The perils of dividend cuts - MONEY
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Like many long-term investors, I spend much of my time honing and monitoring my investments, closely following trading statements, directors’ dealings, interim and annual results and, of course, share price movements. 

From time to time I may undertake transactions, in my case usually adding to an existing holding. Ideally, I like to see profits and dividend grow each year, but while one has to accept more difficult years, cutting or passing a dividend is a big “no-no”. 

Recently my biggest disappointment has been the share price performance of Charles Taylor, the insurance services group, which has fallen steadily from £3 to £2. 

I found the fall inexplicable. Regulations ensure that if a company’s results are likely to be significantly different from market expectations then it must make an announcement. But there had been no such announcement. Indeed, when I attended the company’s capital markets day, I came away enthused about Taylor’s prospects, particularly with growth opportunities in its insurance software division. 

True, stories were circulating about losses sustained through the failure of one of its client’s marine and energy syndicates but I judged them not to be too material, or an announcement would have had to be made. I awaited the annual results with a degree of trepidation — and thankfully they provided reassurance. 

Although there was a headline statutory loss arising primarily from acquisitions-related amortisation, deferred consideration payments and property relocation costs, the underlying story was of growth in revenue and earnings, with a pleasing 5 per cent increase in the total dividend. I had expected that the results would deliver a modest bounce in the share price, but hardly a movement. 

I had dinner recently with David Marock, now in his eighth year as chief executive of Charles Taylor, and found him as perplexed as me. Part of the problem is that the 135-year-old company is not an easy group to understand, though it has simplified its story to clients and investors. 

It provides a wide range of global services to the insurance industry from more than 100 offices and has invested substantially in recent years in developing software for the insurance sector. One example is a global data transfer platform that operates across thousands of participants that work with the Lloyds market. 

On the negative side, there is a higher level of debt than I would like to see (noting the average debt is still under two times Ebitda) plus a pension deficit. But in the company’s words: “We are comfortable with the current level of financial leverage and net debt.” 

Looking to the future, there should be tangible benefits from the move from three London offices into one, useful growth from both claims services and insurance management, and the increasingly valuable software division “InsureTech” should move into profit this year with exciting potential thereafter. 

I take some reassurance in my positive view of Charles Taylor from other shareholders with a similar view, such as Miton, Slater and Legal & General. Liberum, the corporate house broker, has a target price of 385p, double Tuesday’s 193p price. So, with a forecast single figure price/earnings ratio and dividend yield approaching 6 per cent, I happily made my 19th purchase of the stock, adding to an already important holding.

Turning to other parts of the portfolio, there have been encouraging results from my second largest holding, exhibitions and events group Tarsus, with a 10 per cent dividend increase coupled with “a positive outlook for 2019”. Elsewhere, I have seen an 11 per cent dividend increase from international natural animal feed additives Anpario on the back of a 31 per cent increase in diluted earnings and strong cash balances. 

A very positive pre-close trading statement from self-storage group Lok’nStore propelled the shares towards an all-time high. New acquisitions and developments will increase the number of stores operating from 32 to 41. 

On the more cautious side, Gooch & Housego, the photonic components and systems company, issued a trading update forecast that the current year would show only low single-digit growth; lighting manufacturer FW Thorpe delivered lower interim trading profits with only a fractional increase in the dividend; and a trading update from ventilation systems manufacturer Titon warned of substantially lower results from its important South Korean operations. Fortunately, both Titon and Thorpe are financially very strong.

Finally, two intriguing matters. Caroline Silver, chair of PZ Cussons, ended her comment on the interim results with: “Furthermore, the board has approved specific strategic initiatives which will streamline our portfolio of activities and limit exposure to volatility in Nigeria, with more information to be provided in due course.” PZC has been a very disappointing holding in recent years, primarily because of problems in Nigeria, thus developments could be significant. 

Second, K L Kepong International — the thwarted bidder for palm oil group MP Evans — has been quietly building up a stake and have just gone over the 20 per cent mark. I will be keeping a very close eye on developments at both PZC and MPE.

John Lee is an active private investor and author of ‘How to Make a Million — Slowly’. He is a shareholder in all the companies indicated.

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