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Questor: Dairy Crest’s share price may have disappointed but the dividend looks safe, so hold on
Our Income Portfolio’s second-worst performer, so far at least, has been Dairy Crest, the maker of Cathedral City cheese and Clover spreads: the shares have fallen by 23.1pc since we advised readers to buy them in October 2016.
The company issued a trading update on Monday and Questor has scrutinised it, and the reaction of City analysts, for any clues as to when the shares might start to recover and, more importantly, if investors have anything to fear in connection with its future dividend payments.
Dairy Crest is a highly innovative company; it even has a research centre at Harper Adams University in Shropshire. It said it was about to introduce two flavoured Cathedral City snack bars and a revamped range of snacks for children in partnership with Nickelodeon, as well as lactose-free Cathedral City.
The brand’s share of its market has been growing in recent years – it now stands at 57.5pc – and a key reason for this has been impressive growth in “value-added” varieties such as sliced or grated cheese and snacks. These formats are much more profitable: they typically sell for twice the price of the standard product, said Peel Hunt, one of Dairy Crest’s house brokers.
A new formulation of Clover Light with no artificial ingredients was launched last month and a new prebiotic dietary fibre “shot”, a by-product of cheese production intended to nourish health-promoting bacteria in the gut, is to go on sale next month under the Promovita brand. “This clearly takes Dairy Crest into a new, added-value market,” Peel Hunt said.
As a result of the company’s focus on innovation the percentage of revenues from new products – those developed in the previous three years – has increased from 7pc in 2014-15 to 14pc last year.
New products are not the only potential source of growth, however. In May Dairy Crest raised £70m from the sale of new shares to expand its Davidstow plant in Cornwall, which will enable it to produce much more Cathedral City.
Demand for the increased output certainly seems to exist: in the past the company has been unable to pursue export opportunities to the full because of supply constraints.
Even so, the volumes sold in Germany and Austria, the biggest market, grew by 25pc last year and Peel Hunt’s analysts said they saw “a big opportunity to extend this”. The trading update was, as is normal, thin on numbers, but the company did say that full-year profit expectations were unchanged.
Peel Hunt’s forecasts are for £498m in sales, compared with £456.8m last year, and profits on the "Ebitda" measure of £96m against £90.2m. Statutory profits before tax were skewed wildly last time by cost savings in the pension scheme.
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As there are now more shares in issue thanks to the fundraising exercise in May, the rise in profits will not be reflected in earnings per share, which the broker expects to be marginally lower at 36.2p on an adjusted basis. Dairy Crest stressed in last year’s annual report its “commitment to progressively growing the dividend” and for the payments to be covered by adjusted profits by a ratio of 1.5 to 2.5 times.
If adjusted earnings per share of 36.2p did materialise they would cover an unchanged dividend of 22.6p by 1.6 times, so the company should have scope to announce a small increase. There is certainly no reason to fear a cut.
Our focus for the Income Portfolio is always on the sustainability of the dividend rather than the ups and downs of the share price, so our advice remains hold. However, as new, more profitable products are introduced and as efficiency improves as the result of the expansion of the Davidstow plant, we can hope for a recovery in the shares in due course too.
IHT Portfolio update: Brooks Macdonald
Brooks Macdonald, the wealth manager whose shares we added to our Inheritance Tax Portfolio of Aim shares three weeks ago, announced full-year results yesterday. Turnover rose by 14.4pc to £101.6m and underlying profits before tax by 6.1pc to £18m, although the statutory figure fell by 16.4pc to £6.7m because of “legacy matters” and a software write-off, among other things. The results were in line with City expectations, although the shares lost 3.2pc. Hold.
- Questor archive: telegraph.co.uk/questor
This article was amended on Feb 7 2019 after it came to our attention that the prediction of £90m in full-year profits for Dairy Crest made by Peel Hunt related to "Editda" (earnings before interest, tax, depreciation and amortisation) and not, as originally stated, to adjusted profits before tax