UK Edition
Questor: Crest Nicholson disappoints the market but the dividend remains highly attractive
One of our holdings published a downbeat trading update on Wednesday, causing the shares to slide by 12.8pc on the day. But Questor sees no reason to sell – especially as the income looks secure.
Crest Nicholson, the housebuilder, said margins were likely to fall because of a combination of rising costs and flat sales prices.
The firm is especially exposed to the more expensive part of the housing market, where things have been tougher than at the lower end, it said.
“The experience of generally flat pricing against a backdrop of continuing build cost inflation at 3pc-4pc will mean that operating margins for the full year [2018] are expected to be around 18pc,” Crest said. This compares with 20.3pc last year and an estimate of 19.4pc for 2018 from Peel Hunt, the broker.
Turnover is still growing strongly, however. Crest predicted a 15pc rise for this year, which would take it to about £1.2bn, although Peel Hunt said the builder’s £1.4bn target for 2019 now looked “unattainable” and instead predicted 8pc growth that year to £1.3bn.
The group said it was shifting its focus to cheaper homes and was “securing land at good margins”.
The fall in margins will lead to a slight fall in profits (on an “adjusted” pre-tax basis) to £205m this year, from £207m in 2017, Peel Hunt predicted.
While any bad news from listed firms is being severely punished by the market at present, Questor is always more interested in the dividend sustainability of the Income Portfolio’s holdings than in movements in the share price.
When we bought our £20,000 holding in November 2016 at 435p, the most recent full-year dividend, for 2015, was 19.7p, giving a yield at the time of 4.5pc.
The shares now stand 1.4pc lower at 428.8p but the most recent full-year dividend (for 2017) was 33p. This is a rise of 62pc and takes the yield at our purchase price to 7.6pc, or more than half as much again as our target of 5pc.
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And the dividend is not being paid at an imprudent level. Although dividend cover, the ratio of profits to the shareholder payment, has been falling gradually from 2.75 times in 2014, the figure was a healthy 2.0 last year and this is the level at which the company intends it to remain.
The combination of the slight fall in predicted profits mentioned above and a set level of dividend cover means that the 2018 full-year dividend is likely to be slightly lower than last year’s: Peel Hunt predicted 32p per share, a fall of a penny. This equates to a yield at our purchase price of 7.4pc.
Our advice is to hold.
Update: National Grid, Royal Mail and Next
Several other holdings have published updates in recent days.
Yesterday, National Grid announced a 4pc rise in profits before tax to £2.7bn on an “underlying” basis for the year to March. The figure for statutory profit was the same, although this represented a 24pc rise because of a lower figure in 2017. Underlying earnings per share were 60.4p; the statutory figure was 103.8p, flattered by the effects of tax changes in America.
The board proposed a full-year dividend of 45.93p, a rise of 3.75pc. This makes dividend cover 1.3 times if we use the underlying figure for earnings per share, which is somewhat below the figure of 2.0 often seen as ideal. Nonetheless, the group reaffirmed that it “aims to grow the ordinary dividend per share at least in line with the rate of RPI inflation each year for the foreseeable future”.
Royal Mail’s annual results yesterday showed a 2pc rise in sales. However, adjusted operating profits, before costs incurred by the firm’s transformation plan, fell by 2.5pc to £694m. The shares lost 7.2pc.
The all-important dividend is to rise by 4pc to 24p. This equates to a yield of 5.3pc at our purchase price of 455p.
Shares in Next jumped by 6.1pc last Thursday when the retailer announced strong sales in the first quarter and increased its profit forecast for the full year from £705m to £717m. However, analysts cautioned that the rise in sales could represent customers bringing forward, because of warm weather, purchases they would normally have made in the summer.
All three shares remain a hold.