16 October 2012
Dear subscriber
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.
BAE Systems – are its future 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.
SSE
SSE, the Scottish and South Eastern utility, released some initial information with regards 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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Many thanks
Steven Dotsch - Managing editor -Dividend Income Investor.com Twitter.com @Investoretire
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