Results in the week commencing November 21 clearly demonstrated the differing attitudes that companies adopt to the payment of dividends.
On Monday we had the final results from electrical products manufacturer and distributor Get and also from Aim-quoted Fountains, which maintains power supplies and ensures trains and highways operate safely. On Tuesday there followed interims from speciality papermaker James Cropper.
As a DVD investor – I mean defensive value plus dividends not digital versatile disc! – I have always placed great score on dividends: they are a crucial part of the total shareholder return, they are a discipline to management, and the dividend yield provides a prop to a share price.
Within Peps/Isas the compounding/reinvestment of dividends, tax free, is a significant bonus, even though the tax credit within Peps and Isas has been withdrawn. A number of plcs such as Air Partner, James Halstead, PZ Cussons and United Drug have splendid records of annual dividend increases going back many years.
Inevitably, though, companies do go through difficult periods. But my firm view is that, whenever possible, they should seek to maintain dividend rates – even if they are not covered by earnings – with two provisos: first, that they can afford the cash cost of the dividend without seriously affecting working capital, and second, that they believe earnings will recover over the next couple of years.
Dividend cuts are bad news – put simply, a 50 per cent reduction by one holding cancels out a 10 per cent increase by five others of comparable size. But returning to the three reporting companies – full marks to Fountains which is seeking to maintain its progressive dividend record – a 10 per cent increase, despite a temporary profits fall.
Similarly for Croppers which held its interim dividend in an attempt to keep faith with shareholders through a very difficult period. This was despite only minuscule profits and a likely loss for the full year, primarily because of major energy cost increases.
However the wooden spoon goes to Get – slashing its total dividend by 53 per cent – even though earnings only fell by 40 per cent! I had already reacted strongly to the near passing of the interim, hoping that at the year-end wiser counsels would prevail but sadly it was not to be.
There is no dispute that the 2004/5 reporting year has been a very difficult one for Get with DIY demand falling and margins under pressure. Management, to its credit, has responded by cutting costs and inventories, streamlining the business, yet still bringing on stream new exciting value for money products, particularly in the home security field.
Gearing has fallen and the trading outlook appears tolerable, though not easy.
So why clobber the poor shareholder who has already taken a battering in capital terms with the shares more than halving from a 2005 peak of 289p? I had added to my holding at 115p, believing them to be oversold.
The lower earnings would still have covered the previous dividend nearly one and a half times. A slight reduction would have been irritating, but why oh why a 53 per cent reduction? This reduced dividend is covered three times by earnings.
I have always believed, and still do, that Get is a well-run business with a considerable future, but perhaps it is time for the controlling Joseph family to take it private. They and their advisers seem to have scant understanding of their dividend responsibility to shareholders or how to maintain investor support and a decent stock market rating.
Meanwhile the hunt for new investment opportunities – where boards have the right attitude to our dividends – goes on. Following a visit to Alumsac’s Kettering HQ, I made a modest Pep investment in the company, which supplies premium products and services to industrial, building and brewing customers, attracted by its 6 per cent yield and the group’s increasing focus on building/roofing systems and materials. Similarly in computer products distributor Northamber, then on a 6.5 per cent dividend yield. Unfortunately a negative AGM trading statement knocked them sharply, but I intend to be patient with this well-stewarded, cash-rich company.