Tesco Trading Update - Dividend Cut!

In a surprise move this morning, Tesco have issued a trading update warning that profits will be less than originally forecast and the interim dividend is to be cut by 75% (link via Investegate).

The appointment of new CEO Dave Lewis is being brought forward by one month and he will now start 1st September.

Tesco say they now expect full year trading profits to be in the range of £2.4bn to £2.5bn - down from £3.3bn last year and below the previous guidance of £2.8bn.  Trading profit for the six months ending 23 August 2014 is expected to be in the region of £1.1bn.

They are also taking the axe to capital expenditure. For the current financial year this will now be no more than £2.1bn, some 16% less than originally planned and a reduction of £0.6bn from the previous financial year.

As a result of this announcement, the share price has slumped and is currently down around 5% at 230p at the time of posting. The chart for the current year is not a pretty sight!

1 yr share price chart
(courtesy of Digital Look)

So, what to do? The options are fold (sell), hold or be bold (buy more). My resolution for this year is not to tinker too much with the portfolio. Selling now would crystalise a capital loss so this is not an attractive option. However, I do not feel confident enough to buy more but have a sneaky suspicion this could well be the better option. For the time being I will do nothing and see how the new management perform and await their decision on the final dividend - if that was to be slashed by the same amount as the interim...mmmm.

Be interested to hear what others would do - leave a comment if you hold Tesco or have a view.

Shares Portfolio - August Update

It’s a wet old start to the bank holiday weekend - plus ca change - so a good opportunity to cast an eye over the individual shares portfolio.

I last updated on my shares portfolio in March. Since then I have made a few acquisitions - Booker, Berkeley, DS Smith, Hargreaves Lansdown and just yesterday, IG Group.

The portfolio has therefore expanded to a total of 23 shares and I have allocated a further £1,500 to each of the additions making a total capital input of £34,500.

Although this is demonstration income portfolio, it mirrors my own holdings in all aspects except weighting for each share. As with my investment trust holdings, I withdraw most of the income from my shares for living expenses. With this demonstration portfolio I will reinvest the income at the end of each year either into an additional holding or recycle the income generated into one of the existing shares.

Performance since the start of the year has been extremely mixed. Several shares have struggled to gain momentum since the last update in March - notably Glaxo, Diageo, IMI, Tesco and easyJet. However, there have been a few positive gainers - Unilever, Reckitt, Next and Legal & General

At the close of business yesterday, the FTSE 100 was 6775 - up 2.4% on March 2014.

The effect of the additions in recent months means it is difficult to make an accurate comparison. The only way to do this would be to unitise the portfolio. However, leaving aside these additions, there is no doubt the portfolio has lost ground since March and its a little disappointing to see the reduction in the capital value.

Having said that, the dividend income is the most important aspect for me and this continues to roll in very much as expected. Most constituents have delivered above-inflation uplifts this year, and several have increased the dividend by over 20%. The average for the whole portfolio is 12% which should make quite a difference to income by the end of the year. As the pay-out levels increase, the capital value - share prices - should follow.

Here’s the current portfolio -

(click to enlarge)

As ever, slow & steady steps…..

IG Group - New Portfolio Purchase

IG is a global leader in online trading, providing access to over 10,000 financial markets - including shares, indices, forex and commodities.

Established in 1974 as the world's first financial spread betting firm, IG's aim is to become the default choice for active traders globally. It is the world's No.1 provider of CFDs and a global leader in forex. It has recently announced it will be launching its new execution-only stockbroking service in late 2014.

With a current market cap of around £2.2bn, it is a member of the FTSE 250. IG has offices across Europe, Africa, Asia-Pacific and the US, where it offers limited risk derivatives contracts via the Nadex brand.

I held IG Group for some time in my SIPP, however in 2012 it was sold along with some other individual shares to release funds for the tax-free lump sum. Since that time it has remained on my watchlist with a view to repurchase in my ISA.

The company issued full year results last month which appeared to be well received. Of course, the tempter for the income investor is the 21% uplift in the dividend to 28.15p which gives a yield of 4.7% at the current share price of 598p. The increase is partly due to increasing the payout ratio from 60% to 70%.

IG Group is looking to Switzerland and Dubai as its next two markets, but seems particularly excited by the upcoming launch of its UK stockbroking service. IG says it “will offer clients the ability to use their share portfolio as collateral to support their trading with CFDs or spread betting”, before then moving on to target the wider share dealing market.

Now in my earlier attempts to make a profit from the markets, I tried out spreads - index, shares, commodities and forex - but gave up after around 6 months as I could never seem to find a consistent advantage. I really should have known better - my grandad was a bookie and he would often point out that when there is one window to pay out winnings and three windows to take bets, the bookies were always on a winner!

One of the big attractions of IGG from a valuation and risk perspective is its balance sheet. Not only does it have a net cash position, but it has the ultimate version of net cash, namely no debt at all. Own funds increased 13.5% to £487.3m (2013: £429.3m).

The Company are constantly trying to maintain a competitive advantage - Warren Buffett refers to this as ‘moats’ - with its constant innovation through investment in new technology. In this regard, Tim Howkins, Chief Executive, commented:
"This was a good year for IG, with growth in revenue, profit, cash generation and dividends. Importantly, we also made strong progress on our strategic objectives, designed to deliver the next phase of our growth.
We will continue to make significant investments in initiatives, this year and beyond, to deliver sustainable growth into the future.  In particular, the imminent launch in the UK of our stockbroking service, as part of our comprehensive share-trading offering, positions us well to address the needs of a much broader audience of active traders."

From past experience, the share price can be volatile so I would not be surprised to see some weakness over the coming weeks however. I am not great at the timing of my purchases but I am hoping IGG will continue to deliver a growing return over the longer term.

The final dividend of 22.4p will be paid 18th November  (xd is 23rd October).

As ever please be sure to DYOR!

bhp billiton - demerger and final results

As the largest mining company in the world, BHP Billiton is essentially a one-stop commodity shop.

BHP makes over half of its profits from mining commodities - particularly iron ore, coal and copper so it is extremely exposed to demand connected to manufacturing and infrastructure e.g. airports, railways and housing, particularly in emerging-market economies such as China. Of course, the prices of these commodities can be a little volatile and over the past 12 months for example, the price of iron ore has fallen by around 30%.

Last week, the Company announced its decision to simplify the business by focussing a portfolio based on its four most profitable areas - iron ore, coal, copper and oil. Potash will remain as a potential fifth pillar of the operation.

The less profitable areas of the portfolio - mainly aluminium, coal, manganese, silver and nickel - will be sold off for an estimated $12bn to $15bn which should improve shareholder returns as the Company’s return on capital and free cash flow should rise. These assets are basically the old Billiton company before the merger with BHP in 2001. The Company confirmed that the demerger will be achieved via the setting up of a separately listed global metals company based in Perth, Australia with BLT retaining a stake in this new company. Existing shareholders of BLT will receive shares in the new company on a pro rata basis.

Commenting on the proposed demerger, CEO, Andrew Mackenzie, said:
"BHP Billiton is becoming a simpler, more productive company and the demerger proposal we have announced today is an important step forward. We plan to create an independent global metals and mining company based on a selection of high-quality aluminium, coal, manganese, nickel and silver assets. Separating these businesses via a demerger has the potential to unlock shareholder value by allowing BHP Billiton to improve the productivity of its largest businesses more quickly and by creating a new company specifically designed to enhance the performance of its assets. With a simpler portfolio, we are targeting at least another $3.5 bn of productivity-related gains by the end of the 2017 financial year".

The results for the full year to end June 2014 announced today show that profits increased 12.7% to $22.2bn (last year $19.7bn) from total revenues of $67.2bn ($65.9bn 2013).

The proposed final dividend is 62c making a total for the year of $1.21 - an increase of 4.3% on the previous year. Due to the strengthening GBP against the dollar, I do anticipate any increase in the amount received this year however. Dividend cover is 2.1x earnings. Over the past 10 years, dividends have increased from 28 cents to 121 cents - a CAGR of 15.8%.

Free cashflow cover has increased from 1.9x in 2013 to a more comfortable 2.4x mainly due to a significant reduction in capital expenditure and tighter control of costs.

The demerger makes a lot of sense. When I was running my business, it was often said that 80% of the profits come from just 20% of the lines sold. It is important in any business to identify and concentrate on the most profitable areas which is essentially what BLT is now doing.

I look forward to receiving my windfall shares in the new company following the demerger..

At the time of posting the share price is down 4% at 1985p - seems the increase in profits was slightly below analysts forecasts. The sp has however had a good run over the past year - up around 18%. Because of the cyclical nature of the business, holders of BLT should always expect it to be a bit of a rollercoaster ride. I have held this in my ISA since 2007 and topped up in late 2008 at around the 1100p area - 18m later and the price was over £25. Throughout this price fluctuation, the dividends have continued to steadily increase so for me, this is very much a case of ignore the price and focus on income.

As ever, please DYOR.

Investment Trust Income Portfolio - August Update

The house move was completed at the end of July and the new phone line and broadband connection has just gone ‘live’ so I can slowly get back to my familiar routines and, of course, regular blog updates.

I last updated on my investment trust income portfolio at the end of 2013 (here's the link). The previous post was 12 months back so perhaps now is a good time to update as the markets appear to be fairly quiet.

Just to recap, in June 2012, I moved my sipp into income drawdown as I felt I could generate a better income over the long term than taking an annuity. Investment trusts now generate a large percentage of my drawdown income and also a large percentage of the income in my stocks & shares ISA. The main objective is to generate an income which will hopefully rise each year to keep pace with inflation - a sort of index-linked annuity substitute.

I thought it may be a good long term project to monitor the progress of  a model portfolio comprising the majority of these investment trusts as if it had been started on 1st January 2013 so I  took the closing prices for each investment trust at the end of 2012 and allocated a nominal sum of £2,000 to each.

The starting portfolio consisted of 12 investment trusts (£24,000) selected from the income sector - both UK and global - and also included some of the higher yielding trusts from other sectors including global growth, far east , smaller companies and some fixed interest. I subsequently added Finsbury Growth & Income Trust and Vanguard All World High Income ETF - £2,000 each. The Vanguard ETF will act as a benchmark against which to measure the performance - income and capital returns - of the portfolio as a whole. There is much comment and debate about the merits of passive trackers versus actively managed funds and trusts so it will be interesting to see how the two compare in real life rather than some academic study.

Although this is demonstration income portfolio, it largely mirrors my own holdings. However, whilst I withdraw most of the income from my trusts for living expenses, with this demonstration portfolio I will reinvest the income at the end of each year either into an addition investment trust - as with Invesco Income Growth this past year - or recycle the income generated into one of the existing holdings.

Since the start of this project in January 2013, the only portfolio disposal was the sale of Blackrock N. American Trust last October. The proceeds of £2,155 were recycled into a top-up of Edinburgh - an additional 375 shares @ 569p. I really do not anticipate making too many changes to the portfolio.

The stand out performance so far continues to be Aberforth Smaller Companies with a total return of 65% although many others have returned well over 20% on a total return basis.

The FTSE 100 currently stands at 6,689, a gain of 13.4% compared to January 2013 - factor in dividends paid will give a total return of around 19.5%. The total return of the portfolio is 22.5% which is very satisfactory.

(click to enlarge)

As I said earlier, my benchmark against which I will measure performance will be the Vanguard High Income tracker. The performance over the past year has been fairly flat and the total return, including income is 3.1%. The portfolio has returned 5.7% over the same period which demonstrates that the actively managed investment trusts have out-performed the passive low cost tracker. Of course, 20 months is not very long in investing terms so it will be interesting to see how the two compare over the longer periods.

I am obviously happy with the portfolio performance so far and will be thinking of a home for this years accumulated dividends as the year draws to a close. Please feel free to nominate your suggestions.

As I absolutely depend on the income from my investments to pay the bills and put food on the table, the objective of the income portfolio is to produce a dependable and rising income. Capital appreciation is always welcome but will largely follow the ups and downs of the general stock market.