So, we’ve run a stock screen on UK stocks using some of the edicts of investment guru Geraldine Weiss and generated four candidates.
In this article we will take a closer look at the four companies the filter generated: Mitie Group PLC (LON:MTO), Aberdeen Asset Management PLC (LON:ADN), RPS Group PLC (LON:RPS) and Unite Group PLC (LON:UTG).
Mitie Group
The trading update from the outsourcing specialist on January 18 raised serious concerns about the future of the dividend.
Mitie said it is conducting a balance sheet review, and has taken a more conservative judgement on contractual positions, identifying an additional £14mln of one-off charges in the current financial year.
As a consequence of the above, it lowered its guidance on underlying operating profit for the full year to 31 March 2017 to a range of £60mln to £70mln.
It also said: “Despite these lower forecast earnings, we expect to continue operating within our contractual banking covenants,” which was supposed to be comforting, but was probably the opposite.
The company cut its dividend at the half-year stage from 5.4p to 4.0p, and the suspicion must be that it will cut again when the full year results are announced on 24 May.
According to Factset, the full-year dividend is due to be cut to 7.82p from 12.1p last year. That leaves the yield on 3.8%, which is only just above the 10-year average of 3.7%.
A yield towards the top-end of the 10-year historical range is a major pre-requisite for Weiss’s system, so that pretty much eliminates Mitie as a candidate.
Aberdeen Asset Management
If Factset is to be believed, fund manager Aberdeen is also set to cut its dividend this year – from 19.5p to 17.29p.
That still leaves it yielding a very handsome 6.5%, versus its 10-year average of 4.8%.
So far, so good.
Weiss also liked the dividend to have been raised five times in the last 12 years; Aberdeen has managed it five times out of the last six (it held its dividend last year).
She also had a host of other “gotchas” such as an A credit rating from Standard & Poor’s and at least 80 institutional investors holding the stock.
Many of these additional checks do not translate to the UK market or we have no way of checking them; we can, however, check other things such as earnings.
At 19.7, the price/earnings ratio just about scrapes into our “less than 20” cut-off point, and the record of earnings growth is also a bit borderline; in the last 10 years the fund manager has seen earnings per share decline year-on-year as often as it has seen them rise.
UBS is not a fan of the stock, having just reiterated its “sell" rating in a research note after Aberdeen reported disappointing inflows of client funds for the fourth quarter.
Market performance and foreign exchange boosts were not as sexy as the broker had hoped, so it cut its earnings per share forecasts and lopped 15p off the price target, which now stands at 230p.
Perhaps more pertinently, it cut its dividend forecast for the 2017-19 period by 15%, as it says Aberdeen’s excess capital position, at £60mln, is now the lowest among UK asset managers in its coverage universe.
The market consensus may be for a dividend cut from 19.5p to 17.29p, but UBS is predicting an even more Draconian cut to 16.5p, after which it thinks it will rise by a halfpenny a year through to 2021.
“With half of publishing analysts expecting the firm to maintain its dividend level and with 17% of Aberdeen's free float being held by Income- and dividend-focused funds (second highest among the UK asset managers), a dividend cut will likely have a negative impact on the firm's shares and is not fully priced in at these levels,” UBS argues.
It may well be right, but if you are holding the stock for the dividend and intend to keep buying the stock, then a share price fall just boosts the yield.
So, in summary, this is one for fans of the Weiss method to keep a careful eye on.
RPS Group
RPS is a consultancy group that does a lot of work for the oil & gas sector (among others). Its fortunes waned when the oil price collapsed, with the shares tumbling from around 345p at the beginning of 2014 to 237p at the end of 2015, but it has since recovered to 255p.
Throughout the period, and in fact going all the way back to 2006, the dividend has increased every year except for last year, when it was maintained at 9.74p.
This year’s dividend is tipped to rise to 9.81p. suggesting a yield of 3.9%; not eye-popping but reassuringly solid.
This one could be a keeper.
Three brokers follow it; one – presumably the house broker – rates it a ‘strong buy’; one as a ‘buy; and the other is neutral.
Unite Group
As luck would have it, student accommodation management and development firm UNITE had full-year results out yesterday (Wendesday), and whacked the dividend up to 18p from 15p in 2015.
That represented the sixth year in a row that the dividend had been raised, which would bring a smile to Ms Weiss’s face, I am sure.
It also announced it had increased the dividend pay-out ratio to 75% of earnings (excluding performance fees for its USAF arm), as defined by European Public Real Estate conventions.
Next year’s dividend is forecast to rise to 22p, which would see it yielding 3.6%. The 10-year average pay-out is 1.3p, and the average yield is 2.9%, so this ticks both boxes in terms of being near the top of the historical range.
JP Morgan Cazenove is a fan of the stock, if not a wholehearted one. It’s rating is “overweight”.
“Unite delivered a strong set of FY16 results, providing a strong rebuttal to the recent bearish views on the business,” the broker said.
“Looking forward, the development pipeline is set to gain traction with 7,000 beds at a development yield of 8.4%. Sales to fund this development aren't currently in our forecasts, which could see Adj EPS pull back c1.5-2p pa; however we like the conservative funding approach as yields continue to compress,” it added.
It is looking increasingly hard to find any red flags on this one, leaving the Weissian portfolio with a selection universe of two probables – RPS and Unite Group – plus a possible (Aberdeen Asset) and a “where’s my barge pole?” (Mitie).