RIRP Investment Updates
Investment Update – 1st June 2013
First Group – Events have moved swiftly since I posted my first reaction to FirstGroup’s rights issue and dividend suspension a week ago. By the end of the week the market was valuing the shares with the rights entitlement at less than the theoretical ex-rights price.
Now that the full details are available, it is clear the restored dividend in over a year’s time will only be producing a yield of under 5% at the rights price, and while the group may later enjoy the revitalisation they hope for, I don’t think I can afford to wait for them to prove it. As I think I can do something better with the cash, certainly in the meantime, I now propose to sell all the RIRP holding.
he shares go ex-rights at close of business on June 7th, the Friday after this issue of The IRS Report is published, and just in case the market changes its assessment after the rights, in the July RIRP article I shall treat the sale proceeds as if half the holding had been sold cum-rights on June 6th, and the remaining half ex-rights the following Thursday, June 13th. If the rights have any value in the market the RIRP will notionally sell them too.
Sadly as FirstGroup is our biggest single holding, its sale will create a £600 black hole in the dividend income for the current year, equal to over 0.6% of the total invested capital. But I will still have over half the RIRP’s accounting year to make up some of the lost ground.
Investment Update – 1st December 2012
RIRP dividend growth tops 11%
Now the Rising Income Retirement Portfolio is nearing maturity, with over 90% of capital invested, reporting on it should become increasingly routine, and for this reason we are in future only going to publish full updates every third month.
This after all was the key behind the original concept — to create a portfolio, for those like me who are in or approaching full retirement, which would require only care and maintenance rather than day-to-day active management. Two main reasons for my adopting this approach were to minimise dealing costs and to protect against the day when I may not feel or be able to take sensible investment decisions.
Ideally, now that only a small amount remains to be invested, I should just be recording a continuing catalogue of dividend increases outstripping inflation from the RIRP. I wish… but of course in reality the sailing will never be entirely so plain. Since the last full report, it is true, the dividends have continued to roll in: the average rate of increase in dividends this year will be comfortably over 11% as three more companies have announced increases.
But we have also had a warning shot from FirstGroup, which has not raised its interim dividend, adding to market speculation about the possibility of a rights issue: this would require some active engagement of the grey cells. If necessary, I will confront this issue in the next full report in the January issue.
Investment Update – 3rd November 2012
FirstGroup (FGP): the shares were not selected for the RIRP on the basis that they would win the West Coast rail franchise. So the company’s failure to win it will not result in any action. The rules of the RIRP require a review and usually a sale if the dividend is cut.
Investment Update – 5th February 2011
Cattles – Sum invested for RIRP: £4,000. Average price per share: 165p. Suspended 23.4.09.
Value of offer under proposed Scheme of Arrangement £24.23.
The shareholder meeting held on January 31st overwhelmingly accepted the 1p per share offer so as to enable the company to be reconstructed, largely to the benefit of the banks who are owed over £1 billion.
But as a result of the huge number of proxies gathered on behalf of the shareholders association, the board was forced to allow major concessions recognising the rights of many of the shareholders who have lost money — which will include those who bought at the time the RIRP was buying — to gradually get some more back in addition to the 1p per share.
Investment Update – 3rd April 2010
In line with our policy of topping up whenever companies maintain or increase their dividends and the yield remains above 4%, we are adding to three companies in the RIRP.
Interserve’s annual results show revenues, pre-tax profits and earnings per share all up healthily, and the final dividend goes up, to make a rise of nearly 3% for the whole year. The prospective yield is almost double the portfolio target. The portfolio adds a further £1,000 worth at 220p.
Balfour Beatty’s full-year revenues were up more than 9% and profits up 7% at £267m. The recent rights issue means earnings per share were unchanged, but adjusted for that, the 12p total dividends for the year are up 8%. We add £1,000 worth at 295p.
Standard Life’s full-year figures show broadly maintained pre-tax profits and earnings per share of 29.1p, allowing a 5% rise in the final dividend to make a well covered 12.24p for the year. The portfolio adds a fifth £1,000 at 205p.
Investment Update – 7th November 2009
Lloyds Banking Group – In theory I should spurn Lloyds’ proposed rights issue and sell the shares, since there is no hope of a dividend for the foreseeable future. But while it is true that unrealised capital profits or losses are almost immaterial to the portfolio’s dividend paying potential, a certain return on the original capital is required and retirees cannot replace lost capital from earnings. So as I am only 50% invested I do not want to crystallise any significant capital losses unless I have to.
Our losses on Lloyds would be much bigger if we had not taken up the last rights issue at tiny cost. The terms of the proposed £13.5bn issue will (unusually) not be announced till later this month, but on my reckoning they will involve less than £600 for our holding, and the price can only reduce our average purchase cost still further. So I shall take them up and hope they will come right one day.
I toyed with taking the profits on Kingfisher which would more than wipe out the losses on selling Lloyds, but am frankly gambling that the group will recover to the point where the government can get out at a profit, and we can decide whether to join them or stay in if they resume dividend payments.
Investment Update – 1st August 2009
National Express – Takeovers are usually bad news for a rising income portfolio since, regardless of price, the subsequent income stream usually falls. National Express, which is now clearly “in play”, may be the exception, since the board are convinced the company is worth significantly more than our average purchase price. The rumoured cash bid would enable us to reinvest at similar yields to what we were getting on the shares. For this sort of portfolio the strategy is to hold the shares until we are bought out.
Investment Update – 6th June 2009
Tate & Lyle – The RIRP has so far made only one investment in Tate & Lyle, because I wanted to see their considered assessment of the adverse International Trade Commission judgment against their claim for patent infringements of their key sucralose product. There is good news and bad: they claim not to be worried by the judgment, and report that a breakthrough in sucralose yields enables them to mothball their US plant and concentrate production in Singapore.
This produces a one-off charge of £97m which cuts profits from £182m to £113m. The final dividend is only maintained at 16.1p, after a small increase in the interim, and is technically not covered by earnings. But the full-year payment of 22.9p is covered 1.5 times by free cash flow and 1.7 times by adjusted earnings from continuing activities.
The outlook is cautious and debt has risen, but the company says its “inherent ability to generate strong cash flows, assisted by the ending of our major capital expenditure programme, will help drive a stronger balance sheet in the year ahead.”
Adding another £1,000 to the portfolio at 312.5p a share to bring the average purchase price down to 349p, giving a highly satisfactory yield of nearly 6.6% on the £2,000 invested to date.
United Utilities – Water supplier United Utilities has produced an optimistic commentary on its full-year figures – underlying pre-tax profit up 12% to £531m, a final dividend of 22.03p payable in August as promised under the capital reconstruction scheme, and the commitment to a 5% increase in the year ahead. The company is in discussion with Ofwat about pricing for the coming 5-year period; its earnings from activities not subject to government price controls increased by 9% to £68m.
The company says its “robust financing position” gives it headroom to cover its projected financing needs through to mid-2011. The only danger I foresee is that utilities might become a political football in the forthcoming election, and that a new “caring-feely” regime might ignore the consensus to date, hitherto preserved under New Labour, that utility companies are not charities and need to earn a proper return on capital to finance their huge capital investment programmes.
The RIRP makes its fifth £1,000 investment at 535.5p, bringing the average purchase price to date down to 651p, giving a yield of just over 5% on the sums invested to date.
Kingfisher – The first quarter update from DIY group Kingfisher shows how a well-managed company can buck recession: first quarter trading profits are up 40% at £128m, despite a slump in sales in China and 25% rise in losses there to £14m. In retrospect I should have bought more Kingfisher earlier, but the price has soared since my first purchases to the point where the yield on any new investment falls way short of my 4% target. So while my sentiment remains very positive, the portfolio has to sit on its hands and look for another buying opportunity later.
Investment Update – 7th March 2009
Pearson, publishers of the FT, owners of Penguin and much more, released their results after the copy deadline for my main article. They are everything I could want. Pre-tax profits are up 25% to £585m, earnings per share are up nearly the same at over 57p, and the dividend goes up 7%.
So long as the dividend goes up by more than inflation (and this is the 17th successive year of above-inflation payouts) I don’t mind them improving their cover, currently 1.7, even though their headline free cash flow was up 55% at over 70p a share. CEO Dame Marjorie Scandino says she expects the company to remain “hardy and aggressive” in difficult times. If the current US exchange rate prevails this year it will add around 7p to earnings per share.
Even though markets were testing new lows as these figures were announced, Pearson are actually showing a gain on my purchase price. The shares do not go xd until April 8th, and ideally I should like the price to come back closer to where I originally bought, but I shall monitor them throughout March and if they start showing renewed strength I will book a further £1,000 purchase if they rise above 660p, when they will still be yielding over 5%.
Comment: Very Positive.
Investment Update – 6th December 2008
If the recession is going to be as severe as as severe as the markets and almost everyone except MR Darling seem to believe, then we are indeed entering unknown territory. When companies cut dividends even though profits are better than expected (as Mitchells and Butlers – not in my portfolio – have done) then the entire rules of the game are changing. The portfolio’s income expectations have been downgraded by Barclays and Lloyds passing their dividends, and my aim is now to preserve the target 4% net yield for the year to form a base on which to produce inflation-linked rises in future years – I am still not yet protecting against real long term deflation. After the markets tested new lows recently, I believe the best policy for the portfolio for the rest of this year is masterly inactivity: I will review the New Year strategy in the January issue.
Investment Update – 6th September 2008
Cattles – I can see nothing in the Cattles interim figures to explain the market’s continued distrust of the shares. Profits for the half year are up a sixth to £70.2m, earnings per share are up over 7% and the interim dividend goes up 5%. The loan loss ratio is unchanged, the cost to income ratio is down, the return on equity is up – and the shares are below the recent rights issue price. As I said in the last issue, if there were no nasty surprises in this statement the Rising Income Retirement Portfolio would top up its holding on the announcement by £1,500 making a total investment to date of £4,000, so I am booking the purchase of a further 1,282 shares at the price they were the day of the announcement reducing the average purchase price per share to 163p.
Investment Update – 5th July 2008
Cattles – The market continues to ignore everything unsecured lenders Cattles tell it. The company again confirms that trading so far this year is in line with its expectations, which were the basis for the recent rights issue at 128p putting the shares on a prospective yield of over 12.8%. It is applying even tighter credit criteria to protect the quality of its loans and continues to express confidence on its funding situation: gearing is under 3.5 times against a covenant limit of 6. Half time results will be announced on August 28th. The price has since fallen below the rights price; if your nerves can stand it, buy.
Investment Update – 7th June 2008
Full-year profits to end March 2008 from Scottish and Southern (Issue 283) are up nearly 14% to £1.23m, with a slightly higher percentage rise in earnings per share, and a 6% rise in the final dividend to make the full year 10% up on last year.
My recommendation was based on the board’s commitment to real dividend growth of 4%, which this clearly comfortably exceeds. Again the board takes the opportunity to state that its “first responsibility to shareholders is to deliver sustainable real growth in dividends”.
The price has moved up some 4.6% since my recommendation and at 1453 still offers a 4.1% historic yield. But if you buy before the shares go xd on August 20th, the raised final dividend alone on September 26th gives you over 2.9% net on your money at the current price, which I make an annualised time-adjusted return of something over 9%.
In my next article I shall be booking another purchase at this date and price.
Similarly United Utilities (Issue 283) have reported a 17% rise in profits from continuing activities to £475m, and confirm payment of the 31.47p final dividend on 8th August with an xd date of June 25th. This alone gives a net return of 4.1% at 765p in just two months’ time, so I shall also be booking another purchase of this stock at this price and date.
Shares in Cattles (Issues 280, 283) took a hammering ahead of the rights call on June 3rd. but by comparison with RBS and Bradford and Bingley the fall is a relative vote of confidence. The company has appointed two more experienced clearing bankers to the board to strengthen their application for a retail banking licence, one of the purposes of the rights issue. Even if the prospective yield of over 9% shows no growth, they still look a bargain for new investors at 173p.
Investment Update – 3rd May 2008
Cattles – The company says that it has made a strong start to 2008, and is achieving higher margins on its new lending volumes. The fall in the share price since my initial recommendation seems to have been largely due to a trickle of institutional selling. Take up rights/buy.