Dividend Cut at Elecosoft, Dignity Trading and Public Transport Problems

Many investors are suffering from dividend cuts by companies. The latest one in my portfolio is Elecosoft (ELCO), a company that produces software for the construction sector. In their announcement of the full year results this morning they indicated revenue and earnings were much as forecast to December, and cash flow was good enough to put them in a net cash position.

Normally these results would not have caused any concerns that the dividend would be reduced or cancelled, but not this year. Even though they only previously paid small dividends and half the “cost” as a scrip dividend, this year’s final dividend has been cancelled. This is what the company had to say:

“Proposed Dividend: Elecosoft’s strong trading performance and cash generation in 2019, and, ironically, the strong start to trading in 2020, would normally have warranted the payment of an increased final dividend. However, having regard to the uncertainties created by the Coronavirus situation and the need to conserve our cash resources, the Board has decided to not recommend a final dividend”.

I don’t normally like to challenge the wisdom of management, who may know more than me about the trading position of the company and future revenue, but this does look at first glance to be excessively cautious. That is particularly so bearing in mind they could have paid it as a scrip dividend if they wished to conserve cash. ShareSoc has published some comments and written to the FRC, FCA and BEIS on the problem of dividend cuts suggesting they should issue some guidance. That seems to be a sensible suggestion because at present we don’t know whether this is just management panicking or being simply prudent.

One company that should surely be benefiting from the coronavirus epidemic is funeral provider Dignity (DTY) – I do not hold the shares. More deaths surely mean more business for them. But in their trading update today they show that it is not that simple. The company says the following:

“The absolute number of deaths increased by approximately one per cent to 161,000 from 159,000 in the comparative period last year. Sadly, since the end of the quarter, the UK has witnessed in excess of 20,000 deaths in a single week, the highest since the beginning of 2000. The number of possible incremental deaths as a result of COVID-19 is a matter of substantial speculation. Should 2020 witness a large number of incremental deaths, beyond the 600,000 originally anticipated by the Office for National Statistics, then it is possible that 2021 and 2022 could experience a lower number of deaths than in 2019. The Group will not speculate on the most likely outcome”.

In addition there is the problem that as many people cannot attend funerals, some funerals are being postponed or executors are opting for lower cost funeral packages. Dignity was already suffering from aggressive price competition which had prompted a strategic review before the latest crisis arose.

The company had previously decided to suspend dividend payments. Like Elecosoft they apparently are simply unable to forecast the likely impact of the epidemic on their business. So no guidance for 2020 is being provided.

On Saturday the 9th May Grant Shapps, Transport Secretary, said that only 10% of former public transport capacity will be available in some locations if social distancing is to be maintained. It seems likely that will be so for many months even if people are permitted to go back to work. This will clearly cause major problems in London where almost all commuters use public transport such as trains, the underground and buses.

After the Prime Minister spoke on the 10th May, Mr Shapps issued this tweet: “Speaking this evening the PM was clear – if you’re going back to work in a job that cannot be done from home, please avoid public transport if possible. Go by car, or even better, cycle or walk. To help, we’ve announced more than £2bn in the biggest ever boost to cycling and walking”.

An example of how problematic London transport has become is a report in the Times that says Transport for London (TfL) has asked the Government for £2 billion. To quote: “TfL is down to its last £1bn, which is being burnt at a rate of £21m a day — leaving it less than two months from emptying its coffers and illustrating the intense pressure on local authority finances”. The article suggests the Government will attach some strings to any funding.

Mr Shapps was clearly right to point out the public transport capacity problem, but his apparent remedy to get everyone walking and cycling makes little sense. It is a typical view of politicians who can afford to live in central London. But for the vast majority of London commuters who travel many miles to get to work, it’s simply impractical even if they are keen cyclists.

Mr Shapps also justified his proposals by saying the epidemic is a great health opportunity to encourage active travel with the objective to double cycling by 2025. He also proposes to implement at least one “zero emission” city, and argues that one of the few positives will be improved air quality. He actually said there are “more than 20,000 extra deaths a year attributed to NO2 emissions”.

This figure is nonsense. It repeats the past allegation of 40,000 deaths from air pollution in the UK which has been shown to be simply wrong and a corruption of statistical evidence. In reality, there may be a few months shortening of life expectancy from all air pollution sources, a lot of which cannot be removed such as natural sources. But the figure is essentially uncertain and it is clear there are no deaths directly attributable to pollution. To specifically indicate NO2, which mainly comes from transport, as being the problem is also wrong when the Government advisory body COMEAP could not even agree that NO2 contributed to the negative impact on health of air pollution from particulates.

Mr Shapps clearly knows little about air pollution and its impact on health but is using his ignorance to put a positive spin on his actions in response to the transport crisis.

Just to show how there is no direct correlation between traffic levels and air pollution, this is what the London Air Quality Network (LAQN) recently reported: “Levels of the pollutant nitrogen dioxide (NO2) has reduced significantly during lockdown, research from King’s College London has found. Concentrations of NO2 have lowered as much as 55% due to less road traffic. However, levels of PM10 and PM2.5 were higher after lockdown than at any other time in 2020, due to easterly winds and pollutants from northern Europe”. The reduction in NO2 is perhaps not surprising when measurements by the LAQN are often taken at the roadside so will be heavily influenced by adjacent traffic. But as particulates (PM10 and PM2.5) are of much greater health concern you can see that Mr Shapps’ spin on the air pollution issue is somewhat misleading. Other UK cities have also shown no direct correlation between traffic reduction from the epidemic and air pollution – at least to date.

The air pollution problem is much more complex than can be solved by encouraging walking and cycling alone.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Ocado Trading Update, Coronavius Apps, EMIS AGM, IDOX Pay, Segro Dividends

Ocado (OCDO) issued a trading update today, and it shows their joint retail venture with M&S is benefiting from the coronavirus epidemic. In the second quarter revenue was up 40% on the prior year. They have had to ramp up capacity significantly to meet this demand, and they have suspended delivery of mineral water so as to cope with the needs of additional households. The announcement gives the distinct impression that they need more warehouses (or CFCs as they call them).

On a personal note, my family has been using Sainsburys’ on-line delivery system and as a “vulnerable” person we get priority. The result has meant neighbours asking us to shop for them. But at least I don’t need to accept the offer of food parcels sent to me yesterday by the local council!

There has been good coverage of coronavirus apps in the national media in the last couple of days. This UK Government has chosen one that relies on a centralised system and it looks distinctly insecure and not good enough to protect privacy. Robert Peston pointed out another flaw in it that someone could maliciously chose to report themselves as suffering from symptom thus causing everyone they might have come into contact with in the last two weeks to self-isolate. I am not at all clear why the Government has chosen this approach, which may deter take-up anyway, when Google and Apple are implementing a different system with fewer privacy concerns. That has been adopted by other countries so there will be problems with international travel.

EMIS (EMIS) held their AGM today. Nobody allowed to attend and no on-line session which is not good enough for an IT company. EMIS operates in the healthcare sector. Recurring revenues have held up but new business sales have been lower. They still expect to meet full year expectations.

However, they did get 15% of votes AGAINST the remuneration report. That included my votes as a holder as it looked a typical complex scheme with total pay too high in relation to the size of the business.

Another example of a poor pay scheme is that of IDOX (IDOX), an AIM listed company that operates mainly in the provision of software to local authorities. Reviewing the Annual Report, the Chairman acquired 585,000 share options last year (current price about 40p, exercise price 1p) based on a share matching scheme. The CEO acquired 3,512,400 share options under an LTIP with an exercise price of 0p (nil). The CFO also acquired 1,000,000 share options, again with an exercise price of 0p, but with a performance condition of the share price being greater than 45p. In summary I think this is way too generous so I have voted against the remuneration report. The AGM is on 28th May, so other shareholders have plenty of time to submit their votes.

Another item of annoying news I received recently was from Segro (SGRO) the property company. They will no longer be sending out dividend cheques from next year. I still prefer dividend cheques for my direct holdings because it is easy to check that the dividends are received and you know exactly when the money is in the bank because you pay them in yourself.

However looking at a report published by the Daily Telegraph last year, it quotes registrar Equiniti as saying that up to 30% of dividend cheques do not get presented which is a rather surprising statistic and must create a lot of extra work. Kingfisher, Marks & Spencer and Vodafone have already stopped dividend cheque issuance, forcing you to give the registrar your bank details. I may have to accept this as a reasonable change even if I don’t like it.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Bank Dividends and Fundsmith Performance

The bad news for many private investors is that most of the major listed UK banks are suspending dividend payments, even ones already announced. This is after they received a letter from the Bank of England requesting that they do so. The dividends are unlikely to be resumed before the end of the year. This is surely a prudent measure as the banks will undoubtedly have many requests for loans from companies to tide them over the virus crisis, while other companies will default on loans already made.  Bank balance sheets are always on a knife edge which is one reason I don’t hold shares in them.

Another investor who does not invest in banks is Terry Smith of Fundsmith. He has just published a letter to investors about the year to date performance of his Fundsmith Equity Fund. It is down only 7.9% when the fund’s benchmark MSCI World Index is down 15.7% and the FTSE-100 is down 23.8%. See www.tinyURL.com/tfjuzno for more information. As I hold the Fundsmith fund, it’s probably made my portfolio performance better than it otherwise would have been as a number of small cap stocks I hold and investment trusts have fallen further. I have not been selling the Fundsmith Equity Fund so that may be one of the few wise decisions made of late.

Terry Smith’s has another go at “value stocks” in his letter. He says they don’t protect you in a market downturn mainly because they are lowly rated for good reason. They are often cyclical, highly leveraged, have poor returns on capital or face other challenges. He could be referring to banks!

Another wise comment he makes is “What will emerge from the current apocalyptic state? How many of us will become sick or worse? When will we be allowed out again? Will we travel as much as we have in the past? Will the extreme measures taken by governments to maintain the economy lead to inflation? I haven’t a clue”. Comment: I don’t either, but like Terry I believe that investing in good businesses remains the best strategy.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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