Investors who have been sitting back, admiring the gains in their US tech-laden portfolios, may have had a sell-off shock this week. They may even have kicked themselves for dithering over if and when to crystallise some of those share price rises.
Admittedly, it’s not an easy decision. Get out too soon and you risk missing further increases, stay in too long and your profits could be washed away in a rout. There are several ways to approach this issue, but it’s worth highlighting that while investors in UK shares typically expect much lower price gains, British companies are generous payers of dividends, which means investors get to bank some returns along the way.
The UK market, currently overshadowed by the strong performance of US tech, takes a lot of flak for handing cash to shareholders (at a rate of close to £100bn a year) instead of ploughing it into future growth, but besides recouping some of their initial outlay, shareholders usually enjoy capital gains too. And companies have been lining up to increase their dividends.
The London Stock Exchange is hiking its interim payout by 15 per cent; Haleon increased its interim by 11 per cent, Greggs by 19 per cent; BAE’s is up 8 per cent and high-flying Rolls-Royce and BA owner International Consolidated Airlines have decided to end their five-year dividend drought. Even 4 Imprint, despite facing a tough market, is using its strong financial performance to deliver a 23 per cent dividend bump.
BUY: 4 Imprint (FOUR)
It is getting harder to sell promotional merchandise, writes Jemma Slingo.
Promotional goods company 4 Imprint struck a less confident tone in its latest set of results. It said revenue growth was “more difficult to achieve” due to an industry slowdown, and that acquiring new customers was a challenge. This is in stark contrast to the “post-pandemic rebound years of 2022 and 2023”.
Nevertheless, the FTSE 250 company managed to increase revenue by 5 per cent between January and June, and operating profit rose by 10 per cent to $69.9mn (£54.6mn). Orders from new customers totalled 250,000, 8 per cent below 2023 levels, but demand from existing customers continued to climb and the average value of orders also rose by 2 per cent.
Crucially, 4 Imprint managed to maintain a double-digit operating margin. In fact, it boosted the margin from 10 per cent to 10.5 per cent by raising prices when supplier cost increases were “minimal” and doubling down on marketing investment.
As a result, management felt confident enough to increase the interim dividend by almost a quarter to 80 cents a share.
There are some potential pressure points, however. Revenue per marketing dollar, which has been climbing steadily in recent years, fell from $8.22 to $7.64 in the period. Meanwhile, revenue in the second half is due to “reflect a growth rate similar to the first half of the year”. It was previously set to accelerate.
The group is still on track to achieve its full-year forecasts, though, and its lean, cash-generative business model remains as attractive as ever. It is also gaining market share and the current tough conditions could present an opportunity to pull ahead of smaller rivals.
HOLD: Glencore (GLEN)
Mining and trading giant says plans to spin off coal assets no longer necessary as sentiment has turned more positive, writes Alex Hamer.
Glencore has cancelled plans to split in two because of what it has called a shift in investor sentiment towards coal. Chief executive Gary Nagle said there had been a “significant change in shareholder appetite” for holding coal assets, even in the past year.
The mining and trading giant has just completed the $6.9bn (£5.4bn) purchase of Teck Resources’ coal business, Elk Valley Resources, a move initially made with the intention of spinning out combined coal units, which include operations in North America, Australia, Colombia and South Africa. Nagle has previously talked about the discount applied to Glencore because of its thermal and metallurgical coal holdings, which drove record profits in 2022, especially among European institutional investors.
He confirmed the new coal mines would be included with the managed wind-down policy in place for the existing thermal coal operations, although the company’s statement underlined the fact that metallurgical coal, used in steelmaking, would be in demand far longer than thermal coal.
Before Wednesday’s announcement, RBC Capital Markets analyst Marina Calero said a split would have brought on a “multiple re-rating” on the copper and trading assets. But Glencore said shareholders had been sceptical about the “scale of a potential MetalsCo [the remaining business] valuation uplift arising from a demerger”.
Copper has been the main focus of the major miners this year, driving BHP’s bid for Anglo American, and more recently its deal for a major greenfield project in Argentina. Glencore also has significant reserves in Argentina, which Nagle dubbed the “next frontier for copper growth”.
The Swiss company has in the past been more hesitant to bring on new supply compared with other miners in order to protect prices.
The reversal of the split plan will see Glencore go back to its previous payout structure, in which net debt is kept below $10bn and excess cash is used for special dividends or buybacks once it is under that cap.
The company had pledged to put more than $5bn into deleveraging to give the two new companies less starting debt. Finance chief Steven Kalmin said the current balance sheet situation, which includes cash through the sale of Glencore’s stake in Viterra, “augurs well for top-up returns” in February.
Glencore also reported lower interim profits on Wednesday. First-half Ebitda was $6.3bn, $400mn below analyst forecasts and 28 per cent down on the first half of 2023. Weaker coal and nickel prices were the main factor behind the fall, offset slightly by higher copper earnings. Cash profits from the energy products division dropped from $4.7bn a year ago to $2.1bn.
The trading division did well in the more volatile metals market in the first half, with its adjusted operating profit for metals and minerals climbing 55 per cent to $1.2bn. The “normalisation of international energy trade flows” knocked energy and metallurgical coal trading, however, by almost 70 per cent. The cash profit in the division overall was down 10 per cent to $1.8bn.
This past week has not just been about results and the demerger for Glencore. Swiss prosecutors handed the company a $152mn penalty for corruption offences, while the Serious Fraud Office in the UK charged the former head of oil trading, Alex Beard, and another four former employees with bribery. A hearing will take place in London next month.
Glencore also has compliance monitors inside the company from the US Department of Justice. Nagle said there had been “very constructive engagement” in the first year with them, adding that in his view Glencore had “best in class” ethics standards, but “monitors are helping us improve . . . even further”.
SELL: SIG (SHI)
The building materials company is feeling the heat from sluggish markets in the first half, writes Julian Hofmann.
Specialist building materials company SIG usually suffers a slower first half as companies and building companies tend to time their projects during the peak spring and summer months. However, a broadly challenging market across all the countries in which the company operates was an unwelcome reminder that the road back to recovery for the heavily indebted company will be a long one.
Market conditions were difficult across the EU-based businesses (58 per cent of revenue) and in the UK. As a result, like-for-like revenue was down 7 per cent year on year, with broadly similar declines in pricing and volumes; lower pricing was felt in all markets, along with lower volumes in most of them.
In the UK, lower transaction volumes for house buying — itself a product of higher interest rates — had a measurable impact on SIG’s interiors business, with like-for-like sales down 14 per cent to £250mn, roughly half the total sales for the UK business.
Meanwhile, the lack of new-build residential and commercial projects in France led to prolonged weak demand here as well. This was felt in the roofing division, where French roofing was 11 per lower at £215mn. Demand was also weak in Germany, including in commercial new-build, but revenues there were only down 3 per cent to £220mn.
Broker Peel Hunt said the operating profit guidance of £20mn-£30mn is unchanged: “However, given the trading backdrop, we are reducing the rate at which we assume profits will recover in 2025 and 2026.” We share that view and see no reason to change the recommendation based on this performance.
