Since we released the five shares to watch at the end of last year stock markets around the world have hit record highs. They’ve subsequently come back some way as the ‘Trump Trade’ has deflated. However, that hasn’t stopped the FTSE 100 closing out the first quarter up 2.5%.
Within the index, there have been some high profile winners and losers. We have seen profit warnings from FTSE 100 stalwarts Pearson and BT, and the drama around Kraft Heinz’s audacious approach to acquire Unilever. As I discuss below, there have been ups and downs in our five shares to watch too.
Remember past performance is not a guide to future returns, three months is a very short time frame and investments should be made for the long term (5+ years). Dividends and yields are variable and not guaranteed. The value of investments can rise and fall so investors could get back less than they invest.
AstraZeneca - up 10.7% (3 months to 31 March 2017)
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
Early January saw Astra push back an update on the high profile MYSTIC trial. That caused the shares to wobble a bit, but subsequent announcements have reminded the market that there is a lot more to the AstraZeneca pipeline than just one drug.
We’re quite happy with what we have seen so far.
There’s been a steady flow of updates from the labs and regulators as drugs progress through the approval process. Oncology is performing particularly well, with lung cancer treatment Tagrisso approved in China and making further progress in the US, while breast cancer treatment Lynparza has delivered promising trial results.
The group has continued its programme of ‘externalisations’ – essentially selling early stage drugs in return for an upfront fee and a share of future revenues. That’s keeping the group’s finances healthy for now, but longer term the group will need drugs like Tagrisso and cardiovascular medication Brilinta to deliver their promised blockbuster revenues.
A lot still hangs on the MYSTIC update, now expected sometime during the second quarter, but in the meantime shareholders have already benefitted from the group’s dividend payments. The shares went ex-dividend on 16 February, so any investors who held them on that date will have also received a dividend of 190 US cents per share. This is just over 3% of the current share price.
The shares currently change hands on a prospective dividend yield of 4.6% for the 2017 financial year.
RPC Group - down 20.8% (3 months to 31 March 2017*)
There’s plenty happening at plastics manufacturer RPC.
The group’s updates on current trading belie the share price fall. Although RPC hasn’t given much detail, it has consistently said trading is ahead of previous management expectations. However, organic growth is not the cause of concern. While acquisitions have always been a big part of the growth story, the pace of expansion is testing the market’s resolve.
The Letica business is RPC’s first major step into the US market, and the group took in the region of £550m from shareholders in a rights issue in order to fund the deal. Other recent acquisitions are not yet fully integrated, including BPI (£261m) and GCS (€650m).
These deals have led to an improvement in buying power, and other benefits, such as cost synergies, are being realised. However CEO Pim Vervaat has alluded to the potential for further deals already.
There will be a limit to how many plates the group can spin at once, so we’re not entirely surprised to hear a few disgruntled rumblings. We wouldn’t mind the group completing a few smaller bolt-on deals here and there, but we’d rather it put major acquisitions on the back burner until the current batch have settled.
There has been some speculation that the constant flow of deals is being used to hide a lacklustre underlying performance. With little operating detail announced since Christmas there’s no evidence to support that supposition yet, but it has clearly spooked the market, contributing to the steep share price fall.
All this means that we’ll be paying particular attention when full year results are released in June. These results will provide an opportunity to demonstrate the current acquisitions are bedding in nicely, and show the doubters there are no cracks in the plastic. The shares currently offer a prospective yield of 3.2%.
*This price change assumes that investors took up their rights in full in the 1 for 4 rights issue earlier in the year.
Pennon - up 6.7% (3 months to 31 March 2017)
We haven’t had much news from Pennon, but that’s not a problem for us. After all, utilities stocks aren’t meant to come with fireworks.
Early in the year, there were question marks over the future of contracts between Viridor, the group’s waste management division, and the councils in Greater Manchester and Glasgow. This division makes up less than 20% of group profit, but it is part of what differentiates the group from the other utilities. It has been good to see the group taking action to preserve its contracts and these doubts have recently simmered down. Nonetheless, this area is something we’ll be looking at in full year results, expected on 24 May. We’ve gone past the first ex-dividend date in the diary, so those who held the shares on 2 February will have received the interim dividend payment of 11.09p per share, which was paid on 4 April.
All in all, Pennon is ticking over nicely at present, and offers the most generous dividend policy among its peers. The shares currently offer a prospective yield of 4.4%, and we continue to see the shares as an attractive income play.
Auto Trader - down 4.1% (3 months to 31 March 2017)
Over the first quarter of the year, little has changed. Auto Trader has not published any updates since November’s half year numbers, and analyst expectations for 2017 earnings haven’t really changed. There are, however, plenty of issues to discuss.
Despite some concern about the impact the Brexit vote could have on big ticket discretionary spending, new car sales, which typically feed through to used car transaction volumes after 2 years or so, have continued to rise. In fact, sales reached an all-time record in March, boosted by customers bringing forward purchases to avoid an extra tax that came in on 1 April, and the ‘new number plate’ effect.
While short-term conditions appear benign, there are still those who have concerns looking further ahead. Ongoing consolidation between the dealerships means there are fewer forecourts out there, and despite the bump in March, analysts are expecting the momentum we have seen from new car sales to slip into reverse over the next couple of years.
When full year results are released on 9 June, we’ll be looking out for the group’s commentary on market conditions, and an update on how its new products are being received. Among other things, Auto Trader is developing smarter marketing tools, which could be a source of extra revenues from the dealers.
The shares offer a prospective yield of 1.4%, but analysts expect the dividend, backed by double digit percentage increases in earnings, to rise in the coming years.
Experian - up 3.4% (3 months to 31 March 2017)
It’s been a fairly quiet quarter at Experian. A trading update back in January showed strong performances across all geographies, with particularly strong performances from the smaller Latin American and EMEA/Asia Pacific businesses.
Recent figures on consumer debt in the major UK and US markets suggest that indebtedness is rising. As a provider of credit ratings to both individuals and banks, that’s good news for the group’s consumer and credit services divisions. More loans mean more credit checks.
The big event of the quarter was the sale of a 75% stake in the email and cross-channel marketing business for $300m. That’s less than some analysts had been hoping for, but rids the group of a lower margin, lower growth business and allows it to focus on its more valuable operations.
Investors who held the shares on the ex-dividend date of 29 December will have received a $0.13 dividend, equivalent to around 0.65% of the current share price. With a PE ratio of 20.2 times next year’s earnings, Experian remains on a lofty rating. However, analysts continue to expect earnings to grow steadily over the coming years.
The shares offer a prospective dividend of 2.3% for the financial year to March 2018.
Contributors to this article hold shares in AstraZeneca, RPC Group, Pennon, Auto Trader and Experian.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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