FTSE prepares for results deluge, HSBC disappoints on dividend, BHP plans swift shale exit and Dunelm’s integration headaches

“The UK stock market holds firm as the full year results season starts to get into full swing. The FTSE 100 was unmoved at 7,247 in early trading on Tuesday,” says AJ Bell Investment Director Russ Mould.

HSBC

“HSBC has kicked off the latest reporting season for UK-listed banks with an 11% rise in adjusted pre-tax profit to $21bn in 2017. However, fourth quarter underlying pre-tax profit of $3.6bn came in 8% below the consensus forecast.

“Many retail investors only care about one number with banks and that’s the dividend. People buy these stocks for income as they’ve historically had generous yields.

“In HSBC’s case, there is no growth in the dividend in today’s results, neither is there a new share buyback programme.

“That may surprise given the bank’s common equity tier 1 ratio, a measure of the ability of the balance sheet to withstand economic shocks, has jumped to 14.5% from 13.6% a year ago.

“A better capital position could strengthen the argument for higher dividends in time, yet investors may have to wait another six months for new chief executive John Flint to deliver his strategic review before learning about future dividend intentions.

“For now, HSBC yields about 4.8% which leaves it lagging behind Lloyds Banking Group whose dividend yield is more in the region of 6% based on forecasts for 2018.”

BHP Billiton

“Keep an eye on events with BHP Billiton’s US shale oil and gas unit as the company implies it may get out of these assets faster than expected.

“The company previously guided in late 2017 for an exit within two years. It now says trade sale bids could be reviewed and potentially completed this calendar year. It is also exploring potential asset swap opportunities and an exit via a demerger or IPO (initial public offering).

“BHP is no stranger to demerging assets, having already separated part of its business now known as South32. The coal-to-manganese producer was spun out of BHP in May 2015 and has since seen its share price rise by just over 50%.

“A study in 2003 by the Krannert School of Management found that subsidiaries spun out of companies outperformed their former parent by more than 20% over the first three years following the demerger; with most of the excess returns within the first 12 months of trading.”

Dunelm

“Homewares seller Dunelm remains in the doghouse amid the latest demonstration that acquisitions are just as capable of destroying value as they are at creating value. Also, sales growth is all very well but is unlikely to carry much weight with the market unless it is matched by profitability.

“For the six months to 30 December 2017, the company posted revenue up 18.4% but this delivered pre-tax profit ahead only by a smidgen (0.7%) to £56.3m thanks to a 1.8% fall in gross margin to 48.6%.

“In fact, if you strip out items relating to its 2016 takeover of WS Group, profit was down 8%.

“The pressure on margins is attributed to the impact of sales acquired in the WS deal, which encompasses the Worldstores online home and gardens site, Kiddicare nursery supplies business and members-only Achica internet furniture store. It also reflected a ‘higher proportion of end of season and seasonal products’.

“Worldstores is expected to deliver a full year loss of between £7m and £8m against previous guidance of £2m to £3m with integration of the WS assets in general proving more time-consuming and costly than expected.

“Profitability is expected to pick up in the second half, but investors may be sceptical after a rocky few years for the business, even if a 7.7% hike in the first half dividend signals some confidence.”

These articles are for information purposes only and are not a personal recommendation or advice.