UK Edition
Questor: Nichols is no bargain but it has a long record of growth in profits and dividends
Patience is going to be required with shares in Nichols, as suggested when this column first analysed the soft drinks maker in January, but the early signs are encouraging.
Last week’s trading update, which accompanied the annual meeting, featured no fresh shocks and this cash-generative, highly profitable firm looks like a worthy pick for any investor prepared to take on the risk of investing in smaller companies for the long term.
Nichols, whose key brands include Vimto, appears to be coping with the introduction of the sugar tax quite nicely. In the first quarter of this year the company’s sales growth in Britain outpaced the wider market’s 2.6pc advance.
The bigger challenge lies with the international operations. Understandable problems in Yemen are persisting, holding back sales overall, even if Africa continues to progress nicely.
Yet the absence of fresh bad news looks like good news and the company continues to generate operating margins north of 20pc and to throw off cash.
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Profit growth is likely to be modest at best this year, and possibly next, but the balance sheet has no debt so management and investors have time on their side.
The valuation is admittedly no bargain, at more than 20 times earnings, but that reflects both the solidity of the balance sheet and the high returns on capital that the company generates, while the dividend is more than twice covered by earnings.
This is a well-run company with a solid record of long-term growth in profits and dividends.
Questor says: hold
Ticker: NICL
Share price at close: £15.40
Update: Devro
Shares in Devro, the sausage skin maker, have risen by more than 10pc since Questor first tucked in early last year, and last week’s trading update suggested that the firm was capable of serving up further appetising capital gains and dividends.
After 2016’s pair of profit warnings, a trading update that passes without incident still qualifies as good news and it is pleasing that management felt able to leave profit expectations unchanged.
Investors must now remain on the alert for trends in input costs, signs of efficiency improvements at the American factory, and, above all, progress in China, where Devro is now looking to push through some welcome price increases.
Modest operating profit increases should be complemented by lower interest bills as the group continues to generate cash and cut debt.
A forward price-to-earnings ratio of 15 represents a big discount to its Spanish peer Viscofan, and a prospective yield of more than 4pc means investors can afford to wait and see if its “Devro 100” turnaround plan really does deliver, even if earnings cover for the forecast 2018 distribution of 9p a share is thinner than ideal at around 1.6 times, according to consensus analysts’ forecasts.
Questor says: hold
Ticker: DVO
Share price at close: 212.5p
Update: Royal Dutch Shell
Judging by the muted share price response, Shell’s first-quarter results did not please everyone, but they looked perfectly satisfactory to Questor, and income seekers can continue to view the oil giant as a core holding.
Even after a capital gain of almost 30pc since our first tip in October 2016 the shares still offer a pleasing 5.3pc yield.
Sceptics will argue that the consensus earnings per share figure of 173.2p ($2.43) and forecast (unchanged) dividend of 133.6p ($1.88) make earnings cover skimpy at 1.3 times.
But once first-quarter operating profit is adjusted for depreciation and working capital, and once tax and capital investment are taken off, Shell generated some $6bn of free cash in the first quarter, a sum that covers the $4bn quarterly dividend payment with plenty to spare.
Any reversal in oil prices could cap capital gains but the yield looks well underpinned.
Questor says: hold
Ticker: RDSB
Share price at close: £26.02
Russ Mould is investment director at AJ Bell, the stockbroker