UK Edition
Questor: Saga may be sailing into calmer waters after a terrible year, so the shares are a hold
Faced by the shares' shocking performance since last April, this column is still kicking itself for not paying more attention to the competitive threats that face Saga's insurance business.
But last week's full-year results at least offered some reassurance on the group's financial performance and strategy, so patient investors may be willing to stick with the FTSE 250 firm, especially as debt is falling and the yield looks plump.
Last year's results were not pretty, scarred as they were by costs associated with helping customers who had been stranded by the collapse of the Monarch airline, and the challenge posed by price comparison websites to the insurance broking business.
In addition, the company continues to invest in IT and two new cruise ships, costs that are burdening near-term profits and cash flow, to the extent that the chief executive, Lance Batchelor, still expects earnings to fall by 5pc this year after last year's disappointing flat performance.
The good news is that this forecast is no worse than December's warning. Better still, strong travel bookings suggest that the company is starting to prove the merits of its strategy, and that it is indeed much more than an insurance business with a few ancillary strands tacked on to the end.
Best of all, healthy cash flow enabled the management to sanction a 6pc rise in the dividend to 9p. This looks affordable, assuming no material change in trading. There could still be twists in the tale but reassurance on the dividend and the 7.2pc prospective yield should help to support the shares.
Questor says: hold
Ticker: SAGA
Share price at close: 125.2p
Update: Card Factory
Rather like Saga, greetings card and gift wrap maker Card Factory is having to redeem itself after a trading alert and, rather as with Saga, last week's full-year figures offered grounds for optimism especially as – again, just like Saga – the firm provided reassurance on its dividend.
Profits lived down to low expectations, sliding by 11pc even as revenues rose by 6pc, mainly thanks to higher costs from the minimum wage and the pound's slide, which inflated purchasing bills.
But that was no worse than expected and the chief executive, Karen Hubbard, and her team nudged the full-year regular dividend up to 9.3p from 9.1p.
That in itself represents a tidy 3.8pc yield. But the boss also hinted at plans to pay another special dividend in 2019.
While it will not reach the 15p a share of the past three years, Card Factory is targeting a 5p to 10p payment. In this column's view 5p looks eminently affordable from free cash flow, assuming no marked deterioration in daily trading (and the pound's rally should now start to help with buying costs).
Operating profit of £76m plus the £11m non-cash items of depreciation and amortisation come to £87m. Take off £17m for tax, £11m for capital investment and £3m for interest and that leaves £56m.
The ordinary dividend costs around £32m so that leaves £24m, enough for a 7p special (with 341 million shares in issue).
Even paying 5p, to leave some margin for error and to remove any need to add debt to fund a special distribution, would take the total dividend to 14.3p, enough for a 6pc yield on the current share price.
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That yield, while tempting, does also remind investors that risks still lurk, in the form of weak consumer confidence, the possible impact of any fresh weakness in the pound and concerns over whether cards will simply be replaced by other forms of (electronic) communication.
Earnings are likely to be flat this year, after all, although record footfall in 2018 may ease investors' worries about any long-term, structural drops in demand.
Dangers still abound but a price-toearnings ratio of barely 10 and the fat yield go some way to reflecting the risks that patient income seekers are taking on.
Questor says: hold
Ticker: CARD
Share price at close: 245.8p
Russ Mould is investment director at AJ Bell, the stockbroker