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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The London stock market has plenty of dividend heavyweights. These are companies that can be depended upon to pay attractive and rising dividends, on repeat.
Miners, banks, oil companies, tobacco businesses and Reits all feature heavily in the lists of top payers, given their typically stable and strong cash flows. With the average yield for the FTSE 100 at about 3.5 per cent, what should investors make of one that’s significantly higher — say twice the average? Shell’s yield is currently 4 per cent but asset manager M&G’s is close to 9 per cent.
There are always exceptions, but generally a high yield in association with a share price that has fallen, and remains in a trough over a long period, is considered a red flag. It might look like a bargain but it could be a value trap. Shrinking revenues and squeezed margins are often the culprit and investors will head for the exit ahead of an expected dividend cut although often companies maintain the dividend for as long as they can.
Those tempted by the resultant high yield face the risk that the dividend is unsustainable and no catalyst for recovery arrives. Their best protection is to peruse the company’s situation (checking for example cash flow, dividend cover, balance sheet strength, competitors) to understand how and when recovery might happen.
Vodafone (dragged down by difficulties in Germany); ITV (where concerns over advertising revenues and competition from the likes of Netflix weighed on the share price); BT (battered by a pension deficit and tough competition), and M&G (whose problems stem from fund outflows), have all at times been categorised as possible value traps. But membership of the value-trap club isn’t always a permanent state. It can be temporary and companies can and do engineer their own release.
HOLD: M&G (MNG)
The asset manager’s full-year results contained disappointments, writes Jemma Slingo.
M&G has surprised the market with better- than-expected profits — but this has not fuelled a big jump in the dividend.
The asset manager and life insurer grew its adjusted operating profit by 5 per cent in 2024 to £837mn. This was 9 per cent ahead of consensus estimates of £770mn. Progress was driven by the asset management side of the business.
However, analysts at Jefferies complained the profit beat had “not translated into a corresponding surprise on the declared dividend”.
Net flows have also underwhelmed, which management blamed on “challenging market conditions”.
M&G appears to be feeling confident, however. Chief executive Andrea Rossi has announced two new targets for 2025-27: to grow adjusted operating profit by an average of 5 per cent or more a year, and to generate £2.7bn of operating capital.
BUY: Close Brothers (CBG)
The motor finance scandal weighs heavily on the merchant bank’s costs, writes Julian Hofmann.
The market was highly critical of interim results for Close Brothers which, despite not being particularly dominated by its regulatory car commissions overhang, were greeted with a near-20 per cent share price fall on the day.
High central costs have been a criticism of Close Brothers for some time. In these results, they showed signs of coming down, but not that quickly.
It was the total amount of adjusting items that really caught the eye, which reflected the impact of the motor finance scandal. Close Brothers recognised £178mn of extraordinary costs, compared with zero at this time last year.
Panmure Liberum analysts commented: “Close may be cheap, but motor finance is not the only issue to be addressed by the group”.
All that said, shares are dirt cheap at barely six times forward earnings, which could tempt speculative buyers who can stand the risk.
BUY: Essentra (ESNT)
The industrial components manufacturer is grappling with soft demand in Europe, writes Valeria Martinez.
Essentra’s full-year results held few surprises after its profit warning last September. The industrial components manufacturer saw demand in Europe, by far its largest and most profitable market, soften in the second half of 2024, dashing any hopes of an early rebound.
With a majority of its revenue tied to Europe, Essentra’s performance closely tracks manufacturing activity in the region. The Eurozone’s manufacturing purchasing managers’ index (PMI), a key indicator, has been in contraction for over two years, dragged down by Germany’s industrial slump.
Still, a tighter rein on costs and a focus on manufacturing efficiencies helped grow the company’s gross margin. With the shares trading at 16 times forward earnings, well below their five-year average, Essentra looks too cheap for a well-managed early-cycle play.
