributed to its heritage. This long and complicated story starts in 1696, when the Hand in Hand Fire Office was founded. This business provided fire insurance and firemen to its policyholders. Fire protection, life insurance and annuities were the main lines of business for much of the first 300 years . The history of Aviva's predecessors is also in some ways the story of the British Empire and the Industrial Revolution. It's an interesting tale, which you can read about on [the company's timeline](https://www.aviva.com/about-us/our-heritage/timeline/?ref=rolandhead.com). The history of Aviva as we know it today can be traced back to 1997, when Norwich Union floated on the London Stock Exchange. In 1998, Commercial Union and General Accident merged to form CGU. In 2000, CGU merged with Norwich Union to create CGNU. In 2002, the combined group was renamed Aviva. Given such a long history, it's tempting to compare Aviva with venerable City names such as **Schroders** and [portfolio stock **Legal & General**](https://www.rolandhead.com/dividend-portfolio/#legal-and-general-group). However, I think a more apt comparison might be with **BAE Systems**. The difference is that while Schroders and Legal & General have been a continous presence in their markets for well over 150 years, Aviva and [BAE](https://www.baesystems.com/en/our-company/heritage?ref=rolandhead.com) have not. They're modern corporate creations that have inherited the legacy of many older businesses. I'd argue that Aviva – and to a lesser extent BAE – may lack the unified identity and clarity of purpose of successful older companies. This is only speculation on my part, but I think it could help explain why Aviva's performance has been disappointing when compared to its older peers. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-lgen-sdr-chart-20yr-180123.png) Aviva (black), Legal & General (blue), Schroders (red) **New broom sweeps clean:** My view on Aviva has rapidly improved since chief executive Amanda Blanc took charge [in 2020](https://investegate.co.uk/aviva-plc--av.-/rns/aviva-appoints-amanda-blanc-as-chief-executive/202007060700090981S/?ref=rolandhead.com). In less than two years, she's raised £7.5bn by selling most of the group's overseas units and refocused the business on the UK, Ireland and Canada; core markets where Aviva has scale and a strong brand. Early indications are that these core operations are now delivering a reasonable level of growth. In the meantime, shareholders have benefited from £4.5bn of one-off returns and a stabilised dividend. Tentatively, I wonder if Amanda Blanc's actions have finally started to resolve the lingering lack of coherence within Aviva's operations, positioning the group to become what it should always have been – a reliable, slow-growing and high-yielding insurer. ## Recent trading & dividend guidance Aviva's most recent trading update covered the nine months to 30 September. Ms Blanc was in bullish form: > *"We are on track to deliver our financial targets and trading momentum is building. Our dividend guidance remains unchanged and, as previously announced, we anticipate commencing additional returns of capital to shareholders with our 2022 full year results."* The headline figures from the group's nine-month results do seem to support a positive view: - **UK & Ireland life insurance:** value of new business +46% to £466m - **General insurance** (e.g. motor, home): gross written premium +10% to £7.2bn - **Wealth management** net inflow of £7bn, compared to £7.3bn during the same period last year - **Pro-forma solvency coverage ratio** of 215%, 35% above the target level of 180%. This is a complex regulatory measure, but the upshot for shareholders is that Aviva had £2.5bn of surplus capital at the end of September. Much of this is expected to be returned to shareholders in 2023. The company is guiding for an ordinary dividend payout of 32.5p per share in 2023\. That's equivalent to a **7.4% dividend yield** at the time of writing. If I can own stocks with an income like that, I don't need much capital growth to beat the long-term average annual total return from the UK market of c.8%. Aviva is currently one of the highest-scoring financial stocks in my dividend screening results. Let's take a closer look at this rejuvenated business. ## Aviva: crunching the numbers ***Description:*** *Aviva is a FTSE 100 insurance group offering a full range of life and general insurance, plus retirement and savings products. The Aviva Investors business provides asset management services for institutional clients.* | **Aviva (LON: AV)** | **Quality Dividend score: 72/100** | **Forecast yield: 7.0%** | | ------------------- | ---------------------------------- | ----------------------------- | | Share price: 442p | Market cap: £12.5bn | *All data at 17 January 2023* | ***Latest accounts:*** *[2022 half-year results](https://investegate.co.uk/aviva-plc--av.-/rns/aviva-plc-half-year-report-2022/202208100700094764V/?ref=rolandhead.com) and [2022 Q3 trading update](https://investegate.co.uk/aviva-plc--av.-/rns/aviva-plc-q3-2022-trading-update/202211090700067521F/?ref=rolandhead.com)* In the remainder of this review, I'll step through the different stages of my **[dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)** and explain whether I think Aviva could be a suitable addition to my quality dividend portfolio . Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ## Dividend culture: very good My dividend culture score looks for a record of continuous dividend payments, regardless of any cuts. When we look at Aviva's dividend history in this way, we can see that the firm does appear to have a strong commitment to dividends: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-dividend-180123.png) Aviva and its immediate predecessors have not skipped a payout in 25 years, even during the pandemic and the financial crisis. **Aviva scores 5/5 for dividend culture in my screening system.** ## Dividend safety: much improved As a quick reminder, the scoring rules I used for financial stocks are slightly different to those I use for non-financials. This is to reflect the slightly different metrics that I use for each type of business. To score for dividend safety with financial stocks, I look at **dividend cover by earnings**. As earnings per share are essentially the 'return' part of return on equity, this ties in with my use of ROE to measure profitability. Aviva's dividend cover has generally stayed in a range between 1.2x and 1.8x over the last 25 years. On the whole, that seems reasonable to me, for a large, mature insurer: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-dividend-cover-180123.png) **Cash generation:** For non-financial stocks, I also look at dividend cover by free cash flow (FCF). However, a standard FCF calculation isn't generally very meaningful for financials, due to the way their accounts work. What I do instead is to manually compare the dividend with an appropriate measure of cash generation. Insurers normally include a figure of this kind in their results. For Aviva, the figure I want is reported as **cash remittances**. It represents surplus cash returned to the holding company (Aviva plc) by the group's operating subsidiaries. This is the money that's used to fund dividend payouts. In this case, checking the accounts tells me that Aviva plc received cash remittances of £1.1bn during the first nine months of 2022, unchanged from 2021\. For the full year of 2022, cash remittances are expected to exceed £1.66bn. The expected 31p per share dividend for 2022 will cost around £870m, so I can see that this payout should be covered twice by cash remittances. **Aviva scores 5/5 for dividend safety in my screening system.** ## Dividend growth: a sorry tale I've already mentioned Aviva's unfortunate track record of dividend cuts. You can see them again in the chart below. The red bars are dividends. On top of this, I've overlaid a black line tracking the group's net asset value per share. Note how the NAVps line maps almost exactly the pattern of the dividend payouts. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-dividend-navps-180123.png) Even without knowing about Aviva's past performance over this period, the falls in net asset value provide a strong clue about the necessity for dividend cuts. The business just wasnt't creating enough surplus value to maintain its previous levels of shareholder return. This is why the share price today is still almost exactly the same as it was 20 years ago, in my view. By way of contrast, here's the same chart for Legal & General, over the same time period: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/lgen-dividend-navps-180123.png) This is why I use net asset value per share \[book value\] in several of my screening rules. I find that this measure provides a good snapshot of whether a business has created value for its shareholders over long periods. It's very rare for my screening system to award a category score of zero to an otherwise high-scoring stock. But that's what's happened here. Aviva's most recent dividend cut has cancelled out the modest NAVps growth seen over the last five years, resulting in a zero score. **Aviva scores 0/5 for dividend growth in my screening system.** ## Dividend yield: high Aviva has always been a fairly high-yielding stock. Of course, this is not entirely surprising, given the group's historic lack of growth. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-dividend-yield-180123.png) Even so, the stock's current dividend yield appears to be at the upper end of its historic range currently, except for a few outlier years. I think this could be a sign that the shares offer value at current levels, assuming trading remains stable. **Aviva scores 5/5 for dividend yield in my screening system.** ## Profitability: improving As I mentioned earlier, I use return on equity as my main measure of profitability for financials. This chart shows the group's return on equity since 1997: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-roe-180123.png) Aviva clearly had a decent spell of profitability from around 2003 though to 2016\. Things have gone downhill since then. However, broker forecasts suggest that profitability should have improved last year. The group's half-year results support this view, showing a return to double-digit return on equity during the first half of last year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/av-1h22-roe.png) Aviva group return on equity H1 22 I think the acid test will be whether Aviva can sustain double-digit ROE *and* reinvest some of it successfully in growth. **This combination could create a significantly more valuable business in the future**, but it's proven elusive in the past. **Aviva scores 3/5 for profitability in my screening system.** 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ## Conclusions: a turning point? **My quality dividend screen awards Aviva an overall score of 72/100 at the time of writing (January 2023).** In my view, Amanda Blanc has done pretty much everything right since taking control at Aviva. She now has the opportunity to create the kind of coherent, focused business that can deliver lasting shareholder value. The group's results for the first nine months of 2022 certainly suggest a return to growth and improved profitability. Cash remittances have remained strong, too. It's too soon to know whether Ms Blanc will be able to maintain this performance, but the situation definitely looks more promising to me than it has previously. I wouldn't rule out owning Aviva shares in my model dividend portfolio at some point, although I've no current plans to invest. --- **Disclosure*: Roland owns shares of Legal & General Group and General Accident preference shares (General Accident is a subsidiary of Aviva).* --- *I look forward to your feedback and will be adding a comment facility to this site very shortly (!). In the meantime, you can always reach me on Twitter* [***@rolandhead***](https://twitter.com/rolandhead?ref=rolandhead.com) *or* [***by email***](https://www.rolandhead.com/contact/)*.* **Disclaimer:** My comments represent my views only. I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Direct Line dividend cut + December 2022 portfolio update URL: https://www.rolandhead.com/portfolio/direct-line-dividend-cut-dec22-results/ Last updated: 2023-12-20T16:22:56.000Z I got that one wrong. [Back in March, I thought](https://www.rolandhead.com/portfolio-shares/direct-line-big-dividends/) that the 9% dividend yield being offered by portfolio stock [**Direct Line Insurance Group**](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance) **(LON: DLG)** was probably safe. It wasn't. Last week Direct Line cancelled its final dividend, blaming December's freezing weather and higher than expected motor claims inflation. In this catch-up update, I'll review the Direct Line news and explain what I'm going to do now. I'll also review the recent full-year results from a [small-cap company](https://www.rolandhead.com/portfolio-shares/a-small-cap-with-a-34-year-dividend-record/) in [my model portfolio](https://www.rolandhead.com/dividend-portfolio/)that's now clocked up 34 years of unbroken dividends. ### Direct Line Insurance For the avoidance of doubt, I hold Direct Line shares personally and in my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) at the time of publication. **Description:* A FTSE 250 company that's one of the UK's largest motor, home and commercial insurers.* [*Click here for an archive of past posts*](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance)*.* | **Direct Line Insurance (LON: DLG)** | **Quality Dividend score: ??/100** | **Forecast yield: unknown** | | ------------------------------------ | ---------------------------------- | ----------------------------- | | Share price: 176p | Market cap: £2.4bn | *All data at 13 January 2023* | *I haven't include my quality dividend score or a forecast yield estimate in the table above. I don't consider my system's current score for DLG to be representative of the current situation, until the next accounts are published. In my view, the likely size of the 2023 dividend payout is also uncertain.* ***RNS release:*** [*Trading update*](https://investegate.co.uk/direct-line-ins-grp--dlg-/rns/trading-update/202301110700083658M/?ref=rolandhead.com) > "... the Board no longer expects to declare a final dividend for 2022." Direct Line shares fell by around 25% on Wednesday, after the company warned of increased losses this year and cancelled its dividend. **Trading update:** Chief executive Penny James says that Direct Line was hit by three unexpected financial issues during the fourth quarter. The combined effect of these is such that the company no longer has enough surplus capital to pay a final dividend this year. **December freeze:** the cold weather in December caused a sudden surge of home and business insurance claims relating to burst pipes and other such issues. The company says it's handling three thousand claims, at an expected cost of around £90m (average c.£30,000 per claim). When combined with the impact of January's cold weather and summer subsidence claims, weather-related claims are now expected to be *"in the region of £140m for 2022"*. That's double the original budgeted amount of £73m. **Motor claims inflation:** to recap, Direct Line issued a profit warning in July, warning that motor claims costs had risen much faster than expected. At the time, **Admiral**, **Saga**,and **Sabre Insurance** all issued similar warnings, so I wasn't too concerned. By November, management claimed to have increased motor prices to *"restore margins".* The firm said that motor claims inflation was *"tracking closely to our expectations"*. Or not. Last week's update revealed that while Direct Line's in-house claims costs were broadly as expected during the fourth quarter, third-party claims continued to rise more quickly than expected. It seems that the company still hadn't increased its prices sufficiently during the final part of the year. Management are presumably trying to protect market share, but there's not much value in writing loss-making insurance. **Commercial property portfolio:** the company's investment portfolio includes some commercial property. According to the firm, the value of this property has fallen by 15%, or around £45m. Once again, management say that this reduction *"is greater than we had initially expected"*, although it's in line with commerical property price indices. Occupancy (and presumably rent) are said to remain stable, but the valuation loss will affect Direct Line's capital surplus. **Outlook:** Direct Line now expects to report a combined operating ratio of 102%-103% this year. A figure over 100% indicates an underwriting loss. In other words, the company expects that its claims costs and operating expenses will be greater than the insurance premiums it collected for the year. The shortfall will be absorbed by investment returns and surplus capital on the balance sheet, derived from cash and investment assets. But this result means that the group's solvency capital ratio (a regulatory measure) will now be *"at the lower end"* of its targeted range of 140%-180%. Paying dividends reduces this ratio, hence no final dividend. **2023:** looking ahead, management have also downgraded their estimate of underwriting profitability for next year. In a weasel-worded statement, they say that motor claims inflation on policies already written mean that the group's combined operating ratio (COR) will rise by 2%-3%, relative to the target of 95%. In plain English, Direct Line appears to be forecasting a COR of 97%-98% for next year. That should mean profitable underwriting, just. But this guidance doesn't leave much room for any further nasty surprises. There was no comment on the 2023 dividend and broker forecasts have been left unchanged. I'm no expert on insurance accounting, but I've taken a look at the half-year accounts to see how bad things might be. **My sums suggest it will be difficult for the firm to improve its capital coverage next year without a sizeable dividend cut – unless the group's investment portfolio performs much more strongly. That's possible, in an era of rising interest rates, but far from certain.** **My view:** Bad weather losses are a fact of life for non-life insurers that provide home and motor cover. I could (possibly) accept the December freeze as an exceptional event, although I'm not really convinced. But I think it's very disappointing that the company is still getting motor claims assumptions wrong, more than six months after this issue triggered a profit warning. I can't help feeling that Direct Line has consistently been too optimistic about likely claims levels. Alternatively, I'd suggest that a planned dividend cut should have taken place earlier this year, in order to increase the capital buffer available to handle unexpected spikes in claims. **Direct Line has now delivered a profit warning followed by a dividend cut – two of the events on my** [**stock-selling checklist**](https://www.rolandhead.com/portfolio/portfolio-selling-shares/)**.** I may wait until the company's full-year results are published on 7 March to make a final decision, but I am increasingly minded to replace Direct Line in my portfolios. I'll confirm my decision and the identity of any replacement in in my March portfolio update, if not sooner. *The remainder of this review covers a small-cap stock in the portfolio that's available to subscribers only.* _This post is for paying subscribers only._ ### Quality dividend portfolio: 2022 review URL: https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/ Last updated: 2023-06-29T15:14:59.000Z 2022 turned out to be an acceptable enough year for my portfolio, although it wasn't always obvious that this would be the case. Rising interest rates and inflation have led some investors to suggest that a different approach is needed to that which has worked in recent years. That may be true in some cases, but personally I found the opposite to be true. When dealing with difficult and unfamiliar circumstances, having a clear, systematic process became more valuable than ever for me. In any case, I try not to read to much into a year's performance. As Richard Beddard [noted](https://knowledge.sharescope.co.uk/2023/01/04/how-to-survive-a-bad-year/?ref=rolandhead.com) in his latest SharePad article, *"one good or bad year tells us nothing about the skill of an investor"*. However, while yearly intervals may be fairly arbitrary, they are still convenient for measuring performance. They tie in with company reporting cycles and have the additional benefit of being widely used, aiding comparability. ### In this report: - [2022 portfolio performance review](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/#portfolio-performance) - [Portfolio changes in 2022](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/#portfolio-changes-in-2022) \- three new stocks, three takeovers & two unforced errors - [Financial characteristics of the portfolio](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/#financial-characteristics-of-the-portfolio) - [Sector allocation](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/#sector-allocation) - [Conclusions](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/#conclusions) (thoughts on interest rates) - [2023 portfolio plans](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-2022-review/#2023-portfolio-plans) 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Portfolio performance To recap, the portfolio I'm discussing here is my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/), which is run using my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The model portfolio was launched on 1 December 2021, but it contains largely the same shares as my personal portfolio, which has been run on a similar basis for a number of years. One key difference is that the model portfolio is based on a single lump sum, rather than regular investments. This makes it much simpler to track performance. With that said, here's how the model portfolio performed in 2022: - **Model portfolio dividend income: 4.6%** (based on 31/12/21 share prices) - ***Model portfolio total return: -1.0%*** - *FTSE 100 total return tracker (acc. units): +5%* - *FTSE 100 dividend yield: 3.7%* This chart shows the portfolio's performance against its [FTSE 100 tracker benchmark](https://www.google.com/finance/quote/CUKX:LON?ref=rolandhead.com) since inception (01/Dec/2021). **Both lines show total return (capital return + dividends):** ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/pf-vs-cukx-chart-perf-010123.png) Model dividend portfolio total return (orange) vs FTSE 100 tracker accumulation units (blue) The combination of a negative total return and a positive dividend income tells us that the portfolio's capital value fell last year. **On average, the shares in the model dividend portfolio fell by 5.6% in 2022\.** This compares to a 20% fall for the FTSE 250 and a 1% *gain* for the FTSE 100\. This unusual result can be explained by a quick look at the make-up of these indices. The FTSE 100 is a market-cap weighted index, which means the largest companies have the biggest impact on the value of the index. The events of last year saw some of the FTSE's biggest constituents deliver exceptional gains, propping up the whole index. For example: - **Shell** (+43%) - **BAE Systems** (+56%) - **BP** (+45%) - **Glencore** (+47%) Taking a broader view, **more than 70% of FTSE 100 stocks fell** last year, as did a similar proportion of FTSE 250 stocks. I don't think private investors who underperformed the FTSE 100 last year should beat themselves up too much. ### Portfolio changes in 2022 The portfolio saw more trading than I would have liked or expected in 2022\. There were two reasons for this: - Ukraine - Takeovers **Stocks sold** **Ukraine:** the Russian invasion of Ukraine prompted me to recognise two likely mistakes in my portfolio construction. Rather than dwelling on them too long, I sold immediately: - Gold miner **[Polymetal International](https://www.rolandhead.com/dividend-portfolio/#polymetal-international) (LON:POLY)** \- sold at 746.4p for a loss of 45% on 25/Feb/22 ([sale report here](https://www.rolandhead.com/portfolio-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/)) - Copper/zinc group **[Central Asia Metals](https://www.rolandhead.com/tag/caml/) (LON:CAML)** \- sold at 229p for a loss of 6% on 3/Mar/22 ([sale report here](https://www.rolandhead.com/portfolio-shares/central-asia-metals-caml-sale/)). **Takeovers:** three companies in my portfolio received takeover offers last year: - **[Air Partner](https://www.rolandhead.com/dividend-portfolio/#air-partner) (LON:AIR)** \- sold at 122p for a gain of **55%** on 25/Feb/22 ([sale report here](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-february-review/)) - **[Homeserve](https://www.rolandhead.com/dividend-portfolio/#homeserve) (LON:HSV)** \- sold at 1,172p for a gain of **38%** on 30/June/22 ([sale report here](https://www.rolandhead.com/portfolio/may-2022-dividend-share-news/)) - **[EMIS Group](https://www.rolandhead.com/dividend-portfolio/#emis-group) (LON:EMIS)** \- not yet sold; sale expected to complete in Q1 2023 ([comment here](https://www.rolandhead.com/portfolio/june-2022-dividend-share-news/)) Homeserve was added to the portfolio to replace Air Partner, but the home repair specialist received a takeover bid within three months of my purchase. I think this highlights the value that was on offer in the UK market at the time, rather than any particular skill on my part. I'm a little sad to lose AIR, HSV and (probably) EMIS, as I think they were all good businesses with the potential to deliver the kind of compound growth I'm seeking. However, I can't really complain. Takeovers are part of the game, and these quick profits helped to offset the portfolio's unfortunate early loss on Polymetal International. **New stocks** During 2022, I added three new stocks to the portfolio to replace Polymetal International, CAML, Air Partner, and then Homeserve. Here are the links to my buy reports on each stock (subscribers only): - [Portfolio shares: adding US exposure to the portfolio](https://www.rolandhead.com/portfolio-shares/buying-uk-share-us-exposure/) (bought 1 April 2022) - [Portfolio shares: a 170-year-old business to replace Homeserve](https://www.rolandhead.com/portfolio-shares/170-year-old-business-replace-homeserve/) (bought 1 July 2022) - [Portfolio shares: a cyclical FTSE 250 stock with a 6%+ yield](https://www.rolandhead.com/portfolio-shares/cyclical-ftse-250-stock-with-a-6-yield/) (bought 1 October 2022) 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). I added each stock to the portfolio on the first day of the new quarter, in line with my trading policy of [only allowing myself a maximum of two trades each quarter](https://www.rolandhead.com/portfolio/portfolio-selling-shares/). ### Financial characteristics of the portfolio The perfect stock probably doesn't exist. Like the businesses from which they derive, most stocks are stronger in some areas and weaker in others. For example, some of the companies in my portfolio have higher yields and lower growth rates. For others, it's the opposite. I'm quite content with this. While the selection of individual stocks can be exciting and rewarding, what really matters is the performance of the overall portfolio. For this reason, one of the techniques I use to monitor the quality and expected performance of my portfolio is to calculate average financial metrics for *all* of my stocks. This allows me to get a feel for the overall shape of the portfolio, and monitor whether it's likely to be improving or worsening. Here's are the performance metrics for the portfolio at the end of 2022: | **Median mkt cap** | **TTM ROCE** | **TTM EBIT yield** | **TTM FCF yield** | **Net debt/5yr avg net profit** | **TTM div yield** | **5yr avg div grth** | **F'cast div yield** | **No. yrs div paid** | | ------------------ | ------------ | ------------------ | ----------------- | ------------------------------- | ----------------- | -------------------- | -------------------- | -------------------- | | £2.3bn | 22.2% | 9.4% | 7.0% | 0.3x | 4.5% | 7.6% | 5.0% | 21 | *Data source: SharePad/author analysis 03/01/2023\. Some adjustments were needed - don't take this as gospel.* The portfolio **average ROCE** of 22% tells me that in aggregate, at least, my companies are far more profitable than average. The **trailing 12-month EBIT** (earnings before interest and tax) and **FCF** (free cash flow) figures suggest that the portfolio is quite reasonably valued. These numbers also tell me that in aggregate, my companies convert around 75% of their operating profit into free cash flow. That's a good performance, in my view. One reason for this healthy cash conversion is that these companies don't have to spend too much on interest payments (which are deducted from EBIT). **Average net debt** across the portfolio is just 0.3x five-year average net profit. Looking ahead, the ***trailing* dividend yield** of 4.5% and ***forecast* dividend yield** of 5% imply aggregate **dividend growth** of 11% this year. I expect the final result to be slightly different to this, probably lower, but this estimate is in the same ballpark as the **five-year average dividend growth** of 7.6%. Finally, the portfolio's **trailing free cash flow yield** of 7% tells me that the trailing dividend yield of 4.5% was covered comfortably by free cash flow, at least in aggregate. **How did it change in 2022?** Market conditions and the make-up of the portfolio have changed significantly over the last year. How do these numbers compare with the picture at the start of 2022? Pleasingly, they're very similar: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/image.png) Source: my [2021 dividend portfolio review](https://www.rolandhead.com/portfolio/2021-portfolio-review/) Of course, this attractive aggregate profile does not mean that all the stocks in the portfolio are potentially attractive buys. Averages can be used to mask a multitude of sins. For example, cash cows with limited growth potential might be masking over-valued growth stocks with poor cash generation. There's always a risk. But on balance, I'm happy that the portfolio has stayed on track after a difficult and unusual year. ### Sector allocation My intention is always to maintain a reasonable degree of sector diversification. But equally, this is a dividend portfolio; I have to go where the income is. In the UK market at least, some sectors offer significantly more income potential than others. Here's how the portfolio was weighted at the **start of 2023**: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/pf-sector-split-jan23-1.png) Here's how this chart looked one year ago (Jan '22): ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/model-pf-sectors-jan22-cash.png) The model portfolio's growing cash balance is a result of dividend income. This will need to be reinvested. I'll cover this topic over the coming months. ### Conclusions ***Don't ignore rising interest rates*** The war in Ukraine appears to have blown the starting whistle on a long-awaited bout of inflation and rising interest rates. UK inflation has topped 10%, while the Bank of England Base Rate has risen from 0.1% to 3.5% in the space of one year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/01/uk-boe-base-rate-10yr-070123.png) Bank of England Base Rate, 2013-2023 (source: SharePad) Interest rates and inflation both had a notable impact on markets in 2022\. I try to avoid macro forecasts, but I think this disruption is likely to continue into 2023. Highly-rated US tech stocks and cryptocurrencies have been most dramatically hit by the end of the cheap money era. But even for investors with a focus on more defensive, quality businesses, I think the impact of rising interest rates is worth considering. Interestingly, famed investor and Fundsmith founder Terry Smith flagged interest rates as a key risk to his portfolio back in 2019\. *[Maynard Paton](https://maynardpaton.com/?ref=rolandhead.com) and Mark Atkinson recently took a closer look at this issue and at the outlook for [Fundsmith in the Private Investor's Podcast](https://www.fundyourretirement.com/podcasts/pip007-fundsmith-review-is-fundsmith-still-a-good-buy/?ref=rolandhead.com) – which I'd recommend – but to explain why Smith might bave been worried, here's a simple example.* FTSE 100 drinks group **Diageo** has an investment grade credit rating and is generally viewed as a safe, defensive business. In October 2022, Diageo [issued $2bn of bonds](https://investegate.co.uk/diageo-plc--dge-/rns/diageo-launches-and-prices--2.0-billion-usd-bonds/202210200700055357D/?ref=rolandhead.com) with coupon (interest) rates between 5.2% (three year) and 5.5% (10 year). Less than three years ago, [in April 2020](https://investegate.co.uk/diageo-plc--dge-/rns/diageo-launches-and-prices--2.5-billion-usd-bonds/202004280700110504L/?ref=rolandhead.com), Diageo was able to borrow the same kind of money at rates ranging from 1.375% (five year) to 2.125% (12 year). Corporate bond rates have eased slightly since October, I think. But it seems reasonable to assume that this high-quality business may now have to pay 3% more to borrow money than it did three years ago. That's a staggering difference. Based on a net debt figure of £14bn, my sums suggest this increase in borrowing costs could lead to an increase of £420m in Diageo's annual interest bill. That's almost double the company's 2022 interest bill of £438m, and would represent nearly 10% of last year's £4.4bn operating profit. This increase in interest costs won't be felt immediately. Most big companies maintain a portfolio of debt that rolls over gradually, a little each year. I'd guess that we might see Diageo's interest bill rise steadily over the next three to six years, perhaps – unless management divert more of the group's free cash flow to debt repayments. If the company does opt to reduce leverage, then that might mean reduced investment in growth – or even a dividend cut. I think the latter is unlikely at Diageo, but it could certainly happen at weaker businesses. Indeed, I think the impact of higher interest rates on some businesses may be quite sudden and severe. More than ever, I think this is a good time to be focusing on companies with modest leverage or net cash positions. ### 2023 portfolio plans I expect to add one new stock to the portfolio when the EMIS takeover completes. This has been delayed, but the company [now expects](https://investegate.co.uk/emis-group-plc--emis-/rns/acquisition-timetable-update/202211010700078082E/?ref=rolandhead.com) to seal the deal by the end of March. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! I'm not planning any changes to my investment strategy, although I am working on some small refinements to my scoring system. I'll detail them here if this takes place, but I'm wary of the risk of trying to narrow the funnel *too* much*.* I use the screen to create a manageable menu of stocks to consider, not as an automated selection tool. So I'm happy to do some manual filtering, too, rather than risking ruling out too many potential candidates. More generally, I'm hoping to invest more time in this website in order to make some technical improvements and add more UK dividend stock coverage. Watch this space. I'll explain any changes here as they happen. In the meantime, please feel free to contact me through [Twitter](https://twitter.com/rolandhead?ref=rolandhead.com) or [by email](https://www.rolandhead.com/contact/) if you have any questions. **For now, all that remains is for me to thank you for your continued support and wish you good luck in the markets in 2023.** --- *I look forward to your feedback and will be adding a comment facility to this site very shortly (!). In the meantime, you can always reach me on Twitter* [***@rolandhead***](https://twitter.com/rolandhead?ref=rolandhead.com) *or* [***by email***](https://www.rolandhead.com/contact/)*.* **Disclaimer:** My comments represent my views only. I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Savills: is this property firm a good dividend share? URL: https://www.rolandhead.com/dividend-shares/savills-is-this-property-firm-a-good-dividend-share/ Last updated: 2024-01-12T11:23:10.000Z Founded in 1855, **Savills (LON: SVS)** can probably claim to be one of the world's oldest real estate agents. Investors who've bought shares in this 167-year old firm at almost any time over the 30 years have done well. Even this year's 40% sell-off has not had much impact on the long-term chart: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-all-chart-141222.png) Savills share price 1993 - 2022 **In this piece, I'll look at Savills' long-term track record of growth and consider why the shares have fallen so sharply this year. I'll also explain why I think this stock might be a suitable candidate for my quality dividend portfolio.** 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! **The story so far:** Savills was [founded](https://www.savills.co.uk/why-savills/our-history.aspx?ref=rolandhead.com) by Alfred Savill in 1855\. The new firm rapidly gained a foothold in the agricultural market, through advisory relationships with Essex landowners. The business remained largely focused on the rural sector until the 1950s, when Savills merged with Rees-Reynold and Hunt, a commercial property specialist. In 1988, Savills abandoned its partnership model and floated in the London Stock Exchange. Over the 34 years since then, the group has expanded into Asia, continental Europe, the US and the Middle East. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-1hfy22-geo-split.png) Savills H1 2022 geographic overview (source: [Savills](https://ir.savills.com/financial-results?ref=rolandhead.com)) In most cases, Savills acquired established companies in each market to provide immediate scale, rather than starting from scratch. Today the group's offering is built around a mix of residential and commercial property. Services offered include investment and property management, in addition to more traditional transactional and consultancy work. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-1hfy22-seg-split.png) Savills H1 2022 operating segment results (source: [Savills](https://ir.savills.com/financial-results?ref=rolandhead.com)) Although real estate is essentially a people business, I believe Savills' scale, longevity, and strong brand may have created a lasting competitive advantage. The company [describes](https://www.savills.co.uk/why-savills/group-structure.aspx?ref=rolandhead.com) it in this way: > Irrespective of location, our people form part of a wider integrated network that enables them to provide our clients with access to market intelligence, contacts and the highest quality advice. ## Rising interest rates prompt rethink A recent [article in the FT](https://www.ft.com/content/1590f756-dfeb-4a30-b5e3-2f404e54312a?ref=rolandhead.com) (paywall) by legendary US investor Howard Marks caught my eye. Marks – whose firm Oaktree Capital manages over $160bn – reckons that high inflation and rising interest rates may have triggered a sea change in market conditions. He thinks this could have a broad impact on investment conditions over the coming years. I mention this here because I think it's fair to assume that Savills' growth over the last decade has benefited from falling interest rates and asset price inflation. While I'm sure that the firm would have traded successfully even without ultra-low rates, my guess is that progress would have been slower. In its half-year results, management admitted that rising interest rates were *"a new experience for many market participants".* The company says that *"the risk is towards a short term reduction in activity as markets adjust to \[...\] rising debt cost"*. I think the significance of these changing conditions is easier to understand with the help of this SharePad chart, which shows the Bank of England base rate since 1982: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/uk-base-rate-40yr-141222.png) UK Base Rate 1982 - 2022 Buyers of super-prime homes in London and large country estates may not be worried about rising mortgage rates. But for mid-market residential customers, I'd guess that interest rates are still significant. However, I think the larger impact from rising rates will be in commercial property, where investors rely heavily on debt markets. Logically, higher borrowing costs mean either that rental rates must rise, or property prices must fall. It seems very likely to me that commercial property prices and transaction levels will fall, at least temporarily, while the market finds a new balance. That could hit Savills' revenue from property transactions. Markets are certainly pricing in a more downbeat outlook. Savills' share price has fallen by 20% since August's half-year results, and by 40% from the record high seen at the start of this year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-1y-chart-141222.png) This slump has left stock trading on 11 times forecast earnings, with an expected dividend yield of 3.9%. I'm intrigued. The shares are cheaper than I've seen them in for a long time, and Savills is now one of the highest-scoring stocks in my screening system. Is this the kind of quality dividend stock I should be targeting for [my portfolio](https://www.rolandhead.com/dividend-portfolio/)? ### Savills: crunching the numbers **Description:* international real estate agency and advisory business.* | **Savills (LON: SVS)** | **Quality Dividend score: 78/100** | **Forecast yield: 3.9%** | | ---------------------- | ---------------------------------- | ------------------------------ | | Share price: 832p | Market cap: £1.2bn | *All data at 14 December 2022* | ***Latest accounts:*** [*results for the half year ended 30 June 2022*](https://investegate.co.uk/savills-plc--svs-/rns/half-year-report/202208110700086235V/?ref=rolandhead.com) In the remainder of this review, I'll step through the different stages in my [**dividend screening system**](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain whether I think Savills could be a suitable addition to my quality dividend portfolio . Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: beyond doubt I score companies' dividend culture by simply looking at how many consecutive years they've paid dividends for. My focus here is on continuity; how deeply embedded in the company's culture and capital allocation strategy is the dividend? ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-dividend-141222.png) Savills achieves a perfect score here, with a 30-year track record of continuous dividend payouts. As far as I can see, there's only been one cut, in the 2008 financial crisis (the 2020 payout was made up in 2021, although that's not shown here). **Savills scores 5/5 for dividend culture in my screening system.** ### Dividend safety: strong A dividend that's not backed by rising earnings and free cash flow may be at risk of a cut. For this test, I look at dividend cover by both earnings and free cash flow. I also check the level of debt leverage in the business. My goal is to flag up unsupportable payouts, but perhaps more importantly I'm looking for a worsening trend of affordability. For example, if a company's payout ratio has increased steadily from 50% to 80% over a period of years, it could signal that the dividend is growing too fast and may become unsupportable. Reassuringly, that's not the case at Savills. Dividend cover has trended between two and four times earnings for much of the last 30 years. Free cash flow dividend cover has also been solid, bearing in mind that FCF is typically more volatile than accounting earnings. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-dividend-fcf-cover-141222.png) Leverage has also been consistently low. Indeed, Savills has reported a net cash balance for most of the last 30 years. The recent increase reflects the 2019 change to IFRS 16 lease accounting, rather than any sudden increase in financial debt: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-leverage-141222.png) Savills' payout looks safe to me, barring a major collapse in earnings. **Savills scores 3.7/5 for dividend safety in my screening system.** ### Dividend growth: solid foundations In my view, good quality dividend growth should be representative of growth in the underlying business. When this is true, the dividend should be sustainable. On the other hand, if a company is merely paying out an increasing share of its earnings each year, then dividend growth is likely to hit a wall at some point. To score a stock for the quality of its dividend growth, I compare the dividend growth rate with the growth of free cash flow per share and net asset value. In my opinion, these two metrics provide a good indicator of how sustainable dividend growth might be. Here's how these metrics look on a chart, plotted against the firm's dividend: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-divps-fcfps-navps-151222.png) What this tells me is that Savills returns an affordable portion of its free cash flow each year, while maintaining a prudent cash balance and reserving funds to support future growth. Arguably, we might question whether the company could consider paying larger dividends. The relatively low rate of dividend growth is the main reason why my system doesn't score the shares more highly in this category. However, given the company's long track record and the uncertain outlook for commercial property right now, I'd be content as a shareholder to know that the payout has a healthy margin of safety. **Savills scores 3.7/5 for dividend growth in my screening system.** ### Dividend yield: not a high yielder Savills conservative dividend payout ratio means that it's rarely been a high-yield stock. The yield has not topped 3% since the financial crisis, according to SharePad. Payouts were disrupted during the pandemic, but this chart doesn't seem to reflect a make-good special dividend that was paid in May. To give a more accurate indication of the expected running yield of this stock, I've included forecast dividends. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-dividendyield-151222.png) Assuming that the company pays dividends as forecast, the forecast dividend yield on the stock is at a level last seen during the financial crisis. This suggests to me that Savills' valuation might have fallen to an attractive level for a long-term entry. However, the stock's history of low yields means it scores poorly in this category. **Savills scores 1.4/5 for dividend yield in my screening system.** ### Valuation: attractive I score stocks for valuation based on their EBIT yield and free cash flow yield. This enables me to see how the business is valued relative to its operating profit, and whether this profit is reliably convered to free cash flow. The picture here is pretty good. Since the financial crisis, at least, Savills appears to have reliably convered most of its operating profit into surplus cash each year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-ebit-fcf-yield-151222.png) Moreover, the stock's EBIT and FCF yields are both well above the 8% threshold I use as a rule of thumb for good value. Forecasts suggest a lower result this year than in 2021, but the valuation still looks attractive to me, barring a complete collapse in profits. **Cyclical earnings:** I don't generally use the P/E ratio in my screening because I prefer measures that reflect debt and/or cash generation. However, I do find cyclically-adjusted earnings to be a useful valuation tool for cyclical stocks. The measure I generally use is the CAPE, or cyclically-adjusted price to earnings ratio. This averages inflation-adjusted earnings over 10 years, and compares this figure to the current share price. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-cape-151222.png) Savills currently has a CAPE of 10.5, according to SharePad. That's the lowest value seen since 2011, giving me some confidence that the valuation could be attractive on a cyclical basis – i.e. reflecting peak-to-trough earnings. The caveat here is that if we are entering a new era, as Howard Marks suggests, the trough could be a little lower than expected. **Savills scores 4.5/5 for valuation in my screening system (which does not currently include CAPE).** ### Profitability: high I look for companies with above-average profitability, as I expect these to be more likely to outperform the wider market over long periods. For non-financial companies, I use return on capital employed (ROCE) as my main measure of profitability. Although operating margin is also useful, it doesn't capture how much value a business is creating each year in the way that ROCE does. In this chart I've plotted ROCE and net asset value per share for Savills since 1993\. We can see how a high ROCE has supported continual NAV growth, despite the company's record of dividend returns and regular acquisitions. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-roce-navps-151222.png) However, it's notable that ROCE has fallen steadily from 24% in 2013 to 14% last year. My suspicion is that much of this decline relates to a string of acquisitions that have taken place during this time. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/image.png) Source: [Savills **"Our History"*](https://www.savills.co.uk/why-savills/our-history.aspx?ref=rolandhead.com) In a worst-case scenario, we could shortly discover that Savills overpaid for these acquisitions and that they aren't very profitable. However, I don't think that's the problem. In my view, a more likely explanation is that these deals resulted in more than £400m of goodwill being added to Savills' balance sheet, increasing capital employed and thus decreasing returns (ROCE = EBIT / Capital Employed) Acquisitions with significant goodwill often reduce ROCE, because equivalent internally-generated assets do not require goodwill to be added to the balance sheet. *For example, my sums suggest Savills would have generated a 2021 ROCE of 18% if goodwill was excluded from the balance sheet, instead of the 15% actually reported.* *There are accounting treatments to neutralise the effect of acquisitions, but I don't (currently) use these in my scoring system.* ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-roce-goodwill-151222-1.png) However, Savills' trailing ROCE is still well above average, and high enough to be attractive to me. On balance, I'm comfortable that this is a profitable business with a track record of creating value for its shareholders. **Savills scores 4.2/5 for profitability in my screening system.** ### Fundamental health: very strong My fundamental health score aims to pick up areas not covered elsewhere in my system – primarily leverage. The two metrics I use here are: - Net debt/5yr average after-tax profit - Fixed charge cover - how easily a company can pay its rent, lease and interest costs from its operating profit. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/12/svs-fixchgcvr-leverage-151222.png) **Leverage:** I choose to compare net debt with after-tax profit, rather than EBITDA. The main reason for this is that it gives me an idea of how easily a company might be able to repay its debt from genuine excess profits. That's not the case with EBITDA, from which many expenses must be deducted to allow a business to operate sustainably. As a rule of thumb, I target a maximum leverage multiple of 4x, although the impact of IFRS 16 lease accounting on reported net debt means that I'm more flexible on this than I used to be. I don't have any concerns about the health of Savills' balance sheet or its use of debt. **Savills scores 5/5 for fundamental health in my screening system.** ### Conclusions: quality at a reasonable price? **My quality dividend system awards Savills an overall score of 78/100 at the time of writing (December 2022).** In my view, Savills appears to be a well-run business with above-average profitability. I think it could potentially have a small economic moat, thanks to the network effects provided by its reach, brand and longevity. My only serious concern is that the impact of rising borrowing costs might be greater and take longer to play out than the market is currently recognising. The UK base rate of 3.5% (at the time of writing) is still low by historic standards, but it's much higher than most market participants are used to. Rising borrowing costs may mean that the relationship between commercial property prices, rent, and leverage needs to be recalculated. It could be a bumpy road for a while. **My view:** However, while I'm cautious, I also think that a lot of the bad news *is* already in the price at Savills. On balance, I would be comfortable starting to build a long-term position in this stock. It's impossible to time the bottom, but I'm very confident that this 167-year old firm will weather this storm, as it has done many times previously. I expect Savills to remain a market-leading firm that can provide attractive returns to *long-term* shareholders. If I didn't already own shares in [this housebuilder](https://www.rolandhead.com/portfolio-shares/cyclical-ftse-250-stock-with-a-6-yield/), then Savills would certainly be on my shortlist of stocks to buy for my portfolio to replace EMIS, which is [being taken over](https://www.rolandhead.com/portfolio/june-2022-dividend-share-news/). 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** My comments represent my views only. I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### November 2022 portfolio update: 6% yield + tech growth URL: https://www.rolandhead.com/portfolio/6-yield-tech-growth-november-2022-portfolio-update/ Last updated: 2023-05-20T12:07:05.000Z As the end of the year approaches, the outlook for the UK and other developed economies remains uncertain. Fortunately, the majority of companies in my quality dividend portfolio seem to be coping well with these headwinds, so far. This month's report has an unusually heavy skew to big caps – all four stocks covered are FTSE 100 members. That's more of a calendar quirk than anything else. FTSE 100 shares only make up around one-third of my portfolio. The remainder of my holdings are split fairly evenly across the FTSE 250 and small cap indices (including some AIM stocks). My monthly portfolio reports are only available to subscribers. I'd strongly recommend signing up – you'll also get full access to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and detailed reviews of all portfolio trades. The model portfolio contains all the same shares I hold in my own portfolio. _This post is for paying subscribers only._ ### Dividend shares: should I add Hargreaves Lansdown to my portfolio? URL: https://www.rolandhead.com/dividend-shares/should-i-add-hargreaves-lansdown-to-my-portfolio/ Last updated: 2023-05-27T09:24:39.000Z Most private investors today take for granted the ability to choose and manage our own investments through easy-to-use, low-cost online platforms. But this functionality was unheard of 40 years ago, when Peter Hargreaves and Stephen Lansdown launched **Hargreaves Lansdown (LON: HL)**. The story since then has been one of relentless growth – until now: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-revenue-eps-all-231122-1.png) **In this piece, I'll look at HL's impressive financial track record and the current challenges being faced by the business. I'll also explain why I might not be adding this FTSE 100 stock to my quality dividend portfolio just yet.** **The story so far:** Hargreaves and Lansdown saw the opportunity and demand for private investors to play a more active role in managing their own investments. Although the financial planning sector was already established, these services weren't (and still aren't) designed to provide good quality investment information directly to clients. The two men started to provide information on unit trusts (funds) and tax planning directly to clients through a regular newsletter. HL then launched a discretionary investment management service in 1986, followed by the Hargreaves Lansdown PEP – a predecessor of the ISA. All of this happened just as the 1980s stock market boom was approaching its peak. However, when the market crashed in 1987, HL continued to answer the phone to clients, offering help and constructive advice where possible. According to the firm, some competing brokers and fund managers simply stopped answering the firm, sacrificing client trust and goodwill. This eventful first decade laid the foundations for the company's development into a leading discount stockbroker during the 1990s, culminating in the launch of the UK's (then) cheapest online dealing service. Hargreaves Lansdown has continued to expand since then, offering an ever-increasing selection of investment products and information for investors. Both founders remain shareholders (albeit reduced), despite having retired from the business. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-shareholders-stocko-241122.png) Source: [Stockopedia](https://app.stockopedia.com/share-prices/hargreaves-lansdown-LON:HL./shareholders?ref=rolandhead.com) Nov 2022 HL helped to create and define the market it now leads. But the competition hasn't stood still. Hargreaves Lansdown faces a wealth of strong competition today, including tech startups offering free trading, as well as direct rivals such as **AJ Bell** and Interactive Investors ([now owned by ludicrously-named fund manager **Abrdn**](https://investegate.co.uk/abrdn-plc--abdn-/rns/acquisition/202112021040303704U/?ref=rolandhead.com))**.** 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Hitting the wall Since touching record highs of more than 2,000p in 2019, Hargreaves Lansdown's share price has fallen by more than 50%. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-10yr-chart-221122.png) The company has shed its premium valuation and now trades on 15 times forecast earnings, with a near-5% dividend yield. That's unusually affordable – the shares are now trading on a P/E rating last seen during the 2008/9 financial crisis, shortly after the company's 2007 IPO: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-pe-241122.png) I think it's fair to say that HL's de-rating is at least partly due to investor fears that this business may finally have gone ex-growth. Fee costs may be another problem. Having once been a low-cost pioneer, HL is now more expensive than some rivals. Customer numbers doubled to 1.7m during the six-year tenure of CEO Chris Hill. But after launching a comprehensive plan to invest in [new digital-led services in February](https://investegate.co.uk/hargreaves-lansdown--hl.-/rns/capital-markets-day/202202220700083498C/?ref=rolandhead.com), Mr Hill has recently [announced](https://investegate.co.uk/hargreaves-lansdown--hl.-/rns/directorate-change/202210170701030203D/?ref=rolandhead.com) his departure. News of his decision came after news reports that HL is facing a lawsuit from more than 3,000 investors who suffered losses when Neil Woodford's funds [collapsed in 2019](https://www.funds-europe.com/july-august-2019/the-neil-woodford-crisis-an-accident-waiting-to-happen?ref=rolandhead.com). HL listed Woodford's flagship Equity Income Fund on its best-buy fund list until trading in the fund was suspended in 2019. The claims against HL are said to be for *"hundreds of millions of pounds"*, according to [this FT report](https://www.ft.com/content/ee9b0fe1-602f-41c8-a4a8-d970bd18cc1f?ref=rolandhead.com). At this stage, there's no way to predict any eventual outcome, but I think it's worth being aware of the potential for liabilities in this area. Interestingly, the Woodford affair seemed like a scandal at the time, but it doesn't seem to have damaged HL's general reputation (except among affected investors...). ### Should I add HL to my dividend portfolio? Today, Hargreaves Lansdown is the UK's leading DIY investment platform and a FTSE 100 business. The group has £120bn of assets under administration (AuA) and over 1.7m clients. Profit margins are high; HL is expected to generate a net profit of £250m this year, on revenue of £655m. Although the firm's [Q3 trading statement](https://investegate.co.uk/hargreaves-lansdown--hl.-/rns/trading-statement/202210170700090192D/?ref=rolandhead.com) showed new client growth slowing, net inflows remained positive and third-quarter revenue was up by 15%. Management even felt sufficiently confident to increases margin guidance for the year (slightly). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-3q22-highlights.png) Source: [Investegate](https://investegate.co.uk/hargreaves-lansdown--hl.-/rns/trading-statement/202210170700090192D/?ref=rolandhead.com) My [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) will shortly have a vacant slot, assuming the [takeover of software group EMIS](https://www.rolandhead.com/portfolio/june-2022-dividend-share-news/) (I hold) completes as expected. Does Hargreaves Lansdown has the qualities I'm looking for in a potential member of the portfolio? ### Hargreaves Lansdown: crunching the numbers ***Description:*** *Market-leading UK DIY investment platform providing access to equities, funds and a wide range of other investments.* | **Hargreaves Lansdown (LON: HL)** | **Quality Dividend score: 76/100** | **Forecast yield: 5.0%** | | --------------------------------- | ---------------------------------- | ------------------------------ | | Share price: 813p | Market cap: £4.0bn | *All data at 18 November 2022* | ***Latest accounts:*** *[Final results for the year ended 30 June 2022](https://investegate.co.uk/hargreaves-lansdown--hl.-/rns/final-results/202208050700060108V/?ref=rolandhead.com)* In the remainder of this review, I'll step through the different stages in my **[dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/)** and explain whether I think Hargreaves Lansdown could be a suitable addition to my quality dividend portfolio . Unless specified otherwise, the financial data I use in this process is drawn from SharePad. --- ### Dividend culture: strong I score a company's **dividend culture** using one simple metric – the number of years of unbroken dividend payments. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-dividendps-241122.png) The company has paid a dividend in every full financial year since its listing in 2007\. This may partly be due to the fact that both founders have always been significant shareholders and remain so, even after retiring from the business. Hargreaves only gets a middling score from my algorithm, but this reflects the company's relatively short spell as a listed company – just 15 years. All the evidence so far suggests to me that this business has a strong dividend culture. **Hargreaves Lansdown scores 3/5 for dividend culture in my screening system.** ### Dividend safety: armour-plated My **dividend safety score** compares a company's dividend payout with its earnings and free cash flow per share. I also look at debt and leverage, to ensure that shareholders aren't receiving cash that would be better used repaying debt. Dividend cover of two times earnings is often used as a benchmark for dividend safety. As a useful rule of thumb, I share that view. However, I don't think it always makes sense to apply a one-size-fits-all approach. A highly cyclical company that's prone to big profit swings – **BP**, for example – might need a higher level of cover to ensure the dividend remains sustainable. At the other end of the spectrum, Hargreaves Lansdown is a capital-light business with high margins, good cash generation and stable earnings. In this scenaraio, I think that a lower level of earnings cover is probably sufficient to provide a reasonable level of safety. That's what we see here – the dividend has consistently been covered around 1.5x by free cash flow and earnings since 2008\. Despite these regular payouts, the group's cash balance has steadily trended higher: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-dividend-fcf-cover-cash-241122.png) It's clear that if earnings fall much below last year's level, dividend cover could become stretched. I don't think this is too likely, but it's certainly a possibility. However, the group's last-reported net cash position of c.£500m would be sufficient to fund two years' dividends at the current level. On balance, I think a dividend cut is unlikely. **Hargreaves Lansdown scores 4.7/5 for dividend safety in my screening system.** ### Dividend growth: solid foundations As a long-term investor, I want my dividends to grow, or at worst, be flat. Dividend cuts will erode my income and may indicate wider problems with a business. My **dividend growth score** is intended to give me a clear view of the factors I believe are needed to support *sustainable increases to the shareholder payout*: - Free cash flow growth - Net asset value growth In this chart we can see that HL's dividend growth has been supported by matching free cash flow growth, as well as steady NAVps growth *(As a quick reminder, I include NAVps growth as an indicator that the underlying business is expanding. If this isn't happening, then management may be relying on cost-cutting or increasing the payout ratio to fund dividend growth – not always sustainable)* ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-div-fcf-nav-ps-growth-241122.png) My algorithm blends a company's five-year growth rates for dividend, free cash flow and NAV to give a score for dividend growth. Last year's fall in free cash flow and NAV dampen HL's overall score here, but the stock still earns an above-average score for dividend growth. **Hargreaves Lansdown scores 3.5/5 for dividend growth in my screening system.** ### Dividend yield: bucking the trend My intention is to buy shares in companies that are able to deliver long-term dividend growth. In some cases, I'm willing to accept lower yields today in order to (hopefully) benefit from future compounding. However, yield is still important to me and I aim to maintain a portfolio yield that's comfortably ahead of the FTSE 100 average. *([At the end of September 2022](https://www.rolandhead.com/portfolio/q3-2022-quality-dividend-portfolio-review/), the portfolio had a forecast yield of 5.3%, compared to 4% for the FTSE 100.)* Until very recently, Hargreaves has been a relatively low-yielding stock, due to its premium valuation. That has now changed – this year's share price slump means HL's dividend yield is now higher than at any point in its listed history: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-div-yield-241122.png) HL's 5% dividend yield looks attractive to me, at least at face value. But I also think it's worth reflecting on the sudden change in the valuation that's implied by this sharp rise in yield. The market appears to be pricing in a future that's rather different to the recent past. This might be a short-term misvaluation by Mr Market – or it might not be. **Hargreaves Lansdown scores 2.8/5 for dividend yield in my screening system.** ### Profitability: falling to earth? Hargreaves Lansdown has long been one of the most profitable businesses on the UK market. But the company appears to be in danger of losing this reputation. Return on equity has been trending lower for **the last decade**: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-roe-241122.png) I don't think this falling profitability indicates any underlying problem. But it does seem to indicate that the business is not quite as profitable at its current scale as it was 10 years ago. I can see three possible reasons for this loss of profitability: - **Competitive pressures pt I:** HL operates in a more crowded market place than it did even 10 years ago. In addition to other mainstream investment platforms like ii and AJ Bell, HL faces competition from a new generation of trading apps with no dealing fees. - **Competitive pressures pt II:** The fees charged by active fund managers have come under growing pressure from cheaper passive investing products in recent years. HL offers a wide choice of third-party funds on its platform, but the revenue margin it receives from selling these products has fallen from 0.62% (FY13) to 0.39% (FY22). There's also a second reason for this decline – regulatory change. - **Regulatory change:** The [Retail Distribution Review (RDR)](https://www.fca.org.uk/news/news-stories/post-implementation-review-retail-distribution-review?ref=rolandhead.com) restricted fund commission payments to advisers and platforms. RDR came into force at the end of 2012, with further changes from 2014\. We can see that HL's operating margin dipped fell when RDR was introduced, before recovering from 2016 onwards, when the phased implementation of RDR changes was completed. As part of this change, HL introduced an updated pricing structure, presumably recovering some lost margin. However, from 2017, the group's operating margin entered a more persistent downtrend. I suspect this is due to competitive pressures, and perhaps HL's growing scale and cost base: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/hl-opmargin-241122.png) Hargreaves Lansdown remains an outstandingly profitable business. But there's no sign yet that the group's profitability has stabilised. Nor is there any sign that competition from a growing host of rivals – recently [joined by **CMC Markets**](https://investegate.co.uk/cmc-markets-plc--cmcx-/rns/interim-results/202211160700055300G/?ref=rolandhead.com)– is about to ease. In my view, one of the biggest risks to Hargreaves Lansdown's current valuation is that the group's profitability will normalise at a lower level yet. If combined with slower growth, this could justify a further step down in valuation and share price. For example, let's imagine that HL's operating margin falls to 38% – the level achieved by rival AJ Bell last year. At this level, my sums suggest that operating profit would fall by 17%, and that last year's dividend would not have been covered by earnings. Despite this future risk, HL's history of excellent profitability earns the stock a top score in my screen, which does not attempt to predict the future. **Hargreaves Lansdown scores 5.0/5 for profitability in my screening system.** ### Conclusions: a good business, but what next? **My quality dividend system awards Hargreaves Lansdown an overall score of 76/100 at the time of writing (November 2022).** Hargreaves Lansdown's past performance has seen it benefit from first-mover advantage and sure-footed strategy to become the UK's market-leading private investor platform. The business remains hugely profitable and I think it has a very strong balance sheet. On a medium-term view, I think HL will remain successful and could be an attractive investment. However, the near-term looks potentially challenging. The group faces strong competitive pressures and the risk – unquantifiable to me at this stage – of significant legal damages relating to Woodford funds. There's also the broader question of growth. Peter Hargreaves and Stephen Lansdown sure-footedly identified and took ownership of a large, growing niche. Departing CEO Chris Hill was able to continue this work, doubling the group's client count in six years. However, HL now has 1.7m clients. That's 2.5 out of every 100 people in the UK. I think it's worth asking where future growth might come from. Here's what we know right now: - Rising interest rates are likely to boost income from investors' cash deposits. However, HL's own [cash savings service](https://www.hl.co.uk/investment-services/active-savings?ref=rolandhead.com) may cannibalise this income. It makes it easier for investors to move cash into interest-paying accounts when it's not needed for investments. - Mr Hill's February strategy laid out plans to scale up the company's own fund management operation, which attracts pre-RDR levels of margin. - Other plans included an expanded advice service, and using data analytics to provide *"data-driven insights"* for clients. All of these seem plausible to me, but they will require investment and don't look like easy or quick fixes to me. **My view:** On balance, I think HL is a good business that could be an attractive investment at the right price. With the shares trading on 15 times earnings and offering a 5% yield, the price *may* already be attractive. Personally, I'm not yet convinced. I'm interested to see what happens next. But I won't be adding Hargreaves Lansdown to my portfolio at this time. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### October 2022 dividend portfolio update URL: https://www.rolandhead.com/portfolio/october-2022-dividend-share-update/ Last updated: 2023-02-09T10:05:56.000Z **Update:** this piece was amended on 18/12/2022 to include details of a second set of company results - see below for details. --- October was a quiet month for portfolio news, with just two of my stocks issuing results. The first of these is a housebuilding stock that's unloved at the moment, but which I think could offer decent long-term value at current levels. I introduced this business in a recent post [here](https://www.rolandhead.com/portfolio-shares/cyclical-ftse-250-stock-with-a-6-yield/). The other company in this update is an AIM-listed small-cap I've written about before, which benefits from [very high profit margins, super cash generation and founder-management](https://www.rolandhead.com/portfolio-shares/founder-led-aim-dividend-stock/). *(Although there were several trading updates from portfolio companies, I don't generally cover these here unless they contain something unexpected. That didn't happen in October.)* --- The remainder of this post will only be available to subscribers, so I'd urge you to sign up (**free**) to read on. As an added bonus, free subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week.* _This post is for paying subscribers only._ ### September 2022 dividend portfolio news URL: https://www.rolandhead.com/portfolio/september-2022-dividend-share-news/ Last updated: 2023-05-20T12:07:44.000Z Yes, you read that right. This is the monthly review of my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) for **September**. I would normally publish my monthly portfolio update more promptly than this, but events got in the way last month. Apologies for being so tardy. September's financial news was dominated by events outside of investing. Fortunately, the companies in my portfolio continued to turn in respectable performance and did not suffer unduly in the markets. Although the businesses in my quality dividend portfolio are not immune to outside pressures, I continue to believe that over the long term, a strong balance sheet, a clear strategy, and positive cash flow should prevail over most headwinds. ### Portfolio news updates In September, five of my portfolio stocks reported results. These included FTSE 250 retailer **[Dunelm](https://www.rolandhead.com/dividend-portfolio/#dunelm) (LON: DNLM)**, consumer goods group **[PZ Cussons ](https://www.rolandhead.com/dividend-portfolio/#pz-cussons)(LON:PZC)** and three **members-only small cap stocks**. A free sign-up is required to read my coverage of these small caps. I'd strongly recommend this – you'll also get full access to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and all portfolio share reports. As a reminder, the model dividend portfolio contains the same shares I own myself. **Disclosure:* unless otherwise specified, Roland owns all the shares discussed in this article.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** ### Dunelm **Description:* Homewares retailer with a network of out-of-town stores and online presence. A family-controlled business. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#dunelm).* | **Dunelm (LON: DNLM)** | **Quality Dividend score: 74/100** | **Forecast yield: 5.2%** | | ---------------------- | ---------------------------------- | ------------------------- | | Share price: 875p | Market cap: £1.7bn | *All data at 01 Nov 2022* | ***RNS release:*** *[Preliminary results for the 53 weeks ended 2 July 2022](https://investegate.co.uk/dunelm-group-plc--dnlm-/rns/preliminary-results/202209140700103537Z/?ref=rolandhead.com)* > "Strong sales growth of 16.2%6 with total sales 41% higher than FY19" I rate Dunelm as one of the best quality retailers in the UK. Over the last year, various less retailers have complained of problems relating to cost inflation, supply chain disruption and labour shortages. Dunelm simply said that its sales had been 41% higher than in FY19 and said that its share of the homewares market had risen by 1.4% to 10.2%. Revenue rose by 18% to £1,581m, while pre-tax profit for the year was 35% higher, at £213m. Impressive stuff, in my view. Dunelm is currently working to broaden its range and expand into the furniture market. A new warehouse was opened this year to fulfil furniture orders. But management says that historically, 85% of growth has come from market share gains. I initially wondered whether this might be a sign that Dunelm's growth would reach a natural limit. However, I don't think a 10% market share is likely to be the ultimate limit for the group's low-cost, big-box store and online offering. In my view, constraints on growth are not yet a serious concern. This view is supported by Dunelm's surprisingly broad demographic appeal. According to the company, the number of active customers rose by 8.5% last year, with gains across all income groups: > "We have seen growth in customer numbers across all income levels, with a year-on-year increase of more than 10% in both the <£20k per annum and >£100k per annum income groups13. We have also increased the appeal across all age ranges, with customers aged between 16 and 24 growing by 8.5% and those aged 65 and over growing by 16.2%." I suspect that Dunelm should be able to continue expanding for some years. I'd imagine this is also the view held by incoming chair Alison Brittain. Ms Brittain is the outgoing chief executive of Premier Inn owner **Whitbread** and is a highly-rated FTSE 100 executive. I think she's an impressive hire for Dunelm. **Financial review:** In my view, Dunelm's latest results highlight most of the reasons why it's a member of my quality dividend portfolio. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/11/dnlm-fy22-results-summary.png) Revenue rose by 18% to £1,581m last year, or by 16% when normalising for a 52-week financial year (last year had 53 weeks). The proportion of digital sales fell from 46% to 35%, but this seems logical given the broader return to store shopping over the last 12 months. Digital sales were just 20% of total sales in FY19, demonstrating the progress made during the pandemic. Finally, pre-tax profit climbed by 34.9% to £212.8m last year, while gross margin was steady at 51.2%. Operating costs as a percentage of sales fell by 1.6%, lifting Dunelm's operating margin rose to 13.8%. That's the highest level for six years. Return on capital employed also rose sharply: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/09/dnlm-opmargin-roce-240922.png) Cash generation remained good, despite some inventory build to protect against supply chain disruption. The balance sheet is largely free of debt: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/09/dnlm-fcf-netdebt-fy22.png) Shareholders benefited from Dunelm's strong cash generation with a generous stream of dividends. **Dividend:** Dunelm's ordinary dividend rose by 14% to 40p per share. The company also declared a special dividend of 37p, giving the stock a total trailing yield of 10% at recent share prices. The ordinary dividend was covered 2.1x by adjusted earnings and roughly 2x by free cash flow. My sums indicate that the total dividend paid, including the special, would have cost around £155m – almost exactly equalling last year's £153m free cash flow. In my view, Dunelm's ordinary dividend continues to look very robust. I think there's probably scope for more special dividends over the coming years, too. Based on SharePad consensus forecasts, the shares offered a FY23 forecast yield of around 5.2% on 1 November 2022. **Outlook:** CEO Nick Wilkinson says that sales have been robust during the first 10 weeks over the year (July/August '22). Looking ahead, Wilkinson expects to achieve a 50% gross margin this year, in line with past years' performances. Full-year results are expected to be in line with current expectations. This suggests that Dunelm shares may be trading on around 11 times forecast earnings. **My view:** In my view, last year's results showed robust profitability, good cash generation and continued execution of the company's proven strategy. I have no qualms about continuing to hold Dunelm in my model portfolio. With a trailing free cash flow yield of nearly 10%, I think the shares are probably cheap. --- ### PZ Cussons **Description:* Family-controlled consumer goods group with a focus on hygiene brands, such as* Carex *and* Imperial Leather*. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#pz-cussons).* | **PZ Cussons (LON: PZC)** | **Quality Dividend score: 52/100** | **Forecast yield: 3.2%** | | ------------------------- | ---------------------------------- | ------------------------- | | Share price: 199p | Market cap: £858m | *All data at 01 Nov 2022* | ***RNS release:*** *[Full-year results for the year ended 31 May 2022](https://investegate.co.uk/pz-cussons-plc--pzc-/rns/2022-full-year-results/202209220700122291A/?ref=rolandhead.com)* > "...we expect to deliver FY23 results in line with current consensus estimates" PZ Cussons seems a little slow to report for a FTSE 250 company; it took nearly four months for the group to deliver its full-year results. However, the numbers look pretty solid to me. They reinforce my impression that CEO Jonathan Myers is doing a competent job of turning around this venerable business. UK sales fell last year as the pandemic hand hygiene boom tailed off (PZ Cusson's *Carex* brand is the market leader). However, the group reported like-for-like sales growth in its other key markets of Asia Pacific (Australia/Indonesia) and Africa (primarily Nigeria). Myers' focus on a smaller number of core brands and markets appears to be bearing fruit. Like-for-like sales were positive at a group level last year, while underlying operating margins also improved. **Financial review:** I've included a summary of PZ Cusson's adjusted results below. The revenue drop can be explained by the disposal of the group's low-margin yoghurt business (*five:am)* and by adverse FX movements. The statutory results included a number of adjustments last year, but they netted out to a reduction of £1.3m in pre-tax profit. Having reviewed the (lengthy) list of adjusting items, I'm comfortable that they're all legitimate and likely to be one-off in nature. Although I generally prefer to use statutory results, in this case I think these adjusted numbers provide a more useful picture of operating performance: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/09/pzc-fy22-fin-summary-a.png) Source: PZ Cussons FY22 presentation **Profit margins:** I think it's interesting to drill down a little further into PZ Cussons' margins. While the group's overall operating margin is 11.5%, regional figures vary widely: - Europe/Americas (UK/US): 18.1% - Asia Pacific (Australia/Indonesia): 12.0% - Africa (Nigeria/broader West Africa): 10.0% While the AsiaPac and Africa margins are much lower, both improved significantly last year thanks to a combination of pricing, product mix and cost savings. **ROCE:** My preferred measure of **return on capital employed (ROCE)** was 10.8%, by my calcuation. *(To reach this, I stripped out PZC's pension surplus from each of the last two years (as it's not capital employed) and then averaged capital employed for the 12-month period to calculate ROCE.)* **Free cash flow:** Reassuringly, cash flow remained strong. Stripping out disposals and acquisitions, my calculations suggest that free cash flow rose from £31.8m to £48.5m last year. This covered the £27.4m dividend comfortably. PZC sold £18.4m of surplus property in Nigeria last year and collected £6.4m from the sale of the *five:am* yoghurt brand. Despite investing £37m in the acquisition of *Childs Farm*, this cash inflow enabled the group to reduce net debt by £20.9m to £9.8m. Financially, this looks like a resilient picture to me. Although profitability is significantly lower than larger peer **Unilever** (which I also hold), leverage is much lower at PZ Cussons. **Dividend:** The ordinary dividend has been increased by 5.1% to 6.4p per share. That gives PZC shares a yield of 3.2% at the time of writing. **Outlook:** CEO Myers says that he's confident of hitting full-year expectations, despite pressures from cost inflation and \[weaker\] consumer spending. Looking further ahead, the group's revenue growth target has been increased from *"low-mid single digits"* to *"mid-single digits"*. I'd imagine this reflects inflation rather than more rapid growth, but it seems reassuring in the current environment. Adjusted operating profit margins are expected to rise into the mid-teens over time. Further investments (acquisitions?) of £20m are expected over the next three years to continue the transformation of the business. I remain optimistic about PZC's ability to expand in emerging markets, where high birth rates should support the development of brands such as *Cussons Baby*. **My view:** I'm quite happy with PZ Cussons latest results and am encouraged by the group's stabilised performance. I think the shares are probably trading close to their fair value, but I think there's room for continued gains over time. I remain very happy to hold this family-owned stock in my dividend portfolio --- *The remainder of this post is only available to registered members. Please sign up to read on – I'll never spam you and will generally email no more than once a week.* --- _This post is for paying subscribers only._ ### Q3 2022: Quality dividend portfolio review URL: https://www.rolandhead.com/portfolio/q3-2022-quality-dividend-portfolio-review/ Last updated: 2023-05-27T09:26:41.000Z I think it's probably fair to say that the third quarter of 2022 brought some surprises in the market, not all of them welcome. I've **not made any changes** to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) in response to the recent sell off, nor will I be. However, in my personal portfolio – which holds the same stocks but is topped up regularly – I'm planning to put my cash balance to work over the coming weeks, topping up some of my existing holdings. ### Portfolio performance Here are the headline numbers for the portfolio's performance during the third quarter of 2022\. **Q3 2022:** - Model portfolio total return: -4.7% (including **1% dividend income**) - FTSE 100 total return: -3.7% (including **0.9% dividend income**) **Nine months to 30 September 2022**: - Model portfolio total return: -9% (including **3.4% dividend income**) - FTSE 100 total return: -3.7% (including **2.8% dividend income**) Here's how the my model dividend portfolio has performed against my benchmark FTSE 100 tracker ETF (**[iShares CUKX](https://www.rolandhead.com/dividend-portfolio/)**). As a reminder, this is a model (virtual) portfolio. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/10/rhtr-pf-vs-cukx-ytd-300922.png) Both model portfolios are measured on a total return basis, including dividends. The model portfolio has broadly tracked the FTSE 100 for most of the year, but hasn't yet recovered from the impact of the Ukraine invasion. The sharp drawdown during Q1 was the result of my unfortunate decision to invest in Russian gold miner **[Polymetal International](https://www.rolandhead.com/dividend-portfolio/#polymetal-international)**. I've covered that investment and the subsequent changes to my investment strategy [here](https://www.rolandhead.com/portfolio-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/). Of course, portfolio movements usually mask a far wider range of individual share price movments. Here's a chart showing how the stocks in my portfolio rose and fell during Q3: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/10/3q22-shareprice-changes.png) Quality dividend model portofolio Q2 2022 share price movements **You can see full details of all portfolio shares [here](https://www.rolandhead.com/dividend-portfolio/).** 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! The majority of fallers in the portfolio during Q3 were those with exposure to a cyclical downturn, especially in consumer sectors. However, there were a couple of outliers, too. Among the top fallers were a small-cap industrial and a financial stock. I'm holding onto both as I think that they are starting to look oversold and have good medium-term prospects. **Model portfolio:** As a quick reminder, my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) is a virtual fund that's run using [my dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The model portfolio contains the same stocks as my personal portfolio, but the two aren't exactly the same. Many of my personal holdings pre-date the model portfolio and have different cost prices. Additionally, the model portfolio has been constructed with a single lump sum of virtual cash in order to make tracking performance easier. My own share dealing account gets topped up from my income each month. In the remainder of this review, I'll explain the changes I made to the portfolio during the second quarter and take a look at the portfolio's key dividend quality metrics. ### Stocks sold during Q3 I did not sell any shares from the model portfolio during Q3 2022. ### New stocks in Q3 I added two new stocks to the model portfolio (and my own holdings) during the third quarter. Subscribers can read about each of these new stocks in the articles below: - *[A 170-year-old business to replace Homeserve](https://www.rolandhead.com/portfolio-shares/170-year-old-business-replace-homeserve/)* - [*A cyclical FTSE 250 stock with a 6%+ yield*](https://www.rolandhead.com/portfolio-shares/cyclical-ftse-250-stock-with-a-6-yield/) These purchases were made to replace earlier disposals from the portfolio following the takeovers of **[Air Partner](https://www.rolandhead.com/dividend-portfolio/#air-partner)** and **[Homeserve](https://www.rolandhead.com/dividend-portfolio/#homeserve)**. As things stand today, the portfolio has 20 stocks, which is my target size. However, this should fall to 19 by the end of the year, assuming the takeover of software group **[EMIS](https://www.rolandhead.com/dividend-portfolio/#emis-group)** completes as planned. This gives me the scope to add one company to the portfolio over the coming months, if I can find a suitable opportunity in my screening results. ### Quality dividend model portfolio: financial metrics The performance of individual stocks is fascinating and can be very satisfying. But the only thing that really matters in financial terms is the performance of the portfolio. For this reason, I like to look at the aggregate characteristics of my portfolio to see if – collectively – the companies I've chosen are displaying the kind of qualities I'm looking for. I admit that I've borrowed this technique from Fundsmith founder Terry Smith. He describes it as a way of visualising a portfolio as a single business. Here's how my quality dividend model portfolio looked, in aggregate, at the end of September 2022 (the H1 figures are [here](https://www.rolandhead.com/portfolio/h1-2022-quality-dividend-portfolio-review/)): | **Median mkt cap** | **TTM ROCE** | **TTM EBIT yield** | **TTM FCF yield** | **Net debt/5yr avg net profit** | **TTM div yield** | **5yr avg div grth** | **F'cast div yield** | **No. yrs div paid** | | ------------------ | ------------ | ------------------ | ----------------- | ------------------------------- | ----------------- | -------------------- | -------------------- | -------------------- | | £1.8bn | 22.8% | 11.8% | 8.1% | \-0.1x | 4.9% | 8.4% | 5.3% | 21 | *(Source: SharePad/author analysis - some manual adjustments were needed; don't take this as gospel)* **Comment:** Despite the market ructions of the last three months, the metrics in the table above have only changed slightly since the first half. Falling share prices mean that yield measures have generally increased. Meanwhile, pressure on profit margins at some of my companies means that the portfolio's mean return on capital employed (ROCE) is slightly lower than it was three months ago (H1: 23.5%). I'm not concerned by these shifts. Indeed, I'm quite encouraged by the numbers. The portfolio's aggregate **free cash flow yield** of 8.1% suggests value to me. It also tells me that my stocks' cash generation should be sufficient to cover the **forecast dividend yield** of 5.3%. If my companies deliver dividends as forecast, then the portfolio will generate **dividend income growth** of 8.2% this year, nearly matching UK inflation. In terms of valuation, an **EBIT yield** of 11.8% is comfortably above the 8% level I view I use as a rule-of-thumb test for good value. Similarly, the portfolio's **average ROCE** of 22.8% is well above the wider market average. This suggests that the businesses in my portfolio are significantly more profitable than average. I'd expect that to support market-beating long-term growth, in aggregate. Of course, there's no guarantee this purely numerical assessment will translate into a winning portfolio. One particular risk is that I've chosen companies that have performed well in the past but won't in the future. As I've commented before, another risk is that these attractive portfolio averages could be masking problems with individual businesses. However, I remain comfortable that my portfolio is displaying the attributes I look for in good quality dividend investments. I don't plan to make any voluntary changes to the portfolio during the final quarter of this year, except to try and select a replacement for EMIS. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! **Disclosure:* At the time of publication, Roland owned shares in EMIS.* --- **Disclaimer:** This is a personal blog. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Podcast - My approach to quality dividend investing URL: https://www.rolandhead.com/podcasts/dividend-investing-podcast-fyr/ Last updated: 2024-01-10T12:47:37.000Z I recently appeared on the [Fund Your Retirement podcast](https://www.fundyourretirement.com/fund-your-retirement-podcast/?ref=rolandhead.com) with Lee Cleasby to discuss my approach to quality dividend investing and my experiences as an investor. Topics covered during the show included: - [the process I use](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) to narrow down my investment process to a manageable number of shares - one of my highest-conviction shareholdings (that [I've been buying recently](https://www.rolandhead.com/portfolio-shares/170-year-old-business-replace-homeserve/)) - my view on the importance of dividend growth - what I look for in a dividend stock - the size and construction of [my income portfolio](https://www.rolandhead.com/dividend-portfolio/) - how I handle mistakes and losses - when [I might sell shares](https://www.rolandhead.com/portfolio/portfolio-selling-shares/) The podcast was recorded on 21 September 2022\. You can listen on [YouTube](https://youtu.be/hMqaLVPI-Sg?ref=rolandhead.com) ) or through all of the [usual podcast platforms](https://www.fundyourretirement.com/podcasts/fyr065-investing-for-dividend-growth-with-roland-head/?ref=rolandhead.com). I hope you enjoy it! --- *I'll be adding a comment facility to this site in the future; I look forward to your feedback over the coming months. In the meantime, you can always reach me on Twitter* [***@rolandhead***](https://twitter.com/rolandhead?ref=rolandhead.com) *or* [***by email***](https://www.rolandhead.com/contact/)*.* **Disclaimer:** This is a personal blog and I am not a financial adviser. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Portfolio shares: A FTSE 100 tech stock with sticky customers URL: https://www.rolandhead.com/dividend-shares/ftse-100-tech-stock-with-sticky-customers/ Last updated: 2023-11-07T11:00:30.000Z My dividend system is designed to try and highlight companies with the potential to be long-term compounders. As I'm still working, I'm not necessarily interested in maximising my dividend yield today. What I want is to find shares that can deliver rising yield on cost and associated capital gains over long periods. The FTSE 100 share I'm looking at today has satisfied these criteria ably in the past. Although the last couple of years have been a little sticky, my view is that the business in question is now well positioned to resume its steady growth journey. Here's a chart showing this company's earnings, dividend and share price over the last 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/09/tbc-sp-eps-div-170922.png) To find out the identity of this business and why I've chosen it for my model portfolio, read on. *The remainder of post is only available to paid subscribers, who also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/).* --- _This post is for paying subscribers only._ ### Portfolio shares: a cyclical FTSE 250 stock with a 6%+ yield URL: https://www.rolandhead.com/dividend-shares/cyclical-ftse-250-stock-with-a-6-yield/ Last updated: 2023-11-07T11:00:15.000Z This week I'm introducing a new share for my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). This new addition will bring the model portfolio up to its target size of 20 shares – at least until [the takeover of **EMIS**](https://www.rolandhead.com/portfolio/june-2022-dividend-share-news/) (I hold) completes later this year. The new company is a FTSE 250 member, as was [the last company I added to the portfolio in July](https://www.rolandhead.com/portfolio-shares/170-year-old-business-replace-homeserve/). I'm not specifically targeting FTSE 250 stocks, but in my view a number of these mid-cap businesses offer an attractive combination of value and growth potential at the moment. This is easier to understand if we remember that the FTSE 250 has underperformed the FTSE 100 by nearly 25% over the last year. The valuations of many FTSE 250 stocks have fallen to quite attractive levels, in my view: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/09/googfin-ftse100-ftse250-1y-080922.png) Source: [Google Finance](https://g.co/finance/UKX:INDEXFTSE?window=1Y&comparison=INDEXFTSE%3AMCX&ref=rolandhead.com) The company I've chosen to add to the portfolio has a dividend yield of more than 6% and an unbroken 30-year record of dividend payments (although this has included some cuts). In my view, this company's shares currently look affordably priced on a medium-term view. Its operating margin and ROCE have averaged almost 15% since 2007, and its balance sheet has a decent net cash position. Although this business faces clear cyclical risks, its share price has already fallen by 40% this year. I think this has priced in a degree of caution. This is a stock (and a sector) that I've been mulling over for some time. I've decided that I'm now comfortable investing – as always, with a long-term view in mind. *The remainder of post is only available to paid subscribers, who also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/).* --- _This post is for paying subscribers only._ ### August 2022 dividend portfolio news URL: https://www.rolandhead.com/portfolio/august-2022-dividend-share-news/ Last updated: 2023-05-20T12:07:56.000Z The FTSE 100 looks likely to end August up by around 1%. Smaller cap indices have continued to lag the big caps, echoing the trend seen so far this year. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/08/ukx-mcx-smx-ytd-google-270822.png) Source: [Google Finance](https://g.co/finance/UKX:INDEXFTSE?window=YTD&comparison=INDEXFTSE%3AMCX%2CINDEXFTSE%3ASMX&ref=rolandhead.com) My quality dividend model portfolio has an average market cap of around £1.6bn, so is weighted towards the FTSE 250\. The contents of this monthly update reflect this mix. In August, I had one FTSE 100 stock report results, two FTSE 250 members and one small cap. The largest two of these were **[Legal & General](https://www.rolandhead.com/dividend-portfolio/#legal-and-general-group)** and **[Direct Line Insurance](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance)**. The other two were member-only stocks, details of which are only available to subscribers. I'd strongly recommend this – you'll get full access to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) and all portfolio share reports. The model dividend portfolio contains the same shares I own myself. **Disclosure:* unless otherwise specified, Roland owns all the shares discussed in this article.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** ### Legal & General ***Description:*** *FTSE 100 asset management, retirement, and life insurance group. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#legal-and-general-group).* | **Legal & General (LON: LGEN)** | **Quality Dividend score: 91/100** | **Forecast yield: 7.6%** | | ------------------------------- | ---------------------------------- | ---------------------------- | | Share price: 256p | Market cap: £15.3bn | *All data at 27 August 2022* | **RNS release:* [L&G half-year results 2022](https://www.investegate.co.uk/legal---38--general-grp--lgen-/rns/l-g-half-year-results-2022-part-1/202208090700043247V/?ref=rolandhead.com)* > "We've made a good start to the year, with operating profit and EPS up 8%, cash and capital generation up double digits, DPS up 5% and a return on equity of 21%." Legal & General is currently the highest-ranking financial stock in my screening results. The stock's valuation has remained stubbornly modest in recent years, despite the group continuing to deliver high returns on equity and strong cash generation. This year's half-year results continue the theme. The group reported £4.4bn of new pension business (H1 2021: £3.1bn), while the investment management division saw £65.6bn of net inflows (H1 2021: £27.4bn). These helped to lift operating profit by 8% to £1,160m. Capital generation rose by 14% to £0.9bn. As a result, L&G's regulatory Solvency II coverage ratio increased to an ample 212% (H1 2021: 182%). Group profitability remained excellent, with a half-year return on equity of 21.3%. With an economic slowdown now seemingly almost certain, management were also keen to highlight the quality of L&G's bond portfolio. According to the firm, 99% of the group's £73.2bn annuity bond portfolio is investment grade. The company has not had a default for the last 13 years and its £2.7bn credit provision remains unused. During the first half of the year, 100% of scheduled cash flows were received from the group's direct investments (i.e. alternative assets, such as property and renewable energy). This is all very reassuring, but I think it's probably fair to say that it's too soon to see much impact on good quality investment grade assets. The next 12-18 months may be a more severe test. However, given Legal & General's large scale and 180-year track record of investing in long-term assets, I'm inclined to think the shares should be a fairly safe place for my cash. **Dividend:** The interim dividend was increased by 5% to 5.44p per share. That's consistent with forecasts for a full-year payout of 19.4p per share, which would give a 7.6% yield. **Outlook:** Legal & General remains on track to deliver the five-year plan set out in November 2020\. From a shareholder perspective, the company expects to increase dividend coverage by growing earnings and capital generation faster than the payout. With a forward yield of 7.6%, I'd expect that the guided *"low to mid-single digit"* dividend growth should be enough to deliver 10%+ annual returns from the stock. **My view:** Rising interest rates and rampant inflation are presenting less experienced investors with a whole new world. But Legal & General has survived many such challenges before and I believe the group's integrated model should continue to perform well. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/08/lgen-fy21pre-busmodel.png) Source: Legal & General Legal & General's long-term focus and large scale make it a comparative rarity in the UK market. I'm very happy to continue holding the shares, and believe they're attractively valued at current levels. --- ### Direct Line Insurance ***Description:*** *A FTSE 100 company that's one of the UK's largest motor, home and commercial insurers. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance).* | **Direct Line Insurance (LON: DLG)** | **Quality Dividend score: 65/100** | **Forecast yield: 9.9%** | | ------------------------------------ | ---------------------------------- | ---------------------------- | | Share price: 207p | Market cap: £2.7bn | *All data at 27 August 2022* | **RNS release:* [Half-Year Report 2022](https://www.investegate.co.uk/direct-line-ins-grp--dlg-/rns/half-year-report-2022/202208020700095328U/?ref=rolandhead.com)* > "... uniquely complex motor market conditions during the first half, due to significant regulatory changes, heightened claims inflation and macroeconomic uncertainty, have challenged our short-term profitability." I covered Direct Line's recent profit warning and updated guidance in my July review, which [you can read here](https://www.rolandhead.com/portfolio/july-2022-dividend-share-news/). August's half-year results did not add a great deal to the picture, except to flesh out some of the numbers. Gross written premium for the half year fell by 2.1% to £1,523m, while operating profit dropped 47% to £195.5m. The group's combined operating ratio rose from 84.2% in H1 2021 to 96.5%. Annualised return on tangible equity fell by 12.3% to 17.8% (H1 2021: 30.1%). On a statutory basis including intangibles, I calculate a trailing 12-month return on equity of 10% – some way below the group's historic average of c.15%. This slide from the analyst presentation made it clear where the problem lay. Direct Line's motor insurance business made an underwriting loss in H1, as claims costs exceeded premium income: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/08/1h22-profit-breakdown.png) Source: Direct Line Insurance H1 FY22 presentation Here's why. According to the company, motor insurance claims costs have risen by around 50% since the start of 2019: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/08/dlg-1h22-pres-motor-claims-inflation.png) Source: Direct Line Insurance H1 FY22 presentation CEO Penny James admits that claims costs have risen faster than the company expected, but she believes that the cost advantages of its in-house repair network and new pricing models will help to recover this lost margin. James also says that Direct Line (and others) are continuing to push price rises into the market. **Dividend:** The interim dividend was left unchanged at 7.6p per share. Assuming the full-year payout also remains unchanged, this gives Direct Line shares a prospective yield of almost 10%. This payout isn't expected to be covered by earnings, but if performance improves in 2023 as expected, I think that shareholders *may* avoid a dividend cut. **Outlook:** The company expects the 2022 full-year combined operating ratio to be 96%-98%, normalised for weather. This ratio is expected to improve to *"around 95%"* in 2023 and to return to a target range of 93%-95% over the medium term. The company's ongoing target of achieving at least a 15% return on tangible equity is unchanged. Direct Line's underwriting profitability is clearly going to be marginal this year. However, the group's Solvency ratio of 152% remains adequate and I think Direct Line, like L&G, should start to benefit from higher interest rates as we enter next year. **My view:** It would be naïve for me to ignore the risk of a dividend cut here. However, I believe Direct Line remains a good business that's doing all the right things. Most UK motor insurers have reported similar headwinds in recent months. The main concern seems to be how soon discipline will return to the wider market. If cheap capital remains available to support undisciplined underwriting, insurers like Admiral and Direct Line could face a period of sub-par returns or shrinkage. I'm still comfortable holding Direct Line in the model portfolio and my own holdings. --- *The remainder of this post is only available to (free) members. Please sign up to read on – I'll never spam you and will generally email no more than once a week.* _This post is for paying subscribers only._ ### Portfolio shares: an underrated FTSE 100 dividend stock URL: https://www.rolandhead.com/dividend-shares/underrated-ftse100-dividend-stock/ Last updated: 2023-11-07T10:59:59.000Z One of the advantages of my [dividend portfolio](https://www.rolandhead.com/dividend-portfolio/) system is that it's designed for *slow investing*. Only [very rarely](https://www.rolandhead.com/portfolio-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/) do I need to take prompt action about anything. I've kept a cursory eye on the markets during this results season, but I've also been spending a little more time in the real world than usual. However, normal service should now be resumed. In my usual [month-end update](https://www.rolandhead.com/portfolio/july-2022-dividend-share-news/), I'll take a look at results issued by my portfolio stocks in August. However, this week I want to consider a FTSE 100 dividend stock that rarely gets any coverage in the investor press. I'm not sure why this is; I think it has all the hallmarks of a quality business. I'm not alone, either. Terry Smith's Fundsmith business is a top 10 shareholder, having held a 5% stake since 2018. Here's how the company in question has performed over the last 20 years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/08/anon-shareprice-div-eps-190822.png) Share price (black), earnings per share (red) & dividends (blue) My sums suggest that Mr Smith's position is underwater slightly at current levels. The [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/)'s position is also running a small loss, but I'm not concerned. I reckon the long-term picture remains very attractive. To find out the identity of this business and why I've chosen it for my model portfolio, read on. *The remainder of post is only available to *free* subscribers, who also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/).* *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week.* _This post is for paying subscribers only._ ### July 2022 dividend portfolio news URL: https://www.rolandhead.com/portfolio/july-2022-dividend-share-news/ Last updated: 2023-05-20T12:08:56.000Z It's earnings season and the RNS feed is heating up. In this July update I'll be looking at half-year numbers from FTSE 100 consumer goods giant **[Unilever](https://www.rolandhead.com/dividend-portfolio/#unilever)** that weren't as bad as I feared. I'll also take a look at a profit warning from insurer **[Direct Line Insurance](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance)**,and look at results from a two members-only stocks, including one with a 6% dividend yield. As a quick reminder, signing up to this newsletter is free and gives you access to my [model dividend portfolio](https://www.rolandhead.com/dividend-portfolio/), which contains the same shares I own myself. **Disclosure:* unless otherwise specified, Roland owns all the shares discussed in this article.* --- **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** ### Unilever **Description:* FTSE 100 consumer goods group with a global presence in the food, hygiene and personal care markets. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#unilever).* | **Unilever (LON: ULVR)** | **Quality Dividend score: 61/100** | **Forecast yield: 3.7%** | | ------------------------ | ---------------------------------- | -------------------------- | | Share price: 3,995p | Market cap: £102.8bn | *All data at 27 July 2022* | **RNS release:** [half-year report for the six months to 30 June 2022](https://www.investegate.co.uk/unilever-plc--ulvr-/rns/half-year-report/202207260700056838T/?ref=rolandhead.com) > Underlying sales growth of 8.1%, with 9.8% price and (1.6)% volume [Unilever](https://www.rolandhead.com/tag/ulvr/) had already warned investors to expect big cost increases this year. What we didn't quite know was by how much the company would be able to put up its prices. Now we know. The price of popular products such as *Hellmann's* mayonnaise, *Magnum* ice creams and *Persil* rose by an average of 9.8% during the first six months of this year. There was an inevitable impact on demand, with volumes sold falling by 1.6%. The end result was better than it might have been, I think. Unilever's underlying sales rose by 8.1% during the half year, while underlying operating profit climbed 4.1% to €5.0bn. The group reported an underlying operating profit margin of 17%, a reduction of 1.8%. These figures exclude certain items and reflect Unilever's continuing business. The company's statutory figures are slightly worse, but still consistent with underlying performance: - Revenue +14.9% to €29.6bn (includes a 5.6% positive currency impact) - Operating profit +1.7% to €4.5bn - Operating margin -2% to 15.2% - Diluted earnings per share -4.7% to €1.13 **Outlook:** Unilever appears to have been more successful than it expected at raising prices. The company has upgraded its full-year guidance for underlying sales growth to be higher than its previous forecast of 4.5%-6.5%. This will be *"driven by price with some further pressure on volume"*. Price increases are needed to offset cost inflation, which is expected to be €4.6bn over the full year. This is an increase from the previous estimate of €3.5bn in early February (before the Ukraine war). Underlying operating margin for the full year is expected to be 16%, at the bottom of the 16%-17% guidance range. **Dividend:** The quarterly dividend was held unchanged at €0.4268 per share. **My view:** Unilever wants to raise its prices to protect its profit margins, without pushing too many customers away to cheaper own brands. I think that Unilever's product mix may leave it weaker than some rivals here. The group's home care division (cleaning products) saw the biggest fall in volume, down 3.8%. My guess is that people will trade down more readily on cleaning products than they might on – say – pet food, chocolate or baby food. These are examples of areas where rival **[Nestlé](https://www.nestle.com/aboutus/overview/ourbrands?ref=rolandhead.com)** has strong brands, but Unilever doesn't. However, this isn't a big enough worry to put me off Unilever. I think the group's global portfolio of brands is likely to be durable and should survive this tough period. I'm also reassured to see that the company has increased spending on marketing and R&D to try and protect these brands. I wouldn't say Unilever stock was obviously cheap at the moment, but my feeling is that the current valuation is probably reasonable on a long-term view. I remain happy to hold the shares in the model portfolio. --- ### Direct Line Insurance ***Description:*** *A FTSE 100 company that's one of the UK's largest motor, home and commercial insurers. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#direct-line-insurance).* | **Direct Line Insurance (LON: DLG)** | **Quality Dividend score: 71/100** | **Forecast yield: 10.7%** | | ------------------------------------ | ---------------------------------- | -------------------------- | | Share price: 200p | Market cap: £2.6bn | *All data at 27 July 2022* | **RNS release:** [Trading update](https://www.investegate.co.uk/direct-line-ins-grp--dlg-/rns/trading-update/202207180700077340S/?ref=rolandhead.com) > *... we have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing.* I normally restrict my coverage in these monthly reports to company results, rather than trading updates. This is done to avoid too much repetition and to manage my workload. However, Direct Line's update on 18 July was a profit warning, not just a routine trading update. So I think it merits a look. **Current trading:** Niche rival **Sabre Insurance** had already [flagged up](https://www.investegate.co.uk/sabre-insurance-grp--sbre-/rns/half-year-2022-trading-update/202207140700074121S/?ref=rolandhead.com) rampant cost inflation for UK motor insurers, so this announcement wasn't a complete surprise. Direct Line says that claims costs are rising more quickly than it had expected. As a result, motor insurance price increases over the last 12 months have not been enough to offset these costs. As a result, profits will be lower than expected this year. **Outlook:** Direct Line now expects to report a combined ratio of 96% to 98% for 2022\. An insurer's combined ratio represents the percentage of premium income that's required to fund claims and operating expenses. A figure below 100% means a company's underwriting is profitable. In addition to any underwriting profit, insurers hope to generate an investment income from their premium income. The good news is that Direct Line doesn't expect to report a loss this year. But the guided range is well below the company's target of 93%-95% and is disappointing. Looking ahead, Direct Line says it increased prices through Q2 to restore margins. The company has also recently introduced *"an updated motor risk pricing model"* which it believes *"materially improves risk selection"*. In theory, that should improve underwriting profitability. We'll have to see. **My view:** Motor insurers in the UK are being hit by a combination of factors. Higher used car prices mean that claims settlement figures are higher. Supply chain delays mean that parts needed for repairs can take longer to get hold of. This results in longer periods of courtesy car hire while policyholders' cars are off the road. It's a bit of a perfect storm and is clearly a sector-wide issue. The only thing that really concerns me is the risk that intense competition in this sector will make it difficult for disciplined insurers like Direct Line to raise prices. That could lead to a period of poor returns for shareholders. Right now, I'm doing nothing. Although I think there's some risk of a dividend cut, I feel that the overall investment case still holds water here; Direct Line should remain a cash generative business that's generates plenty of income. I'll take a more detailed look at Direct Line when the insurer's half-year results are published in August and I have a fresh set of financial data to work with. For now, I remain happy to hold the shares. --- _This post is for paying subscribers only._ ### Portfolio shares: a small-cap with a 34-year dividend record URL: https://www.rolandhead.com/dividend-shares/a-small-cap-with-a-34-year-dividend-record/ Last updated: 2023-02-09T09:52:36.000Z This week I'm reviewing another member of my quality dividend model portfolio. The company in question is a slightly quirky small cap that was founded in 1924 and has been listed on London's main market for more than 30 years. I've come to rate this business very highly for its consistency performance and conservative financial management. Shareholders have benefited from an almost unbroken run of share price and dividend growth since the late 1990s: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/07/jel-div-sp-chart-190722-cropped.png) I don't think it's too late for me to invest. In fact, I think this business is in the early stages of a structural growth opportunity. In addition to this, I expect it to be able to continue delivering incremental growth for the indefinite future. The shares look quite reasonably valued to me at the moment, too. To find out the identity of this distinctive business and why I hold it in [the model portfolio](https://www.rolandhead.com/dividend-portfolio/) and my personal holdings, read on. *The remainder of post is only available to *free* subscribers, who also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/).* *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week.* --- _This post is for paying subscribers only._ ### Portfolio shares: is it the right time to buy Burberry? URL: https://www.rolandhead.com/dividend-shares/is-it-right-time-to-buy-burberry-shares/ Last updated: 2023-11-07T10:59:43.000Z I explain why FTSE 100 luxury fashion group Burberry (LON:BRBY) is a member of my quality dividend model portfolio. _This post is for paying subscribers only._ ### H1 2022: Quality Dividend model portfolio review URL: https://www.rolandhead.com/portfolio/h1-2022-quality-dividend-portfolio-review/ Last updated: 2023-06-29T15:16:18.000Z After a difficult Q1 (due partly to [some unforced errors](https://www.rolandhead.com/portfolio/q1-22-quality-dividend-portfolio-review/)), I'm pleased to report that the performance of my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) stabilised during the second quarter. Although the portfolio is still lagging behind its FTSE 100 ETF benchmark, I'm not too unhappy with the current situation. After all, six months is an exceedingly short period of time for stock market investment, especially when those months have included the start of a European war and a sudden surge in inflation. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Portfolio performance Here are the headline numbers for the portfolio's performance during the six months to 30 June 2022: - **H1 2022 model portfolio total return: -5.6%** - H1 2022 model portfolio dividend income: 2.4% - *FTSE 100 H1 2022 dividend income: 1.9%* As I reinvest all dividends and do not make any withdrawals, the benchmark I use for the model portfolio is the **iShares Core FTSE 100 ETF Acc (CUKX)**.This is an accumulator fund, so dividends are automatically added to the unit value of the ETF. This is the closest fund analogue I can find to my approach. - CUKX H1 2022 total return: -0.7% As this SharePad chart shows, my model portfolio clawed back lost ground against the benchmark during the latter part of H1, but is still lagging this low-cost ETF on a year-to-date basis: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/07/1h22-rh-vs-cukx-chart.png) Quality dividend model portfolio (green), CUKX FTSE 100 ETF (gold) As is often the case, the portfolio' stable performance since March has masked a much wider range of individual share price performances. Here is a chart showing share price performance for the portfolio during the first half of this year: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/07/qdmp-1h22-shareprice-movt-2.png) Quality dividend portfolio H1 2022 share price movements 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). Both **Homeserve** (HSV) and **[EMIS](https://www.rolandhead.com/dividend-portfolio/#emis-group)** (disclosure: I hold) received takeover bids during the half year, hence their outsized gains. The biggest losers in the portfolio were mostly FTSE 250 consumer stocks and other cyclical businesses caught in this year's market sell off. Time will tell whether I added these stocks to the model portfolio at too high a price, or whether this is just a temporary period of negative sentiment towards what I believe are good businesses. **Model portfolio:** As a quick reminder, my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) is a virtual fund that's run using [my dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The model portfolio contains the same stocks as my personal portfolio, but the two aren't exactly the same. Many of my personal holdings pre-date the model portfolio and have different cost prices. Additionally, the model portfolio has been constructed with a single lump sum of virtual cash in order to make tracking performance easier. My own share dealing account gets topped up from my income each month. In the remainder of this review, I'll explain the changes I made to the portfolio during the second quarter and take a look at the portfolio's key dividend quality metrics. ### Stocks sold during Q2 During the first quarter of 2022, three stocks left the portfolio. You can read about them in [my Q1 update](https://www.rolandhead.com/portfolio/q1-22-quality-dividend-portfolio-review/). During the second quarter, there was only one sale – **Homeserve**. This sale was due to the company's ongoing takeover bid. To free up cash for new purchases I decided to sell the portfolio's shares (and my own) ahead of the bid completing. | **Company (ticker)** | **Date purchased** | **Purchase price** | **Date sold** | **Sale price** | **Total return (inc dividends)** | | -------------------------------------------------------------------------------- | ------------------ | ------------------ | ------------- | -------------- | -------------------------------- | | [Homeserve (LON: HSV)](https://www.rolandhead.com/dividend-portfolio/#homeserve) | 1 April 2022 | 850p | 30 June 2022 | 1,172p | 38% | ### New stocks in Q2 At the start of the second quarter, the portfolio had 19 stocks. This fell to 18 with the disposal of Homeserve. Although I'm targeting 20 holdings, I only added one new stock during the second quarter. This means that I'll still need at least two more over the remainder of this year, when the EMIS takeover is factored in (I still hold EMIS). **New stock:** You can read about the new company I've added to the portfolio in this piece from June: ***"[A 170-year-old business to replace Homeserve](https://www.rolandhead.com/portfolio-shares/170-year-old-business-replace-homeserve/)".*** Over the next three months, I aim to find at least one more new stock to add to the model dividend portfolio. As usual, I'll write about it here and then add it to the portfolio on the first day of the next quarter. ### Quality dividend model portfolio: financial metrics The performance of individual stocks is fascinating and can be very satisfying. But the only thing that really matters in financial terms is the performance of the portfolio. For this reason, I like to look at the aggregate characteristics of my portfolio to see if – collectively – the companies I've chosen are displaying the kind of qualities I'm looking for. I admit that I've borrowed this technique from Fundsmith founder Terry Smith. He describes it as a way of visualising a portfolio as a single business. Here's how my quality dividend model portfolio looked, in aggregate, at the end of June 2022 (the Q1 figures are [here](https://www.rolandhead.com/portfolio/q1-22-quality-dividend-portfolio-review/)): | **Median mkt cap** | **TTM ROCE** | **TTM EBIT yield** | **TTM FCF yield** | **Net debt/5yr avg net profit** | **TTM div yield** | **5yr avg div grth** | **F'cast div yield** | **No. yrs div paid** | | ------------------ | ------------ | ------------------ | ----------------- | ------------------------------- | ----------------- | -------------------- | -------------------- | -------------------- | | £1.6bn | 23.5% | 10.3% | 7.7% | \-0.1x | 4.5% | 7.9% | 5.0% | 20 | *(Source: SharePad/author analysis - some manual adjustments were needed; don't take this as gospel)* **Comment:** I'm very comfortable with these metrics. Collectively they suggest to me that my portfolio contains highly profitable, cash-generative and growing companies. The portfolio's **forecast dividend yield** of 5% is comfortably ahead of the FTSE 100's 3.8% yield. Meanwhile, the portfolio's **five-year average dividend growth rate** of 7.9% gives me hope that income from the portfolio will broadly keep pace with inflation. An average **return on capital employed (ROCE)** of 23.5% tells me that collectively, at least, my companies are significantly more profitable than average. To give this number some context, over the last 12 months, the companies in the portfolio have generated ROCE ranging from 5.5% to 79%. Median ROCE is 18.4%. An average **EBIT yield** of 10.3% suggests a reasonable valuation. This yield figure has risen from 8.3% over the last quarter, reflecting falling share prices and the switch from Homeserve to my new stock. The trailing 12-month (TTM) **free cash flow yield** of 7.7% is higher than the TTM dividend yield of 4.5%. That implies that collectively, my companies' dividends have been covered 1.6x by free cash flow over the last year. Looking ahead, **dividend yield growth** of 0.5% implies an 11% increase in portfolio dividend payments over the coming year. That's reasonably close to the portfolio's **five-year average dividend growth rate** of 7.9%, which seems reassuring to me. Finally, the companies in my portfolio have paid dividends every year for an average of **20 years**. Although these histories may have included some dividend cuts, I think this is a decent record. I recognise that these portfolio averages may be masking problems with individual businesses. However, I feel comfortable that the portfolio is displaying the qualities I'm looking for in quality dividend investments. I don't plan to make any voluntary changes to the portfolio this quarter, other than to select a 20th stock. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### June 2022 dividend portfolio news (+ another bid) URL: https://www.rolandhead.com/portfolio/june-2022-dividend-share-news/ Last updated: 2023-05-20T12:09:54.000Z June saw another one of the stocks in my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) fall prey to a US-funded takeover bid. AIM-listed medical data and software group **EMIS** is to be sold for £1,243m to a subsidiary of US healthcare giant **UnitedHealth Group** (no position). I comment on this below. The EMIS bid brings my takeover tally to three since December (the other two were **[Air Partner](https://www.rolandhead.com/dividend-portfolio/#air-partner)** and **[Homeserve](https://www.rolandhead.com/dividend-portfolio/#homeserve)**, both of which I no longer hold). That's a record for me, by some margin. While I'm not complaining, I'm not exactly celebrating either. All three were companies I'd like to have kept hold of. Fortunately, the current market weakness seems to be creating some better buying opportunities. Elsewhere, it's been a quiet month for results. Only two portfolio stocks delivered update; **PZ Cussons** and a [member-only small-cap stock](https://www.rolandhead.com/portfolio-shares/buying-uk-share-us-exposure/). I cover both of these below. Companies in this review are listed in alphabetical order. **For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).** **Disclosure:* Unless otherwise specified, Roland owns all the shares mentioned.* --- ### EMIS Group ***Description:*** *A healthcare technology group with products widely used across the NHS and UK pharmacies. [Click here for an archive of my past coverage](https://www.rolandhead.com/dividend-portfolio/#emis-group).* | **EMIS Group (LON: EMIS)** | **Quality Dividend score: 60/100** | **Forecast yield: 2.0%** | | -------------------------- | ---------------------------------- | -------------------------- | | Share price: 1,866p | Market cap: £1.2bn | *All data at 30 June 2022* | **RNS release:* [Recommended cash offer for EMIS Group](https://www.investegate.co.uk/optum-uk/rns/recommended-cash-offer-for-emis-group-plc/202206171550463480P/?ref=rolandhead.com)* > "for each EMIS Share: 1,925 pence in cash" The board of EMIS has accepted a cash offer of 1,925p per share from Optum Health Solutions (UK). Optum is a software and consultancy business that delivers population health management and medicine optimisation services to the NHS. Optum is a subsidiary of £400bn US healthcare giant **UnitedHealth Group**. Like EMIS, Optum works extensively with the NHS. Both sets of directors say they believe that by combining the two businesses, they'll be able to create a more effective and faster-growing data technology business to support the NHS. I daresay they might. One suggestion I've heard is that the combined company may find it easier to win new work from the NHS, due its greater scale and product reach. **Dividends:** The deal is expected to complete in the fourth quarter, but in the meantime the terms of the bid allow EMIS to pay an interim dividend of 17.6p per share and a final dividend of 21.1p per share, without any reduction in the offer price. Assuming that both dividends are paid and the 1,925p offer goes through, my sums suggest that holding the shares to completion could deliver a further 97.7p per share. Based on the model portfolio's cost price of 1,301p, that's equivalent to a further 7.5% return. For this reason, I'm not going to rush to sell the stock into the market unless I feel there's a compelling new stock to buy. Obviously this plan leaves me exposed to the risk that the deal might fall through. In this case, I'm not concerned about that, as I'd be happy to continue holding EMIS shares. **My view:** The 1,925p bid represents a 49% premium to the closing EMIS share price of 1,292p on 16 June, the day before the bid. More broadly, it's a 46% premium to the volume-weighted average price over the preceding three months. I don't think it's a bad offer, although my guess is that over time EMIS would probably have reached these heights anyway. Recent results seemed to show improving momentum to me. However, it looks like a done deal to me, so I'll begin hunting for a replacement stock to add to the portfolio at the end of September, when my quarterly trading window next opens. --- ### PZ Cussons **Description:* Family-controlled consumer goods group with a focus on hygiene brands, such as* Carex *and* Imperial Leather*. [Click here for an archive of past posts](https://www.rolandhead.com/dividend-portfolio/#pz-cussons).* | **PZ Cussons (LON: PZC)** | **Quality Dividend score: 55/100** | **Forecast yield: 3.3%** | | ------------------------- | ---------------------------------- | -------------------------- | | Share price: 197p | Market cap: £860m | *All data at 30 June 2022* | **RNS release:* [Trading update for the year ended 31 May 2022](https://www.investegate.co.uk/pz-cussons-plc--pzc-/rns/trading-update/202206270700082115Q/?ref=rolandhead.com).* > "Our expectations for FY22 Adjusted Profit Before Tax are unchanged." UK and Africa-focused consumer goods group PZ Cussons has issued a year-end trading update. Fourth-quarter trading was said to be in line with expectations. Group revenue for the year is expected to be £590m. This represents 3% like-for-like growth across the full year and appears to be in line with consensus forecasts. Q4 LFL sales were +7%, so I'd guess a fair chunk of full-year LFL growth represents recent price increases, rather than volume gains. The UK Hand Hygiene category (led by *Carex)* is said to be normalising after the pandemic. More broadly, sales of the group's portfolio of core *Must Win* brands rose by 4% during the fourth quarter. I looked at PZ Cussons [in more depth recently](https://www.rolandhead.com/portfolio-shares/will-my-patience-pay-off-at-pz-cussons/) and will cover the full-year results here when they're issued. **My view:** PZ Cussons and CEO Jonathan Myers seem to be continuing to deliver to plan. While macro headwinds remain, I think the shares look reasonably priced at 200p. --- _This post is for paying subscribers only._ ### Portfolio shares: A 170-year-old business to replace Homeserve URL: https://www.rolandhead.com/dividend-shares/170-year-old-business-replace-homeserve/ Last updated: 2023-11-07T10:59:20.000Z Takeovers keep coming. My quality dividend model portfolio has now received three since December 2021\. For the record, they are [**Air Partner**](https://www.rolandhead.com/dividend-portfolio/#air-partner), [**Homeserve**](https://www.rolandhead.com/dividend-portfolio/#homeserve)(disc: I hold) and a third company I'll discuss in my next monthly review. Three takeovers in seven months is certainly a record for me, but this forced turnover is creating its own challenges. I don't buy stocks with the intention of trading them out for capital gains. Rather, I'm looking for businesses with the potential to deliver rising income and compound growth over many years. Finding suitable replacement stocks isn't always easy, but the company I'm introducing to replace Homeserve is a business I've admired for a number of years. This FTSE 250 business is 170 years old and is a proven compounder, with a dividend that's risen by 460% over the last 20 years. That's a compound average dividend growth rate of 9% per year since 2002\. If this rate of dividend growth can be maintained, then the yield from this stock could provide a useful hedge to inflation over the coming years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/06/ckn-dividend-noname-230622.png) Source: SharePad I'm hopeful that the current valuation of this business will provide an attractive long-term entry point for the portfolio. To find out the identity of this business and why I've bought it for the model portfolio and my personal holdings, read on. *The remainder of post is only available to *free* subscribers, who also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/).* *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week.* --- _This post is for paying subscribers only._ ### Portfolio shares: Will my patience pay off at PZ Cussons? URL: https://www.rolandhead.com/dividend-shares/will-my-patience-pay-off-at-pz-cussons/ Last updated: 2023-11-07T10:59:04.000Z There aren't many family-controlled businesses in the FTSE 250\. But consumer goods group **PZ Cussons ([LON: PZC](https://www.rolandhead.com/dividend-portfolio/#pz-cussons))** will be the second such company I've looked at in two weeks. *(The first was homewares retailer [*Dunelm*](https://www.rolandhead.com/dividend-portfolio/#dunelm)– check out that piece [here](https://www.rolandhead.com/portfolio-shares/is-dunelm-good-cheap-dividend-stock/) if you missed it.)* This business can trace its roots back [135 years](https://www.pzcussons.com/about-us/our-history/?ref=rolandhead.com) to Sierra Leone, where founders George Paterson and George Zochonis (PZ) began trading commodities with the UK. In 1975 PZ acquired Cussons, creating the current business. Today the company operates in four main markets; the UK, Nigeria, Indonesia and Australia. Key [brands](https://www.pzcussons.com/our-brands/?ref=rolandhead.com) include *Imperial Leather*, *Carex*, *Cussons* and *Original Source*. The Zochonis family remain dominant shareholders and control approximately 30% of the stock, although a good chunk of this is held by the [Zochonis Charitable Trust](https://www.pzcussons.com/about-us/the-zochonis-charitable-trust/?ref=rolandhead.com). According to the company, around 13% of PZ Cussons dividends go to the Trust each year. In a similar vein, PZ Cussons is working to become a [B-Corp](https://bcorporation.uk/?ref=rolandhead.com), underwriting its commitment to sustainable principles. Unfortunately, PZ Cussons has not enjoyed the same run of success as Dunelm in recent years. Both sales and profits have fallen steadily since 2014, reversing a two-decade run of growth: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/06/pzc-revenue-pbt-100622.png) This venerable business has faced a range of problems over the last five years. These have included allegations of financial misconduct [by a former chief executive](https://www.investegate.co.uk/pz-cussons-plc--pzc-/rns/update-on-settlement-agreement-with-former-ceo/202004020700045040I/?ref=rolandhead.com), [slowing sales in Nigeria](https://www.investegate.co.uk/pz-cussons-plc--pzc-/rns/final-results-for-the-year-ended-31-may-2020/202009230700067961Z/?ref=rolandhead.com) and [a lack of strategic focus](https://www.pzcussons.com/wp-content/uploads/2021/03/PZ-Cussons-CMD-Presentation-25.03.2021.pdf?ref=rolandhead.com) that's led to a general decline. Fortunately, [newish chief executive](https://www.investegate.co.uk/pz-cussons-plc--pzc-/rns/appointment-of-new-chief-executive-officer/202003190700087038G/?ref=rolandhead.com) Jonathan Myers is making good progress resolving these problems, in my view. Since taking charge in March 2020 he's refocused the business on a core portfolio of 'Must Win' brands in hygiene, baby and beauty segments, and has disposed of various non-core assets. My impression is that the focus and performance of the business is already visibly improved. But this progress has yet to be reflected in the company's share price, which is still dominated by the impact of the pandemic: _This post is for paying subscribers only._ ### Portfolio shares: Is Dunelm a good, cheap dividend stock? URL: https://www.rolandhead.com/dividend-shares/is-dunelm-good-cheap-dividend-stock/ Last updated: 2023-11-07T10:58:03.000Z Homewares retailer **Dunelm (LON: DNLM)** has been a disappointing performer since I added it to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). Shares in this business – which is still controlled by the founding Adderley family – are down by 36% from my entry price, but I'm not giving up yet. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/06/dnlm-1y-chart-030622-1.png) Source: SharePad **Why are the shares falling?** I think that Dunelm's share price slump probably reflects expectations of a post-pandemic sales slowdown. This isn't unreasonable. Dunelm traded very strongly through the pandemic, as demand for homewares surged. Rather fortuitously, Dunelm had invested in ecommerce capabilities just before the pandemic. This left the group well-positioned to expand its online trading, which now accounts for around one-third of sales. The remainder comes from its stores, which tend to be large-format units on retail parks. Again, this turned out to be the best type of shop to have when non-essential retailers reopened. Shoppers could drive to retail parks, avoiding public transport and cramped high-street units. _This post is for paying subscribers only._ ### May 2022 dividend portfolio results review URL: https://www.rolandhead.com/portfolio/may-2022-dividend-share-news/ Last updated: 2023-05-20T12:10:23.000Z I review May's results and takeovers from the UK dividend shares in my quality dividend model portfolio. _This post is for paying subscribers only._ ### Portfolio shares: Cash-rich balance sheet and growth ambitions could support big gains URL: https://www.rolandhead.com/dividend-shares/fortress-balance-sheet-growth-potential/ Last updated: 2023-11-07T10:56:58.000Z This week I'm writing about [another AIM stock](https://www.rolandhead.com/portfolio-shares/founder-led-aim-dividend-stock/) with a cash-rich balance sheet and a founder-led heritage. But the similarities stop there. The company concerned has been run quite conservatively in the past – some might say complacently. But this business now has a new CEO. He's made clear that he's determined to shake things up and increase the pace and breadth of the group's operations. I own the shares personally and in the [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) on this site. I see this as the kind of small cap that could quietly double in value over the next few years. Although of course, the opposite might happen too. Read on to see what you think. --- The remainder of this post is only available to paid subscribers, so I'd urge you to sign up to read on. As an added bonus, free subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) and my buy and sell reports. _This post is for paying subscribers only._ ### Portfolio shares: A founder-led AIM dividend stock URL: https://www.rolandhead.com/dividend-shares/founder-led-aim-dividend-stock/ Last updated: 2023-11-07T10:55:57.000Z This week I'm returning to my portfolio shares series to introduce an AIM stock from my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). The company concerned has many of the hallmarks I associate with the best type of AIM company: - Owner management with significant shareholding - High profit margins and returns on capital - Very strong balance sheet - Excellent cash generation - Progressive dividend policy - Somewhat of a defensive moat In case you start thinking I've found the perfect stock, I should also say that the company's product portfolio depends quite heavily on a single core offering. I might also argue that there's some uncertainty around future growth prospects. I hold the shares personally and in the model dividend portfolio I run on this site. --- The remainder of this post will only be available to paid subscribers, so I'd urge you to sign up to read on. As an added bonus, subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) and buy and sell reports. _This post is for paying subscribers only._ ### Is TP ICAP's 8% dividend yield a bargain income buy? URL: https://www.rolandhead.com/dividend-shares/tcap-8pc-dividend-yield-buy/ Last updated: 2023-05-27T09:37:29.000Z I don't think there are many financial stocks that are as unloved today as FTSE 250 interdealer broker **TP ICAP (LON: TCAP)**. This City business has seen its share price fall by nearly 75% since 2018. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-shareprice-chart-040522.png) This painful decline has left this former high flyer offering a forecast dividend yield of 8%, with the potential for a return to growth in 2023. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-forecasts-sharepad-040522.png) Source: SharePad Assuming we're not heading for another 2008-style financial crisis, then I can only see a couple of likely explanations for TP ICAP's share price slump. One is that this business is priced for obsolescence and terminal decline. That's a possibility, as I'll explain. The other possible explanation is that the share price is wrong. Perhaps TP ICAP's brokerage services are still relevant and the business will return to growth. For the avoidance of doubt, TP ICAP **is not** a member of my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). However, I'm wondering if I should be paying more attention to this unloved high yielder. SharePad's summary page presents mixed messages, suggesting some attractive value metrics but a poor record of growth and cash conversion. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-sharepad-summary-040522.png) Source: SharePad To find out more, I'm going to take a look at the stock through the lens of my dividend screening system. I want to find out if I should be considering this business for my quality dividend portfolio. After all, current forecasts suggest the shares could offer an 8% yield, covered twice by earnings. As an income investor, these are the kind of metrics that get me hot under the collar. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### What does TP ICAP do? (and what's wrong) TP ICAP's core business is Tullett Prebon, a London brokerage firm whose history can be traced back (with many twists and turns) to 1866\. You can read about the history of this storied business [here](https://www.tullettprebon.com/about/about%5Fourstory.aspx?ref=rolandhead.com). For my purposes today, I'm going to start the story in 2006, when Tullett Prebon was demerged from stockbroker Collins Stewart and floated on the LSE. At that time, Tullett Prebon was led by CEO Terry Smith (of Fundsmith fame) and was one of the world's largest interdealer brokers. The company's main selling point was its team of telephone brokers, who would negotiate and arrange transactions between other brokers and market participants (hence, interdealer broker). These were typically non-standard deals that couldn't be handled electronically or on exchanges. It doesn't take much imagination to guess that demand for such services has dwindled in the 16 years since Tullett's flotation. The number of markets accessible through electronic trading has grown, supported by the data and analytics needed to accurately price more complex transactions. Terry Smith's [departure](https://www.cityam.com/terry-smith-quit-boss-tullett-prebon/?ref=rolandhead.com) from Tullett Prebon in 2014 was ostensibly to run his [Fundsmith](https://www.fundsmith.co.uk/about-us/?ref=rolandhead.com) fund management business full time. But I suspect Smith saw the writing on the wall and guessed that voice brokers' best days were behind them. Smith's successors at Tullett have had little choice but to pursue a strategy of consolidation and diversification. In 2015, Tullett acquired its main London-listed rival ICAP, creating TP ICAP. Other deals have followed, including oil broker PVM and most recently, Liquidnet. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-brands-040522.png) Source: TP ICAP website At the same time, TP ICAP has been steadily working to transform its core broking services from *"high touch to more profitable low touch channels"*, to quote CEO Nicolas Breteau. What this means in practice is shifting as much broking activity as possible onto TP ICAP's new Fusion electronic trading platform, while developing supporting data and analytics services. Today the company bills itself as *"a leading electronic market infrastructure and information provider"*. Clients will eventually be able to logon directly to Fusion. Mr Breteau's ambition [appears to be](https://www.investegate.co.uk/tp-icap-group-plc--tcap-/rns/final-results/202203150700067989E/?ref=rolandhead.com) to gradually squeeze out its expensive human brokers: > By implementing Fusion, we aim to progressively shift the profile of our broking activity from high touch (i.e. a high level of broker involvement in completing a transaction) to low touch (i.e. fully or mostly electronic execution workflow) channels, thereby improving operating margins. The group's efforts so far have not been entirely in vain. TP ICAP's revenue has risen from £851m in 2012 to £1,865m in 2021\. Operating profit has also trended higher over the same period: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-ebit-chart-040522.png) Unfortunately, the group's acquisition spree has resulted in significant dilution. TP ICAP's share count has **tripled** from 244m in 2012, to 789m today. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-sharecount-2012-21-040522.png) This dilution has had an unfortunate effect on earnings **per share**, which have halved since 2011: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-eps-040522.png) I think it's fair to say that long-term shareholders have not yet had their patience rewarded. However, investment is about the future, not just the past. TP ICAP shares are now trading on six times earnings and appear to offer a well-covered 8% dividend yield. I don't think too much improvement would be needed to trigger a re-rating of this stock. ### TP ICAP: crunching the numbers ***Description:*** *Interdealer broker group operating across financial, energy and commodity markets. Combines voice brokerage with data-driven electronic services.* | **TP ICAP(LON: TCAP)** | **Quality Dividend score: 51/100** | **Forecast yield: 8%** | | ---------------------- | ---------------------------------- | ------------------------ | | Share price: 129p | Market cap: £1,050m | *All data at 4 May 2022* | ***Latest accounts:*** *[2021 final results](https://www.investegate.co.uk/tp-icap-group-plc--tcap-/rns/final-results/202203150700067989E/?ref=rolandhead.com) (15/03/2022)* In the remainder of this review, I'll step through the different stages in my dividend screening system to explain how TP ICAP scores. Unless specified otherwise, the financial data I use in this process is drawn from SharePad. As a reminder, I use slightly different screening rules for financial stocks. I'll try and highlights these differences as I go, but I covered this topic more fully in [this recent piece on Direct Line](https://www.rolandhead.com/portfolio-shares/direct-line-big-dividends/) (disc: I hold). ### Dividend culture: Quite strong TP ICAP has always been a dividend stock, and the company's record in this respect is quite strong. Until the pandemic intervened, TP ICAP's dividend per share had not been cut since since the Tullett Prebon business was spun out of Collins Stewart at the end of 2006: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-dividends-050522.png) Although the payout was flat from 2012 until 2020, we've already seen that the share count rose sharply during this period. So the total payout increased substantially. My dividend culture score only looks at continuity of payments and ignores any cuts. That means TP ICAP scores quite highly in this category. **TP ICAP scores 4/5 for dividend culture in my screening system.** ### Dividend safety: not too bad My dividend safety score looks at a company's historical and recent dividend payout ratio. I do this to try and spot companies which might be distributing too much of their earnings to shareholders, leaving too little to strengthen or expand their businesses. According to SharePad, TP ICAP's dividend payout ratio has averaged around 45% for most of the last decade, with a couple of blips: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-div-payout-ratio-050522.png) TP ICAP's current dividend policy is to maintain a payout ratio of 50% of adjusted earnings. This seems reasonable to me. I don't have any concerns in this area. **TP ICAP scores 3/5 for dividend safety in my screening system.** ### Dividend growth: weak The purpose of my dividend growth score is to test the sustainability of a company's dividend growth. This score has two elements: - 5yr average dividend growth - 5yr average net asset value per share growth The purpose of this is to test whether a company is maintaining dividend growth by slowly liquidating its assets. That scenario would likely be reflected in a falling NAVps. Here, my scoring system provides a rare negative score. TP ICAP's NAVps and its dividend have both fallen over the last five years: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-navps-dps-050522.png) However, I would probably argue that the stock's falling NAVps is the result of changes relating to the acquisitions and equity raises that have taken place over the last year. For example, net asset value rose from £1.7bn to £2.0bn last year, but NAV *per share* fell because of the increased sharecount. On balance, I'm not overly concerned about TP ICAP's falling NAVps, as long as this decline levels out in 2022. **TP ICAP scores -0.5/5 for dividend growth in my screening system.** ### Dividend yield: high With a forecast dividend yield of 8% you would probably expect TP ICAP to score highly for yield. It does, but I don't just look at forecast yield. My scoring algorithm blends together forecast yield, five-year average yield and TTM yield to gain a more rounded view on the stock's typical yield. TP ICAP has been a high yield stock for most of its time as a listed business, but we can see from this chart that the yield is unusually high at the moment: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-dividend-yield-050522.png) In general, I would see such a high yield as a sign of either value or distress. In this case, I think it's more likely to indicate value. **TP ICAP scores 4/5 for dividend yield in my screening system.** ### Profitability: middling One of the main aims of my system is to build a portfolio of stocks with above-average profitability. In some ways I think this is more important than dividend yield. The reason for this is that I aim to hold my stocks for many years. If they are not profitable enough to compound faster than the market average, then I suspect I'm likely to underperform over time. On the other hand, highly profitable businesses with good cash conversion should naturally generate higher dividends over time, improving the income from my portfolio. For financial stocks, I use two measures of profitability: - 5yr average return on equity - TTM return on equity We can see that TP ICAP's return on equity has been pretty humdrum since 2016, according to SharePad. This reflects the big increase in intangible assets which followed the merger with ICAP: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-roe-050522.png) Some people might adjust out these intangibles, but I prefer not to. They represent real capital deployed by management, so I think it's right to measure returns against them. Overall, it's a rather mixed picture. But if the TP ICAP's turnaround gathers pace and profitability improves as promised, I would expect ROE to rise. **TP ICAP scores 3/5 for profitability in my screening system.** ### Leverage: moderate TP ICAP's borrowing has steadily increased over the last decade, presumably due to the company's long-running cycle of acquisitions and restructuring. I calculate financial net debt at £166m, or £435m including IFRS 16 lease liabilities. This matches up with SharePad's numbers: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2023/05/tcap-net-debt-050522.png) I don't generally use net debt as a metric for financial stocks. It's not always relevant or even easily calculable. However, I think it is useful in this case. Converting net debt into leverage tells me that TP ICAP's net debt is around three times last year's adjusted net profit. That's within the range I allow when screening non-financial stocks. My normal leverage metric for financial stocks is based on the ratio of assets to equity. As I discussed in [my review of **Legal & General**](https://www.rolandhead.com/portfolio-shares/legal-general-7pc-yield-too-cheap/)(disc: I hold), I'm reviewing this approach, as I don't think it's suitable for life insurers, in particular. In this case, I think it *might* give me some useful information. Or at least it might do if TP ICAP's balance sheet had not been transformed by the impact of acquisitions and rights issues. My judgement, based on a review of TP ICAP's borrowings, is that the group's leverage is moderate and not a concern. But once again, I feel my scoring system is not up to the job of interpreting this balance sheet accurately. For what it's worth, **TP ICAP scores 2/5 for leverage in my screening system.** I think this judgement may be harsh, but I think it's better to be conservative in such a changing business. ### Conclusion: a turnaround buy? **TP ICAP scores a 51/100 in my dividend screening system at the time of writing (May 2022).** This is one of the lowest scores of any qualifying stock*.* TP ICAP's inconsistent track record will probably prevent me from adding the shares to my quality dividend model portfolio. But if I was still in the habit of investing in value and turnaround stocks, then I'd be very tempted to buy some shares in TP ICAP. CEO Nicolas Breteau appears to be steadying the ship and I think that TP ICAP's scale and client networks are likely to remain valuable. It seems reasonable to assume that the group's financial performance could now start to improve. The main short-term risk seems to be that market conditions will not favour TP ICAP. Looking further ahead, I wonder if the group could struggle to differentiate its offering as it comes to rely more on data-driven electronic trading. Stock market history suggests to me that as data becomes more widely available and markets more interconnected, it becomes harder for any proprietary platform to maintain an edge. Even so, I think TP ICAP looks interesting at current levels. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- ‌**Disclaimer:** This is a personal blog and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### April 2022 dividend portfolio results review URL: https://www.rolandhead.com/portfolio/april-2022-dividend-share-news/ Last updated: 2023-05-20T12:10:37.000Z It is the end of April, so it's time for my monthly review of news and results from the companies in my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). Although April was a relatively quiet month in the markets, there were still some interesting updates for investors to absorb. In this post, I'll be looking at news from five companies in my portfolio. For the avoidance of doubt, companies are listed in alphabetical order. **(For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).)** The remainder of this review is only available to subscribers, so I'd recommend that you sign up **(free)** to read on. As an added bonus, free subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week.* _This post is for paying subscribers only._ ### Portfolio shares: can small-caps be great dividend stocks? URL: https://www.rolandhead.com/dividend-shares/can-small-caps-be-great-dividend-stocks/ Last updated: 2023-11-07T10:54:43.000Z So far, I seem to have spent a fair amount of time covering the big cap stocks in my [quality dividend portfolio](https://www.rolandhead.com/dividend-portfolio/). This week I'd like to address this imbalance by taking a look at the smallest member of the portfolio, which has a market cap of £55m. The company in question has a very solid track record, in my opinion, but there are a couple of factors which I feel make it slightly riskier than average. Despite this, I've been impressed by results over the last few years. Barring any nasty surprises, I think this business has the potential to be a long-term compounder for me. What's more, I think the valuation looks tempting at current levels. The remainder of this post is only available to subscribers, so I'd urge you to sign up (**free**) to read on. As an added bonus, free subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week.* _This post is for paying subscribers only._ ### Portfolio shares: Is Legal & General's 7% dividend yield too cheap to ignore? URL: https://www.rolandhead.com/dividend-shares/legal-general-7pc-yield-too-cheap/ Last updated: 2023-11-07T10:53:38.000Z This week I'm looking at a [186-year old](https://group.legalandgeneral.com/en/about-us/history?ref=rolandhead.com) FTSE 100 business that has generated double-digit returns on equity and consistent growth in recent years. The company in question is **Legal & General Group (LON: LGEN)**, one of the UK's largest asset managers and insurers. L&G had £1.4tn of assets under management at the end of last year and is a big player in the retirement market. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/04/lgen-ebit-nav-150422.png) However, despite a seemingly impressive track record, Legal & General is relatively unloved by UK investors. The shares trade on just eight times forecast earnings, with a dividend yield of over 7%. That's more than 2% higher than the yield on offer from most of the big UK banks, despite their dismal record since the 2008 financial crisis. I'm a fan of Legal & General and see the stock as a good income investment. The dividend was maintained (albeit cut) through the 2008 financial crisis. It was paid as usual in 2020, when many insurers withheld their payouts. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/04/lgen-dividend-140422.png) _This post is for paying subscribers only._ ### Q1 2022: Quality Dividend model portfolio review URL: https://www.rolandhead.com/portfolio/q1-22-quality-dividend-portfolio-review/ Last updated: 2023-05-27T09:38:16.000Z Welcome to the first quarterly review of my quality dividend model portfolio. My virtual portfolio has had a mixed start to the year and ended the first quarter down slightly. But the news hasn't all been bad. Let's start with the headline numbers. - **Q1 portfolio total return: -4.4%** - Q1 portfolio dividend income: 1.1% - FTSE 100 Q1 dividend return: 1.1% To put this in context, the **iShares Core FTSE 100 ETF Acc (CUKX)** I use as a benchmark delivered a total return of +3.4% over the period. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/04/qdmp-q1fy22-chart-vs-cukx.png) SharePad portfolio chart showing Q1 performance (green) versus benchmark (gold) As a quick reminder, the [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) is a virtual fund that's run using my dividend screening system. The model portfolio contains the same stocks as my personal portfolio, but the two aren't exactly the same. Many of my personal holdings pre-date the model portfolio. Additionally, the model portfolio has been constructed with a single lump sum of virtual cash in order to make tracking performance easier. My own share dealing account gets topped up from my income each month. In this review I'll drill down into the portfolio performance during the period and take a look at some key dividend quality metrics. I'll also review trading activity in the portfolio during the quarter and discuss my plans for the next three months. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! ### Sold stocks I'll start with the three stocks I sold from the portfolio during the quarter , as one of these made an outsized contribution to the portfolio's loss for the period. My plan is to be a very inactive trader, but these sales were largely forced on me due to circumstances. I hope that this level of portfolio churn will be the exception, not the rule. I've circled the three sold stocks on the chart below. Full details of [the portfolio](https://www.rolandhead.com/dividend-portfolio/) are available to free subscribers: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/04/qdmp-1q22-shareprice-movt.png) Quality dividend portfolio Q1 share movements - **[Air Partner (LON: AIR)](https://www.rolandhead.com/dividend-portfolio/#air-partner)** was sold due to a takeover bid - sale report [**here**](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-february-review/). - **[Polymetal International (LON: POLY)](https://www.rolandhead.com/dividend-portfolio/#polymetal-international)** was sold due to its Russian exposure. Sale report [**here**](https://www.rolandhead.com/portfolio-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/). - **[Central Asia Metals (LON: CAML)](https://www.rolandhead.com/dividend-portfolio/#central-asia-metals)** was sold due to the close alliance between Kazakhstan and Russia and my perception of the risk this might pose. Sale report **[here](https://www.rolandhead.com/portfolio-shares/central-asia-metals-caml-sale/)**. *You can read my sale report on each stock by clicking on the links above.* Here are the details of the overall profit or loss from each of these sales. Fortunately, the Air Partner takeover helped to offset the losses from Polymetal and CAML. | **Company (ticker)** | **Date purchased** | **Purchase price** | **Date sold** | **Sale price** | **Total return (inc dividends)** | | ------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------ | ------------- | -------------- | -------------------------------- | | [Air Partner (LON: AIR)](https://www.rolandhead.com/dividend-portfolio/#air-partner) | 1 Dec 2021 | 79p | 25 Feb 2022 | 122p | 55% | | [Polymetal International (LON: POLY)](https://www.rolandhead.com/dividend-portfolio/#polymetal-international) | 1 Dec 2021 | 1,364p | 25 Feb 2022 | 746.4p | \-45.6% | | [Central Asia Metals (LON: CAML)](https://www.rolandhead.com/dividend-portfolio/#central-asia-metals) | 1 Dec 2021 | 243.5p | 3 Mar 2022 | 229p | \-6.4% | ### New stocks Selling three stocks left the portfolio looking somewhat depleted. My originally [strategy for selling and replacing stocks](https://www.rolandhead.com/portfolio/portfolio-selling-shares/) stipulated a limit of two trades per quarter. After some thought, I've decided to stick with this limit, despite the unusual circumstances of the last two months. There are a couple of reasons for this. I want to control the pace of portfolio churn, and I also think there's some value in drip-feeding new companies into a portfolio. Market conditions may well change further over the next quarter, creating some fresh opportunities. My experience is generally that buying periodically can deliver better results than all at once. The only exception to this is when I've been able to buy during a market crash, when the problem is having too much choice. **I added two new shares to the portfolio on 1 April, after writing them up on this website during March.** ### New stock #1: Homeserve **([Buy report 18 March 2022](https://www.rolandhead.com/portfolio-shares/buying-homeserve-shares-dividends/))** Shortly after publishing my buy report on **[Homeserve (LON: HSV)](https://www.rolandhead.com/dividend-portfolio/#homeserve)**, shares in this home repair provider surged higher on news that private equity group Brookfield Asset Management [was considering an offer for the business](https://investegate.co.uk/brookfield-asst-mgmt/rns/statement-re-possible-offer/202203241609419595F/?ref=rolandhead.com). There's been no further deal news since the initial announcement on 24 March. Although Homeserve's share price is now around 20% higher than when I picked the stock, it's still below mid-2021 levels and well below historic highs. On balance, I think Homeserve still looks reasonably valued on a long-term view, so I went ahead and added it to the portfolio on 1 April. You can see full details on the [portfolio page](https://www.rolandhead.com/dividend-portfolio/). ### New stock #2: US exposure from a UK stock Details of my second new pick are only available to free subscribers, who can read my 25 March buy report *"[Portfolio shares: adding US exposure to the portfolio](https://www.rolandhead.com/portfolio-shares/buying-uk-share-us-exposure/)"*. ### Q2 buying plans One more stock is needed to bring the portfolio up to its target size of 20 holdings. I plan to leave this slot vacant until the next quarterly review at the start of July. During this quarter I will research and select a replacement stock. I'll publish a buy report here before I add the new company to the portfolio. **In Q2 I will run the portfolio with 19 stocks, barring any more unforeseen selling events.** ### Quality dividend portfolio: financial characteristics While the success or failure of individual stock picks is interesting, it's the portfolio result that really matters. For this reason, I want to wrap up this quarterly review with a look at some quality metrics for the portfolio as a whole. This technique is borrowed from fund manager Terry Smith. He reports the aggregate financial characteristics of the stocks in his Fundsmith portfolios, so that they appear as a single business. I've done this for the quality dividend portfolio below. Changes since the end of 2021 are minimal ([2021 review here](https://www.rolandhead.com/portfolio/2021-portfolio-review/)), but I've tweaked the contents of the table slightly this time. | Median mkt cap | TTM ROCE | TTM EBIT yield | TTM FCF yield | Net debt/5yr avg net profit | TTM div yield | 5yr avg div grth | F'cast div yield | No. yrs div paid | | -------------- | -------- | -------------- | ------------- | --------------------------- | ------------- | ---------------- | ---------------- | ---------------- | | £2.9bn | 23% | 8.3% | 6.8% | 0.1x | 4.2% | 8.5% | 4.7% | 20 | *(Source: SharePad/author analysis - some manual adjustments were needed; don't take this as gospel)* **What does this tell me?** I think these numbers tell a positive story. An EBIT yield of 8.3% looks reasonable value to me, although this average does mask a wide range of individual valuations. The portfolio's trailing 12-month free cash flow yield of 6.8% is greater than its trailing dividend yield of 4.2%. This implies that collectively, my companies have paid dividends covered 1.6x by free cash flow over the last year. That seems reassuring to me. Looking ahead, the increased forecast yield for this year implies expected dividend growth of 11.9% across the portfolio, well ahead of inflation. This growth rate is slightly ahead of the five-year average dividend growth rate of 8.3%, but not outlandishly so, given the element of post-pandemic recovery in many businesses. Finally, the companies in the portfolio have an average return on capital employed of around 23% and have paid dividends for the last 20 years, on average. To me, these seem like attractive qualities for an income portfolio. I remain comfortable with all the stocks in the portfolio and do not plan any changes this quarter, other than selecting a 20th stock. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### March 2022 dividend portfolio results review URL: https://www.rolandhead.com/portfolio/march-22-dividend-portfolio-news/ Last updated: 2022-04-26T18:31:36.000Z Welcome to my monthly roundup of results and news from the stocks in my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). March was a little quieter [than February](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-february-review/), as results season started to wind down. But there were still five portfolio stocks which issued results during the month, so there was plenty to keep me occupied. This review won't include details of the portfolio's Q1 performance. I'll publish that in a separate post in the next few days. Without further ado, let's start March's review. For the avoidance of doubt, companies are listed in alphabetical order. **(For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/).)** The remainder of this review is only available to subscribers, so I'd recommend that you sign up **(free)** to read on. As an added bonus, free subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week.* _This post is for paying subscribers only._ ### Portfolio shares: adding US exposure to the portfolio URL: https://www.rolandhead.com/dividend-shares/buying-uk-share-us-exposure/ Last updated: 2023-11-07T10:53:00.000Z This week I'm revealing the second of three new shares I plan to add to my quality dividend model portfolio to replace recent departures. You can read about the first new stock – **Homeserve** (I hold) – in [last week's update](https://www.rolandhead.com/portfolio-shares/buying-homeserve-shares-dividends/). The UK share I'm adding this week will add a notable amount of exposure to the US economy to my portfolio. Given the state of events in Europe right now, I think this extra geographic diversification may not be a bad idea. There are some cyclical risks to this business, but these have been avoided so far. Moreover, the valuation and income on offer look tempting to me and appear to include some margin of safety. The remainder of this post will only be available to subscribers, so I'd urge you to subscribe to read on. As a quick reminder, paid subscribers get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) and reports on each share I decided to buy (or sell). _This post is for paying subscribers only._ ### Portfolio shares: Why I'm buying Homeserve URL: https://www.rolandhead.com/dividend-shares/buying-homeserve-shares-dividends/ Last updated: 2023-11-07T10:51:40.000Z A combination of unforeseen events and mistakes mean that my 20-stock [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) has been reduced to 17 stocks in the space of a month. Although I don't plan to be too dogmatic about maintaining the portfolio exactly at 20 stocks, I do plan to replace (probably) all three of these shares over the next few weeks. As a quick reminder, the departed companies are: - [**Air Partner (LON: AIR)**](https://www.rolandhead.com/dividend-portfolio/#air-partner) \- sale report [here](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-february-review/) - [**Polymetal International (LON: POLY)**](https://www.rolandhead.com/dividend-portfolio/#polymetal-international)\- sale report [here](https://www.rolandhead.com/portfolio-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/) - [**Central Asia Metals (LON: CAML)**](https://www.rolandhead.com/dividend-portfolio/#central-asia-metals) \- sale report [here](https://www.rolandhead.com/portfolio-shares/central-asia-metals-caml-sale/) This week I want to look at the first of these replacements shares. **Homeserve (LON: HSV)** is probably a company that many UK investors are familiar with through its business providing home emergency insurance for burst pipes and similar problems. This is typically sold through partnerships with water utilities. This business still exists, but Homeserve is a much broader and more global business today. The company's stated purpose is *"making home repairs and improvements easy"* and the group now generates around 60 % of its profits in North America. In addition to the UK, Homeserve is also present in Japan and much of western Europe. Globally, Homeserve has two main product lines: - Membership and HVAC (heating, ventilation and air conditioning) - Home Experts (eLocal in the USA, Checkatrade in the UK) **Membership and HVAC:** Homeserve was founders by CEO Richard Harpin in 1993 as a joint venture with South Staffs Water. The UK membership business can be traced back to this time, while the US business was launched in 2003. Membership services are similar to insurance and allow customers to take out policies to provide protection from plumbing and HVAC problems. Homeserve also covers areas such as electrical problems and pest control in some markets. Homeserve now has 4.8m customers in North American, with 1.5m in the UK. France and Spain have 2m between them. In recent years, the US business has grown strongly but the UK has underperformed, losing customers and reporting falling profits. Efforts are being made to turnaround the UK business. These include partnerships with energy suppliers E.On and Shell Energy, digitising customer interactions, and the recent [acquisition of CET Structures](https://investegate.co.uk/homeserve-plc--hsv-/rns/acquisition/202110270700023430Q/?ref=rolandhead.com), a rival UK home emergency assistance business. I'm not sure how much scope the UK membership services market has to recover and expand. But I feel progress in the US alone supports a confident view on this business. Homeserve's membership proposition appeals to a certain percentage of customers. But others – like me – will never be buyers. This is where the group's Home Experts business comes into play. **Home Experts:** The home repair and improvement market is typically quite fragmented. A sizeable share of the market is held by independent tradespeople who tend to operate by phone and recommendation. Although this approach can work well, common issues are inconsistent pricing, variable service quality and erratic availability. Homeserve's Home Expert business is an attempt to bring this business online through a trusted marketplace that offers user reviews, messaging options, and search and quote facilities. In the UK, Homeserve's brand is [Checkatrade](https://www.checkatrade.com/?ref=rolandhead.com), which I think is fairly well known. In the US, the group has [eLocal](https://www.elocal.com/?ref=rolandhead.com), which is somewhat larger. Homeserve charges a subscription fee for listing on its these websites. eLocal generated revenue of £48.5m and an operating profit of £6.1m during the first half of the current year. Checkatrade is being developed based on lessons learned from the more mature eLocal business. This is delivering results. Checkatrade's operating loss shrunk to just £0.2m during H1, and this business seems likely to become profitable soon. **Management:** I'll come onto Homeserve's numbers in a moment. But first I'd like to take a look at the group's management. Founder Richard Turpin remains CEO of Homeserve, with a 12% shareholding worth £270m at the time of writing. Since spinning out the business from South Staffs Water and floating it in 2004, Homeserve shares have delivered a capital return in excess of 400%. The dividend has risen from 3p to 26p over this period and has only been cut once since 2005. A further management attraction, for me, is the recent appointment of Tommy Breen as chairman. Breen's previous role was as chief executive of [**DCC**](https://www.rolandhead.com/dividend-portfolio/#dcc), which is also a [member](https://www.rolandhead.com/portfolio-shares/dcc-portfolio-share-review/) of my [model portfolio](https://www.rolandhead.com/dividend-portfolio/) (disclosure: I hold DCC). Mr Breen was CEO of DCC for nine years until 2017 and had a 30-year career at the Irish firm. During Breen's time in charge, DCC's revenue rose from £5.9bn to £12.3bn. DCC's net profits doubled from £108m to £203m over the same period. I'm encouraged by the appointment of Mr Breen as chair. I'm also encouraged to see that he spent £922,000 buying Homeserve shares [last](https://investegate.co.uk/homeserve-plc--hsv-/rns/director-pdmr-shareholding/202105191439001828Z/?ref=rolandhead.com) [year](https://investegate.co.uk/homeserve-plc--hsv-/rns/director-pdmr-shareholding/202111291545029302T/?ref=rolandhead.com). ### Homeserve: crunching the numbers ***Description:* *Homeserve offers a range of home repair and improvement services and operates online platforms connecting independent tradespeople to consumers.*** | **Homeserve (LON: HSV)** | **Quality Dividend score: 79/100** | **Forecast yield: 4.3%** | | ------------------------ | ---------------------------------- | --------------------------- | | Share price: 680p | Market cap: £2.3bn | *All data at 17 March 2022* | ***Latest accounts: [Half-year report](https://investegate.co.uk/homeserve-plc--hsv-/rns/half-year-report/202111160700104524S/?ref=rolandhead.com)* *for six months ending 30 September 2021.*** In the remainder of this review, I'll step through the different stages in my dividend screening system and explain why I've chosen Homeserve to be one of the replacement stocks for the model portfolio. Unless specified otherwise, the financial data I use in this process is drawn from SharePad. **Note:** For the purposes of this review, I'm going to classify Homeserve as a financial stock. That's how it's classified by SharePad and indeed the *FT.* This means I'll be using the financial version of my screen. *(I explained why I have financial and non-financial versions of my screen in [last week's article](https://www.rolandhead.com/portfolio-shares/direct-line-big-dividends/).)* ### Dividend culture: very strong It's great to kick off with a simple clean metric. I measure dividend culture by the number of consecutive years that a company has paid a dividend, even if it's been cut in that time. Homeserve has paid a dividend every year since at least 1995, giving it a 27-year streak. According to SharePad, the payout was cut modestly in 2005 after the group was spun out of South Staffs Water. Otherwise, there haven't been any reductions. It's an impressive record. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/03/hsv-dividends-170322-2.png) **Homeserve scores 5/5 for dividend culture in my screening system.** ### Dividend safety: impeccable I rate dividend safety using by looking at the payout ratio as a percentage of earnings. However, free cash flow cover is also important. Ultimately, I want my dividends to come from surplus cash. Homeserve scores well on both counts, as we can see from this chart: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/03/hsv-div-fcf-cover-170322-2.png) Interestingly, this chart highlights why I only check for dividend cover by earnings in my screen, not free cash flow. Homeserve has an excellent record of free cash flow in my view, but free cash flow is often lumpy for growing businesses, as they invest in expansion. I think that's what we can see here. The level of dividend cover has reduced over the last decade, but I'd say this is consistent with the greater size and maturity of the business. Overall, I'm very comfortable with the safety of Homeserve's dividend. **Homeserve scores 5/5 for dividend safety in my screening system.** ### Dividend growth: healthy To score stocks for dividend growth in my financial screen, I use a weighted blend of five-year average dividend growth and five year net asset value per share (NAVps) growth. We've already seen that the group's dividend growth has been strong in recent years. But what about NAVps growth? I use NAVps to test whether a financial firm is creating or destroying value for shareholders. This is possibly one area where the use of my financial screen is less appropriate for Homeserve, as its balance sheet isn't quite like that of an insurer, [for example](https://www.rolandhead.com/portfolio-shares/direct-line-big-dividends/). Even so, I think it's a useful check. Homeserve's net asset value per share has in fact risen strongly over the years. Just not in a straight line: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/03/hsv-nav-170322-1.png) The recent dip means that Homeserve doesn't score quite so highly for NAVps growth as it does for dividend growth. Even so, the shares manage a credible score in my system. **Homeserve scores 3./5 for dividend growth in my screening system.** ### Dividend yield: above average Homeserve is not a share that's often come onto my high yield screens. However, the chart below shows that there have been opportunities to buy the stock at above-average yield over the years. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/03/hsv-div-yield-170322-1.png) I think right now could be one such opportunity. Homeserve's forecast yield of 4.3% is well above the level seen in recent years and looks attractive to me, given the company's dividend track record. Homeserve's recent history of lower yields means it doesn't score all that well for yield in my screen at the moment. But I think this payout looks appealing at current levels. **Homeserve scores 2.3/5 for dividend yield in my screening system.** ### Profitability: high Homeserve has historically enjoyed double-digit operating margins and returns on equity. Although the company's statutory profits dipped during the pandemic year, I expect profitability to be restored in FY22 and certainly FY23. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/03/hsv-roe-roce-margin-170322-1.png) The group's strong profitability supports what we've seen already – steady NAV and dividend growth over many years. Clearly, this has been a successful business over a long period. I suspect that on reason why ROCE has fallen below return on equity in recent years is Homeserve's increased leverage. Debt will lift ROE while supressing ROCE. This is because ROCE is calculated based a company's debt and equity capital. ROE only includes equity capital. Increasing debt will magnify returns on equity, at the expense (typically) of higher risk. This is a key element of the private equity playbook; wafer thin equity and lots of debt. **Homeserve scores 5/5 for profitability in my screening system.** ### Leverage: higher than I'd like One of the differences with the financial version of my stock screen is that it uses the ratio of assets to equity as a measure of leverage, instead of net debt. I [discussed this in more detail last week](https://www.rolandhead.com/portfolio-shares/direct-line-big-dividends/). In Homeserve's case, I think it makes sense to look at debt in a more conventional way too, so here's a chart that tells a more complete story. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/03/hsv-assets-equity-netdebt-ebitda-170322-3.png) Let me break this down a bit. We've seen a steady increase in borrowing and leverage since 2016 as Homeserve has invested in the Home Experts platforms and the US business. However, although leverage has risen, I don't think it's out of hand. The red bars show us the **ratio of assets to equity**. This has hovered between 2.0x and 2.5x in recent years, except over the last 18 months. As a rule of thumb, in most businesses, I prefer not to see this ratio get too far above 2.0x. Similarly, the group's **net debt/net profit** ratio (blue line) has generally been reassuringly low. However, a steady increase in borrowing since 2016 has left the net debt/profit ratio close to my preferred maximum of 4.0x. Using the more conventional **net debt/EBITDA** ratio (black line), Homeserve reported leverage of 2.1x at the half-year mark. I prefer to see this metric limited to 2.0x, but for profitable, cash-generative businesses I can accept a little more. Fortunately, Homeserve's own policy is to keep leverage between 1.0x and 2.0x EBITDA, except for short periods. I expect to see a moderate reduction over the coming year as profits recover. Reflecting this mixed picture, **Homeserve scores 3/5 for leverage in my screening system.** ### Conclusion: I'm feeling positive After scoring a stock on all of these criteria, my screening system weights, sums and normalises these scores to give a total out of 100. **Homeserve earns an overall score of 79/100 in my dividend screening system at the time of writing (March 2022).** This puts it in the top 5% of UK stocks which currently qualify for [my screen](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The obvious risk with Homeserve, in my view, is that the business could go ex-growth. This could lead to a prolonged period of lacklustre performance, potentially made worse by costly failed attempts to reignite growth. I don't think this is likely just yet. The growth of the US business in recent years, plus more recent steps taken in the UK and Europe have convinced me that this business still has room to evolve and expand. I'm also encouraged by the progress of the Home Experts platforms, although I don't know how likely it is that they'll ever become equal contributors to earnings with the core membership division. CEO Richard Harpin has built a FTSE 250 company from the ground up, and continues to have a material shareholding. I think the arrival of Tommy Breen as chairman last year should give Harpin the partner he might need to take the group to the next level of its development. Although Homeserve's leverage is a little higher than I'd like to see, my sums suggest we should see profits rise and leverage fall over the coming 18 months. **Decision: I'm going to add Homeserve shares to the quality dividend model portfolio.** In line with [my policy for selling and replacing shares](https://www.rolandhead.com/portfolio/portfolio-selling-shares/), I'll add them to the model portfolio at the start of the next quarter. I'll also be adding Homeserve shares to my own personal holdings, at some point **after** this article has been published. For the avoidance of doubt, I do not currently hold Homeserve shares. --- ***To make sure you don't miss out on future articles, please hit subscribe to receive all my posts by email and gain access to member-only areas of the site.*** *I'll be adding a comment facility to this site as soon as I'm able to; I look forward to your feedback over the coming months. In the meantime, you can always reach me on Twitter [*@rolandhead*](https://twitter.com/rolandhead?ref=rolandhead.com) or [*by email*](https://www.rolandhead.com/contact/).* **Disclaimer:** This is a personal blog. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Portfolio shares: Direct Line's 9% yield looks safe to me URL: https://www.rolandhead.com/dividend-shares/direct-line-big-dividends/ Last updated: 2023-11-07T10:51:15.000Z FTSE 250 insurer Direct Line Insurance (LON:DLG) boasts a forecast dividend yield of 9%. I explain why the stock is a member of my model portfolio. _This post is for paying subscribers only._ ### Quality dividend model portfolio: February review URL: https://www.rolandhead.com/portfolio/quality-dividend-portfolio-february-review/ Last updated: 2023-05-20T12:11:11.000Z This is my monthly newsletter, reviewing trading updates and results from members of my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) during the preceding month. You can catch up on my review of December and January [here](https://www.rolandhead.com/portfolio/quality-dividend-portfolio-january-review/). This week it's time to take a look at portfolio shares which issued updated the market in February. As I've mentioned previously, these monthly updates won't include details of portfolio performance, which I think is meaningless over such a short period. I'll provide quarterly reports on [portfolio performance and valuation](https://www.rolandhead.com/portfolio/2021-portfolio-review/). For the remainder of the time, I think my time and energy can be better spent understanding the quality of the companies in the portfolio and looking for new opportunities to replace [sold](https://www.rolandhead.com/portfolio-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/) [shares](https://www.rolandhead.com/portfolio-shares/central-asia-metals-caml-sale/). Without further ado, let's start this month's review. For the avoidance of doubt, companies are listed in alphabetical order. For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The remainder of this review is only available to subscribers, so I'd recommend that you sign up **(free)** to read on. As an added bonus, free subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week* _This post is for paying subscribers only._ ### Portfolio shares: I'm selling Central Asia Metals URL: https://www.rolandhead.com/dividend-shares/central-asia-metals-caml-sale/ Last updated: 2023-11-07T10:50:40.000Z *Disclosure: At the time of publication, Roland owned shares of Central Asia Metals.* Having been [burned by Polymetal International](https://www.rolandhead.com/portfolio-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/) (and subsequently seen the shares fall much further, after my sale) I've decided to close [my model portfolio's](https://www.rolandhead.com/dividend-portfolio/) holding in **Central Asia Metals (LON: CAML)**. This AIM-listed UK firm produces copper in Kazakhstan (and lead/zinc in North Macedonia). It's been a reliable performer for income investors over the years. So far, it's share price has not been seriously affected by the events in Ukraine. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/03/caml-6m-chart-020322.png) _This post is for paying subscribers only._ ### Portfolio shares: Polymetal International - why I was wrong and what I'm doing now URL: https://www.rolandhead.com/dividend-shares/portfolio-shares-polymetal-international-why-i-was-wrong-and-what-im-doing-now/ Last updated: 2023-11-07T10:50:04.000Z *I'm writing this at the end of a dark day for Europe. My thoughts are with the people of Ukraine. The stock market seems less important than usual, but as steward of my own investments, I need to correct a mistake I've made.* In my recent post *"[How and why I'll sell dividend shares](https://www.rolandhead.com/portfolio/portfolio-selling-shares/)"* I covered all the usual scenarios that can arise and cause problems for investments. Profit warnings, dividend cuts and dodgy acquisitions, for example. I neglected to consider the risks posed by seismic geopolitical events, such as the Russian invasion of Ukraine. I think there were a couple of reasons for this. In part it was just plain oversight. I was focused on company or sector-specific risk factors. I didn't consider the broader picture. However, in part I think I felt that I shouldn't really *have to* consider this kind of risk. After all, this is meant to be a quality income portfolio, not a speculative play. This leads me to the first serious mistake I've made with the model portfolio. *Disclosure: At the time of publication, Roland owned shares of Polymetal International.* ### Polymetal International: when gold isn't a safe haven Readers who have signed up to my free mailing list and viewed my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) may know that the model portfolio (and my personal portfolio) includes Russian gold miner **Polymetal International (LON: POLY)**. Although this is (was?) a FTSE 100 stock, Polymetal shares still closed down by 38% on Thursday. The reason is obvious enough. The company's activities could be severely impacted by western sanctions against Russia. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/02/poly-1yr-chart-240222.png) When I added Polymetal International to the model portfolio launch holdings in December, I already owned the stock myself. This was where the mistakes started. I've generally avoided Russian stocks over the years because it's long been clear that normal rules don't apply in Russia. However, I made an exception for this gold miner. At the time, Polymetal was one of the top-scoring stocks in [my dividend system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/), with a score of 75/100 and a temptingly high yield. The company had been listed in London since 2011, paid regular dividends and had low costs and high profit margins. Moreover, Polymetal was a FTSE 100 member and did not seem to have any serious governance concerns. What I didn't consider was that the Russian political risk I'd carefully avoided for many years would suddenly materialise is the worst possible way. Unfortunately, that's what's happened. Experience is what you get when things don't go to plan. What I've learned is that I should have stuck to my long-term rule of avoiding Russian stocks. More precisely, I should have codified this rule in my stock selection procedure. That way, I wouldn't have felt free to override it. Lesson learned. What I need to decide now is whether to keep Polymetal in the model portfolio and my personal holdings or crystallise my losses and move on. ### How should I decide? As a systematic investor, I'm keen to follow the rules. Not following them with Polymetal has already cost me. So I need to try and make the correct decision now. One approach would be to consider the fundamentals. Polymetal [issued an update](https://investegate.co.uk/polymetal-international-plc--poly-/eqs/polymetal--response-to-the-escalation-in-ukraine/20220224113102EBNEK/?ref=rolandhead.com) on Thursday reiterating its 2021 and 2022 guidance and confirming that its operations are unaffected thus far. Reading between the lines, I think the company has already been taking measures to work around the impact of likely sanctions. It's possible that Polymetal shares are outrageously cheap today. Equally, they might not be. The full impact of enhanced sanctions against Russia is not yet clear. One risk (apart from further share price falls) is that Polymetal might decide to de-list from London and focus on its domestic stock market listing. Holding onto Polymetal shares *might* work out well, but **systematically**, I think it's wrong for me. At this stage, it's impossible for me to assess the risks or even guess at the most likely outcomes. Keeping this stock in the portfolio would be a gamble. That's clearly incompatible with my quality dividend ethos. Having reached this conclusion, it's easy to know what to do. I must correct the previous breach of my rules. If I'd followed the rules, I wouldn't own Polymetal shares today. I certainly wouldn't buy them today. So, continuing to hold them is illogical. **My decision: I'm going to sell Polymetal from the model portfolio and my own personal holdings, after this article has been published.** The loss will be substantial, although I won't know just how big it might be until after the market opens on Friday 25 February. I'll update this article with details of the sale. --- **Update 26/02/2022:** I sold the model portfolio's shares in Polymetal International for 746.4p on 25/02/2022, representing a loss of 45.6%. I sold my personal POLY shares at the same time as I made this virtual trade. --- ***To make sure you don't miss out on future articles, please hit subscribe to receive all my posts by email and gain access to member-only areas of the site.*** *I'll be adding a comment facility to this site as soon as I'm able to; I look forward to your feedback over the coming months. In the meantime, you can always reach me on Twitter [*@rolandhead*](https://twitter.com/rolandhead?ref=rolandhead.com) or [*by email*](https://www.rolandhead.com/contact/).* **Disclaimer:** This is a personal blog. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Portfolio shares: Is Imperial Brands a classic high-yield buy? URL: https://www.rolandhead.com/dividend-shares/imperial-brands-a-high-yield-buy/ Last updated: 2023-11-07T10:49:24.000Z *Disclosure: At the time of publication, Roland owned shares in Imperial Brands.* Fashions change but so do accepted views. A little over 20 years ago, smoke-filled pubs were the norm. Fund manager Neil Woodford was lauded for his contrarian decision to load up on cheap tobacco stocks during the dot com boom. Now, not so much. I come home from the pub without smelling like an ashtray, and many mainstream fund managers are shunning tobacco stocks. ## **A turnaround opportunity?** For **Imperial Brands (LON: IMB)**, the rise of ESG investing has coincided with a period of self-inflicted poor performance. Under former CEO Alison Cooper, pre-tax profit fell between 2017 and 2019, while investments in new generation products such as vapes failed to deliver hoped-for results. Cigar-smoking Ms Cooper ran out of road and agreed to step down [in October 2019](https://investegate.co.uk/imperial-brands-plc--imb-/rns/directorate-change/201910030700016319O/?ref=rolandhead.com). She was [replaced by Stefan Bomhard](https://investegate.co.uk/imperial-brands-plc--imb-/rns/directorate-change/202002030700086597B/?ref=rolandhead.com), who was previously CEO of automotive group **Inchcape**. Mr Bomhard took charge in February 2020\. Since then, he's [sold Imperial's luxury cigar division](https://investegate.co.uk/imperial-brands-plc--imb-/rns/update-on-sale-of-premium-cigar-businesses/202104291454111169X/?ref=rolandhead.com), cut the dividend, tightened the group's focus on cigarettes, reduced net debt and returned the business to growth. _This post is for paying subscribers only._ ### How and why I'll sell dividend shares URL: https://www.rolandhead.com/portfolio/portfolio-selling-shares/ Last updated: 2024-01-28T11:24:41.000Z Last updated: 28/01/2024 My [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) is a systematic portfolio. That means I aim to select shares to buy and sell based on a consistent and repeatable process. My [dividend screening system](https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/) is part of this. Although I also apply a level of subjective judgement, using a screen ensures that every company is judged and scored in a consistent way, based on the criteria I've chosen to define my investment strategy. If I buy shares in accordance with a set of rules, then clearly I need a corresponding set of rules for deciding when to sell shares. In my experience, this is much harder to get right. In this week's post, I want to set out my first pass at defining the rules I'll use for selling shares in the quality dividend model portfolio. I expect these rules to evolve over time, but this is how I'm going to start. ## When will I sell a share? Not very often! At least, that's my plan. I aim to choose companies that can deliver reliable income and compound growth over many years. If I get it right, then I won't have to trade very often at all. A private investor with a long-term view, I can afford to take a relaxed view on liquidity. My approach does not require knee-jerk trading and I don't need to be able to liquidate large positions at short notice. I rarely buy or sell shares, except after careful deliberation. I hope and expect to hold the majority of shares in [the portfolio](https://www.rolandhead.com/dividend-portfolio/) indefinitely. But sometimes life gets in the way. Things change. Some investments just don't work out the way we hope they will. From a rules-based investing perspective, I need to have procedures in place to ensure that any sales are managed consistently and in accordance with my investing criteria. To do this, I need: - A list of events that will trigger my sale review process - A clear process for deciding whether to sell ## Potential sale events: review process Although I routinely monitor news and results from the companies in which I'm invested, my default stance is to continue holding unless certain specific events trigger a review of the position: - [Company-specific problems](#company-specific-problems) - [Merger or takeover activity](#merger-or-takeover-activity) - [Dividend cut](#dividend-cut) - [Profit warning](#profit-warning) - [Significant fall in the stock's quality dividend score](#significant-fall-in-dividend-quality-score) If any of these take place, then I will review the stock to decide whether I should continue to hold it in the model portfolio. ### Company-specific problems I do not sell due to share price moves and market uncertainty alone. In general, I wait for new information to be provided by a company before I consider whether to take any action about a troubled position. When this happens, I then review the information and consider factors such as these: - is the company financially-stressed or likely to become so? - has the underlying quality of the business changed? - are external or internal changes likely to affect **future** profitability? - is the dividend likely to be cut? (see [below](#dividend-cut)) - have I lost confidence in management? - more broadly, **has the story changed?** **Decision:** if I feel that the answer to one or more of the questions above is *yes*, then I may consider selling, although this isn't a hard-and-fast rule. In practice, I find that this patient approach *sometimes* helps me to avoid an unecessary loss. Sometimes shares fall and then bounce back as problems turn out to be less serious than feared. On other occasions, unfortunately, my approach means that the *eventual loss when I do sell* is bigger than it might have been if I'd sold at the first hint of trouble. This is the approach I find works best for me. It doesn't suit everyone and I know others who successfully follow other strategies. **Selling example:** in March 2023, I decided to sell my holding in **Direct Line Insurance** following a review of the company's results and a dividend cut. [Here is the review I published at that time explaining the reasons for my decision](https://www.rolandhead.com/dividend-shares/should-i-sell-my-direct-line-insurance-shares/). ### Merger or takeover activity In a takeover scenario there's little choice except whether to sell shares into the market or wait to see if the deal completes successfully – not always the case. I use both approaches at times, depending on timescales and competing demands for my portfolio's cash. Merger activity is a little different. These combinations aren't always welcome news, in my experience. If a company in my portfolio is entering into a merger, I'll take the following steps: - Understand the terms of the merger and the expected benefits from combining the two businesses. *Are they convincing or compelling, or is this a bailout/takeover in disguise?* - Build a simple financial model to understand what the combined business might look like. For this I'll use similar measures of valuation and quality to those I use in [my screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). **Decision:** If I have a strong negative view on the merger, I may sell immediately. Otherwise, I will continue to hold the shares until the combined business publishes its first full set of accounts. I'll then add this data to my screening system to see how the enlarged business scores. If the stock's financial metrics and dividend quality score remain attractive post-merger, I'll continue to hold. If not, I'll sell. ### Dividend cut One of the main aims of my quality dividend screening system is to weed out companies with unsustainable dividends. I'd hope that dividend cuts will be a rare event, but I can't rule them out. If a portfolio stock announces a dividend cut, I'll take two steps before making a decision: - Understand why the dividend is being cut; is the cut a short-term measure for a specific reason, such as a factory fire or natural disaster? Or is the company permanently resetting its payout at a lower level to help address financial weakness, overdistribution, or underinvestment? - Look ahead; does the reduced dividend remain attractive, based on my criteria for yield, growth and quality? **Decision:** If a dividend cut takes place due to a short-term setback, I will normally continue holding the stock as long as my view of the underlying business is unchanged. I may also continue holding the stock if I feel the dividend cut actually improves the quality of the business. Shell's dividend cut in 2020 is an example of this rare event. However, in the majority of cases I expect that a dividend cut will be a sign of underlying problems. In this case I'm likely to sell the stock from the model portfolio. In such cases I'll also aim to carry out a more in-depth review to see if I can improve my system to avoid similar problems in the future. ### Profit warning Profit warnings often go hand-in-hand with dividend cuts. Most of the comments above will also apply in the event of a profit warning. - My first task will be to understand the cause of the warning. Is it a short-term problem caused by an unpredictable event? Or does it reflect on underlying problems with the business, its management or its operating model? **Decision:** As a long-term investor, I recognise that problems happen. A profit warning isn't automatically a sell for me, but I'm also conscious of the adage that profit warnings come in threes. So I'll take a critical look at the background to the warning, its cause and the likely outlook. If I think the problems are solvable, I will continue to hold the stock until a fresh set of accounts are published. I'll then update my screening score for the stock and follow the process outlined below. ### Significant fall in dividend quality score When I add a share to the quality dividend model portfolio, its score in my screening system is a key factor in the decision. So what should I do if this score falls? A few thoughts: - Many of the metrics used in the screening rules are unlikely to change quickly. In a number of cases I use five-year averages to smooth out short-term volatility and identify underlying trends. Even on a one-year view, measures such as ROCE or dividend growth rates will not change quickly, because they aren't linked to share price action. - As a result, I expect the scores for individual stocks to change slowly. So far that's been true. - I won't be whipsawed into rapid trading decisions simply because of a change in a stock's score. But there may come a time when a company in the portfolio is comprehensively outranked by another comparable business. If this happens, I may have to replace the holding to stay within my rules-based system. - Regardless of scoring changes, I won't take any action without understanding why a stock's score has changed – both absolutely, and relative to its peers. **Decision:** My intention is that I will dampen and slow any trading activity in the portfolio by limiting the frequency with which I allow changes. My plan is to review the portfolio quarterly for stocks whose declining scores might indicate a need for action. However, my intention – provisionally – is to restrict myself to two trades per quarter. This will force me to prioritise my concerns and limit portfolio churn. ## Conclusions I'll write more about these topics when potential sale situations arise and as my understanding of my system evolves. For now, my guiding principles are that I will not sell a stock without understanding why the situation has changed. I will be prepared to ride out short-term periods of underperformance, if I think the long-term investment case remains attractive. 💡 Don't miss any of my dividend share coverage – [subscribe to my FREE weekly email now](https://www.rolandhead.com/#/portal/signup)! --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Quality Dividend model portfolio: January review URL: https://www.rolandhead.com/portfolio/quality-dividend-portfolio-january-review/ Last updated: 2023-05-20T12:10:57.000Z I plan to provide a monthly newsletter reviewing trading updates and results from members of my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) during the preceding month. In this inaugural update I'll include news from December as well as January, in order to maintain a complete record since the [portfolio's inception](https://www.rolandhead.com/portfolio/welcome-dividend-system/). I won't be including details of monthly portfolio or share price performance. The reason for this is that I do not believe this information is meaningful or relevant for a long-term dividend portfolio. Indeed, I think that focusing on such short-term movements is probably counter-productive. Instead, I will provide quarterly reports on [portfolio performance and valuation](https://www.rolandhead.com/portfolio/2021-portfolio-review/). For the remainder of the time, I think my time and energy can be better spent understanding the quality of the companies in the portfolio and looking for possible new opportunities. Without further ado, let's start this month's review. For the avoidance of doubt, companies are listed in alphabetical order. For an explanation of my Quality Dividend score, [see here](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). The remainder of this review is only available to subscribers, so I'd recommend that you sign up **(free)** to read on. As an added bonus, free subscribers also get full access to my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). *Rest assured I'll never spam you. You'll only get an email when I publish a new post, usually once a week* _This post is for paying subscribers only._ ### Portfolio shares: Is Air Partner a takeover bargain at 125p? URL: https://www.rolandhead.com/dividend-shares/is-air-partner-a-takeover-bargain-at-125p/ Last updated: 2023-11-07T10:47:58.000Z This week I was going to write about small-cap **Air Partner (LON: AIR)**. This air charter specialist is a member of my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/) and my personal portfolio, which holds broadly the same stocks. I'd already started writing before the stock surged 50% higher on Thursday, when a [125p takeover offer](https://investegate.co.uk/wheels-up-experience/rns/recommended-cash-offer-for-air-partner-plc/202201270700107893Z/?ref=rolandhead.com) was announced by US firm **Wheels Up Experience**. This deal values Air Partner at £84.8m and has been recommended by the group's board. In my view, the takeover is likely to go ahead. Wheels Up appears to be seriously cashed-up and looking to expand after a [SPAC flotation](https://www.ft.com/content/ec08b822-e022-41d1-8252-0a04b2772031?ref=rolandhead.com) last year. *(This Seeking Alpha piece by Vince Martin has [an interesting review of Wheels Up's prospects](https://seekingalpha.com/article/4457608-wheels-up-experience-risky-spac-play?ref=rolandhead.com). On balance, I think I'd prefer to own Air Partner...)* Major shareholders controlling 27.5% of Air Partner stock have indicated that they intend to accept the offer, through a mix of irrevocable commitments and non-binding letters of intent. Among the latter is the well-known private investor and ISA millionaire Lord Lee, who has 4.88% stake in Air Partner. To me, these undertakings indicate that unless a higher bid emerges, Air Partner will be sold. **Is 125p a fair price?** The offer price is around 50% above the level where Air Partner has been trading recently, so it's a reasonable premium based on the company's recent performance. However, Air Partner shares have traded at 150p within the list five years, so I'd guess it's possible that some shareholders or rival bidders might see room for improvement on the 125p offer. We have seen a few bidding wars on UK stocks recently, especially as the stronger dollar has improved relative value for US buyers. My back-of-the-envelope calculations suggest that **a price of 125p is probably reasonable, but not expensive**. I estimate that the offer values Air Partner's business at around 11 times average free cash flow since 2016\. That's equivalent to a FCF yield of around 9%. The group also generated an average return on capital employed of 24% over that period. Based on this past performance, I would certainly argue that Air Partner is worth buying at 125p, especially for a trade buyer. I've no idea how likely it is that a rival bidder will emerge, but on balance I suspect I'm unlikely to write about Air Partner again. I'll be a little sad to see this stock go, but I can't complain at a 50% profit in less than two months for [the model portfolio](https://www.rolandhead.com/dividend-portfolio/). **I'll now start work on finding a replacement stock, but that's a subject for another day - watch this space.** What I'd like to do today is to revisit the reasons why I chose Air Partner for the portfolio. I think there's still some value in this exercise, because Air Partner is a very different business to [**DCC**](https://www.rolandhead.com/portfolio-shares/dcc-portfolio-share-review/)and [**Unilever**](https://www.rolandhead.com/portfolio-shares/is-unilever-a-quality-dividend-stock/)(the portfolio shares I've covered so far). ### What does Air Partner actually do? Air Partner's origins stretch back to 1961, when it was founded as a school to retrain military pilots for civilian flying. By the 1980s, it had evolved into a charter broking business, matching charter clients with a pool of available aircraft. This charter specialty has remained at the core of the group's operations. Today, Air Partner can call on around 7,000 planes as needed – although it doesn't own aircraft (an attraction, in my view!). Charter operations are divided into three segments, commercial, private and freight. Air Partner has also acquired adjacent businesses over the year to expand its operations into areas such as emergency planning (e.g. evacuations), security and training. I'd normally be wary about a diverse, acquisitive group like this, but in this case, I believe there's a natural fit between the group's businesses. Put another way, I think the combination offers greater value than the constituent parts. CEO Mark Biffa has been in role since 2010 and has done a good job, in my view. Air Partner's financial performance and strong balance sheet are also attractive, as I'll explain now in a truncated version of my usual screening review. ## Air Partner: crunching the numbers - **Air Partner (LON: AIR)** - Share price: 81p (pre bid) / 123p (after 125p offer) - Market cap: £51.5m (pre bid) / £78.2m (after 125p offer) - Shares in issue: 63.6m **In the remainder of this review, I'll step through the different stages in my [dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/) and explain why Air Partner scored highly for me. Unless specified otherwise, the financial data I use in this process is drawn from SharePad.** ***Note:* *Any calculations I've made which relate to Air Partner's share price/market cap were completed before the offer was made. I've not recalculated them since.*** ### Dividend Culture: beyond question I measure dividend culture by simply counting the number of consecutive years of dividend payments. Air Partner floated on the London Stock Exchange in 1989\. It's paid a dividend every year since 1990, according to Stockopedia (whose dividend history for AIR seems to go back slightly further than SharePad). ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/01/air-stockopedia-dividends-270122.png) Source: Stockopedia This record hasn't been achieved without a few cuts along the way, but then air travel is a cyclical industry. Perhaps that's to be expected. In any case, I think it's fair to say that this business has had a strong dividend culture. Unsurprisingly, **Air Partner scores 5/5 for dividend culture in my screen.** ### Dividend Safety: robust My dividend safety score is a blend of historic dividend cover, free cash flow cover and leverage. Despite the impact of the 2020 dividend cut and earnings slump, Air Partner scores well here. In normal times the group's dividend has decent cash flow cover and is comfortably covered by earnings. A debt-free balance sheet also helps to bolster the score. The end result is that **Air Partner scores 5/5 for dividend safety in my screen.** I think this is a fair comment – despite the payout becoming stretched at some points in the past, Air Partner's forecast dividend for the current year should be covered more than three times by earnings. ### Dividend Growth: a mixed record Unsurprisingly, Air Partner scores badly for dividend growth. The two metrics I use – free cash flow growth and dividend growth – have both been weak on a five-year view. **Air Partner scores 2/5 for dividend growth in my screen.** **Dividend yield: sustainable** Air Partner has been a high yielder in the past but isn't anymore. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/01/air-dividend-yield-270122.png) Source: SharePad The stock's forecast yield of 3.1% puts it firmly in the mid-range. **Air Partner scores a middling 3/5 for dividend yield in my screen.** ### Valuation: decent underlying value I use a blend of free cash flow yield and earnings yield (EBIT/EV) to score stocks for value. Unlike regular airlines, Air Partner saw demand boom during the pandemic thanks to Covid-related freight and private jet activity. Operating profit doubled from pre-Covid levels to £10.4m in FY21 (y/e 31 Jan), but has since pulled back somewhat. Even so, my sums indicate a trailing 12-month (TTM) earnings yield of 12%, which looks attractive to me. The free cash flow situation is weaker, due to a £2.3m outflow of working capital during H1 FY22\. This was triggered by an upturn in business which caused a £6.6m increase in receivables. I'd expect the full-year picture to look more favourable, but as things stand, my sums suggest that free cash flow for the 12 months to 31 July was negative. As a result, the shares don't score as well for value as I might have expected. **Air Partner scores 3/5 for valuation in my screen.** ### Profitability: attractive I use return on capital employed and return on equity to score stocks for profitability. I believe these metrics best capture the likelihood of value creation for shareholders. One of the attractions of Air Partner's business is its record of strong profitability. Although operating margins are fairly average, the group's asset-light model means that it generates attraction returns on capital employed: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/01/air-ebit-roce-opmargin-270122.png) Source: SharePad As a result of this attractive profitability, **Air Partner scores 4/5 for profitability in my screen.** ### Fundamental Health: strong My final factor score is designed to flag up companies with inappropriate leverage or onerous debt servicing charges. For this I look at fixed charge cover and the ratio of net debt to five-year average profits. Air Partner has reported a net cash position for some years. However, the cash flow statement shows regular interest payments, reflecting the occasional use of a revolving credit facility. As a result of this mixed picture, **Air Partner scores 4/5 for fundamental health in my screen**. ### Conclusions: a fond farewell Air Partner's profits have not always progressed upwards as smoothly as shareholders might have liked (see chart above). But I believe this is fundamentally a good business under strong management. I'm a little disappointed to be losing Air Partner to a takeover bid, but we are where we are. On many measures, I believe this business looks attractively valued, even at 125p. Congratulations to holders and good luck to Wheels Up. **To make sure you don't miss out on future articles, please hit subscribe to receive all my posts by email and gain access to member-only areas of the site.** *I'll be adding a comment facility to this site as soon as I'm able to; I look forward to your feedback over the coming months. In the meantime, you can always reach me on Twitter @rolandhead or by email.* **Disclaimer:** This is a personal blog. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Portfolio shares: Is Unilever still a quality dividend stock? URL: https://www.rolandhead.com/dividend-shares/is-unilever-a-quality-dividend-stock/ Last updated: 2023-11-07T10:47:37.000Z *Disclosure: Roland Head owns shares in Unilever.* FTSE 100 consumer goods giant **Unilever (LON: ULVR)** is one of 20 shares in my systematic income portfolio, which I've named the [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/). I also hold the shares in my personal portfolio, which largely mirrors the model portfolio. _This post is for paying subscribers only._ ### Portfolio shares: DCC's ROCE fixation and 27-year dividend history appeal to me URL: https://www.rolandhead.com/dividend-shares/dcc-portfolio-share-review/ Last updated: 2023-11-07T10:47:12.000Z *Disclosure: Roland owns shares in DCC.* **This is the first of a series that will introduce the stocks in my [quality dividend model portfolio](https://www.rolandhead.com/dividend-portfolio/).** FTSE 100 firm **DCC (LON: DCC)** describes itself as an *"international sales, marketing and support services group"*. More usefully, I think DCC can be described as a conglomerate with the following characteristics: - **Core skillset:** Distribution - **Markets:** B2B and B2C - **Sectors:** Energy, healthcare/beauty, and technology - **Geography:** UK, Ireland, USA, and western Europe This Irish company is below the radar for many investors, despite its FTSE 100 membership. But I think DCC has a track record which deserves respect and makes it an interesting alternative to better-known **Bunzl**. DCC floated in 1994\. In the 27 years since then, it's delivered a total shareholder return of 6,640%\* and a compound average annual dividend growth rate of 13.9%\*. Perhaps not coincidentally, DCC's reporting includes a welcome emphasis on return on capital employed (ROCE) and free cash flow. *(\*DCC statistics)* I think this business has the potential to continue growing at an attractive rate, while providing a high-quality dividend. **DCC is a member of my quality dividend model portfolio and a holding in my personal portfolio.** In this review I'll explain how this business makes money and why it's one of the highest-scoring stocks in [my dividend screening system](https://www.rolandhead.com/all/how-my-dividend-investing-system-works/). _This post is for paying subscribers only._ ### Why DCC's adjusted ROCE is double my calculation URL: https://www.rolandhead.com/dividend-shares/dcc-adjusted-roce-explanation/ Last updated: 2023-11-07T10:46:21.000Z *Disclosure: Roland owns shares of DCC. This stock is also a member of Roland's quality dividend model portfolio.* DCC's November 2021 investor presentation presented a return on capital employed (ROCE) of **17.1%** for the group. My calculations suggest a **statutory ROCE figure of just 8.4%**. While most companies use some adjustments, I thought that the scale of the difference required closer examination. ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/01/dcc-highlights-nov21.png) **Source:* [**DCC investor presentation Nov '21*](https://www.dcc.ie/~/media/Files/D/DCC-v2/documents/results-and-presentations/2021/company-overview-presentation-nov-2021-master-v1.pdf?ref=rolandhead.com) It took me a little while to understand DCC's alternative approach to calculating ROCE, so I thought it might be worth an article exploring this topic. _This post is for paying subscribers only._ ### 2021 Quality Dividend portfolio review URL: https://www.rolandhead.com/portfolio/2021-portfolio-review/ Last updated: 2023-11-04T14:42:58.000Z Welcome back - and a belated Happy New Year to all readers. A detailed stock review is in the pipeline, but I'd like to start 2022 with a portfolio review. I'm going to take a somewhat alternative approach to this, as I don't yet have a full year of figures for my [Quality Dividend **model** portfolio](https://www.rolandhead.com/portfolio/welcome-dividend-system/) *(although my personal portfolio, which is largely invested in the same stocks, has been running in a similar way for some years)*. Instead, I want to look at the overall shape and characteristics of this portfolio. I'm going to focus on two areas which I think are likely to define [the model portfolio](https://www.rolandhead.com/dividend-portfolio/)'s future performance: - Sector allocation - Financial characteristics ### Quality Dividend portfolio: financial characteristics In the excitement and interest of stock picking, it's sometimes easy to lose focus on the importance of building a quality portfolio. The success of individual stock picks is obviously important, but the results they deliver in aggregate is ultimately the measure of success. To measure this, one technique I've found useful is borrowed from Terry Smith's [Fundsmith](https://www.fundsmith.co.uk/?ref=rolandhead.com) reporting. Smith **averages the key financial metrics for all the stocks in a portfolio**. The portfolio then appears as if it's a single business. I've become a fan of this approach, which I think can be quite revealing. I've done the same calculations for my Quality Dividend model portfolio. Here's how it looks: | **No. of stocks** | **Median mkt cap** | **TTM ROCE** | **TTM EBIT yield** | **TTM FCF yield** | **TTM div yield** | **5yr avg div growth** | **Forecast div yield** | **Net debt/5yr avg net profit** | | ----------------- | ------------------ | ------------ | ------------------ | ----------------- | ----------------- | ---------------------- | ---------------------- | ------------------------------- | | 20 | £3.2bn | 20.6% | 8.7% | 6.7% | 4.1% | 8.3% | 4.4% | \-0.2 | *Data source: SharePad/author analysis.* **What does this tell me?** The median **size** of the companies in my portfolio is £3.2bn - squarely in mid-cap territory. History suggests this could offer a good mix of growth and income, over time. On average, these companies generated a **return on capital employed** of 20.6% over the last 12 months. That's well above the wider market average, which I believe is 8%-10%. The trailing **free cash flow yield** of my portfolio companies collectively is 6.7%, which seems attractive to me in these low yield times. More importantly, this free cash flow covers the portfolio's trailing **dividend yield** of 4.1% by 1.6 times. This suggests to me that my portfolio companies are not overdistributing dividends. Instead, they are keeping some cash back for debt reduction and growth investments. That's what I want to see in a long-term investment. Next, we can see that my model portfolio companies have delivered **average dividend growth** of 8.3% per year over the last five years. This growth figure is slightly ahead of the 7.3% annual dividend growth implied by the portfolio's current **forecast dividend yield** of 4.4%. This suggests to me that dividend forecasts for the current year look fairly reasonable, assuming no unexpected disruptions. Finally, aggregate leverage appears to be pretty light. I'm not a fan of heavily geared businesses, as they increase the downside risk for equity holders. The model portfolio contains a number of non-financial businesses with net cash. The remainder are modestly geared, with one exception. If my model portfolio was a single stock, I think it would look like a **profitable, cash-generative, and growing business**. I'm pretty sure I'd want to own it. **Of course, this does not mean that the individual stocks in my model portfolio are slam-dunk buys.** Averages can be used to mask a multitude of sins. For example, cash cows with limited growth potential might be masking over-valued growth stocks with poor cash generation. There's always a risk. But I'm pretty comfortable with the overall profile of my model portfolio. It shows all the characteristics I'm looking for in my personal investments. ### Sector allocation > "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing". This Warren Buffett quote is often cited by investors as a reason to concentrate their portfolio in their best ideas. It's certainly true that Buffett made a lot of money from a few investments in his early years as an investor. But even he doesn't do this so much anymore. Mr Buffett's [investments at Berkshire Hathaway](https://www.cnbc.com/berkshire-hathaway-portfolio/?ref=rolandhead.com) look quite diversified to me, covering sectors including financials, utilities, tech, consumer goods and industrials. A concentrated approach can work very well. However, I think the real problem here is that survivorship bias can give us a **false perception** of how risky it is to own just a few stocks. We all know about the big winners, but concentrated investors who fail tend to disappear off the radar. To use a crude analogy, there are far more actors waiting tables in Hollywood than there are at the Oscars each year. I admire people who can commit totally to one idea and risk everything, but I've never been one of them. I don't know what the future holds. And I won't necessarily be able to spot internal problems at my companies before they blow up. For this reason, I've constructed my model portfolio with quite deliberate sector diversification. I'll write about this in more detail in the future. But in short, I use the 10 main economic sectors as a starting point and **aim** to select stocks from each. However, I'm not going to buy shares in companies which score badly in my system just to tick a box. For this reason, the model portfolio currently includes stocks from **eight different sectors**. I suspect this may be a realistic maximum, if I'm to avoid buying shares without much conviction. I'm quite happy with this situation. Circling back to Mr Buffett, I think what the Sage really meant was that adding more companies to a portfolio doesn't automatically make it safer. **Long-term portfolio safety** comes from paying a reasonable price for shares in good companies. Anything else is just speculating. My model portfolio currently contains 20 stocks. I don't intend to exceed this limit, but I may let the size fall slightly over time, if I feel it's appropriate. Here's how the portfolio looks in terms of sector allocation at the start of 2022: ![](https://storage.ghost.io/c/81/b0/81b02f4d-7696-44c3-a500-35a32fccad19/content/images/2022/01/model-pf-sectors-jan22.png) I'll dig into these selections and explain my portfolio trading rules in more detail in the coming weeks and months. For now, thanks for reading - and good luck in the markets in 2022. Roland **Disclaimer:** This is a personal blog. The information provided is for information and interest. Nothing I say should be construed as investing advice or recommendations. The investing approach I discuss relates to the system I use to manage my personal portfolio. It is not intended to be suitable for anyone else. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### How my dividend investing system works URL: https://www.rolandhead.com/portfolio/how-my-dividend-investing-system-works/ Last updated: 2026-01-14T16:16:08.000Z **Last updated: 14/01/2026** In a previous post, I introduced my [dividend income system](https://www.rolandhead.com/portfolio/welcome-dividend-system/) and explained why I've adopted a systematic approach to investing for my personal portfolio. In this piece I'm going to discuss the criteria I use to select stocks. I'll also provide an overview of how I incorporate these into an overall scoring system. **Disclaimer:* My commentary reflects my own opinions and investment activity, as they relate to my personal share portfolio. My views do not represent advice or recommendations and are not intended to be a substitute for personal research or qualified financial advice.* *I do not provide share tips and I am not a financial adviser. The investing approach I discuss is my personal approach and is not intended to be suitable for others to follow.* --- **November 2022:** I recently recorded a podcast discussing my approach to dividend investing for the [Fund Your Retirement](https://www.fundyourretirement.com/fund-your-retirement-podcast/?ref=rolandhead.com) platform. The podcast was recorded on 21 September 2022\. You can listen on [YouTube](https://youtu.be/hMqaLVPI-Sg?ref=rolandhead.com) ) or through all of the [usual podcast platforms](https://www.fundyourretirement.com/podcasts/fyr065-investing-for-dividend-growth-with-roland-head/?ref=rolandhead.com). I hope you enjoy it! --- ### How I got here When I started investing for income, I focused on metrics such as dividend yield, P/E, and earnings cover. But I found that these were inadequate indicators of dividend quality. By this, I mean dividend safety and dividend growth potential. **I realised that some stocks offer high yields because they have little else to offer investors except slow-motion value destruction and - eventually - a dividend cut.** Influenced by the work of Terry Smith and others, I became convinced that if I wanted my income portfolio to have a chance of beating the market, I needed to place a greater emphasis on quality metrics. As a result, I started to place more weight on measures such as return on capital employed and free cash flow. Not all of the shares which score highly in my system offer high yields. But the overall yield from my portfolio is quite satisfactory, in my view, at just under 5%. To put this in context, the current yield from the FTSE 100 is 3.4%. Over time, I hope that the low-yielding stocks in the portfolio will deliver stronger dividend growth than the high yielders. My ambition is that the overall **dividend yield on cost** of my portfolio will steadily increase. ### What stocks am I buying? To populate my screen, I need to define an investable universe of stocks. The criteria I use are broad and fairly simple: - Primary UK listing - Market cap of at least £25m - At least five years of consecutive dividend payments - Expected to pay a dividend for the current year These criteria mean that my universe includes most of the FTSE All-Share index and a fair number of AIM stocks. I'm happy with that. I'm keen to combine the growth potential of quality small caps and the high yields on offer from larger businesses. **Selling:** as a private investor with a long-term view, I can afford to take a relaxed view on liquidity. My approach does not require knee-jerk trading and I don't need to be able to liquidate large positions at short notice. I rarely buy or sell shares, except after careful deliberation. **In particular, I do not sell due to share price moves and market uncertainty alone – in general, I wait for new information to be provided by a company before I consider whether to take any action about a troubled position.** In practice, I find that *sometimes* my approach helps me to avoid an unnecessary loss. On other occasions, unfortunately, it means that the *eventual loss is bigger* than it might have been if I'd sold at the first hint of trouble. As always, I think the important thing is for investors to define their own strategy that they understand are comfortable following. On balance, I find this approach works for me. But I know many other successful investors who take different approaches. ### My screening rules The approach I took when developing my system was to define the characteristics I was looking for in a good quality dividend. I then worked backwards to identify the financial metrics from which these characteristics might be derived. Here's an overview of the factors I look for. **Dividend culture:** Does the company have a track record of unbroken dividend payments? To qualify for my screen, I require a minimum of five consecutive years of payouts. Longer dividend streaks attract a higher score. **Dividend safety:** How affordable is the payout? In my experience, the most common reasons for a dividend cut are lack of cash flow or earnings cover and excess leverage. **Dividend growth:** A dividend that isn't growing may indicate that affordability is stretched, or that the underlying business isn't growing. I may accept a flat payout when the yield is both high **and** sustainable, but otherwise I want to see dividend growth. To measure dividend growth, I score each stock on historic dividend and free cash flow growth. **Dividend yield:** I'm flexible about yield, but it's obviously still important to me. To score a company on yield, I look at the stock's five-year average dividend yield and its forecast dividend yield. **Valuation:** I look at valuation in terms of earnings yield and free cash flow yield. Are these yields attractive, and do they support the underlying dividend yield? **Profitability:** Terry Smith and Warren Buffett both make an eloquent case for why long-term equity returns are ultimately linked to return on capital employed. There are some good quotes [here](http://mastersinvest.com/newblog/2019/1/13/roc?ref=rolandhead.com). For my screen, I score stocks on return on capital employed and return on equity. I use both trailing 12-month and five-year average figures to give a blended view on profitability. **Fundamental health:** This is really about balance sheet health. I use leverage ratios and fixed charge cover to gain an idea of the margin of safety that's available before debt obligations might trigger a dividend cut. More broadly, I use these metrics as a proxy for the financial health of the business. In my view, a well-run, growing business shouldn't be overleveraged or have any difficulty servicing its debts. **Momentum (added Nov 25):** I added these rules after finding that I'd entered into a number of positions in the face of (with hindsight) negative trends. While I don't necessarily regret owning the companies concerned, I do regret not timing my entry a little better. I decided to add a mild momentum weighting to my scoring to try and reflect underlying trends in a company's valuation, earnings and share price. While I don't want to become a technical investor or a trader, experience has taught me that buying well makes a big difference to eventual investment returns. You can read a fuller description of my momentum rules in [this update](https://www.rolandhead.com/portfolio/my-portfolio-top-ups-for-december-new-momentum-rules/). **Note:* The screening rules described above are applied to non-financial stocks. I use slightly different metrics for financial stocks, but the principles are the same.* ### The end result The scores I derive from these screening criteria are weighted and then normalised. I then combine these to generate an overall score for each stock, on a scale of 0-100\. I'm then able to filter stocks by sector, providing a diversified shortlist of potential candidates for the portfolio. My final stock selection process involves an element of subjective judgement and opinion. But that's a story for another day. **I'll finish with an example of how I apply this process to an individual stock – FTSE 100 drinks giant Diageo, which I reviewed in February 2024:** - [After falling 30%, are Diageo shares too cheap to ignore?](https://www.rolandhead.com/dividend-shares/after-falling-30-are-diageo-shares-too-cheap-to-ignore/) 💡 My paid service provides full access to my model dividend portfolio. Subscribers also get full coverage of portfolio company results and details of all my portfolio trades. [Signup today for immediate access](https://www.rolandhead.com/#/portal/signup). --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated. ### Welcome: introducing my quality dividend portfolio URL: https://www.rolandhead.com/portfolio/welcome-dividend-system/ Last updated: 2024-05-18T15:58:30.000Z Welcome to my new website. Although [rolandhead.com](https://www.rolandhead.com/) has been around in various guises for a decade now, it's been somewhat neglected over the last few years. That's now going to change. I'll be using this revamped site as a platform to document and share the **systematic investing approach I use to run my dividend portfolio**. Like many investors, I started out with a focus on value stocks. Over the years, that approach has evolved to a primary focus on good quality dividend income. There's a natural overlap between value and income, in my view. But by focusing on **quality income** my strategy now more closely reflects the primary goal for my portfolio. > **Provide a market-beating dividend yield that grows ahead of inflation and requires minimal trading.** The other big change that's affected my investing over the last decade is that I've become a keen devotee of systematic investing. Airline pilots, surgeons and other highly-skilled professionals routinely execute complex tasks successfully by using checklists to minimise the risk of adverse outcomes. I believe the same approach makes sense for investing. I find it hard to maintain a consistent and correct approach without a pre-defined framework. In my experience, that has sometimes led me to make inconsistent and poor choices. **Using a systematic approach** has solved this problem for me. Over time, I've isolated the criteria I believe drive positive long-term returns and sustainable dividend growth. I've built these into a **stock screening system** which reduces my investable universe to a manageable number of shares, and assigns a score to each company. This isn't a one-size fits all system. It's no good for growth stocks, momentum plays or deep value opportunities. Instead, I've designed my rules for one purpose only: > ***To help me find the best UK dividend shares and build a portfolio which offers market-beating yield and growth.*** I'll explain this system in more detail in future posts. For now, I'll just say that although my screen guides my stock selections, I'm not simply investing by numbers. I use my scoring system as a basis for selecting potential candidates. I then carry out further analysis and research before making a decision. Thanks for reading this far. In the coming days, I'll shortly be revealing the model portfolio I'll use to track the process of my strategy. It's based very closely on my personal portfolio, but doesn't have any of the historic baggage or cash flow complexity, so is easier to track and follow publicly. As with [my work elsewhere](https://www.rolandhead.com/my-work/), I'll be completely transparent in terms of disclosure and will be open about unsuccessful investments. There will be lots more content coming down the line in the coming weeks and months. This will include **detailed stock reviews** and more in-depth insight into **my stock-screening rules**. Roland --- **Disclaimer:** This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations. You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated.