UK Edition
Stock markets the world over remain on tenterhooks as they assess the pace – and consequences – of governments’ attempts to gently ease the lockdowns imposed on populations to combat the spread of Covid-19.
Investors are also looking at the policies devised by central banks to tackle the outbreak’s economic fallout, and the latest loss of momentum appears to coincide with a slowdown in the rate at which America’s Federal Reserve is adding to its quantitative easing programme.
With so many imponderables, investors must confront the fact that they do not know what is going to happen next – for the simple reason that no one does.
As a result, they must try to focus on what they can control and understand, and one way to do that is to focus on the features of those companies that seem to be doing best during the current difficult circumstances.
From this column’s perspective, common themes include demand that is relatively insensitive to the economic cycle, flexible (and digital) working, strong cash flow and healthy balance sheets. Reliable – or even growing – dividend payments can result from this quartet and provide share price support for good measure.
ContourGlobal does not quite tick every box but it checks out positively on enough of the tests to merit further inspection. The firm owns or operates power generation assets around the world, from Europe to the Caribbean and from Africa to Latin America.
That geographic breadth is a bonus and demand for power is less sensitive to a downturn than many other needs, although by no means entirely immune. The company’s nine executives are based in five cities and are used to working remotely, so ContourGlobal feels sufficiently flexible, especially as staff at the individual operational sites are also connected by video and voice.
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Management noted little or no effect from Covid-19 alongside the full-year results in March and suggested that very little was expected in 2020 either, thanks to careful planning of both staff shifts at the power generation facilities and inventory of critical spare parts in an attempt to minimise the risk of disruption.
The one area where the firm does not quite tick the box is borrowing, thanks to a $3.5bn (£2.9bn) net debt pile and an interest cover ratio of just 1.2 times. At least such figures are not unusual for utilities, which can bear such burdens more easily than most, thanks to the stable demand they enjoy and healthy operating margins and cash flow they generate.
In addition, much of the debt is held at the local project level, while the parent company’s first major debt repayment milestone is in 2023. That cash flow also supports the dividend policy. ContourGlobal increased its full-year shareholder distribution by 10pc in 2019 and has expressed its desire to repeat the feat in 2020.
Last week’s declaration that the first-quarter dividend would indeed increase by 10pc to 4.06 American cents a share, or $27.1m, is an encouraging sign and management’s confidence is further evidenced by April’s launch of a £30m share buyback.
If the dividend does grow as planned, the shares currently offer a prospective yield of nearly 8pc. The FTSE 250 constituent, which joined the London market in late 2017, pays out on a quarterly basis.
There are risks, which mean the 8pc is on offer for a reason. Emerging market exposure can trip companies up because of currency movements, for example, although ContourGlobal aims to sell its Brazilian assets to limit this risk. Local politics can also be a complication, as the $12m hit taken in 2019 on the failure of a project in Kosovo, owing to local opposition, makes clear.
After that reverse, the company has no plans to work on any new coal-fired projects, which should please investors of an ethical bent, especially as more than a third of the 4,846 megawatt installed base already comes from solar, wind and other forms of renewable energy.
If the dividend plan is affirmed, the market could warm to ContourGlobal.
Questor says: buy
Ticker: GLO
Share price at close: 162p
Russ Mould is investment director at AJ Bell, the stockbroker.
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