The Week
The Week, 28/08/09
Two swallows make a summer
One good month can be put down to fortune; two good months smacks of a genuine stock market recovery.
The FTSE 100 index has pushed above 4,900 points, helped by a pick-up in house prices and news that the contraction in the UK economy in the second quarter was fractionally better than feared. It is now reasonable to assume that 4,400 points, the previous resistance points for London’s main index, is now the floor.
August tends to be a quiet month for results. Those companies with a March 31st year end have long since set out their wares while the biggest of the groups with calendar year accounts, especially the banks, have cleared their desks in time for the summer holidays.
Yet one obvious reason for the surge in the Footsie has been the wide spread of strong company results trickling out this month. I don’t normally write about individual companies (except when the situation is dire and I can warn investors off) because I fear that readers will rush out and buy whatever companies I mention.
However, with the proviso that it is up to you to look closely at the companies concerned and make you own judgement about whether the good news is already reflected in the share price, it is worth raking over this week’s excellent batch.
Perhaps the most surprising announcement was a 33% increase in the interim dividend at office space provider Regus. This is a company that is particularly sensitive to the state of the global economy and indeed the recession has reduced profits for the six months to June by 7.4% as businesses have cut jobs and therefore the amount of space they need. No doubt quite a few of Regus’s clients have gone bust.
Regus is, however, confident that it has seen early signs of better things to come. The fall in occupancy rates from 84.8% in the first half of 2008 to 80% was in my view quite encouraging as one might have expected far worse.
This company has been to hell and back over the years, nearly going bust at one point, and is certainly to be treated with caution but it has learnt a lot of lessons in the meantime, such as not overstretching itself and spreading its properties across a variety of economies, particularly promising those in Asia where, according to chief executive Mark Dixon, rental prices are stabilising and businesses are using Regus to reduce costs.
While the second half will undoubtedly be tough in the home base of the UK, Regus is offering a start-up service for new businesses to alleviate the situation.
Power generators supplier Aggreko is much less of a surprise package. It has been making quite spectacular progress for years, irrespective of the state of the global economy, because so many businesses cannot afford even a very short term loss of electricity.
Here the interim dividend is increased 15% on profits up by more than half. The second half is likely to see Aggreko holding its own despite the fact that last year’s figures were boosted by the Beijing Olympics, which will not be repeated, and by storm damage in the US, which may not recur.
Support services group Serco saw its share rise strongly when it produced a rise of more than 30% in revenue and profits, with the dividend up 25%. The £4 billion worth of new contracts secured so far this year is Serco’s best performance so far.
Chief executive Chris Hyman calculates that local authorities in the UK have run up a combined £4 billion deficit over the past two years and will be even keener to farm out services to save money.
Sceptics will argue that bringing in the private sector does not achieve long term savings for the public sector, though it often involves a short term benefit while putting off higher costs until years later. Whatever the economic reality may be, companies such as Serco can establish long term visible earnings.
We had record results from two insurance companies, Admiral and Hiscox. Both have increased their dividends. Admiral is a motor insurer. It has increased its premiums and its customer numbers. Hiscox is a Lloyds of London reinsurer and it has done well because there have been no major catastrophes so far this year, although that could change in the second half when hurricanes blow through the Gulf of Mexico.
Just to balance the picture, we should remember that there are always losers as well as winners. Cairn Energy, a very successful oil explorer and producer, ran up a first half loss as revenue fell with the crude oil price. Still, Cairn plans to step up production over the next couple of years and it has plenty of cash to fund its projects. If the global economy picks up, so will the oil price.
All in all, we have confirmation that there are plenty of companies around making profits and paying dividends. I still fear a correction in September but the outlook for share prices is much better now than it was in August 2008 or August 2007.
Rodney Hobson
Author, Shares Made Simple and Small Companies, Big Profits