With the FTSE 100 firmly in bear market territory as this column is written, a lot of damage is already done. What investors must now weigh up is which firms’ finances are sufficiently fragile and their competitive position so weak that their future trading could be seriously compromised?
Such wounded warriors may need more capital (which means cash going from investor to company, the opposite of what we are trying to achieve) or limp along for some time or, worst of all, simply fold under pressure. Portfolios should be checked for such potential problems and such dangers possibly ejected, even now.
Yet investors can also start to look through the wreckage for firms that have strong finances, a robust competitive position and a valuation that is starting to look attractive.
The potential hit to their business from any economic downturn may even be relatively modest in the end.
Telecom Plus, a long-standing holding, may be such a firm and the sort of stock that could prove to be a tempting “buy-on-weakness” investment for long-term portfolio builders.
It would be wrong to say that the multi-utility provider will be completely immune from any sustained viral outbreak. Partners’ sales activities could be curtailed if they are unwell and a company that benefits strongly from word of mouth recommendations could be hindered if fewer people are out and about.
Moreover, would-be customers may decide they have better things to think about than switching phone company if they are self-isolating, poorly or worried about a relative or friend.
But Telecom Plus’s model seems robust and is proven over the long term, as it seeks to provide good value to customers and the convenience of a single bill across its energy, telecoms and insurance services.
Demand should prove relatively resilient, even in the event of an economic downturn, although there can be fluctuations in the energy market, for example, in the event of a mild winter.
Telecom Plus has barely £40m of net debt, including leases. In the year to March 2019 operating income and interest income of £45.5m in aggregate compared with an interest expense of £1.5m.
Interest cover of 30 times means time is on our side as well as that of management even if earnings start to weaken markedly.
Finally we come to valuation. The stock offers a historic yield of 5.3pc. Analysts expect further dividend growth, not least because the interim payment was increased by 8pc. But should profits growth slow, management could decide to be prudent and rein in that rate of advance, especially as earnings cover is thin at 1.1 times.
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Even then an unchanged payout could be of great interest to long-term investors at a time when returns on cash are going down yet again.
Although we are now sat on a capital loss of 181p a share or 15.6pc, the 154p in dividend payments received over our holding period helps to lessen the pain and re-emphasise, as if it were needed, the importance of these precious payments.
A long-term hold that could even be topped up on the market’s bad days.
Questor says: hold
Ticker: TEP
Share price at close: 981p
Update: Dignity
The fact that Dignity, the funeral firm, managed to issue a profit warning and axe its dividend last week of all weeks shows just how much regulatory and competitive pressure faces the business.
This column must admit it has underestimated both quite terribly and as a result has made an undignified mess of the stock.
Net debt of £506m and sliding profits mean that interest cover is now below the comfort zone of 2 times and the firm is even postponing cost cuts and efficiency measures, so unclear is the regulatory situation.
Time to swallow a horrid book loss.
Questor says: sell
Ticker: DTY
Share price at close: 316.8p
Russ Mould is investment director at AJ Bell, the stockbroker
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An early version of this story was originally published. Some numbers have now been updated. This story appears online only because of lack of space in the newspaper as a result of our coverage of the coronavirus epidemic and is therefore free to read