Markets in good mood ahead of Easter, Diageo still paying dividends, and breathing space for Restaurant Group

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“Investors have been treated to a decent pick-up in markets just as the nation prepares to start what might be the most frustrating Easter weekend ever. Clear skies and nowhere to go,” says Russ Mould, Investment Director at AJ Bell.

“Leisure stocks continue to rally as the market seemingly takes the view they’ve been oversold. Interestingly, banks are also shooting upwards despite investors being denied dividends from this sector near-term.

“European and Asian markets also moved higher, so did the Brent Crude oil price which advanced 3.1% to $33.86 per barrel.

“More clarity from companies is helping to improve investor sentiment with businesses updating on the state of their finances and how trading has been hit. The news is generally miserable but at least it is removing some of the uncertainty over how earnings will be hit."

Diageo

“Investors will be very thirsty for income as dividends from UK stocks increasingly dry up, so they may well be raising a glass to Diageo’s decision to pay its interim dividend.

“This move is worth placing in context. The drinks manufacturer was a fair way down the road in terms of doling out the cash, having declared the dividend in January, and, notably, buybacks are off the table for the rest of the year.

“The company has a lot of debt but not all borrowings are equal and crucially it has no financial covenants attached to any of its debt – or in other words even with a significant drop in earnings there’s seemingly no chance of lenders reacting by issuing penalties or taking assets.

“Demand for the company’s range of products from Smirnoff vodka to Johnnie Walker whisky and Guinness will be heavily impacted by the collapse of business to restaurants, hotels and pubs.

“However, people are unlikely to stop reaching for their favourite tipple entirely during a stressful period. In the wake of the financial crisis studies showed that drinking outside of working hours went up.

“Diageo’s shops and supermarket sales have been picking up in recent weeks although the business itself admits it is unclear if this will endure.

“It is encouraging to see management look through the current crisis conditions to ensure they are well placed for a recovery in consumer demand when it comes.

“Reacting in haste by cutting a huge volume of staff and not looking after suppliers and customers would be short sighted.”

Restaurant Group

“The trend for companies to go cap in hand to shareholders and ask for more money is really gathering pace with it becoming a daily event in recent weeks.

Restaurant Group is the latest company to raise a slug of new cash and it is perhaps one of the most obvious businesses to have tapped investors for money, given its high levels of debts and market concerns about its ability to weather the crisis.

“An extra £57 million will give it welcome breathing space but it still needs life to return to normal as soon as possible. It has plans to cut costs and spending which will help the business stay afloat temporarily, much to the relief of Wagamama fans across the country.

“Unfortunately its finances are still fragile and it needs the lockdown to end as soon as possible so people can get back out and enjoy its restaurants.

“Getting people back through its doors might take longer than you think as there must surely be a sense of nervousness once the lockdown is lifted. Will people be confident enough to sit in a potentially crowded place or will it be a slow transition back to normality?

“Buying Wagamama was deemed a risky move at the time as it paid a high price for the business, despite it having a very strong brand and clear growth potential. Under normal circumstances Restaurant Group should have been well into its turnaround plan for its legacy brands and pushing hard on Wagamama’s expansion. Sadly not only have these plans been put in the back of the cupboard, but basic survival plans have been actioned.

“For the sake of all the noodle fans across the UK and all the staff working for the business, let’s hope it can get through these dark days.”

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