Vodafone slashes dividend, Greggs on a roll

Tuesday, May 14, 2019 - 10:09

“Hopes of a resolution to the current trade tensions between the US and China, after President Trump hinted at a settlement in the coming weeks, helped drive a recovery in the FTSE 100 on Tuesday despite a big drop on Wall Street overnight,” says Russ Mould, Investment Director at AJ Bell.

Vodafone

“It’s not perfect but the market often does a pretty good job of factoring in news ahead of time. In Vodafone’s case the widely rumoured threat to the dividend and its negative impact on the shares in recent months turned out to be prescient.

“And with the yield running at nearly 10% as of yesterday investors had plenty of warning that this situation was too good to be true.

“It brings to an end a two decade streak of dividend increases from the company and may lead investors to look rather nervously at some of the other income stocks in their portfolio.

“A high yield is often a signal that a dividend could be cut and it is important to look at the balance sheet, the earnings and cash flow situation and the other demands on a company’s capital when assessing the safety of an income stream.

“In Vodafone’s case the fact the shares were higher this morning likely reflects some relief that they have finally lanced this boil.

“After all it would be wrong to argue that a company should never cut its dividend particularly if it is having to service borrowings at the level carried by Vodafone– in fact there is research which suggests that a cut can often be positive for a share price.

“However, it does mean the company will have limited credit in the bank with shareholders as it looks to execute on its heavy investment in 5G rollout.”

Greggs

Greggs is on a (vegan sausage) roll. Since the company launched its vegan-friendly snack in January 2019 it has upgraded guidance several times, unveiled a special dividend and added around £700m to its market value.

“Not a bad contribution for a humble bit of pastry filled with a meat substitute. This is not the only reason like-for-like sales have been shooting the lights out at Greggs; investment in the range and quality of products it sells in recent years has turned it from a humble budget baker to a food-on-the-go destination for busy consumers.

“The company is also doing a lot of the right things in the background, allocating capital to its manufacturing capabilities, improving its distribution infrastructure and getting a handle on back-office functions.

“There is a danger that expectations are being raised too high by the current period of impressive growth, however there is nothing the company can do about that, all it can do is keep plugging away.

“The success of the vegan sausage roll suggests there could be mileage in bringing out more meat-free options, though rivals will be eyeing Greggs’ sales here greedily and the company is unlikely to enjoy a monopoly in this area.”

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


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.