Pipes Before Oil
It’s always a tricky call when a company restores its dividend. Right now I would rather invest in Wolseley (WOL) than BP (BP.).
At first sight that looks to be an odd choice. BP suspended its dividend for a comparatively short period and for a specific one-off event, the oil spill in the Gulf of Mexico. The suspension was more a political necessity to avoid fanning the flames of wrath in America than a result of economic need. It was always understood that the suspension would be short lived and although the dividend was restored at only half its previous level the expectation was that it would be ramped up, as quickly as decorum allowed, to its earlier glory.
Wolseley was an entirely different kettle of fish. While diversification is usually a sensible idea to spread risk, so that you are not beholden to one particular product, or one particular market, or one particular country, in Wolseley’s case it proved disastrous.
Having spread successfully across the Atlantic, Wolseley came unstuck in spectacular fashion when the American housing market collapsed. As the credit crunch bit, commercial construction also dried up and the contagion spread to the UK. For Wolseley, there was no hiding place.
Its US building materials arm Stock, which had provided diversification away from Wolseley’s main lines in plumbing and heating, was the first part of the business to run into serious trouble. As early as November 2006 Stock was laying off 2,000 staff and by May 2009 it was facing bankruptcy.
However, now is not the time to pick over the bones, wringing our hands in anguish. Now is the time to greet with joy the restoration of Wolseley’s dividend with an interim 15p for the six months to 31 January.
The figures behind the payout include trading profits up 64% to £275 million, a swing from a pre-tax loss of £261 million to a profit of £195 million and a 5% increase in revenue to £6.63 billion. Far more important, though, is the reduction in net debt which once hit £3 billion. Now it is down to £714 million, having been reduced from £910 million a year ago. As interest rates start to rise, this will bring considerable savings on top of those already enjoyed.
Also gratifying is the 9% rise in like-for-like sales in the US, where all the problems began. The US housing market is improving and DIY spending in picking up.
The results, and the dividend, were greeted with a 65p rise in the share price to 2154p. There is a danger of getting too carried away, and there has been one previous false dawn as far as the share price is concerned. It reached 2,261p on 10 February before falling back.
Chief executive Ian Meakins says construction markets around the globe have ‘broadly stabilised’, which is a far cry from saying that they are taking off. Non-residential construction remains subdued in the US.
Raw material prices, such as copper, oil and steel, are rising at an uncomfortable rate. Wolseley is trying to use alternative materials where possible and to limit the number of its suppliers so that it has tighter control on input costs. However, there is only so much that can be done and gross margins, which improved in the first half, will be flat in the second half.
However, Meakins knew all this when he decided to restore the dividend - and restore it at a substantially higher level than the 11.25p dished out three years ago when Wolseley last paid a dividend.
The policy has been to set the final dividend at twice the level of the interim, which implies a final 30p this time, making a total 45p. There is no guarantee that this will happen but it is a fair indication. Earnings per share in the first half were 47.1p, more than enough to cover such a full year’s dividend.
Taking this implication to its logical conclusion, the shares are yielding just a touch over 2% for the current year to 31 July, better than a bank savings account but well below the stock market average of well over 3%.
Wolseley was once a stock market darling. Buying at the current share price would be an act of faith that there is much, much more to come. If you are interested, decide whether you want to come in for the long term. Alternatively, you could see if the shares fall back and present a better buying opportunity, though I suspect that is unlikely. Otherwise, walk away and find better yields elsewhere.
Big Oil, Big Problems
In contrast, BP seems to run from one problem to another. A change of leadership can mean that a new start is made in a better direction. It can also lead to hasty decisions that shareholders are left to regret. BP has thus retreated from the Gulf and plunged into controversy in Russia, never a great place to be doing business. Commercial law seems to be based on closeness to Prime Minister Vladimir Putin.
Chief executive Bob Dudley should know. He was forced to flee Russia three years ago after falling out with his partners in the TNK-BP joint venture. Now he is bogged down in a share swap deal with Russian state-owned Rosneft that has further infuriated the TNK oligarchs.
Meanwhile the Gulf crisis has not entirely gone away. There are reports that US investigators are considering corporate manslaughter charges against BP.
I cannot feel any enthusiasm for a company that staggers from one crisis to another. Big as it is, BP has serious problems.
Rodney Hobson is a private investor writing about his own portfolio. The opinions expressed in this column are those of the individual, and not of Morningstar, and should not be construed as financial advice.
