Few stocks have a dividend yield of 15% or more. And when they do, the dividend has usually already been cut drastically or suspended altogether.
Continue reading “Is Connect Group’s 15% dividend yield sustainable?”Category: Share research
Why I still hold Dunelm despite its recent share price decline
Dunelm’s share price has fallen by more than 40% over the last two years.
Part of that decline is due to the market’s Brexit-related dislike of UK-focused cyclical stocks, as some fund managers have pointed out.
However, some of the decline is likely due to increased uncertainty about the company’s growth potential and its ability to compete in the new world of online and mobile shopping.
But before I get into that, let’s back up a bit and have a look at how Dunelm got to where it is today.
Continue reading “Why I still hold Dunelm despite its recent share price decline”Who will be the next Carillion?
For many dividend investors, the demise of Carillion was a disaster.
Not only did their portfolios lose an important source of income, they also saw a permanent loss of capital.
As usual, it’s easy to see what went wrong with hindsight, and in the August 2017 issue of Master Investor magazine, I wrote about some of the key lessons from Carillion’s collapse.
But in this case, hindsight was not necessary, and the problems with Carillion were easy to spot even several years before its eventual demise.
Of course, simply saying Carillion’s problems were easy to spot is of no use to anybody, so rather than do yet another Carillion post-mortem, I thought I would apply a little foresight and look for companies with similar “red flags” which investors might want to avoid or get out of.
Continue reading “Who will be the next Carillion?”Is Galliford Try’s 8% dividend yield enough to offset the risks?
Galliford Try is currently the highest-yielding housebuilder with a dividend yield of 8%. That’s a very high yield, but is it enough to offset the risks of this notoriously cyclical industry?
Continue reading “Is Galliford Try’s 8% dividend yield enough to offset the risks?”Is Buffett right to choose Coca Cola over Microsoft?
As regular readers will know, I think many low-risk defensive “bond proxy” stocks are probably too expensive.
Although I usually only talk about UK stocks, I thought I would take a look at two high-profile examples of the bond proxy genre from across the pond: Coca-Cola and Microsoft.
Continue reading “Is Buffett right to choose Coca Cola over Microsoft?”Reckitt Benckiser: Expensive defensive or high debt, low growth timebomb?
Reckitt Benckiser is a name which came up several times following my recent, mildly negative review of Unilever.
In many ways, Reckitt Benckiser is in the same boat as Unilever. They’re both companies which are highly valued because of their historically low-risk, steady growth characteristics.
That’s why they’re sometimes referred to as “expensive defensives”.
But in recent years, Reckitt Benckiser has generated little in the way of steady growth.
To fix that, management has decided to spend more than £14 billion acquiring Mead Johnson Nutrition, a global leader in infant nutrition.
This could be a smart move, but from where I’m standing the acquisition may have turned Reckitt Benckiser into a high-debt, low-growth timebomb.
Reckitt Benckiser’s growth is going, going gone?
Let’s start with the reasons behind this acquisition; primarily, Reckitt Benckiser’s relatively weak growth over the last few years.
I say “relatively weak growth” because context is important here.
In the good old days of 2012, you would have seen a company riding the crest of a wave. Reckitt’s growth had averaged 17% per year over the previous decade and very steady growth it was too.
This made the company very popular with investors and their enthusiastic buying pushed the share price up from £40 to more than £80 over the last five years.
More recently though, the company has repeatedly failed to live up to the market’s expectations and the shares have fallen back below £65:
Today, Reckitt Benckiser’s ten-year growth rate is a modest 5%. Even more worrying is that growth over the last five years has virtually ground to a halt.
Yes, the 2016 results saw a decent uptick, but that was largely to do with Brexit and the subsequent devaluation of the pound.
How so? Because more than 90% of Reckitt Benckiser’s revenues are generated outside the UK, so when the pound goes down, Reckitt Benckiser’s revenues (reported in GBP) go up.
So if we ignore Brexit then the company’s recent growth has barely kept up with inflation.
This is not good and there are myriad reasons behind these results. They range from one-off mistakes to potentially wide-ranging changes in how consumers view global premium brands (i.e. not as favourably as they once did).
I’m sure many of the institutional investors who jumped on the Reckitt Benckiser bandwagon are not especially pleased with the way things have gone these last few years.
I think it’s likely that huge amounts of pressure have been put upon management, by investors, to pull their fingers out and start generating some growth, pronto.
In response, management decided that if they couldn’t generate growth organically, they’d simply go out and acquire it.
Growth by acquisition can be a dangerous game
And by “acquire” I mean big acquisitions, starting with the acquisition of Mead Johnson for a little over £14 billion.
That’s a huge acquisition, even for a £45 billion company like Reckitt Benckiser.
It is, in fact, more than seven times Reckitt’s recent post-tax profits. And for context, I define any acquisition which exceeds a company’s recent average profits as “large”, so this acquisition is seven times bigger than my definition of large.
There are pros and cons to an acquisition of this size, of course.
On the positive side, Reckitt Benckiser’s revenues, earnings and dividends will jump up in its next annual results.
That’s because Mead Johnson brings with it revenues of around £3 billion and post-tax profits of around £0.4 billion. These will provide a healthy boost to Reckitt Benckiser’s existing revenues and profits of almost £10 billion and £2 billion respectively.
So revenues, earnings and dividends will all increase and Reckitt Benckiser will own the world’s leading infant nutrition franchise. What’s not to like?
In a word, debt.
To afford this £14 billion acquisition, Reckitt Benckiser has increased its debts from an attractively prudent £2.4 billion in 2016 to an eye-watering £17.2 billion today.
In terms of the important debt-to-profit ratio, that increase takes Reckitt from 1.4 in 2016 (comfortably below my preferred maximum ratio for defensive companies of five) to a palpitation-inducing 9.7 today.
This is, in my humble opinion, insanely high and fortunately, it seems that management agrees.
To reduce debt and re-focus the business around its health and hygiene core, the food business (which includes famous brands such as French’s Mustard) has been sold.
This should raise around £3.2 billion, which will be used to reduce the company’s enormous debt pile to about £14 billion.
And let’s not forget, the acquisition will boost profits by about 25% which will also reduce the debt-to-profit ratio.
However, even accounting for these factors, Reckitt Benckiser will still have a debt-to-profit ratio of more than six, which is comfortably above my preferred maximum for defensive companies.
A one-off unsustainable growth spurt
Another problem with debt-fuelled acquisition strategies is that they are usually unsustainable.
In this case, Reckitt Benckiser has boosted revenues, earnings and dividends by 25% or so by borrowing money to buy another company.
However, that’s a one-off event and post-acquisition growth for the combined business is expected to be low single-digit.
If management wants another easy acquisition-driven growth spurt, they’ll have to take on even more debt, which will make the company even more risky than it is today.
Hopefully they won’t do this, but you never know.
Expensive defensive or high debt, low growth timebomb?
Okay, perhaps “timebomb” is an overstatement.
Reckitt Benckiser is still a defensive company selling market-leading, premium-branded health and hygiene consumer goods.
But it is a statement of fact that the company has produced very little real growth in recent years and that it is more indebted than almost any other defensive company in the FTSE All-Share.
So although Reckitt Benckiser is still defensive (i.e. not particularly affected by recessions), I don’t think it’s a low-risk company. Its debts are simply too high for that description to be appropriate.
And because I don’t think it’s a low-risk company, I don’t think it deserves a premium price, and yet a premium price is what it has today.
With the shares at £65.50, the dividend yield is just 2.4%. Even if we assume that next year’s dividend is 25% higher than this year’s, the yield only goes up to 3%.
That’s still below the FTSE 100’s dividend yield of 3.9%, or perhaps 3.5% or so if you buy an index tracker.
Or if you don’t trust the dividend yield as a valuation metric, you might want to look at price relative to earnings over the past decade.
And here again, Reckitt Benckiser does not exactly look cheap. PE10 (which is what I call this ratio) is about 18 for the FTSE 100 and about 28 for Reckitt (or 26 if we factor in 25% higher profits in 2017).
That’s a big difference and it underlines my feeling that Reckitt Benckiser is not only a high debt, low growth defensive stock, it’s also an expensive defensive stock.
I would buy Reckitt Benckiser if…
I still think Reckitt Benckiser is a reasonably good company and I would invest again (having done so not once but twice before), but only under these conditions:
- Debts are reduced – Those debts would have to fall below £11 billion at least, and preferably below £10 billion (and preferably much lower than that), and
- The price is reduced – The share price would have to fall below £55. At that point, the forecast yield could be as high as 3.5% and, more importantly, the company would enter the top 50 stocks on my stock screen.
However, my guess is that the debt-reduction process will take many years, so don’t expect to see Reckitt Benckiser in my portfolio anytime soon.
Hunting for trustworthy dividend stocks
Trustworthy dividend stocks are hard to find.
Yes, you could look at Unilever, Reckitt Benckiser, or any of the other “bond proxies” that dividend investors are so in love with.
But those stocks are mostly expensive and personally, I want to receive a nice dividend yield today as well as healthy dividend growth tomorrow.
There are alternatives to these expensive defensives though, and in this month’s Master Investor magazine, I looked at three of them.
Continue reading “Hunting for trustworthy dividend stocks”Is Unilever a buy, hold or sell?
Unilever PLC is one of those defensive income stocks that investors love to love.
In fact, investors love Unilever shares so much they’ve pushed the price up from £25 in 2015 to a recent high of £45.
Does this mean it’s too late to buy Unilever shares? Or if you already hold them, should you keep holding or does the price increase make this a good time to sell?
Continue reading “Is Unilever a buy, hold or sell?”Unearthing bargains among high yield stocks
In this month’s Dividend Hunter column for Master Investor magazine, I looked at some of the highest-yielding stocks in the FTSE All-Share.
Continue reading “Unearthing bargains among high yield stocks”2 High yield shares in the danger zone
The stock market doesn’t offer shares with high yields without good reason.
Sometimes the companies are out of favour with investors because they’re having a bad PR day, but nothing more.
In other cases, the company might be in serious trouble with a dividend that is about to be cut.
Most high-yield shares sit somewhere in between. The risks are clear if you look in the right places, but how they’ll affect the company is far from obvious.
In this blog post, I’m going to look at two companies sitting in that middle “danger zone”.
Continue reading “2 High yield shares in the danger zone”Prudential or Legal and General: Which is the best dividend growth stock?
As dividend stocks go, Prudential and Legal and General both have mixed track records.
On the one hand, they operate in a sector which is relatively immune to the economic cycle (people don’t typically cancel their life insurance just because there’s a recession).
On the other hand, and despite their blue chip credentials, Prudential cut its dividend following the bear market of 2003 and Legal and General cut its dividend following the bear market of 2008.
However, if these insurers have learned the right lessons, and if their shares are trading at reasonable prices today, then I think the potential yield plus growth rewards could be worth the risk.
With that in mind, I used my latest article for Master Investor magazine as an opportunity to pit these two life insurance giants against each other to see who comes out on top.
Continue reading “Prudential or Legal and General: Which is the best dividend growth stock?”Important lessons from the collapse of Carillion’s share price
The recent collapse in the share price of Carillion took many investors by surprise, but should it have?
Continue reading “Important lessons from the collapse of Carillion’s share price”Was Woodford right to sell Glaxo?
Neil Woodford strides across the equity income landscape like a colossus, gazing down upon his competitors as they scurry about like ants in the dust.
Okay, perhaps that’s taking it a bit too far, but Neil Woodford is without a doubt the UK’s best know income-focused fund manager.
And one of his largest and best-known holdings for the last 15 years has been GlaxoSmithKline, the pharmaceutical and consumer goods giant which is also a household name.
But now these two giants have parted ways, with Woodford announcing recently that Glaxo was no longer a holding in his portfolio.
However, Woodford’s sale of Glaxo was only a partial exit from the pharmaceutical industry. AstraZeneca, another Big Pharma company, continues to be Woodford’s largest holding, taking up more than 8% of his main fund.
I thought it was interesting that he decided to sell Glaxo but keep AstraZeneca, so I decided to have a look at both companies in this month’s Master Investor magazine.
Was he right to sell Glaxo? Should he have sold AstraZeneca instead? And, since I hold both companies in my model portfolio and personal portfolio, should I (and other dividend investors like me) follow Woodford, or not?
Continue reading “Was Woodford right to sell Glaxo?”Who is the heavyweight dividend champion?
One argument against investing in mega-cap dividend stocks is that elephants don’t gallop, and it’s true; they don’t.
However, as a dividend-focused investor, I’m not necessarily looking for companies that can grow at ten or twenty percent each year.
What’s important to me is a market-beating combination of income today and potential growth tomorrow, from companies that are less risky than average. And many mega-cap stocks, including some of the biggest dividend payers in the market, fit that description nicely.
That’s why in this month’s Master Investor magazine I’ve taken a look at the three biggest companies on my stock screen.
In other words, the three highest market cap companies from the FTSE 100 that also paid a dividend in every one of the last ten years.
The three companies (Shell, HSBC and BAT) are all very different, so which one will be the heavyweight dividend champion?
Continue reading “Who is the heavyweight dividend champion?”Is Diageo still an attractive dividend growth stock?
In recent years, Diageo’s dividend growth and capital gains have been outstanding.
But Diageo’s share price has already gained more than 200% since the financial crisis, so is it too late to jump on board?
In this blog post, I try to decide if Diageo is an attractive dividend growth stock by looking at:
1) Its financial past, 2) its susceptibility to common risks, 3) the strength of its competitive advantages and 4) whether the shares are cheap, fairly priced or expensive at their current price.
Continue reading “Is Diageo still an attractive dividend growth stock?”Can KCOM Group maintain its 6% dividend or is it a yield trap?
KCOM Group’s dividend yield is currently more than 6%. That makes it attractive, but it also puts it squarely in yield trap territory.
For a high-yield stock, KCOM is interesting because it’s a company of two halves.
The first half can trace its origins back to the early 20th century, where it started out as the council-run Hull Telephone Department. This is a defensive but declining business, providing fixed-line telephone and internet services to the people of Hull and East Yorkshire.
KCOM’s other half is an internet services business, helping large organisations with complex and long-term internet-related projects. This business is far less defensive, far more cyclical and far more likely to generate long-term growth.
The question for KCOM’s high dividend yield is this:
Can the cyclical internet services business grow fast enough to offset the declining fixed-line business?
And even if it can, will the cyclical nature of that business undermine KCOM’s dividend, just when the yield is at its most attractive?
These are hard questions to answer with any degree of certainty, but you can find out what I thought of KCOM in the May issue of Master Investor magazine.
Continue reading “Can KCOM Group maintain its 6% dividend or is it a yield trap?”5 Dividend champions with high returns on capital
Consistent dividend growth is something that many dividend investors look for, and dividend champions are companies that have achieved it for 25 years or more.
However, it’s an extremely difficult feat to achieve and as a result, there are very few dividend champions in the FTSE All-Share.
To get around this problem, I’m going to temporarily redefine dividend champions as companies with a ten-year record of unbroken dividend growth. In the FTSE All-Share, there are about 40 such “mini” dividend champions, which I think is a good number to work with.
In addition, I’m going to limit that list to five companies with the highest levels of profitability, measured using the average ten-year return on capital employed (ROCE).
Why? Because combined with consistent dividend growth, I think consistently high profitability is an excellent way to search for high-quality companies with sustainable competitive advantages. And those are exactly the sort of companies that have a good chance of prospering long into the future.
So without further ado, here is that list of five highly profitable mini-dividend champions.
Continue reading “5 Dividend champions with high returns on capital”Halfords PLC has a 5% dividend yield but its go-faster stripes have fallen off
Halfords has a dividend yield of 5% at its current share price of 342p.
That’s an attractive yield for a somewhat defensive retailer, but in recent years its go-faster stripes (or at least its previously high growth rates) have fallen off.
So is Halfords a future dividend champion or a dividend trap?
I think it’s more likely to be the former, and here’s why.
Continue reading “Halfords PLC has a 5% dividend yield but its go-faster stripes have fallen off”Marks & Spencer’s dividend yield: Is it big enough to offset the risks?
As dividend-paying stocks go, Mark’s & Spencer is not exactly a “hidden champion”. On the contrary, it’s a company that just about everyone in the UK (investor or not) is aware of.
Because of its long history as the centrepiece of many UK high streets, the company is often seen as a safe and dependable investment, and today the company’s shares can be purchased for about 330p and with a dividend yield of around 5.5%.
Safe, dependable and with a yield of 5.5%; what’s not to like?
But the reality of the last decade or two shows that M&S is not quite as safe and dependable as its enduring presence suggests.
In fact, after recently reviewing M&S I found a company that:
- Is strongly cyclical (which is normal for clothing retailers)
- Has grown very slowly (and failed to keep up with inflation)
- Tends to increase its dividend unsustainably during economic booms (only to cut it back during the next inevitable bust)
- Is carrying large debt and pension liabilities (which is usually not a good idea for cyclical companies)
But it isn’t all bad news. If the company continues to focus on its more successful food business rather than its ailing clothing business, then things may just work out better in the future than they have in the recent past.
Continue reading “Marks & Spencer’s dividend yield: Is it big enough to offset the risks?”National Grid PLC: The ultimate low-risk dividend stock?
If you ask most people what the UK national grid is, they’ll probably say something about it being the electricity grid.
What they’ll have in mind is a network of pylons, cables, transformers and other such infrastructure which enables the transmission of power from power stations to homes and businesses around the country.
I think that’s a reasonable description and National Grid PLC is the company that owns and operates that infrastructure. If you also include the transmission and distribution of gas in that description, as well as a significant and similar business in the US, then you’ll have a fair summary of what National Grid PLC does.
As you might expect, building, maintaining and managing the electricity and gas network is a very defensive business. Booms and busts may come and go, but people still need to cook, heat their homes and boil their kettles. So it should come as no great surprise that the financial crisis had relatively little impact on the company or its progressive dividend.
That progressive dividend, combined with its recent near-5% dividend yield, is why I decided to take an in-depth look at National Grid.
What I found was a very unusual company operating as a state-appointed monopoly, and you can read my full review in the January issue of Master Investor magazine.
Continue reading “National Grid PLC: The ultimate low-risk dividend stock?”