How Many Sofas Can People Buy?

The Week: Morningstar columnist Rodney Hobson wishes DFS well but can't help thinking that the post-lockdown recovery has petered out

Rodney Hobson 28 August, 2020 | 9:05AM
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The Week

The best attitude to take in current investment circumstances is to look for the companies that have done better than expected over the past few months. However, that is not a reason to pile in regardless. Some companies that have fared well so far could fall apart as life gets back to normal.

One cannot fault management at DFS Furniture (DFS) when it comes to enthusiasm for the business or the products and I really do wish the company well. My head just doesn’t see how it can avoid staggering from one crisis to another.

Trading statements are coming round faster than DFS’s fabled sales, and the latest one reiterates that trading has continued strongly online and in the reopened stores over the past six weeks. Order intake has grown by £70 million.

DFS believes consumers are spending more on their homes and that latent demand from the lockdown is being unleashed. We will know whether this happy state of affairs has continued when we get full-year results on September 24.

I hope I am wrong but I think that the tide will turn when that pent-up demand has been satisfied and consumers start to feel the pinch, especially the many who have unfortunately lost their jobs.

The shares rose sharply on the update but have since started slipping back again. I suspect many other investors share my concerns. The post-coronavirus recovery has well and truly petered out. Buy the furniture, not the shares.

High-Risk Lending

Large High Street banks are setting aside billions to cover possible bad debts, a wise move considering the loss of incomes over the past four months and daily doses of workers being laid off permanently.

If the people who lend to the best borrowing risks are worried, what is going to happen to those who dish out cash to the people who are turned away by conventional lenders?

Provident Financial (PFG) reported a £28 million loss in the six months to June 30 but that was less than expected so the shares shot up 11% and added a further 5% the following day in a triumph of hope over reality.

Admittedly Provident is confident enough to pay back all government cash received in the job retention scheme and it promises to resume dividend payments “as soon as operational and financial conditions normalise”.

The shares had been struggling to recover after collapsing from 490p to 144p in the stock market sell-off but now stand at 245p. I really can’t see the attraction.

WPP Dividend Restored

With lowered expectations, shareholders tend to be happy with any dividend, however much reduced, so it was no surprise to see shares in advertising agency WPP (WPP)  rise 4% on news that it was paying a fully covered (by underlying earnings) interim dividend, albeit less than half last year’s.

Revenue was down 12.3%, which was not bad in the circumstances, and cost savings will be towards the £700-800 million a year range.

The UK and India took big hits in the second quarter but the US came through fairly well and China took a surprisingly small hit.

I bought into WPP rather too soon, although I am just about breaking even now and I am holding on for further recovery. However, I have to admit that the road ahead will be pretty rocky and I can’t honestly urge other investors to pile in.

The shares lost more than half their value in the crash to bottom at 490p and the recovery has taken them to around 650p, which is probably far enough for now. I console myself with the thought that the downside looks limited to 600p, while another decent update should push the shares back above 700p.

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.

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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.