Two companies put out discouraging trading statements this week. The one that increased its dividend saw its share price slump; the one that merely maintained its dividend led a whole sector higher. There really is no accounting for the markets at times.
Rolls-Royce (RR.), the stock that slumped, really did put out a stonkingly bad set of results for 2014, made worse by the fact that it highlighted a record order book up 3% on a year earlier and rather hid the worst of the news. This tactic nearly always backfires.
Chief executive John Rishton was forced to admit that revenue for the aerospace and marine technology group was down for the first time in a decade and, more importantly, underlying profits had fallen 8%. He referred to “challenging conditions” and added that since the last guidance “the external environment has deteriorated in some of our major markets”.
The fall in the oil price had created “increased uncertainty for many of our markets and customers”. Finally we reached the admission that profits in 2015 will fall short of last year.
So although the dividend for 2014 is increased by 5%, the shares fell 25p to 880p at the stock market opening. Quite rightly so. The shares slumped from 950p to 780p in October when Rolls issued a much gentler warning so it is hard to justify the subsequent recovery to above 900p. They are still not anywhere near low enough in my reckoning and I do wonder if investors who nipped in when the shares opened lower had read the statement fully and carefully.
Anglo American (AAL) has taken a beating alongside other resources groups, slipping from 1,600p at the end of July to 1150p in January before picking up a little. Results for 2014 reflect higher output but lower commodity prices. Its dividend is maintained at 85 US cents.
Although he stresses the progress made in difficult circumstances, chief executive Mark Cutifani is rather more upfront in addressing the undeniable problems, which is to his credit. He admits to particularly sharp price falls for the bulk commodities of iron ore and coal and that further progress is necessary to meet targets during the cyclical downturn.
He admits bluntly: “I expect tough trading conditions to prevail during 2015.”
Even Cutifani must have been pleasantly surprised when his words prompted an immediate jump back above 1200p when the market opened, with Anglo leading mining stocks higher. One can only say that this presented a great opportunity for shareholders to take profits or cut their losses.
If you stayed in, you are certainly playing a long game. That is not wrong in itself but you will need an awful lot of patience – it is going to get tougher before it gets better. First half results for 2015 will be a test of nerves.
Glimmers of Hope in Europe
There are some glimmers of light in Europe. I just hope we are not clutching at straws. European economies are, on balance, doing slightly better although the picture remains patchy.
Germany saw GDP jump 0.7% in the final quarter of 2014 with domestic demand apparently stronger than expected. France managed another anaemic rise but at least fears that President Francois Hollande had cause the economy to shrink have proved premature.
Only three eurozone economies shrank in the final quarter. Unfortunately one of them was Greece, which had hitherto seemed to be on the path to recovery. This makes a settlement of the protracted Greek debt problem all the more urgent. German Chancellor Angela Merkel has for the first time hinted at a possible deal.
Last but not least, there seems to be a breakthough in the Ukraine, where Merkel and Hollande are apparently achieving more through European diplomacy without the unhelpful rattling of American sabres.
Perhaps Friday the thirteenth will not prove to be unlucky for investors after all.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not the views of Morningstar UK.
.jpg)
