BAE takes off on proposed merger with EADS!

BAE Systems @ 363.60p, +34.90p (10.62%)
EADS @ Eu 28, -Eu 1.67 (-5.63%).

I would much rather be looking at iPhone 5 and its potential to boost Apple's earnings but the potential merger between EADS and BAE looks more pressing, particularly as I hold BAE in my portfolio (August 2012: Portfolio update.).

Really not sure I can understand the logic of the BAE EADS merger which is obviously now at quite a mature stage of negotiation.

Amidst the bureaucracy and difficulties previously seen BAE sold its 20% stake in Airbus in 2006, in a move that it was presumed would make it a more attractive proposition to partnerships and contracts in the US.
At the time, a late intervention by EADS, in releasing an announcement on delays to the A380 program also caused controversy by subsequently bringing down the value of the 20% stake as well as opening the EADS executives to accusations of insider dealing following executive share sales prior to the announcement.
According to Wikipedia (http://en.wikipedia.org: Noël Forgeard), the then CEO, Noel Forgeard, "made a 2.5 million Euro profit on the sale of EADS shares,^[1] with his children earning 4.2 million Euro, just weeks before news of Airbus A380 delays was released.^[2] Forgeard denied 
any wrongdoing, claiming that he was a scapegoat in the matter.[3]
Forgeard resigned as CEO of EADS on 2 July 2006 and was replaced by Christian Streiff.[4]"
Thats not to say that BAE hasn't also had its share of controversy given various SFO investigations and accusations of incentives.

But back to the present, reports suggest that BAE will hold 40% of the enlarged group and that it would retain a dual listing in London and Paris (http://www.sharecast.com: BAE surges on possible tie-up with EADS).
However, the group will have a unified board management structure.
Yeh right I've heard that one before!

Sensitivity, ring fencing, national interests. Even putting aside the history of executive feuding, political conflict, and accusations of subsidies and insider dealing, it really does sound like an unwieldy bureaucratic nightmare waiting to happen.

You can just see the scheduling of "summits" ahead of any decision can't you.

Surely it must also put paid to BAE's US ambitions given the constant war over subsidies between Boeing and Airbus.

Given that the BAE statement came out after, and in response to the share price surging (http://otp.investis.com: Stmnt re Share Price Movement), the news was obviously leaked and being acted upon by somebody so perhaps the insider dealing is a hard habit to kick. 

Looking forward, it also looks like there will be a hit to BAE shareholders with all this talk re. different dividend payout philosophies.

As mentioned already, it looks like negotiations are fairly well advanced as well, which probably won't give me the time or information to properly consider the situation.

The shares have gone up though, which in the short term is good (they might yet deflate), but BAE doesn't go ex dividend until the 17th October. 
And 7.8p per share represents 2% of the current share price of 363.6p.

To be fair though, there just isn't enough information to make a comfortable judgement here but my overriding perception is negative given EADS history, bureaucracy, and politically motivated roots.
The tentacles of control and proposed government interests don't suggest anything to me of a competitive, commercially astute organisation.
I actually can't even think of BAE in that light yet given recent results (BAE: 2011 Preliminary Results.), but it has at least taken steps and as a stand alone entity it can exercise some ambition and control over its own destiny whilst attempting to make itself a world class manufacturing organisation. 
As it stands I worry that, despite protestations of centres of excellence and leading technology the new organisation might be nothing more than a political football to be bounced around the various governments and/or shareholders as it has been in the past (see corporate governance - http://en.wikipedia.org: EADS).

I'm not overly optimistic on the prospects then for what could be a gargantuan organisation but I will have to try to keep an open mind in the coming days and weeks in the hope that a more positive chink of light can be thrown on the venture.

If it could succeed then it would certainly create some kind of monopolistic defence/aerospace organisation in Europe and rank alongside US rivals.


Perhaps picking the bones from some of the old pearls of investment wisdom might provide me with some direction here: 
- "buy on the rumour, sell on the fact" or
- "its better to travel than arrive".

I've just had another thought though, which I will follow up in a second part to this post, regarding how this might pan out but need to take a look at the charts and re-read what we know now (Part 2: BAE takes off on proposed merger with EADS!).

Related articles:
- http://www.sharecast.com: BAE surges on possible tie-up with EADS
- http://otp.investis.com: Stmnt re Share Price Movement
- http://en.wikipedia.org: EADS

Related posts:
- August 2012: Portfolio update.
- BAE: 2011 Preliminary Results.
- Part 2: BAE takes off on proposed merger with EADS!

Super Mario powers up the markets with bond purchase program!

FTSE 100 @ 5777.34, +119.48 (+2.11%).
MIB @ 15780.32, +652.24 (+4.31%)
IBEX 35 @ 7862, +368 (+5.91%)

So the ECB President continues to show that he is indeed a man of action (unlike his neutral predecessor), and, in his comparatively short tenure (v. the sovereign debt crisis), appears to be trying to deliver on his promise to "do whatever it takes to preserve the Euro", by announcing the ECB's intention to intervene in the short term bond markets (1 - 3 years) with an "unlimited bond purchase program".

"Draghi said that the purchases, known as Outright Monetary Transactions, will “enable us address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.” (London close: Markets celebrate ECB bond-buying plan).

Crucial to perception of the ECB's determination is the "unlimited" aspect of the program which seems fully intended to deter speculators.

More eagerly awaited than the upcoming summit, the ECB President's announcement today, coupled with comments by German Chancellor Angela Merkel that appeared to support the unlimited bond purchase plan as being within Draghi's mandate, was enough to push the FTSE to a 119 point gain (2.11%).

Better still were the respective 5.91% and 4.31% gains in Spain and Italy as the most likely and immediate beneficiaries of the program.

So lots of exuberance and expectation in the market jumps today which itself might be enough to keep the borrowing costs of Spain and Italy in check.

What Mario Draghi does appear to have cottoned onto is that perception is often reality, or reality is often perception, and almost from his first day on the watch the ECB President has not shied away from the Euro conundrum and has at times seemed to be the one man intent on delivering more than words and platitudes.

My own portfolio benefitted to the tune of 1.74% today with the biggest individual gain of 5.31% coming from Aviva, as you would expect, given the nature of the announcement and Aviva's own speculated exposure to European sovereign debt.

Aviva @ 344.90p, +17.40p (+5.31%)

Its still early days but today's gains feel much better than the scalpings that some of my portfolio holdings have taken in the last few days with:
- Rolls-Royce on concerns that airlines might be belt tightening (http://www.bloomberg.com/news/2012-08-23/eads-rolls-royce-fall-on-qantas-decision-to-cancel-boeing-787s.html), 
- Vodafone on broker Bernstein downgrade to market perform, and then,
- BP following news reports that the US Dept of Justice is proposing to "throw the book" at BP with a charge of gross negligence contributing to the Macondo Gulf of Mexico disaster (War of words heats up ahead of BP's court case).
And whilst the FT reports that the rig owner, Swiss owned Transocean, also remains implicated it seems bizarre that the contracted company responsible for the allegedly incorrectly mixed cement, Halliburton, does not seem to be?

At least all 3 took part in today's rally.

Rolls-Royce @ 834p, +6p (+0.72%)

Vodafone @ 179p, +2.5p (+1.42%)

BP @ 431.45p, +7.6p (1.79%)

But, as already mentioned, it is early days (no action yet!), and far too early to know if this is the turning point for the Euro but, the 6th September 2012 could yet go down in the history books as the day that Super Mario drew a line of no retreat and rallied his resources to rescue the Euro.

For myself I only hope that the reality matches the renewed expectation and puts a much needed first foundation in place for a return to economic stability.

Related article links:
- http://www.sharecast.com: London close: Markets celebrate ECB bond-buying plan
- http://www.sharecast.com: The ECB shows its hand: Unlimited bond purchases
- http://www.bloomberg.com/news/2012-08-23/eads-rolls-royce-fall-on-qantas-decision-to-cancel-boeing-787s.html
- http://www.sharecast.com: War of words heats up ahead of BP's court case

Related post:
- August 2012: Portfolio update.

Portfolio top up of IG Group.

IG Group @ 423.10p, -1.40p (-0.33%)

I was tempted back into the market yesterday by IG Group which has continued to pull back since its most recent results (IG Group beats forecasts. What storm clouds?).
At the time the shares stood at 450p or so but are now in the 420's.
They have actually slipped a bit more since I bought yesterday but c'est la vie.

Recent falls now put the shares on a forward pe of 11.1 and a consensus forecast yield of 5.4%.
The current doubts don't appear to be anything new given that certain banks/brokers have always attempted to call time on the company's growth after each set of results.
But the company is clearly still a leader in its field and more importantly appears to be conservatively managed with a high degree of focus on shareholder returns with a dividend that has increased 87% in the 5 years to 31 May 2012, and whilst maintaining a dividend cover in the region of 1.7 times.
This could arguably be higher, and so give more protection, but given the backing of its cash reserves, debt free balance sheet, and the fact that it has maintained cover in this region for many years now bodes well and illustrates a good understanding of the business.

Revenues have increased 123% over the same period and excluding last years blip due to the value of the Japanese acquisition being written down (Has the sun set on IG Index?), profits before tax have increased by 91.48% over the 5 years to 31 May 2012

Cash has reduced over the same period though, as the company has expanded internationally and invested in technology but as at 31 May 12, was back on a healthy one year uptrend at £228m (2011:£124m), contributing to a a strong debt free balance sheet.

Taking a look at the share's relative performance this year (Chart screenshots courtesy of Digitallook.), I can see that they are currently underperforming the FTSE 100 by around 16% (RH scale in the first chart), and its own index, the FTSE 250 by around 26% giving them some discount to recover in the short term to catch the market average.


Relative to FTSE 100:

Click to enlarge, close to return.

Relative to FTSE 250:

Click to enlarge, close to return.

Obviously, a lot depends on Europe's future health (as everything seems to currently), and there are questions over growth. 
I actually think that the 2 go hand in hand and if Europe (and other markets) recover, then growth will return as confidence in economies and consumers return.

In terms of the explosive growth that the company has experienced in the past, and analysts want going forward, this is probably now reliant on US markets opening up to its products. 
Currently, I read that the company's 2 main products: spreadbetting; and contracts for difference, are illegal in the US (http://en.wikipedia.org: IG Group), but that the company does have a strategic foothold with a US based electronic market place allowing consumers to trade derivative products.

And, whilst the purchase for me is a top up on my existing long term holding (July 2012: Portfolio update.), I can still see enough to suggest a potential 20% upside plus a reasonably safe 5% dividend (if anything can be termed safe these days).

Fingers crossed.

Related posts:
- IG Group beats forecasts. What storm clouds?
- Has the sun set on IG Index?
- http://en.wikipedia.org: IG Group
- July 2012: Portfolio update.

Housebuilding sector and the NewBuy scheme.

Having been asked:

"With the goverment backed indemnity mortgages in partnership with all major house builders and few of the high street lenders.....which would be your pick of house building shares?" 

...and not having had a reason to look at house-builders for some time it seemed an opportune time to take a look given the relative buoyancy of house prices despite the credit crunch, lenders' apathy and the governments attempts to kick-start the housing and lending markets.

With the introduction of the NewBuy scheme buyers of new build homes, who might not yet have the required deposit for a current mortgage, could have access to 95% mortgages as long as they can afford the premiums.

"Under the scheme, the builder will put 3.5pc of the purchase price in a shared insurance ‘pot’ and the government will guarantee another 5.5pc."  that will help to reduce the risks to the lender.

Despite the scheme's introduction my initial reaction is that given the factors affecting the macro environment: recession, inflation, and credit squeeze, there is still more than a little faith required to invest in the sector. 
Current valuations only add to that risk.
However, the sector is traditionally very cyclical and geared to recovery and low interest rates but such is the chaotic and seemingly out of synch environment at present low interest rates themselves serve little purpose given the banks own attempt to improve their capital position.

Its therefore quite a surprise to see that the housebuilders on my watchlist all seem to have some kind of healthy recovery priced in with strong forecast earnings growth putting them all onto healthy mid to high teen forecast price to earning ratio's (a surprise to me anyway).

So stepping into the Tardis, the housebuilders still on my watchlist are:- Persimmon, Berkeley, Barratt's, Bellway and Bovis. 
Across them all Profit margins and cash balances seem relatively low. 
Dividend yields are usually good from this sector but are negligible currently reflecting the cashflow concerns for me.
Obviously the right decision to cut dividends to support cashflow in this case but without this prop it begs the question of why the share prices seem so healthily rated.

The other obvious metric is around landbanks and (if I am guessing the category correctly) I have looked at balance sheet "inventories" v sales as an indicator of how much is already in place to protect future growth. Values are subjective but you would hope they are all using a comparable criteria.
Borrowings also warrant looking at particularly if they have overpaid at the height of the last boom and therefore could still be paying for the inventory not being built upon.

Anyway Persimmon looks the weakest here as it has around £2bn of inventory v £1.5bn sales. So if inventory is the land bank it has land in place to cover 1.3 years (not sure of the proportionate cost of land to sales so will assume it is 1:1 but if it was 25% land cost then this would be 5.2 years and so on and so forth).
Barratt's figure is £3.3bn to £2bn, Berkeley is £1.6bn to £742m, Bellway is £1.27bn to £866m and Bovis is £800m to £364m.

Berkeley has the highest gearing of debt to equity at 24% gross but the most amount of cash at £266m which is enough to make the net debt position 0. Bovis is similarly in a net no debt position.
Barratt's at 14% gross gearing and Persimmon at 11.7% aren't in this luxurious position and carry net debt (not enough cash to cover borrowings). 
Bellway is 9.32% with a negligible 1.55% for the net figure.

So thats a plus for Berkeley and Bovis for me particularly when cashflow can be a concern in this industry as so much needs to be paid out upfront before a sale actually brings money in.
But on a general level Persimmon and Barratt's have the higher sales figures so if margins were the same then this would potentially generate a larger profit figure. 
It might seem like pile it high and sell it cheap but is there a quantity over quality factor as well?
On an overall plus for the sector, and despite the already healthy amount of expectation built into the share prices' of these companies, the underlying strength has surprised me, with debt and cashflows seemingly under control, and healthy forward landbanks.

But I would probably go for Berkeley due to it being in the strongest cashflow position but also look at the quality associated with the "brands" being sold and the potential premium that can be realised.  
Taking another view though, this might not be the area that would benefit most from the new scheme's customer demographics e.g pile it high!

Its interesting though and will be interesting to keep an eye on the sector to see if the initiative results in greater volumes during this bumpy recovery or if it just helps to shift "sticking" stock with the insurance premium serving the same purpose as a discount (the builder contributes 3.5% of the purchase price).
Banks and lenders are still key though and have recently been warned again about their capital positions whilst the still new Financial Conduct Authority continues to look for the powers required to enforce this so there might still be a sting in the tail.

Berkeley Group @ 1346p, -6p (-0.44%)
Bellway @ 839p, -20.50p (-2.39%)
Bovis @ 510p, +5p (+0.99%)
Barratt Dev. @ 151.50p, +0.8p (+0.53%)
Persimmon @ 661.5p, -1p (-0.15%)


Related articles:
- http://www.telegraph.co.uk: Builders hope for mortgage guarantee boost

Vodaphone update: Interim results.

Vodafone @ 176p, +3.15p ( +1.82%)

Vodafone delivered half year results today for the 6 months ending 30 September 2011.

Looking at the comparables:
- Half year revenues came in at £23.52bn (£22.603bn), +4.1%

- Operating profit up sharply at £6.478bn (£2.615bn), +147.7%, due mainly to the sale of Vodafone's 44% interest in SFR to its majority shareholder Vivendi for £6.8bn.

- Profit for the period "down" to £6.644bn (£7.504bn), -11.5% mainly due to the timing of capital investment

- Net assets/shareholders interests down to £85.272bn (£90.543bn), -5.8% following sales of minority interests.

The company also stated the following highlights:

- Q2 Group organic service revenue growth +1.3%; Europe -1.2%, AMAP +8.2%

- H1 EBITDA up 2.3% to £7.5 billion; EBITDA margin 32.0%, down 0.6 percentage points, as expected

- Adjusted operating profit £6.0 billion; full year guidance now improved to £11.4 - £11.8 billion

- Free cash flow £2.6 billion; full year guidance of £6.0 - £6.5 billion confirmed

- Interim dividend 3.05 pence, up 7.0%; special dividend of 4.0 pence to be paid at the same time 

So free cash flow range guidance confirmed for the full year along with an improvement to the previous guidance for operating profit (previously £11 - £11.4bn).

Overall revenues were up by 1.3% consisting of: European revenues down 1.2% due to price reductions in Spain but up 8.2% in Africa, Middle East, Asia Pacific (AMAP), despite inertia in Australian and Indian markets.

The company also re-iterated and detailed current progress against its strategy which is to:

1.	Focus on key areas of growth potential; The single biggest industry opportunity identified as Mobile Data. Revenues from which were up 23.8% to £3.1bn representing 14% of Group service revenue supported by smartphone penetration at 21.7% of European customers. Emerging market exposure with AMAP and Turkey key drivers.
2.	Deliver value and efficiency from scale; Traditional economies of scale being pursued with shared technology platforms and procurement strategies.
3.	Generate liquidity or free cash flow from non-controlled interests;  44% stake in SFR sold along with the 24.4% stake in Polish operator Polkomtel. £4bn of the SFR proceeds will go on a share buyback. Verizon Wireless (the second largest wireless operator in the US), a joint venture with Verizon Communications remains a key investment and in July announced a special dividend worth £2.8bn to Vodafone which will go towards debt reduction and the 4p second interim (special) dividend.
4.	Apply rigorous capital discipline to investment decisions. Continued intention to enhance Return on Capital and maintain A credit rating.

The 1st interim dividend amounts to £1.538bn and the special a further £2.017bn which is around 53.5% of the declared profit for the period.

Cash and equivalents is showing as £6.975bn.

Net debt also continues to fall as a result of cash generation.

On the downside:

I did notice some exposure to Greece, along with Portugal and Ireland which the company says continue to be affected by well publicised economic factors.

There also continues to be an ongoing potential tax liability related to the purchase of Vodafone India.
The company continues to fight the liability through the legal system and there should be a supreme court decision before the year-end.
To that effect Vodafone has put aside $2.5bn in provisions but there remains a risk that this liability could be doubled!

Vodaphone is a company that has changed quite a bit over the years since its grand expansion during the Technology, Media, and Telecoms boom of the late 90's when it seemingly sought world domination but saddled itself with significant debt as a result.
Remember the auctions for 20 year 3G licenses completed in April 2000 (just before the Tech bubble burst).
Vodafone paid £5.964bn for theirs prior to going on the convoluted acquisition trail which saw it take over Mannesman, which had itself just taken over a hugely overpriced Orange in a wasted attempt to protect itself from Vodaphone (www.gsmhistory.com: Great Moments in Mobile Radio History from the inside – The 3G Auctions).


It all proved to be very good business for the then Labour Government and it is a travesty that the then Chancellor, Gordon Brown couldn't have been more prudent with the £22.47bn auction proceeds.
A BBC article of the time suggest that the proceeds were the equivalent of £400 per person in the UK but that the Government planned to pay down the National debt (http://news.bbc.co.uk: UK mobile phone auction nets billions).
Just where did it all go?
And, taking a further lesson from history when considering what is a fair price, how long has it taken for technology to catch up with the 3G licensed airwaves to eke some kind of profit for the investment.

To some degree the company's enormously expensive expansion strategy has been justified as the evolving company has not seemed to struggle to maintain cash flows to support debt servicing and repayment, and dividends.

Revenues have grown steadily over the last 5 years and the company looks just about ready to grow profits again through the increasing use of smartphones, a focus on controllable and higher margin interests, emerging markets, and its stake in Verizon Wireless.

The special dividend from Verizon Wireless is also very welcome and could yet be a sign of things to come.

Of course there are a number of risks and potential liabilities such as from the tax case involving Vodafone Essar (India), global/regional recession, and regulatory pressure on charges. 

But, the company has behaved like a utility cash cow in the last few years quietly going about its business selling assets, servicing debt, and maintaining a generous dividend.
This last few years has also seen the company derated considerably particularly when one remembers its heady days as the biggest company in the FTSE with a capitalisation in excess of £300bn (2011: £89bn).
Its recent single digit P/E status has assumed very little growth and even then the price has only been propped up by a generous dividend payout.

I have mentioned Vodafone a few times in previous posts and finally added them to the portfolio in August at 160.334p. 

At today's closing price of 176p the shares have increased by 9.22% over 3 months. 

In addition, the shares are due to go ex-dividend (for the interim and special), on the 16th November which, at 7.05p (3.05p + 4p) will give a further 4.39% in dividends.

With a forward P/E of 11.1 and a forecast yield of 7.2%, the shares aren't as cheap as they have been but global depression aside the company has a strong geographic spread and significant exposure to the burgeoning uptake of smartphones which look set to be an essential "utility" with an exciting future that might just be taking off.

Slightly better growth prospects and an above average dividend policy might just be the catalyst for a positive rerating of the shares which I look forward to.
Related articles: - www.vodafone.com: Presentation - Vodafone Group Plc Interim Results - www.vodafone.com: News Release - Half-year financial report for the six months ended 30 September 2011 - www.sharecast.com: Vodafone adjusts operating profit guidance higher - http://news.bbc.co.uk: UK mobile phone auction nets billions - www.gsmhistory.com: Great Moments in Mobile Radio History from the inside – The 3G Auctions Related posts: - Stock Markets stabilising at the end of a turbulent week? - Portfolio housekeeping and additions: Talk Talk, Invesco Perpetual, Vodaphone, and Tesco. - August 2011: Portfolio Update. - September 2011: Portfolio Update. - October 2011: Portfolio Update.

Update: Dunelm Group "Simply Value for Money"

Dunelm Group @ 440.2p, +34.7p (+8.56%) as at 11.53am

I note a decent gain on Dunelm Group today following its Interim Management Statement (www.sharecast.com: Dunelm returns to sales growth). 
The home ware and soft furnishings retailer reported that like for like sales in the last quarter have returned to growth by 1.9% (-1.3% previous period). Like for like being a reference to stores open for this period and the previous one so it serves as a measure of existing store performance as it excludes new store openings with their razzmatazz promotion and new customer curiosity.
Total sales for the period, including new stores, have actually grown by 11% to £123.8m.

The Chief Executive, Nick Warton, spoke positively despite the challenging trading conditions as he reported:
- like for like growth of 1.9%,
- a 1.2% increase in margins despite raw matetial increases,
- probable market share gains given the group's above average position relative to the British Retail Council's home textiles index (a measure of company revenues against the total market for textiles),
- future growth potential from the new store openings.

With satisfactory trading and a focus on costs the board also anticipates profit for the year to be in line with current expectations.

I gave the company a once over back in February (Dunelm Group) and not too much has changed in its prospects for me. Like most of the economy it has had a couple of quarters of flattish/negative growth but the company's embedded qualities and prospects appear to be intact.
Still largely family owned with family values, there is a strong focus on costs (the company is debt free), with profitability and shareholder returns being key outcomes.
The opportunity for growth through store openings is substantial and as long as the "family" don't take their eyes of the performance of existing stores, and are able to maintain loyalty, then growth on a like for like basis and through new stores seems certain.
On that basis the potential for long term dividend growth also seems substantial.
The share price has bounced around a bit since February moving from below 400p to 480p and back again before todays statement.
Still one thats worth tucking away for steady growing income then.

Article links:

- 7 July 2011 - www.sharecast.com: Dunelm returns to sales growth

- 14 Apr 2011- www.sharecast.com: Dunelm suffers like-for-like sales fall

Previous posts:
- Dunelm Group

Scottish & Southern Energy Preliminary Results

Scottish & Southern Energy @ 1327p, - 14 (-1.04%)


Down today (with the markets) but, Scottish and Southern (SSE), another UK utility from the Virtual Portfolio, also revealed preliminary results last week.


- Revenues of £28.334bn (+31%)
- Pre-tax profits of £1.3bn (+1.6%)
- Cashflow per share of 183.5p in excess of earnings per share of 162.2p
- Cash at bank of £476.9m (2010: £261.7m)
- Full year dividend of 75p per share (+7.1%)
- Dividend cover of 1.5 times
- Stated intent to increase this years dividend by RP+2% and RPI plus going forward.


- Average net debt of £5.891bn (2010: £5.292bn)
- Net gearing of 98% (2010: 185%)
- Net interest payments of £256m (2010: £265m)
- Interest cover of 7.3 times

"Its corporate credit ratings are now:

- 'A-', with a 'stable' outlook (Standard & Poors; reaffirmed in June 2010); and

- 'A3' with a 'stable' outlook (Moody's; reaffirmed in July 2010)."

Nice and clear corporate objectives:
"SSE's key financial objective is to deliver above-inflation increases in the dividend every year, and this has again been achieved. SSE is one of just six FTSE 100 companies to have delivered real dividend growth every year since 1999, when the company paid its first dividend," trumpeted Lord Smith of Kelvin, the chairman of SSE. 


The results do seem to celebrate the company's record on dividend returns for shareholders (this being the 12th successive year of above inflation increases) but balances it with efficiency, the environment and customer service targets.


Slightly concerning is the drop in powers station availability on:
- Gas stations - 88% from 94%
- Coal powered stations - 84% from 92%


and, lost minutes to customers from:
- Scottish Hydro 78 minutes from 74 minutes
however, Southern Electric improved slightly to 64 minutes from 65 minutes


The company also announced two acquisitions related to the generation of wind power: the first a manufacturer of towers; and the second a wind farm. 
Wind power still seems to be a questionable technology (for large scale generation) to me based upon its not so green credentials (rare earth metals mined in China for Neodymium magnets).
Is future growth really going to come from wind power?


Lots to like about the company with its clear objectives and commitment to shareholders. Finances seem to be going in the right direction: gearing down; interest cover up; cash up; dividends up.


Some concerns about future growth then (will it just come from volumes?); and wind power which now contributes 1,900 megawatts to SSE's 11,000 megawatt capacity.


SSE has often been touted as a target, as most UK utilities are, due mainly to the UK's inability to "protect" its key industries. As it stands most of the UK's utilities have already been taken over by foreign companies (I wonder what that says about UK margins as well as the lack of protectionism).
Is there a takeover premium in the SSE share price? At a forecast price to earnings ratio of 11.6 times there doesn't seem to be.


There isn't a published ex-dividend date as yet but, taking last year financial calender as an estimate, SSE's shares went ex-dividend on the 28th July (payable on the 24th September).


The shares are forecast to yield 5.8% for the current year, climbing to 6.1% in the year ending 2013. So, from a dividend point of view I am still happy to hold. 
And, at the current price of 1327p, the shares have so far produced a 15.3% capital gain and a dividend return of 8% - making a total gain of 23.3% for the portfolio which, for 16 months, I am quite pleased with.


- www.sharecast.com: SSE trumpets its dividend growth
- preview.bloomberg.com: Scottish & Southern Profit Rises on Regulated Network Sales
- www.sse.com/Home

Renishaw and Global Economic recovery!

Renishaw @ 1650p, +5p (+0.3%)


Just taking another look at Renishaw. A company at the forefront of metrology (the science of measurement) and serving major industries such as Aerospace; Automotive; Science; and Medicine.

The company released a 3rd quarter interim statement yesterday which seems to further underline the company's recovery that was initially highlighted in their 2nd quarter statement in January and led to a significant 1 day jump in the shares.

Highlights were:

- Revenue of £75m up some 60% on last years 3rd quarter

- £32m of sales in March alone

- sales up 95% in the 9 months year to date

- net cash balance of £35.3m

- significant demand from the Far East and China

- forecasting profits slightly ahead of expectations.

One has to remember that the comparables are weak having just come through the recession of the last few years.

But, if it was my company I would be looking to surprise on the upside so by modestly stating "slightly ahead" will the company now proceed to delight the city and its shareholders!

Looking back Renishaw ploughed a trough of 273p in March 2009, as its global markets imploded in the aftermath of the credit crunch, but has since made a steady recovery that has begun to accelerate over the last 6 months and the share price now stands at 1650p.

Management took some tough decisions to survive that period and to their credit the workforce appear to have supported them.

Recruitment is also worth noting with the company's headcount having increased by 285 to 2384 and there are a further 293 vacancies to fill.

In March 2009, the company released 500 of its then 2240 staff.

Similarly, with strong activity levels being seen in its markets the company has also increased its working capital/ inventory.

There is an obvious risk in this jump in headcount and inventory but the company can only plan/invest in what it has confidence in, and the rest is down to capable management.

Has the company got capable management? It seems so to me: the company has grown strongly; tough decisions have been made in the last few years; and the company does have a level of prudence in its accounts.

Cash balances are increasing and there are no "borrowings" showing in the balance sheet. There are increasing liabilities but these are not shown as borrowings and no interest payments are running through the profit and loss.

However, other liabilities (both current and non-current) are increasing and it would be useful to understand what they are and the risk that they pose should they be called in.

The 2 founders: Sir David McMurtry (Chairman and CEO) and John Deer (Deputy Chairman) retain a strong majority stake in the business and it could be that they themselves are the "other liabilities".

Like one or two other companies, Renishaw is an essential to the markets its serves but by the same token when those markets contract, Renishaw also suffers. In this way it is often seen as a gauge to recovery in those markets and sectors it serves as investment in capacity generally comes before customers can increase production to meet global demand.

As a result, one can often "speculate" the future based upon optimism in the global economy in much the same way as commodity prices are based upon "speculated" future demand from such as China and India. Increasing demand against supply limitations pushes the price up as it does with any "marketplace".

Charter International, with its leading ESAB welding and cutting business, is in a similar category if not quite at the same level of uniqueness as Renishaw. In the case of both companies, any expectation of recovery and growth in their global markets will significantly boost the speculated "prospects" for profits and the share price.

The reason for my talking speculative is to highlight the risks involved as at 1650p the company is on a forecast Price/Earnings of 19.5 times and that itself is in expectation of a profit increase of 166%.

Renishaw has generally been a desirable, high flying company so I wouldn't be too concerned (or too excited) about the forecast 166% increase in profits (due to the weak comparables) however, looking at a different comparable, a 166% jump in profits would be approx. double the levels achieved in 2006 and 2008.

But, with 9 months of the current financial year now accounted for the company is giving guidance that it will slightly exceed expectations!

Looking beyond the current financial year, it depends where you believe the global economic recovery is. 

China, India, US, UK, Japan, and Aerospace, Automotive, Scientific, and Medical; are all recogniseable high growth sectors and regions that have, and will drive economic recovery and Renishaw's prospects.

At 1650p, and a P/E of 19.5, recovery and current year profits growth would appear to be priced in but what happens beyond that? 

The current consensus if for a 12% increase in profits for the year ending 2012. 

I would suggest that this in itself is not enough to support the share price at these levels, but also speculate that the company has the potential to exceed this as customers re-invest and replace older technology.

Renishaw is in a unique position of rendering its own technology obsolete as it develops new ones. As one would expect, It maintains ongoing support for its technology but eventually replacement/updating is required.

However, the key factor is whether there is enough global demand to ensure that customers "invest" in new capacity and/or replacement.

So lots of speculation beyond the current financial year but Renishaw's recovery does potentially give a strong indication as to where the global economy is in its recovery cycle.

If investment in capacity/replacement is taking place at a significant level in the markets Renishaw serves then these industries could have turned a significant corner in their own recovery and are potentially stepping up investment to meet an anticipated increasing demand.

As to Renishaw as an investment, it is a desirable company for me with patented market leading technology, and capable management, but I have probably missed out on the opportunity presented over the last 12 months by not recognising the strengths and qualities of the company; and its position as a forerunner in the economic cycle of the markets it serves. 

From a growth point of view, the current 2 year picture that I have isn't enough of an enticement either although it is going through its own investment in capacity and working capital which, once supply catches up, might still lead to improvement in its other metrics such as: profit margins; Return on Capital Employed etc.

The threats continue to be around any slowdown from its markets (and China in particular as they combat inflation), or in the timing (and success) of R & D spend which has historically averaged 18% of turnover (2011 forecast turnover is £272m. 18% of which would be £49m).

What I should also have recognised as a strength was its take-over potential should the company not have been able to manage its way through the downturn.

The company's net asset value is only 178.61p per share but it is the unquantified potential and demand for its patented technology, and its in-house manufacture (retained knowledge and capability), where the value really is (but this is speculation again).

In summary then, on a 2 year view and at the current price, an investment in Renishaw wouldn't fit into either: the Value and Income side of my portfolio; or the Growth side. 

And, even though I think that Renishaw will continue to grow and maintain their position, they aren't a share for me yet. But, I do also think that the company's recovery is a strong signal that global recovery may be entering a new phase.

- www.sharecast.com: Renishaw sees better than expected FY

- www.sharecast.com: Renishaw profit powers ahead

- www.telegraph.co.uk: Renishaw axes 500 staff weeks after they agree 20pc pay cut

- www.ft.com: Best technology: Determined to remain leaders in their fields

Aviva update

Aviva came back to the market yesterday with an interim management statement for its first quarter period ending 31 March 2011.


All seems to be good news at this point with:
- a 20% rise in sales to £1.09bn (over the same quarter last year) which represents the 5th consecutive quarter of increased sales.
- 580,000 new motorist customers added in those 5 quarters bringing the car insurance client base to 2,000,000.
- average premiums increased by: 24% on car insurance; 6% on home insurance; and 10% on commercial business.
- an extension to 2016, of its UK distribution contract with HSBC along with the added bonus of being the banks preferred strategic partner across mainland Europe.


Apparently, the Paul Whitehouse led advertising campaign has been a success as well.


I also assume that the increase in premium is not isolated to Aviva as the industry has for some time now warned that premiums would be increasing particularly after a number of natural disaster and trends affecting claims. 
Alongside the obvious natural disasters, I am thinking new entrant price wars, and the growth of the claims (particularly with motoring) related to organised fraud.


Highlighting one decreasing number, the company did declare a fall of 14% in its new life insurance business as the company executes its strategic intent to rotate out of less profitable areas/regions into its established core marketed regions.


Strangely the company did also refuse to comment on the progress of its plans to sell the RAC, which it purchased in 2005 for £1.2bn.
Does that suggest that there are few takers in the current climate, or that the sales may not recover the £1.2bn that Aviva paid for it? 
We shall have to wait and see.


Another spot of good news came with the statement that Aviva "has no exposure to the recent natural disasters in Australia, Japan and New Zealand, which have landed the insurance industry with a $30bn (£18.5bn) bill."

Possibly more by luck than any powers of prophecy I would suggest, but it is good news nonetheless.


So, with Aviva @ 436.4p, +0.8p (+0.18%) the share price is:
- up 48% on its 52 week low of 294.2p
- 9.5% away from its recent 52 week high of 477.9


The shares continue to trade on a forecast Price to Earnings ratio of 7.5 times with a forecast yield of 6.2% and the cash balances, closing at £25.455bn for the last financial year, have almost doubled in the last 5 years.


In the last Annual accounts, the Cashflow per share at 64.91p was higher than the declared earnings per share of 55.1p (but with insurance premiums generally being collected prior to services being delivered I would have expected this).
The dividend is more than twice covered by earnings which gives some comfort that they will continue to pay it.


So, the investment in Aviva seems to have performed as expected without ever seeming to have become overextended. In fact, with the potential for more capital gains and a chunky dividend, it continues to look like an opportunity to buy some and lock them away for the next 5 years.
There will always be the risk of exposure to market declines; increasing financial regulation; and natural disasters (the nature of the industry I'm afraid), but, if the management is capable then then it will manage its cashflows and cash reserves through these dangers.
As it stands, premiums are increasing, and with this just being the 1st quarter, there is potentially a solid increase to full year profits to look forward to. One step at a time though!


How has Aviva performed for the portfolio then?
Well, at 436.4p the shares are currently showing a 16.23% capital gain in the virtual portfolio.
And, having just paid out another dividend today, they have also yielded a further 5.5% which gives a total gain of 21.8%.


Should we see a pull back in the market over the next few months I might actually be tempted to add some more to the portfolio although my preferred option would still be to diversify by picking up some other quality blue chips (with good yields) providing essential products or services, such as pharmaceuticals, telecoms; and consumer goods.


Related articles:
- www.guardian.co.uk: Aviva raises insurance premiums – but gains customers
- thescotsman.scotsman.com: Aviva continues sales successes
- www.independent.co.uk: Aviva's UK sales motor ahead


Related posts:
- April 2011: Portfolio Update
- Arriba Aviva

BP starts the day down on Final results (but finishes up!)

Well the market hasn't taken that too well has it. As expected BP resumed paying its dividend but apparently surprised the market with news that it plans to sell half of its US refining business.
Must be that news thats pushing the shares down and not Egypt's situation as BG is up.
Apparently, BP (and partners) produce more than 40% of Egypt's oil output and BG approx 35% of all gas.
Could still be an effect I guess, as the oil price is booming over concerns about transporting oil through the Suez, and the market for natural gas is depressed.

But, there is also the TNK-BP issues where their Russian partners have blocked the dividend but surely that just means that profits are being retained within the joint venture?

Anyway, not quite off the day I was looking for with BP's results but there must be good news in the results somewhere?

At 9:25am:
BP @ 477.3, -7.55 (-1.55%) ex dividend date is 9th Feb
BG Group @ 1415p, +15 (+1%)

But finishes up!

More questions that answers though. Some analysts questioning whether or not BP can return to being the dividend payer it has been following the divestment program. In addition, many were disappointed with the underlying performance and elsewhere, BP's Russian partners in TNK-BP have successfully raised an injunction in a London court that prevents the share swap until the 25th Feb.

BP @ 492p, +6.15 (+1.27%).

IG: Update to FSCS Post.

Some Sharecast news throws a bit more light onto the FSCS interim levy that I referred to in a previous post (IG Group: FSCS sticks the boot in!) and its potential impact to IG. The item suggests that IG did have £1m provisioned but will have had little or no visibility of the levy (chalk one to the regulatory bodies then). 
Seems a bit short-sighted that to protect retail investors against potential future business failures you can issue surprise invoices with 30 days payment terms. 
I would have expected some kind of prior consultation as to the direction in which the FSCS strategy and modelling was going but apparently not. 
Alternatively some form of stress test on a company's ability to pay within 30 days, or even a contributory plan, seems essential unless the FSCS has some prescient knowledge of a company that is going to fail in 31 days time!
Digging a little further on Keydata, it seems that the company failed over 2 years ago and many put the blame firmly on the door of the FSA for inadequately policing the situation. Even more confusing was the FSCS decision "not" to compensate Keydata investors??? (as seen in dailymail.co.uk: Payout bombshell for Keydata victims).

Taking some learning from the Keydata situation, and the lack of policing, shouldn't there also be some form of stress testing or minimum capital reserves for any company in the financial services sector (wasn't this the straw that finally brought about the credit crunch?). And, wouldn't it be ironic if the surprise levy amount and/or payment terms ultimately resulted in the failure of a business.
Seems to me that the regulatory bodies themselves need a bit of regulating or training in communication and planning!

Back to the Sharecast release: IG Group latest to receive FSA compensation bill, there is no question that IG has the resources to make the payment but, the writer suggests that the "unforeseen" nature of the regulatory expense will probably put paid to rumours of a special dividend and may result in a slightly more conservative management of working capital and capital investment.
This combination of factors has resulted in some analysts at Panmure Gordon paring back profit forecasts for 2011 to £166.4m, -£4.4m (-2%).

Frustrating for an investor though. Having seen the aftermath of the lack of regulation there is an obvious need for more protection (and this levy is part of the savings compensation scheme) but it doesn't seem that there is much of a coherent plan or that it will rein in banking pay and bonuses!