Hobson: Prepare for Kier's Dividend to be Scrapped

THE WEEK: Morningstar columnist Rodney Hobson laments how far Kier has fallen, and warns Thomas Cook shareholders to get out while they can

Rodney Hobson 7 December, 2018 | 2:17PM

danger dividend scrapped warning cliff edge

So we’re all agreed: Kier (KIE) isn’t going to be the next Carillion, is it? Or is it? Are you sure?

Well, Carillion (CLLN) went bust rather than hit its shareholders with a stonking great rights issue, so that’s one difference. Shell shocked shareholders in Kier may be feeling they got the lesser of two evils.

Being asked to stump up for 33 new shares for every 50 held is quite an imposition, one that is reflected in an issue price of 409p, a whacking 45.6% discount to the share price before the unexpected announcement but one that is necessary to persuade shareholder to throw good money after tarnished.

We rather had the impression from the Kier board that it wouldn’t come to this. I accept that directors were put in a difficult position when Carillion died: they didn’t want to cause panic, especially as many investors and commentators were raising question marks. I now wonder if I was a bit naïve in accepting the reassurances at the time, though I was sufficiently doubtful to avoid buying the shares.

Kier shares were near 1150p in January but the doubters, now proved correct, pushed them down to around 760p even before the rights issue took them over a cliff. At around 425p after the issue was announced they had lost more than 60% in 11 months. The market is working on the assumption that the dividend will be slashed, so the double-digit yield is purely theoretical.

Shareholders were left with a nasty choice but on balance my advice was going to be grit your teeth and stump up, as most of the cash will be used to reduce debt, putting the group is a stronger position at a time when lenders are keen to reduce their exposure to the construction sector.

However, as Kier shares have fallen below the 409p rights price there is no point is taking it up as it’s cheaper to buy in the market. Not that I would advise anyone to buy into Kier at this stage.

The American Nightmare

If there’s one thing more-risky than a retailer thinking it can prosper branching out across the Atlantic it’s a bus and train company attempting the same journey. Stagecoach (SGC) grossly overpaid for Coach USA in 1999 and had to write down its value. Undeterred, it went on another buying splurge in 2012 and once again it is writing down assets, though mercifully not as heavily this time.

It is also “reviewing strategic options” that could involve selling some or all of a US business that is suffering from increased competition.

As soon as it becomes a UK business again, its shares may be worth buying. Don’t count on it though. Even without the exceptional charges, Stagecoach reported a 10% fall in the half year to the end of October. It has lost its East Coast rail franchise and its profitable South West Trains contract. Let’s see if it succeeds in getting out of America and how much it gets for its pains before even thinking about it.

Dead Cat Bounce

The sage of travel company Thomas Cook (TCG) rolls on, with the shares jumping 50% in one day this week. Mind you, that was only 11.5p, so far has the stock fallen. Shareholders may have thought the worst was over after the shares tumbled from 146p in May to a mere 23p – not quite joining the 90% club, yet.

However, I suspect the latest recovery is a dead cat bounce caused by short sellers closing their positions and pocketing substantial profits. I worry about Cook’s debts and fear that a rights issue may be needed. Any jump in the shares is an opportunity for shareholders to cut their losses and get out.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carillion PLC14.20 GBX-28.95-
Kier Group PLC408.19 GBX-0.88-
Stagecoach Group PLC142.50 GBX-1.72-
Thomas Cook Group PLC27.30 GBX-4.68-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.