So far as the 'Aim sustainable dividends' portfolio is concerned, Somero Enterprises Inc (LON:SOM) has made more comebacks than Frank Sinatra.
It’s back in again, after being shown the door last month.
READ Aim sustainable divis portfolio is cashed-up after banking handsome profits on Somero Enterprises
The stock has been good for us so it is nice to have it back but it is slightly annoying that we’ve blown £75 of assumed dealing costs – not to mention being on the wrong side of the bid/offer spread – as a result of buying it three times and selling it twice.
We sold in March at 355p and bought back in this month at 405p, which is no way to run a railway but I only do what the stock screen tells me to.
The reason it was ejected last month was a consequence of the forecast dividend cover for Somero, a manufacturer of laser-guided equipment used in levelling concrete, dropping below our required minimum level of 1.25 to 1.2.
Dividend cover is simply earnings per share divided by the dividend pay-out - the higher it is, the more scope there is for the company’s board to push up the dividend; forecast dividend cover simply uses the consensus broker forecasts for the current year’s earnings per share and dividend, rather than the most recently completed financial year.
As I wrote last month, “Somero missed the cut this time around by a small margin and all it would take for it to re-enter the portfolio (again) would be for brokers to raise their earnings forecasts or, I suppose, cut their dividend forecasts, although the latter is not really the sort of company we are looking for in this portfolio.”
That’s what has happened this month; our minimum requirement is for forecast dividend cover of 1.25 and Somero’s cover is now projected to be 1.3 so it is back in.
You can read the parameters we use in the stock screen in the two articles linked to below.
READ Dividend payers on Aim: not as rare as you might think
READ Taking AIM at sustainable dividends
Steaming in with a purchase of a developer of kettle safety controls
In March we looked at a number of stocks that were “bubbling under”, looking to break into the portfolio but none of them has done so this month, whereas a company called Strix Group PLC (LON:KETL) has sneaked unmarked onto the back post to stick one in the net.
If you’ve never heard of the company, that may be because it only listed on Aim in August of last year.
It’s a designer, manufacturer and supplier of kettle safety controls and other complementary water temperature management components, which explains why it has the ticker symbol KETL.
It floated at 100p and currently trades at 132p, which is highly encouraging.
Full-year results released last month saw revenue edge up 2.9% to £91.3mln in 2017 from £88.7mln while adjusted profit before tax rose 5.6% to £28.3mln from £26.8mln.
Basic earnings per share clocked in at 14.5p and the final dividend was 1.9p.
When looking at dividend-paying stocks and the sustainability of those dividends, I pay more attention to cash generation than profits, which can be manipulated by clever accountants, so it is good to see net cash generated from operating activities was £33.8mln (2016: £32.0m), an increase of £1.8mln or 5.6%.
Net debt at the end of £34.9mln was 1.3 times the adjusted underlying earnings (Ebitda), and well within the screen’s comfort margin.
Based on broker forecasts - “forecasts” as a plural might be a misnomer there – the stock is set to yield 5.3% in the current year at the current price, with forecast dividend cover of 1.7. Furthermore, free cash flow is expected to cover the forecast dividend payment 4.9 times, which is comfortably the highest level of cover of all the stocks in our little virtual portfolio.
All of which suggests it is time to get the KETL on and steam in.
In the meantime, here are the scores on the doors.
Company
Number of shares
Total cost
Average price per share
Current bid price
Current value
Profit/loss (£)
Profit/loss (%)
Brooks Macdonald
48
£1,003
2090.25p
1,825p
£876
-£127
-13%
James Halstead
195
£998
511.69p
387p
£755
-£243
-24%
Miton Group
2,240
£1,000
44.67p
41p
£918
-£82
-8.2%
Plus500
102
£998
978.21p
1,300p
£1,326
£119
33%
Somero Enterprises
243
£999
411.17p
390p
£948
-£51
-5.2%
Strix Group
745
£998
134.01p
131.6p
£980
-£18
-1.8%
- Cash: £4,310
- Market value of current holdings: £5,803
- Market value (including cash): £10,113
- Unrealised profit on current positions: -£194
- Dividends received: £62
- Profit/loss from closed positions: £237
- Total realised profit/loss + dividends: £299
News flow on the portfolio's constituents has been mixed
It was a mixed month, with Brooks Macdonald Group and James Halstead moving further away from break-even, while Miton edged towards it and Plus 500 continued its sparkling run. We’ve got £40 worth of dividends due to come in from Brooks Macdonald and Miton, which is a small but welcome boost.
Wealth management firm Brooks Macdonald did not set the heather on fire with its half-year results last month, with the market perturbed about declining margins as clients shifted to flat, all-in fees.
A £5.5mln increase in the provision for resolving legacy issues related to the Spearpoint acquisition also upset the market; these things have a tendency to balloon but right now it is only a provision and there is the possibility the company will not have to dole out that amount.
Discretionary funds under management grew by 25% to £11.7bn, which trounced the 4.3% increase in its benchmark index, the MSCI WMA Private Investor Balanced Index.
For our purposes, the forecast dividend cover is very comfortable at 2.3 and the dividend pay-out is covered 3.2 times by free cash flow, so it looks like a case of just hunkering down and waiting for the stock to return to fashion.
Family-owned floor coverings firm is still on a premium earnings multiple of 21.6 based on broker forecasts for the current financial year despite the shares having lost almost a quarter of their value since we started the “Aim sustainable dividends” portfolio.
The company hit the newswires earlier this week when it revealed it was considering making an offer for rival flooring company Airea.
Airea recently announced it would close its retail carpets business due to mounting losses and a worsening trading environment.
Its contract flooring business Burmatex, which accounts for 74% of group turnover, is "highly" profitable and cash generative, which is presumably why James Halstead is mulling making an offer for it.
READ Airea shares jump after news of potential offer from James Halstead
Until Halstead decided on whether to pull the trigger, we’ll sit tight on the shares as the metrics look OK, although forecast dividend cover of 1.3 is a bit near the knuckle.
Completing the round-up of news flow relating to the portfolio’s stocks, Miton Group’s full-year results were very reassuring, with adjusted profit before tax up by a third to £6.8mln from £5.1mln the year before.
The dividend payment was whacked up 40% to 1.4p, reflecting confidence in future prospects and the momentum in the fund manager’s assets under management, which rose to £3.82bn at the start of 2018 from £2.91bn at the start of 2017.
I’ve said before that many of the investment principles on which this portfolio is run have been influenced by the thoughts of fund manager Gervais Williams, so it’s good to see Miton making progress.