These stockmarket dogs fight back

Stuck in an overcrowded kennel of stockmarket dogs – unloved companies showing high yields – Saga (SAGA), Greene King (GNK), and Dunelm (DNLM)  – finally bared their teeth today.

The news from all three was better than expected, triggering a rally for their shares of 8% or more and easing concerns that they are among the casualties of the challenging trading conditions facing the consumer sector.

Saga’s improvement took shares away from the record lows seen following December’s profits warning, when the over-50s holidays-to-insurance company cited headwinds including the collapse of Monarch Airlines.

To the relief of investors, there was no damage to the dividend in full-year results today as Saga increased the pay-out by 5.9% to 9p. Chief executive Lance Batchelor said the company was still highly cash generative and that the award was a sign of the board’s confidence. It also cut its debt ratio 1.7 times earnings.

Batchelor hopes that the pain being felt now will be offset in the future by a better quality of earnings and support for a progressive dividend policy.

Source: interactive investor               Past performance is not a guide to future performance

Unfortunately for investors, his strategy to replace riskier and more capital-intensive underwriting with more sustainable earnings from broking and travel has not been without its difficulties.

Even though Saga has achieved decent growth in earnings from its travel business, it has not seen the expected profit uplift in broking, particularly from the ultra-competitive UK home insurance market.

More recently though, retail broking has grown customer numbers at the start of this financial year, with a 14% increase in new business volumes.

And in travel, the business has already secured the majority of its full-year 2019 sales targets and is expected to achieve another step forward in profits this year.

With a dividend yielding 7.3% and a projected 2018 PE multiple of 8.4%, Numis Securities has retained its ‘buy’ recommendation and 180p price target. That’s still below the 185p starting point at Saga’s high-profile IPO in May 2014.

Having been the subject of a series of broker downgrades in recent weeks, Dunelm hit back today with a share price improvement in excess of 10%. The stock was trading at above 750p in October but has endured a torrid start to 2018, falling by more than 25% at one stage.

Today’s rally follows news of a 4.6% jump in like-for-like revenues in the quarter to the end of March. This included growth of 1.2% in stores and a 36% increase online.

Margins were lower, but Dunelm thinks the current quarter will show a significant improvement as the company has no plans to repeat the end of season sales seen last year.

Dunelm shares yield in the region of 5%, having increased the full-year pay-out by 3.6% to 26p in September.

Source: interactive investor           Past performance is not a guide to future performance

There was also a reassuring update from Greene King after the pub chain and brewer said the recent bad weather would not prevent it from delivering full-year profits in line with expectations at between £240 million and £245 million.

Greene King, whose share price has shown a steady decline for more than two years, said it was well placed to withstand the market challenges and deliver long-term value to shareholders. According to Stifel, the stock has a 7.1% dividend yield and PE multiple of 7.5x.

They said: “The shares offer good scope for a re-rating and we consider the dividend to be relatively safe.”

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