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Questor: Lloyds and Crest Nicholson have failed to make gains but both are worth holding
Questor Income Portfolio: the two stocks have updated on trading in recent days and dividends from both seem safe
Two of this portfolio’s laggards have published significant updates in recent days. We look at what they mean for shareholders, focusing, as ever, on the sustainability of their dividends.
Update: Lloyds Banking Group
Questor has long been a strong believer in this stock; it’s a shame from the point of view of capital gains that the market appears to see things differently. But we have no concerns about the dividend.
Yesterday the bank published a trading update for the first nine months of its financial year and every important number reflected continued improvement.
Net interest income rose by 5pc to £9.5bn and underlying profit by the same percentage to £6.3bn. Reported profits before tax were £4.9bn, a 10pc rise compared with the same period last year.
Earnings per share increased by 21pc from 3.9p to 4.7p, with the improvement partly brought about by Lloyds’ repurchase of £1bn worth of shares.
Other, less familiar indicators of health were also reassuring. The ratio of cost to income fell and the ratio of capital reserves to the value of the loan book rose to 14.6pc on the “core equity tier 1” measure favoured by regulators and analysts.
Returns on “tangible” equity rose to 13.5pc from 10.5pc at the same stage last year. While tangible net assets per share fell slightly to 51.3p, this figure is not far below the current share price of 57.72p, which reflects a reassuring level of asset backing for the shares.
The statement made no mention of dividends but that was to be expected.
Ian Gordon, a banking analyst at Investec, the broker, has recently trimmed his dividend forecasts to 3.3p for this year, 3.6p for next and 3.9p in 2020. These figures equate to yields of 5.3pc, 5.8pc and 6.2pc at our purchase price of 62p in December 2016. Hold.
Update: Crest Nicholson
The housebuilder had plenty to say when it published a stock market announcement last week. It said the property market had become more difficult and profits would be lower as a result; it announced a new strategy based on maximising returns from its current land bank; and it shook up the board. The shares lost about 8pc on the day but those losses were later reversed.
Crest said pre-tax profits would be lower this year at £170m to £190m. This is substantially less than the £205m predicted by brokers when we published an update on the stock in May. In the face of subdued demand the company said it had had to “accelerate bulk sales”, which had driven margins lower; they are now expected to be below the previous guidance of 18pc.
The firm’s new strategy recognises that “our land and development pipeline remains a significant store of value”. It said it aimed to preserve that value by “pausing its growth ambitions to align with current market conditions, slowing down build rates and reducing land expenditure”.
It added: “We believe that by maintaining current levels of output from our high-quality land pipeline rather than driving for revenue growth, we will improve the level of free cash flow generated by the business.”
Improvements in free cash flow are music to the ears of income investors because they support dividend payments and indeed Crest said it would now “prioritise cash flow and dividends”. It said it was committed to paying an ordinary dividend of 33p for 2018 and, “subject to no material deterioration in current market conditions”, for 2019 too. It said it also planned to generate a cash reserve.
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A 33p full-year dividend would equate to a yield of 7.6pc at our purchase price of 435p in November 2016.
The company said it was taking action to reduce costs and that the chief executive, Patrick Bergin, would now support the executive chairman, Stephen Stone, as the latter led the business in the implementation of the new strategy. The finance chief is to leave.
Questor regards Crest’s response to difficult market conditions as eminently sensible and naturally applauds the focus on cash and dividends. Hold.
- Questor archive: telegraph.co.uk/questor