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Questor: a rising dividend from L&G and more good news on debt from Premier Oil
Questor Income Portfolio: the insurer is well placed to continue to grow while the oil explorer’s focus on cutting debts is just what we as bondholders want to hear
No nasty surprises this week from the two income portfolio companies that reported full-year results, Legal & General and Premier Oil.
Update: Legal & General
L&G, the insurance and asset management group, has been one of this portfolio’s more consistent performers. This dividend is growing nicely and the share price, although of less day-to-day concern to us than the income, has risen by a useful 9.6pc since we added the shares to the Income Portfolio in January 2017.
In keeping with this record, there was little to surprise us in the 2018 annual results published on Wednesday: pre-tax profits rose by 2pc to £2.1bn, earnings per share increased by 7pc to 24.74p, excluding the release of surplus reserves from the annuity business, and the dividend also rose by 7pc to 16.42p a share.
The gap between the latter two figures gives a rough-and-ready indication that the company is not making excessive distributions to shareholders. Operating profits increased by 10pc to £1.9bn.
A couple of figures stand out in the results: annuity sales reached a record £10bn, although the vast majority were bulk sales made when final salary pension schemes offload risk on to insurance companies; and assets under management at the fund arm exceeded £1 trillion despite stock market declines in the final part of last year.
At our purchase price of 247p the shares now yield 6.6pc, comfortably more than our portfolio’s 5pc target. L&G’s final dividend for 2018 of 11.82p will be paid on June 6.
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The results announcement reiterated that the insurer had “a progressive dividend policy reflecting the group’s expected medium-term underlying business growth”.
It added: “There is no change to our dividend policy.”
Paul De’Ath, an analyst at Shore Capital, the stockbroker, said: “The structural growth drivers that have helped L&G to drive 10pc annual growth in profit consistently over recent years are still very much apparent and the business is confident in delivering similar growth out to 2020.
"Overall the results themselves are broadly in line [with City expectations]. The outlook remains very strong for a business that is well positioned to take advantage of demographic changes in a number of markets.”
We will hold on to the shares in the Income Portfolio.
Questor says: hold
Ticker: LGEN
Share price at close: 270.6p
Update: Premier Oil bonds
As a bondholder this time, Questor looks very differently at Premier Oil.
For one thing, Premier does not pay a dividend – but this is something we welcome because a dividend would represent the outflow of cash that we would prefer to be retained in the business to minimise its net debt. The only thing that matters to a bondholder is that the issuer’s finances remain strong enough to support the interest payments and the eventual repayment of the loan.
We are fortunate in Premier Oil’s case that debt reduction is also the company’s key focus. In this respect, it has made significant progress, with more likely to come unless, for example, the oil price falls again.
In the 2018 full year the company cut its net debt by $393m (£299m) to $2.3bn; $181m of the reduction came from the accelerated conversion of convertible bonds into shares.
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The key to long-term debt reduction is good cash flow from the company’s operations and in 2018 operational cash generation was $777.2m, a rise of 64pc from the previous year. Capital expenditure consumed $353m of this figure.
Premier said it expected to produce “material” free cash flow this year, after capital expenditure, of $250m to $350m, all of which could be used to cut debt. As a result, net debt this time next year could be less than $2bn.
We can say that the company’s goals and strategy are well aligned with our interests as bondholders.
We are happy to hold on to the bonds, in all likelihood until maturity in May 2021, when we can look forward to a substantial capital gain on top of the income we have received thanks to our purchase price, £81, being well below the £100 maturity value.
Questor says: hold
Ticker: PMO1
Bond price at close: £99.62
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