Royal Mail, dividend not so attractive now

One of the major attractions of buying Royal Mail shares was the prospect of a 6-7% dividend yield thanks to the Government pricing the company to sell. This would have been nice for the private investor if you could have got more than the 227 share limit, £750 worth at IPO, but once the issue was scaled back it became less attractive as a hold. I made the point in a post a few days ago that because of the small 227 share limit it might not be worth holding on to them given the 30-40% rise in price since then. If you want more, at a less attractive dividend yield, you now have to pay for it. Some in the city seem to feel the same way.

Investors who bought Royal Mail shares for the income should sell their stakes, experts say. Before trading began on Friday, the appeal of the shares had largely been in the likely dividend stream, which seemed attractive at the price. But with the shares having soared in value, the income now looks less appealing by comparison with the instant capital gain available if you sell.

With the shares priced at 475p at the end of trading yesterday the yield works out at about 4.3pc, net of basic-rate tax, which is deducted at source. Before trading began on Friday the yield stood at 6.1pc, representing 20p a share. The yield is now on a par with income stalwarts such as Tesco or Vodafone – which, unlike Royal Mail, do not face a union battle and massive restructuring.  

http://www.telegraph.co.uk/finance/personalfinance/investing/10378410/Royal-Mail-sell-now-investors-urged-as-yield-falls-from-6.1pc-to-4.3pc.html

So, the euphoria around the Royal Mail IPO is beginning to wear off and as the price rises it is becoming less attractive as the market will inevitably focus on the issues facing the company going forward. There is also the question of whether a 4% dividend yield is attractive now when compared with other dividend payers, chances are that the risks are much higher going forward with Royal Mail. For the institutions however, a 3-4% dividend yield will still be attractive so I would expect them to continue to hoover up Royal Mail shares as the small investor sells off  their 227 shares. As an exercise in widening share ownership, if this was the Government's intention, it has largely failed. Most of the shares will end up, eventually, with institutions.

Tesco, up today, ready to disappoint tomorrow?

It was a surprise today to see Tesco on the rise.  Fair enough the market was up as often seems to be the case on Tuesday at the moment. A rise of 6p, 1.7% in the share price to a little over 364p might not seem much, but it comes on the eve of an IMS that is expected to disappoint. In fact, judging by what some are saying, Tesco could deliver a terrible set of figures tomorrow, a reminder of its UK profit warning back in January 2012.

Tesco’s first quarter results out Wednesday are likely to disappoint, according to Investec. 

The broker expects like-for-like sales to fall as much as 1.0% in the UK, 2.5% in Asia and 5.0% in Europe. It downgraded the stocks to a ‘sell’ rating and issued a target price of 295p. 

"The UK still lacks momentum and international is going from bad to worse," Investec analyst Dave McCarthy said. 

He said the international side of the business is a growing problem and after 15 years there is no sign of acceptable returns. 

The company’s latest results will come after the retailer last month reported its first annual profit decline in two decades. 

http://www.digitallook.com/news/20941271/Wednesday_preview_Tesco_to_report_first_quarter_results.html?username=&ac=

This analysis, especially on Tesco's international performance is a little unfair. 15 years of no sign of acceptable returns? That's pushing it considering they have been growing fairly strongly in most of their overseas markets for some time. You do wonder if Investec have a short on at the moment when they make silly statements like that.

But why the enthusiasm of the price rise today? Why would anyone be buying today if tomorrow is going to produce a bad result? Could it be that some in the know were selling today, the price being ramped up slightly to draw in as many eve of bad IMS statement mug punters as possible? In other words, the long term buy and hold retail buyers? Perhaps that is being too conspiratorial, but given the expectation of further bad news, the best Tesco shareholders can hope for in the morning is that things aren't as bad as predicted and the market reacts kindly. Chances are if the IMS is bad, Tesco could fall a lot more than the 6p it gained today. Let's see what happens in the morning.

Tesco reports, now the hard work begins.

Tesco reported this morning and while there was nothing overly dramatic in the results there was enough perhaps to raise some eyebrows going forward and see the shares sell off a little.

Bottom line is that profits are down 52% which is huge, especially for a company the size of Tesco. A year ago they were at £4 billion in pre tax profits, now it is under £2 billion. However, much of this seems to be due to one off costs.

The decision to finally pull out of the US has been confirmed at a cost of around £1.2 billion. The market knew that this write off would have to happen from pulling out.

Another £800 million has come from property write downs that they are no longer going to develop. Again, this should have been priced into market thinking as Tesco had stated that they were going to concentrate and invest in current stores in the UK.

However, the £1 billion investment in the UK side does not seem to have had a dramatic effect thus far on the bottom line. Trading profits in the UK fell 8.3% in the 52 weeks to February.

There are also difficult economic headwinds to contend with overseas in Europe and Korea.

One big plus today is the continued growth online, up 13% with £3 billion of sales which at the very least will be a reminder to Morrisons that they need to get a move on to get online as they fall further behind.

Another plus is that in these low savings rates times, Tesco has maintained its dividend at around 4%.

For Tesco the hard work now really begins as one would expect these one off write downs to have little further effect going forward. Once out of the US, Tesco needs to get it right in the UK and then hope that any down turn in Europe isn't too severe. Then there's Korea, small overall, but still a dent on profits, with the prospect of war with the North always it seems just over the horizon.

The market will now be concentrating on the pay off from that £1 billion investment in the UK. Going forward Tesco needs to show that it has got this right. If it has then Tesco remains a decent recovery play going forward, but there is still enough doubt, especially as the UK is a very mature market where it might be difficult for the company to get back the market share it has lost. It should be remembered that Tesco had 30% of this market a few years ago and is still the market leader by some way. Getting back to 30% in itself will be a difficult job and remains the reason why ultimately Tesco has to develop elsewhere which despite the US failure includes overseas.

The Week Ahead 1 - 15th to 19th April 2013

Going to try something new which I will try to get out before the start of the market week in future and that is a week ahead feature. This will focus on what is happening in the week to come, covering announcements and company news. It will not be all inclusive or just a list of dates as that can be found elsewhere, but will spotlight a few situations with comments worth watching out for.

Data:

15th April 

China GDP.

16th April 

GB CPI/RPI

Euro Zone CPI/RPI

US CPI

Germany Zew Survey Economic Sentiment

17th April 

GB BoE minutes

US Fed Beige Book

18th April 

GB Retail Sales

US Initial jobless claims

Company Announcements

Morrison makes a convenient deal

It looks like the food retailer Morrison is finally doing something in the areas that it lags behind FTESE100 rivals Tesco and Sainsbury. Morrison is a long way behind the competition when it comes to convenience stores and buying on the web. In response it is to buy a number of Blockbuster video stores and turn them into Morrison convenience stores.

Convenient deal

The 49 stores being purchased for an undisclosed payment are of strategic value to Morrisons which has lagged other supermarkets in creating a convenience-store format, as well as a home delivery service.

It also wants to increase its presence in the lucrative South East of England.

Nationally, Morrisons has about 11% market share among supermarkets, but in the South it is just 6%.

The firm has previously declared its intention to open 70 convenience stores by the end of this year, primarily in the Greater London area.

To this end, it has already bought up seven stores from the failed camera retailer Jessops, and announced the rebranding of the 12 "M Local" stores that it already owns.

http://www.bbc.co.uk/news/business-21490465

Can't see any reason why the city shouldn't like this move as it shows the company is finally doing something to address its weaknesses against the competition. Now they need to sort out their lack of web presence, although hopes that some have that they might buy FTSE250 web retailer Ocado is probably wide of the mark. Ocado's market cap valuation looks a bit too hot at its current price to interest any bid or takeover.

Greencore Group joins the horse meat controversy

Despite all of the media talk surrounding horse meat being found in the products of many beef ready meal products, so far it has had little effect on the share price of those selling the products. Tesco seems to have survived the initial fallout from the scandal, although it would seem the issue is far wider than first thought and could continue for some time as investigations get under way. Today, news emerged that Greencore Group is the latest to be hit and as a supplier it has arguably more to lose.

Greencore shares fell the most in more than 14 years today, dropping as much as 22 percent to 79.5 pence. The drop reduced the company’s market value by as much as 89 million pounds ($138 million) to 313 million pounds.

Separately, Tesco’s Clarke said in a blog on the grocer’s website that he has ordered a review of the company’s “approach to the supply chain.” Tesco will set a new benchmark for the testing of products, he said, adding that new processes won’t mean more expensive food for customers.

Shares of Tesco, Sainsbury and Morrison fell today, though “that may be due to the noise surrounding the horsemeat issue” rather than “many concerns that it’s going to really hurt long- term business,” according to Andrew Gwynn, a food retail analyst at Exane BNP Paribas in London.

http://www.bloomberg.com/news/2013-02-15/u-k-food-industry-chiefs-determined-to-restore-consumer-trust.html

I've been following Greencore for a while, through its recent bullish upward trend, and noted that Naked Trader Robbie Burns gave it a mention yesterday (he's bought it before and done well out of it), however I suspect that he was not up to date with events when he indicated he would buy big time if it got down to around 90p. It currently stands a little under that having fallen over 22% at one stage today.

The problem with this issue, other than the obvious health concerns, is that the suppliers of the products may well find that regardless of their previous reputation, buyers will simply cut them off because they need to be seen to be doing something and distancing themselves from suppliers of the "horse meat" products.

Greencore may well be a good company, but the share price might be more volatile until the whole issue is sorted out and this is one falling knife where you need to be really confident that the underlying bad news won't keep coming back. No one knows right now where it will end.

Online shopping - don't get left behind, a lesson some struggle to learn

There has been much written about the growth of online shopping and the effect that this has been having on the High Street. In the UK companies like HMV have seriously suffered from most of its products now being offered either cheaper online or simply in the form of a new technology that makes the old way of doing things, selling a physical product, almost defunct.  HMV is now in a serious battle to survive, which to a large degree is down to its own failure to adapt to change earlier.

In the gaming sector, companies like William Hill have stolen a march on rival Ladbrokes, with its involvement with Playtech and takeover of Sportingbet in order to enhance its online offer. Ladbrokes, turning down the opportunity to buy Sportingbet itself got left behind, it's web presence being seen as inferior, something it has now resolved to put right, the latest being a deal with Betdaq.

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/leisure/9786343/Ladbrokes-nears-deal-with-Betdaq.html

Yet despite all the evidence of the importance of an online presence, some companies still seem to think that they can get by without it. It's even more amazing when the company happens to be in the FTSE100 and is still largely sitting on the sidelines while its competitors are enjoying massive online growth.

So, let's talk about WM Morrison.

Tesco, Sainsbury and Morrison update.

Next week is a big week for the three big food retailers in the FTSE100.  All three of Tesco, Sainsbury and Morrison are due to report updates, telling us how things went over the Christmas period. All three have a lot to gain and potentially lose depending on what they report.

It has been approximately a year since Tesco reported its UK profit warning that resulted in a share slump of around 20% in a day.  Having almost touched a price of 300p over the summer, the share price has been in recovery mode on the back of a huge investment in its UK operations and its recent announcement that it is to look again at the loss making US operation Fresh and Easy. It is expected that Tesco will either scale this down massively, take on a US partner or more likely sell up completely. The market is probably looking for a further announcement on this when the company reports on 10th January. As the share price has been going up recently the good news may already be in the price, but don't be surprised if there is a further up-rating should it be announced that they are pulling out of the US. If that is also accompanied by an improvement in its UK results, then market sentiment of the good variety may suddenly be with Tesco.

Tesco to give up on the USA?

Tesco reported to the market today and while expectations were low on what to expect, the company did actually say something that the city has probably wanted to hear for some time, that the company is considering what to do with its loss making US operation, Fresh and Easy.

It is now clear that Fresh & Easy will not deliver acceptable shareholder returns on an appropriate timeframe in its current form.

We have therefore appointed Greenhill to assist with the review of options. In recent months, we have had a number of approaches from parties interested in acquiring either all or part of Fresh & Easy, or in partnering with us to develop the Fresh & Easy business. We will communicate progress on this process when we present our full year results for the current financial year in April 2013.

http://www.digitallook.com/news/rns/20544734-10091/TSCO-Strategic_Review_of_Fresh_Easy_html

The chances are that this side of the business will be sold or at the very least a US based partner will be taken on, I expect it will be the former. There is a good chance that once this decision is finalised, Tesco's share price could see a boost, if only because it is one less negative for them to worry about. They got out of loss making Japan, so no one should be surprised if and when they do exit the US.

Is WM Morrison the new Tesco?

At least in the eyes of the city when it comes to being down on a food retailer? WM Morrison is a company which seems to be attracting negative news around the city right now. It looks like the ground is being prepared for disappointment around this one when it updates the market next week. The share price has been falling, brokers have lowered just about everything to do with the company, but is the worst priced in?

Panmure Gordon expects the downgrade cycle will continue at supermarket chain Morrisons, with the group seen under-performing the market all the way into fiscal 2014.

The broker is forecasting third quarter (Q3) like-for-like sales will have declined by 0.1%, which will put pressure on the profit & loss account.

"It has already announced Q1 and Q2 like-for-like sales declines of 1.0% and 0.9% (ex-petrol) respectively. Q3 has a slightly tougher comparable, but we look for a decline of 1%. New space is expected to add around 2.1% to sales growth in H1 [first half], so total sales growth should be just over 1% (ex-petrol). The last Kantar data for the 12 weeks to September 30 had Morrison growing at 0.0%, so the risk to our forecast seems to be on the downside," Panmure Gordon reckons. 

www.digitallook.com

Does the above suggest that any slight bad news will result in a Tesco "profit warning" price fall type day for Morrison next week? Tesco fell almost 20% on the back of a poor showing in its UK market back in January, could the same happen to Morrison if the numbers are even slightly lower than expected? Even though the P/E and dividend yield for Morrison are not that demanding right now, but if the market sees a profit warning coming in then the shorters could have a field day next week.

Tesco v Sainsbury

Earlier this week the big FTSE100 food retailers Tesco and Sainsbury squared off with updates to the city concerning their recent trading. Now that the dust has settled, it's pretty clear that Sainsbury came out the winner in the eyes of the city

Here are a few highlights from Sainsbury's 2nd quarter trading statement.

Total sales for second quarter up 4.3 per cent (4.4 per cent excluding fuel)

Like-for-like sales for second quarter up 1.9 per cent (1.9 per cent excluding fuel)

Total sales for the first half up 4.0 per cent (4.1 per cent excluding fuel) and like-for-like sales up 1.7 per cent (1.7 per cent excluding fuel)

Tesco on the other hand produced its half yearly report which while more or less meeting expectations didn't sparkle the share price, in fact the opposite. Fresh broker downgrades seem to have flown in, pushing the share price lower towards 300p.

Group sales up 1.4% to £36.0bn* (up 3.2% at constant rates); Group sales exc. petrol up 1.6% (up 3.7% at constant rates)

Statutory profit before tax down (11.6)% to £1.7bn; Underlying profit before tax down (8.5)% to £1.8bn

Group trading profit of £1.6bn, down (10.5)% - UK down (12.4)% to £1.1bn; International down (17.1)% to £0.4bn; Tesco Bank up 114% to £94m

Underlying diluted EPS reduction of (7.9)%

Interim dividend per share maintained at 4.63p

Group capital expenditure brought down from £2.1bn to £1.6bn; on track for a full year reduction to c.£3.2bn

Stats from digitallook.com.

Key words in company reports, still effective indicators?

In his book The Naked Trader, how anyone can make money trading shares, Robbie Burns highlights the secret Naked Trader traffic light system using a tool available on the financial site ADVFN.  In brief what this does is to look for key words in company news, statements, reports, announcements, etc with the intention of looking for positives and negatives.  This can then be used to find companies to both go long when positive and short when it is negative.  NT has apparently used it over the years to great success and using such words when searching for trading and investing opportunities is a useful weapon for all investors and traders to take note of and make use of. 

Tesco, a look at the weekly and monthly charts

I've commented a few times on Tesco, here and here, so there is no need to go over old ground as to why this big name on the UK High Street is potentially undervalued.  Tesco is looking to address issues in its home market and this won't happen overnight, the fundamentals in the UK part of its business may remain under pressure for some time yet, but from a technical standpoint the chart is looking better.

The weekly chart is beginning to look as if an uptrend is developing from the recent lows, price seemed to find a support level between 290 and 300p. While most of the indicators on this chart are looking more positive, there is no clear combination of signals just yet that confirm a new uptrend is in place, for example, MACD is still below the zero line, but the price is now heading in the right direction.  The potential break out of the Bollinger Bands gives the possibility that price could carry on going up from here and other indicators will then confirm the move.

Marks & Spencer - Takeover target or just banks fishing for business?

The Marks & Spencer share price has been up today on talk of the company being a takeover target.  My attention was drawn to it in the ADVFN morning market report because something didn't quite sit right with the story.

Here's what ADVFN reported;

"M&S was a high riser on the FTSE 100 after the Sunday Telegraph reported that the High Street giant is the subject of takeover talks. The paper said that bankers at a number of London institutions have assessed the possibility of providing debt finance for a speculative bid of £6bn."

Retailers under the cosh

No one should be surprised that retailers in the UK are struggling at the moment.  We are 4-5 years into "austerity" and other than the financial elite who have benefited from QE, there is little in the way of new money about for Mr and Mrs Average to spend. The market, at least in the way it looks at many retailing stocks seems to expect the type of pre-2007 spending, much of which was on credit anyway, to continue.  At least that's the way it looks if you look at some of the analyst expectations for FTSE stocks.

So, against this backdrop it is interesting to see that some retailers have actually done pretty well or at least held up in the face of austerity, while others have struggled and some gone under.  The market however, seems to have labeled them all the same, retailing to a large degree is an unloved sector right now almost regardless of performance.  Unless you think the world is coming to an end or that we are never likely to see another consumer boom, sooner or later things will turn around and good companies even in the retailing sector will be in demand again.  Here's a few that should be around for a long time and do well.  

Tesco has already been mentioned elsewhere here, but it really does look like an unloved giant right now.  It has mainly struggled to keep pace with others in the UK, but as it had built up a 30% take of the major retailers market, it did seem inevitable that this would be impossible to maintain.  The market has punished the company share price with a vengeance since it announced its first profit warning back in January.  A profit warning that basically said that profits would come in at the lower end of analyst expectations.  Profits for the company as a whole including overseas were actually up for the year, almost £200 million higher than the previous year at an impressive £3,835 billion.  Some FTSE350 companies would be happy with a £200 million profit on its own.  City analysts still expect Tesco to hit £4 billion in profits in the next two years or so despite all the negativity and falling share price.

On the back of recent falls, Warren Buffet has been a heavy buyer while UK fund manager Neil Woodford has been a seller.  Buffet likes to buy market leaders and ride the ups and downs of market sentiment.  Woodford saw better opportunities elsewhere.  Only time will tell which is right.  

Tesco have responded to city criticism by refocusing on its UK operations, but it will take time to turn around, especially when you take into account that the competition in the UK market are also good companies under the cosh.


Sainsbury and WM Morrison have both done well in the last 4 years despite austerity.  Both have more or less performed in line or bettered analyst expectations.  Sainsbury announced in January its best Christmas trading ever and promptly fell 5-6% a few days later on the back of Tesco's "profit warning".  


Sainsbury Pre-tax profits (year ending March)


2008  £479 million
2009  £466 million
2010  £733 million
2011  £827 million
2012  £799 million


Dividend yield for the same 5 year period 3.6%, 4.2%, 4.3%, 4.3% and 5.3%.  Dividend cover is currently 1.7, P/E 10.4. Sainsbury has seen its share price more than halve in value over the same period, the market no longer being prepared to pay any premium for mainly food retailers.

W M Morrison Pre-tax profits (year ending Jan)

2008  £612 million
2009  £655 million
2010  £858 million
2011  £874 million
2012  £947 million


Dividend yield for the same period, 1.6%, 2.1%, 2.8%, 3.6% and 3.8%.  dividend cover is 2.4 and next year the dividend forecast is over 4.0%, P/E 10.3.  Considering that Morrison has no online presence it has done well to increase its market share.  Share price has fallen recently not helped by the Finance Director saying that he will be moving on.  Still one to watch for future growth.


One to watch in the FTSE 250 is Brown (N) which has performed solidly increasing its profits from £78 million five years ago to £96.9 million in the latest financial year.  The dividend yield has also gone up from 3.6% to 5.5%, dividend cover 2.2, P/E 8.3.  There was also a report a week or so ago that ASDA might be looking at a takeover at 360p a share, current price 241.6p.  This was downplayed, but if market talk of 360p a share is to be believed then the company is seriously undervalued at current levels. While the bigger retailers tend to carry quite a lot of debt, they also have significant assets.  Brown on the other hand has very little debt and might be attractive to a bidder in the future.


http://www.telegraph.co.uk/finance/markets/marketreport/9339973/Asda-looked-at-1bn-N-Brown-takeover-deal.html


Data from DigitalLook

Tesco, is the market missing something?

It used to be the case that you couldn't go wrong investing in a safe, boring old company like Tesco.  It is a cash cow which until recently had around 30% of the supermarket pound in the UK.  Then in January Tesco delivered its first profit warning, the shares fell off a cliff losing around £5billion in value in a day.  However, it was a strange profit warning as it was mostly a reflection of a relatively small decline in its UK market, overall Tesco is still doing well if you include its impressive overseas growth.  Profits for the year were actually up.

Tesco Pre-tax Profits.

2008 - £2830 billion
2009 - £2917 billion
2010 - £3176 billion
2011 - £3641 billion
2012 - £3835 billion

What about dividend yield?


2008 - 2.7%
2009 - 3.6%
2010 - 3.1%
2011 - 3.6%
2012 - 4.6%

Share price performance?

6 months = -21.43%
1 year = -25.12%
3 year = -15.37%
5 year = -34.13%

So, if you look at the fundamentals, Tesco profits, dividend yield, revenue and Earnings Per Share are all up despite 4-5 years of austerity.  Just about the only thing going down is the share price.  The January profit warning was basically a city response to "not meeting expectations" which were set quite high for a company like Tesco.

The knock on effect of the decline in Tesco's share price was seen elsewhere in the sector.  Sainsbury announced its best Christmas trading ever, and has put up consistently good figures since the financial crisis started in 2007, yet in the last five years its share price has fallen from around 600p to 285p at the time of writing.

Tesco has announced today that it is to sell 50% of its Japan operations to Aeon, following on from an earlier announcement to cease operations in that country.  The other big problem area for Tesco overseas has been its US operations.  Profit expectations are behind the curve, but heading in the right direction.  Overall, Tesco performs well overseas and is a market leader in many of the countries in which it operates.

At a little over 300p, Tesco is on a P/E of around 8, with a dividend yield getting towards 5%.  The dividend looks reasonably safe despite the slight decline in UK figures.  However, a word of warning on Tesco and other retailers like Sainsbury.  The UK retailing sector is basically unloved by the market at the moment, sentiment is against it.  Long term monthly charts show that both Tesco and Sainsbury are currently in a downtrend.  Share price performance is unlikely to improve until that sentiment changes.

Figures from DigitalLook.