Has the question about Weir Group and its dividend gone away after the engineer lifted its payout by 5 per cent at its most recent annual results last month? It had remained unchanged for the previous four years and it was debatable whether the FTSE 250 oil and gas specialist was being prudent with its cash or a little stingy.
Weir Group was founded in Glasgow in 1871 by two brothers, James and George Weir, who developed a pump to help improve the performance of steamships.
While the group remains known for its pressure pumps, used in the oil and gas sector, it also makes products for handling slurry in the minerals sector and, after its acquisition of Esco last year, heavy machinery tools for use above ground in mining. It operates in more than 70 countries, employs about 15,000 people and is valued by the stock market at £4.2 billion.
In many ways the four-year dividend famine was understandable. Weir had to streamline itself and preserve capital in the wake of the downturn in the oil price that began in the middle of 2014.
As a precision engineer making components for a demanding market — both in terms of endurance and safety — the group could ill afford to take its foot off the pedal in research and development, and management held firm with the budget. Thus the dividend was held at 44p for the three years from 2014.
More of a surprise, however, was the company’s decision to hold the payment flat for the fourth year in a row in 2017, particularly when all the signs were there that Weir’s patience was coming good, against the backdrop of the rise in shale production in North America and a sharp increase in revenue from new products. Analysts had been hoping for a 3 per cent rise.
The increase came in the 2018 financial year, though, when the dividend was lifted to 46.2p a share. The logic was there, not least following the £900 million acquisition of Esco in April, the company’s biggest deal.
Weir funded the acquisition partly through a £385 million share placing, as well as the sale of its flow control division for £275 million, and by drawing on its debt facilities.
It was clear in the results last month that the benefits of owning Esco are coming through ahead of target in terms of cost savings and margin improvements, which augurs well for future dividends.
Orders in the minerals division were up 14 per cent and at slightly better margins. While debt was higher in the wake of the Esco deal, Weir generated almost double the amount of cash from its operations, up from £221 million in 2017 to £411 million last year.
The only setback was in its oil and gas division where, after a strong first half, its activities during the second six months were held back by strains in the US shale market, which was suffering from oversupply and because some developers had already exhausted their budgets.
Weir was downbeat about the outlook for the shale market during the coming year, predicting a year-on-year fall in the number of wells likely to be completed, partly because of the more recent volatility in the oil price, which is a factor in assessing how profitable a project will be.
Nevertheless, the new-look Weir Group — with Esco and without flow control — looks cleaner and more resilient, though its earnings are always likely to be affected by the strength or otherwise of oil and other commodities.
The most recent payout gives Weir shares, up 33½p, or 2.1 per cent, to £16.47 yesterday, a yield of a respectable 2.8 per cent and the stock trades at a multiple of 17.3 times earnings. Worth sticking with.
ADVICE Hold
WHY Disciplined approach to R&D, acquisitions and the dividend are all paying off
Bonmarché
Profit warnings are becoming sadly familiar at Bonmarché. Inside six horrible months, the womenswear retailer that specialises in larger sizes has moved from expecting to be in the black for last year to the tune of about £5.5 million to telling shareholders to brace for a loss of the same amount, perhaps even slightly more. Pre-tax profit for the previous year was £8 million.
Bonmarché was founded as a collection of market stalls in Wakefield by Parkash Singh Chima in 1982 and listed on the stock market in 2013 after being turned around by an affiliate of Sun European Partners, the private equity investor, which still owns more than 52 per cent of the shares.
The retailer employs about 1,900 staff across more than 300 shops and concessions nationwide and its main customer base is aged above 50. It has blamed a string of factors for its decline in trading, from hot summer weather and Brexit uncertainty to the crisis on high streets and consumers’ unpredictable habits. An unscheduled trading update yesterday brought more of the same.
Bonmarché successfully cleared its autumn and winter stock during the flurry of sales in January and February and ended the period with 40 per cent fewer unsold clothes than a year earlier. However, it had to cut prices heavily.
By the end of February its customers seemed to have had their fill of the garments that normally sell well in between the traditional winter and spring ranges, and a sharp downturn in trading since the beginning of March has reversed the gains it made during its sales.
Though spring collection sales are picking up, Bonmarché said that it was not enough to compensate and warned that it was now heading for an underlying pre-tax loss of as much as £6 million, worse than its forecast in December of £4 million. It’s hard to see the chinks of light for this struggling retailer, which, although claiming that it will continue to have the cash to cover its trading requirements, will surely now struggle to pay a final dividend. The shares, which slid 7½p, or more than 20 per cent, to 29½p yesterday, trade for an extraordinary 2.9 times historical earnings for a yield of 20.9 per cent. It’s not looking good.
ADVICE Avoid
WHY Trading under intense pressure and dividend in peril