AA shares crash as dividend cut hits Woodford

A look under the bonnet of the AA (AA.) has revealed what many shareholders must have thought for some time – that the roadside recovery business is in urgent need of a jump-start of its own.

New CEO Simon Breakwell’s immediate plans for a repair job will include major investment in “game-changing” growth drivers, such as Connected Car services and insurance, as he looks to unlock the group’s full potential.

Unfortunately, this will come at the expense of short-term profitability and dividends, which is why shares tanked by a spectacular 22% today. It’s yet another blow for investors who piled into the AA at its summer 2014 float and have seen shares slide from their March 2015 peak of 419.25p.

The decline gathered speed last August after the shock departure of executive chairman Bob Mackenzie was accompanied by a downgrade to profit forecasts.

It was at this point that fund manager Neil Woodford added to his AA position, believing that the “disproportionate” share price reaction showed just “how warped the market’s behaviour has become in recent weeks.”

He noted that some aspects of recent trading, such as membership numbers and cash generation, were encouraging.

His Income Fund Focus blog wrote in September:

“From our perspective, the logical thing to do when shares are under pressure for non-fundamental reasons, is to add to the position, which is exactly what we have done with the AA.”

The AA currently accounts for just over 1% of Woodford's Income Focus fund and 0.8% of his Income fund. Today’s slump serves as another blow for the star fund manager after high-profile losses with Capita (CPI), Provident Financial (PFG) and Allied Minds (ALM).

The rebooting of AA will mean that shareholders including Woodford will get 2p a share for the foreseeable future, compared with the 9.3p a share announced in 2017. A final dividend of 1.4p per share is planned for the year just ended, resulting in a total of 5p per share.

Profitability will also be impacted, with the AA now forecasting underlying earnings of between £335 million and £345 million in FY19. This compares with last week’s guidance for earnings of between £390 million and £395 million in the 2018 financial year.

The downgrade reflects combined incremental investment of £45 million on operational expenditure in FY19 as the company looks to innovate and grow its roadside business and accelerate its performance in insurance.

Breakwell is particularly excited by the Connected Car concept, which uses in-vehicle telematics to identify potential breakdowns before they happen.

He also wants to broaden the AA’s footprint in insurance by targeting new customers who have never been members of the AA and younger drivers.

Describing the AA as a phenomenal business, Breakwell said: “These investments, while reducing our short term profitability, are vital to our long term success.”

He added: “My review into all aspects of our business, from the bottom up, has further strengthened my confidence about the opportunities ahead of us and convinced me of the positive long-term outlook for the AA.”

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