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Questor: a 7.6pc yield is not to be discarded lightly, so we’ll hold on to Crest Nicholson
Questor Income Portfolio: the housebuilder may not produce much growth in the short term but the all-important dividend looks secure
In today’s column, as promised last week, we’ll look at recent announcements from two of our holdings, Crest Nicholson and Dairy Crest.
Update: Crest Nicholson
Although full-year results are normally seen as the most important announcement a company makes, what Crest Nicholson said in October was arguably more significant – especially as the annual results published last week contained few surprises.
Turnover was 9pc higher at £1.1bn but a decline in margins from 20.3pc to 16.7pc sent profits 15pc lower to £176.4m, towards the bottom end of the range the company had indicated in October.
Questor was pleased to see that Crest’s results statement reiterated the new strategy first announced in the autumn: the company confirmed that it would now “focus on shareholder returns by prioritising cash flow and dividends, maximising value in the portfolio and improving operational efficiency”.
It stressed that the changes would “shift our focus from growth towards greater cash generation”.
As we said in October, this can only be good news for the dividend. The company said last week that it would maintain the 2018 payment at 33p a share and would pay the same amount this year in the absence of “material deterioration” in market conditions.
Despite the decline in profits, the 2018 dividend was covered 1.7 times by earnings – slightly lower than ideal, perhaps, but suggestive of a decent safety margin, particularly in light of the new focus on cash generation.
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At our purchase price of 435p in November 2016, a 33p full-year dividend equates to a yield of 7.6pc. A reliable-looking yield of this magnitude is not to be discarded lightly. While there may be better opportunities for growth in other housebuilders, we would have to sacrifice income, this portfolio’s raison d’être, in order to seize them.
Accordingly, we will hold on to Crest Nicholson.
Update: Dairy Crest
“Steady as she goes” was the tone of the trading update released by Dairy Crest, famous for its Cathedral City cheese, on Jan 31. The company said the outlook for the full year remained in line with its expectations. This was despite some stockpiling of ingredients and packaging materials in preparation for Brexit.
Dairy Crest said its key brands – Cathedral City, Clover, Country Life and Frylight – all delivered strong growth in volumes and revenue in the third quarter of its financial year, which ended on Dec 31.
On an aggregate basis, the four brands generated sales growth of around 10pc for the third quarter and 6pc for the nine months to the end of 2018.
Cathedral City had a particularly good third quarter: both volume and sales grew by around 10pc, helped by the launch of new products such as flavoured snack bars.
Frylight returned to double-digit sales growth in the third quarter, although over the nine-month period sales declined thanks to a difficult first half, while a reduction in cream prices enabled the company to resume promotion of Country Life, which led to sales growth in the third quarter.
Demand for “functional ingredients” – demineralised whey powder and galacto-oligosaccharides (GOS) – continued to increase and last month Dairy Crest’s daily GOS “shots” for consumers went on sale for the first time.
Peel Hunt, the stockbroker, forecasts profits for the full year on an “Ebitda” (earnings before interest, tax, depreciation and amortisation) basis of £96.5m, marginally more than when we updated readers on the stock in September. It maintained its forecast for adjusted profits before tax at £68m and for adjusted earnings per share at 36.2p.
If Dairy Crest kept the full-year dividend at last year’s level of 22.6p it would be covered 1.6 times by earnings per share of 36.2p. Its dividend policy is for “progressive growth” and for the payment to be covered by adjusted profits by a ratio of 1.5 to 2.5 times.
As a result, there is every reason to expect a modest rise in the dividend when full-year results are announced in May. Hold.
- Questor archive: telegraph.co.uk/questor