October 16th, 2012
BAE Systems – are its future dividends under threat?
Tesco – is its dividend safe? Yes, for now
SSE – sufficient free cash flow for further dividend growth?
Company trading results
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Back to business . . .
It has been a tumultuous few weeks with EADS being unable to persuade various governments for it to ‘merge’ with BAE Systems. We pick up the pieces, looking at why we believe BAE Systems’ future dividends are at risk.
Also Tesco released some really dreadful first half year results, in particular when compared with Sainsbury’s results. Again, we look at how Tesco’s turn-around is faring and what the prospects are for its dividend payout in 2013.
Are BAE Systems dividends under threat?
During the deliberations between BAE Systems, EADS and the various governments involved, we argued in an earlier article that even without the completion of the transaction with EADS, BAE System’s dividends sustainability and growth would remain under a cloud.
Since, following the collapse of the talks with EADS, BAE Systems has embarked upon a public relations drive stating publicly that it is now considering increasing its exposure substantially to the few remaining (high?) growth areas of US defence, including electronic warfare, services and cyber security, while meeting its largest shareholders behind closed doors to explain in more detail its strategy going forward.
You may well ask yourself where BAE Systems is going to find the money to compete in any sizable acquisitions for which there will be a high demand with several of BAE Systems’ competitors focusing on a similar strategy while at the same time having deeper pockets, without selling off parts of its business, cutting its dividend or raising equity or more debt (both unlikely in the current circumstances).
Also, earlier this week, BAE Systems, revealed that it is working towards securing £30bn worth of new business (when?), including £7bn from Saudi Arabia – I guess the latter may now be questionable due to a Saudi’s threat to boycott any UK purchases as a result of the UK government’s intention to investigate Saudi Arabia’s role in Bahrain last year.
Are Tesco’s dividends safe?
Earlier this month, Tesco reported a 10.5 per cent drop in group trading profits for the first half of the year, its first decline in 20 years. Sales in its key UK market grew by 0.1% in the second quarter, (only) just halting an 18-month slide in its sales and broadly meeting low expectations, as the group is in the midst of a major UK turnaround plan after making a surprise profit warning in January.
With the exception of Tesco Bank, profits from all of the group’s other major divisions spanning Europe, Asia, the US and the UK went into reverse.
Still the Board was comfortable enough, even with the drop in profitability, to maintain the dividend at 4.63 pence, being paid on 21 December 2012 with the shares already having gone ex-dividend on 12 October 2012
I hope that you were not expecting a quick turn-around from Tesco, this time round, as it has only just embarked upon its all-important UK recovery strategy, some of which I outlined in an earlier article, updated in today's article.
A number of dividend paying companies have released trading statements rather than interim or full results, including:
On the same day that Tesco released its half year figures, Sainsbury issued its second quarter trading statement for the 16 weeks to 29 September. In comparison to Tesco things are looking good with total sales up 4.0 per cent and like-for-like up 1.7 per cent in the first half.
Compass released a trading statement on progress for the year to 30 September ahead of the full results due on 21 November. They refer to a strong fourth quarter and organic revenue growth of 5.5 per cent for the full year in line with expectations.
Trading in Southern Europe has been difficult and will be restructured to achieve lower costs in view of worsening economic conditions and declining volume there. This will result in exceptional cash costs of £100m in 2012 and a further £50m in 2013.
ICAP published a trading statement ahead of half year figures to 30 September due on 14 November. With activity in global capital markets remaining subdued, revenue is expected to be down by about 14 per cent. Against this they are making progress with cost reduction which should save £50m per annum by the end of the current year.
FirstGroup released trading figures ahead of their half year to 30 September with the full figures to follow on 07 November. Despite economic uncertainty, overall trading they say is in line with expectations.
While First Group was announced the winner for the West Coast rail franchise, following strong opposition by Virgin Trains it has been cancelled by the government following failures in the tendering process. It looks like the bidding process will have to be re-run.
United Utilities issued an update for the six months to 30 September ahead of its half year results due in late November. They state that current trading is in line with their expectations of delivering a good underlying performance for 2012/13.
Unfortunately, the company expects net debt to be “moderately” higher than at the year end of 31 March as a result of various cash flow movements. Also it is not changing its dividend forecast for the current year to March 2013 with more seen for 2014 in line with their promised increases of RPI+2% per annum for the current five year regulatory period.
Whilst delivering RPI+ dividend increases during their regulation term, utilities like United Utilities occasionally cut dividends at the commencement of their next term and the group is no exception.
SSE, another utility, released some initial information for their half year to 30 September ahead of their figures due on 14 November.
The company appears to remain on course to achieve its principal financial objective – an RPI+2 per cent dividend increase for 2012/13 and thereafter generally to grow it at higher than RPI whilst maintaining dividend cover at around 1.5.
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Till next time
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