May 2022 dividend portfolio results review

May has brought an avalanche of news from the companies in my quality dividend portfolio. In addition to a confirmed takeover bid for Homeserve, portfolio stocks including DCC, Imperial Brands and Burberry issued results.

Fortunately, most of them were fairly positive. But there's a lot to get through so I will begin without any further preamble.

Companies in this review are listed in alphabetical order. For an explanation of my Quality Dividend score, see here.

Disclosure: Unless otherwise specified, Roland owns all the shares mentioned.

Burberry

Description: Upmarket fashion brand with British heritage and global appeal, especially among younger Asian buyers. Click here for an archive of my past coverage.

RNS release: Preliminary results for 53 weeks ended 2 April 2022

Burberry's sales were hit by a loss of tourist trade during the pandemic. Just when it seemed like things might be going back to normal, lockdowns in China caused further disruption.

Despite these headwinds, Burberry's results for the year ended 2 April did not seem bad at all to me.

• Revenue +23% to £2,826m (+10% vs 2019/20)
• Operating profit +4% to £543m
• Operating margin: 19.2%
• Free cash flow: £340m (FY21: £349m)
• Dividend: 47p (FY21: 42.5p)

While margins were lower than last year, the operating margin of 19% is well ahead of the five-year average of 16%. I also calculate return on capital employed at 19%, in line with the stock's five-year average.

Operationally, Burberry reported "strong brand momentum", with an excellent response to its first in-person runway show in two years. Like-for-like store sales were up by 7% during the first calendar quarter of 2022, despite the impact of China lockdowns in March.

In addition, like-for-like full-price store sales were 30% higher than in the pre-pandemic year. This suggests to me that Burberry's elevation strategy is working (a true luxury brand does not need to discount).

Burberry continues to invest in outerwear and leather goods, which it sees as key growth categories. Results seem promising. Full-price sales in these categories were 39% and 28% higher, respectively, compared to 2019/20.

Dividend: Burberry's dividend rose by 10% to 47p, giving a trailing yield of 2.9%. Reassuringly, the payout was covered almost twice by free cash flow. The payout has now returned to pre-pandemic levels:

Comment and outlook: I'm encouraged by Burberry's performance last year. But I'm aware that the key test of the group's recovery will be the normalisation of consumer spending in China.

Covid aside, I can see economic and political headwinds in China that could continue to put pressure on Burberry's sales. It's also not clear to me if overseas tourist spending will recover to pre-pandemic levels. This is a key market for Burberry.

Time will tell. On balance, I think the firm's quality credentials are likely to win through. In my view, Burberry shares are probably quite reasonably valued at current levels, with an EBIT/EV yield of 8% and a forecast dividend yield of 3.2%. I remain happy to hold.

Concurrent Technologies

Description: A UK-based manufacturer specialising in ruggedised computer equipment for the defence and telecoms sectors. Click here for an archive of my past coverage.

RNS release: Results for the year ended 31 December 2021

I covered this AIM small-cap Concurrent Technologies in last week's portfolio share review (free signup required). I don't want to repeat myself too much here, but I will take a brief look at the company's numbers from last year.

These results highlight an attractive 17% operating margin and 14% return on capital employed. There's also a fortress-like balance sheet; net cash of £11.8m covers 20% of the £54m market cap.

However, these numbers also highlight a near-total lack of growth. This is probably a fair reflection of the company's steady-state performance in recent years. But as I discussed in my review, new CEO Miles Adcock is determined to ensure that the future looks more exciting.

Dr Adcock took charge in June 2021. Since then, he says he's put in place changes that will allow Concurrent to double the number of new product releases this year and ramp up production as needed.

The only catch is that like everyone else, Concurrent is suffering from component shortages. Fortunately, the company says that most customers are happy to wait. In reality, they may not have much choice. Concurrent's computer boards are often designed in to other systems and cannot readily be substituted.

Many deliveries are expected to be pushed back into 2023, but at some point the situation should normalise. In the meantime, Dr Adcock is (rightly, I think) continuing to use the group's strong balance sheet to invest in the business, positioning it for growth.

Dividend: Concurrent's 2021 dividend was held unchanged at 2.55p per share, giving a 3.5% yield.

Comment & outlook: Dr Adcock's growth strategy carries risks as well as opportunity. But he seems a very credible and experienced choice as CEO. I think the potential rewards outweigh the downside risk.

I see Concurrent as a potential long-term hold that could do very well over time. Given the group's sticky order book and robust balance sheet, I'm happy to remain patient while supply chain issues play out.

Forecasts from house broker Cenkos suggest that 2022 will be a year to forget. Earnings per share are expected to fall by 26%. from 3.8p to 2.8p.

However, Cenkos expects earnings to double to 6.6p per share in 2023, as the order backlog unwinds and new growth kicks in.

This view doesn't seem unreasonable to me. Although the shares carry a 2022 P/E of 25, this could fall to 12 in 2023. I remain happy to hold.

DCC

Description: A distribution group operating in the energy, technology and healthcare sectors. A roll-up specialist with a focus on consolidating fragmented markets. Click here for an archive of my past coverage.

RNS release: Results for the year ended 31 March 2022

When I reported on DCC's Q3 update in February, I said I thought the shares offered "unusually good value" at £56. Fast forward through some volatility and DCC's share price remains at £56 as I write, despite a solid set of full-year results.

All of DCC's divisions reported profit growth last year, despite considerable wholesale price volatility in the group's LPG and oil/fuel operations.

As this is an acquisitive business, not all of DCC's this profit growth was organic. Helpfully, the company splits this out for us:

• Organic profit growth: 6.1%
• Acquisition profit growth: 9.0%

Free cash flow: the fall in free cash flow reflected the reversal of some working capital movements from last year, but this should even out over the coming year. Free cash flow conversion over the last two years was 96% – an excellent performance.

Profitability: I've discussed DCC's adjusted return on capital employed before, so I won't repeat myself here.

While I prefer to use statutory ROCE of 8% for comparability, I agree that the company's adjusted ROCE of 16.5% is reflective of underlying operating performance. This is a very profitable business, in my view.

Dividend: The full-year dividend was lifted 10% to 175.8p per share, giving a trailing yield of 3.1% at current levels. As usual with this business, DCC's payout was comfortably covered by both free cash flow and earnings.

Comment and outlook: DCC has combined its two energy businesses into a new DCC Energy business. This will maintain current business lines (LPG, heating oil and petrol/diesel) while ramping up investment in reduced-carbon solutions for commercial and domestic customers. Biofuels, hydrogen, EV charging and heat pumps were all mentioned in a recent presentation.

DCC's healthcare and technology distribution businesses look well-positioned to me and are expected to continue expanding.

Profit forecasts for the current year suggest earnings per share will rise by 10% to 473p. That puts DCC on a forecast P/E of 12, with a prospective yield of 3.4%.

Alternatively, the stock has a trailing EBIT/EV yield of 7% at current levels, with a free cash flow yield of almost 6%.

All of these numbers tend to confirm my view that DCC shares probably offer good long-term value at current levels. I remain happy to hold.

Homeserve

Description: Homeserve offers a range of home repair and improvement services and operates online platforms connecting independent tradespeople to consumers. Click here for an archive of my past coverage.

RNS releases: Final results y/e 31 March 2022 and Recommended Cash Offer for Homeserve plc

Homseserve's full-year results looked good to me and appeared to support many of my reasons for buying the stock. But I'm not going to spend time reviewing them here, as this home service provider has now become the second portfolio stock to receive a takeover since December.

Private equity outfit Brookfield Asset Management has agreed a 1,200p per share offer with Homeserve's board, including founder and CEO Richard Harpin.

Comment: I'm disappointed to be losing Homeserve from my portfolio. But this deal has been recommended by the board and I think it's likely to go through.

I'm probably going to sell my shares into the market to free up some cash, as completion isn't expected until the fourth quarter. If I do this, I'll also remove the stock from the model portfolio at the same price.

This will then leave two vacancies in the model portfolio. I intend to fill these at the end of the current quarter, in line with my trading rules.

Imperial Brands

Description: FTSE 100 tobacco group that generates the majority of its income in developed markets. Key brands include JPS, Winston, Gauloises, Davidoff and West. Click here for an archive of my past coverage.

RNS release: Half-year report for six months ended 31 March 2022

They don't shout about it. But my research suggests that many of the big UK equity income funds still rely quite heavily on FTSE 100 tobacco stocks Imperial Brands (I hold) and British American Tobacco (no position) to bulk up their yields.

May's half-year results from model portfolio stock Imperial Brands showed just why these heavyweight sin stocks remain attractive to dividend investors:

• Net revenue (excluding tax/duty) +0.3% to £3,495m
• Adjusted operating profit +2.9% to £1,600m
• Adjusted operating margin: 45.8%
• Net debt -11% to £9,157m
• Interim dividend +1% to 42.5p per share

This business is almost embarrassingly profitable and appears to be returning to growth. Strong cash flow supported a £1.2bn reduction in net debt and a modest dividend increase.

Chief executive Stefan Bomhard's strategy is to focus on combustible market share in the group's five largest markets (USA, Germany, UK, Spain and Australia). The company says that in aggregate, it gained 0.25% share across these cigarette markets during the first half of the year.

Imperial's targeted regional investments in heated tobacco (Pulze, iD) and vaping (blu) are said to be going well. But unlike BAT and Phillip Morris, there doesn't seem to be any suggestion that such products will provide material revenue in the foreseeable future.

Dividend: Imp's interim dividend rose by 1% to 42.5p, putting the stock on track for a full-year payout of 143p. At the last-seen share price of 1,800p, that's equivalent to an 7.9% yield.

Comment and outlook: Imperial shares have made gains recently but continue to look decent value to me, with a an trailing 12-month EBIT/EV yield of 10% and a well-supported 7.9% dividend yield.

The long-term future of the business is uncertain. But Mr Bomhard's strategy appears to be placing Imperial on a sustainable footing, with the potential to deliver incremental profit growth.

I think Imperial shares continue to make sense as an income purchase at current levels.

Jersey Electricity

Description: Sole energy supplier for the Channel Island of Jersey. Also operates property and building services businesses, plus an electrical retailer (Powerhouse). Click here for an archive of my past coverage.

RNS release: Half-year report for six months ended 31 March 2022

In January I admired Jersey Electricity's "material" hedging programme, which is currently allowing the Channel Island utility to sell energy to its domestic customers for just over half the regulatory price cap rate in the UK.

JEL's half-year results are now out, covering the six months to 31 March. They reveal that the utility has experienced some pain from rising wholesale prices and lower energy consumption during a mild winter:

Half-year pre-tax profit fell by 33% to £7.0m. But Jersey Electricity's profitability remained robust, with a trailing 12-month operating margin of 14.6%.

Net cash of £13.1m was unchanged from 30 September, despite £6.0m of infrastructure investment during the period.

Dividend: JEL's interim dividend has risen by 5.6% to 7.6p per share. This payout was still covered twice by earnings, despite the sharp reduction in profits.

Consensus forecasts suggest a full-year payout of 18.2p, giving a prospective yield of 3.4%.

Comment and outlook: This is a relatively new stock for me, but I'm fast becoming a big fan of the group's understated competence and financial strength.

Critics might say JEL benefits from being a monopoly supplier. Perhaps. But this is a monopoly that sells electricity at little more than half the rate consumers in the UK's competitive market are paying...

In the half-year outlook, management highlight cost risks associated with the unhedged portion of the group's electricity supply. These could adversely affect the group's full-year results, but I think a dividend cut is very unlikely.

JEL shares have fallen since I added them to the model portfolio. The stock now offers an 11% EBIT/EV yield and trades at a 30% discount to its book value of 750p. I suspect the shares offer long-term value at this level.

Sage

Description: FTSE 100 accounting software group. A rare example of a UK tech stock with real scale. Click here for an archive of my past coverage.

RNS release: Results for the six months to 31 March 2022

Sage reported four versions of revenue and three versions of operating profit in May's half-year results.

Depending on your view, these numbers provide evidence of good progress with the company's strategy – or reveal a complete lack of growth.

In truth, I think the answer is that both views are correct. Sage is nearing the final stages of migrating all its customers from legacy licence-based software to cloud-based subscription services.

Reported revenue and profits have fallen in recent years as this transition has taken place:

However, this month's half-year results suggest to me that this decline may finally be nearing an end. Both revenue and profit appear to have stabilised:

• Statutory revenue: £934m (H1 21: £937m)
• Statutory operating profit: £204m (H1 21: £203m)
• Statutory operating margin: 21.8%

Sage's organic figures provide some clues as to why this might be. These numbers exclude discontinued operations and normalise for the impact of acquisitions. As we can see, H1 organic total revenue was almost identical to statutory revenue:

• Organic total revenue +5% to £924m
• Organic recurring revenue +8% to £866m
• Organic operating profit: +4% to £184m
• Organic operating margin: 19.9%

I'm encouraged by the continued growth in recurring revenue. However, it's clear that Sage's subscription-based business is not yet quite as profitable as the wider business.

Management expect organic margins to improve as the cloud operations gain scale. At the moment, CEO Steve Hare is prioritising marketing spend and product development over maximising margins, which seems sensible to me.

The question is whether Sage can take market share in a competitive market that includes other large incumbents (e.g. Intuit) as well as cloud-native new entrants.

Dividend: Sage's interim dividend has been increased by 4% to 6.3p per share. Consensus forecasts suggest a full-year payout of 18.3p per share, giving a prospective yield of 2.8%.

Comment: Sage's problem is that it's a tech stock that's so old it's having to transform itself to a more modern business model. However, I think CEO Steve Hare has made good progress since taking the reins in 2019.

The main risk I can see is that Sage's cloud transformation will be too little, too late. Smaller and more nimble firms could steal its supper. While the stickiness of accounting software should help with customer retention, it could also make it harder to win new customers.

Broker forecasts suggest 2022 will be the final year of consolidation before Sage returns to absolute growth. While Sage is not obviously cheap at current levels, the group remains highly profitable and cash generative. If Mr Hare can continue to deliver, I think a premium valuation may be justified.

On balance, I remain happy to hold Sage shares in the model portfolio and await further progress with interest.

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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.

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