RBS a ‘buy’ as it becomes best performing bank after August trough

Otmane El Rhazi from Mindful Money » Shares.

Shares in Royal Bank of Scotland may be languishing at 330p by Investec analysts believe the stock has more to offer.

 

Investec analyst Ian Gordon said that although shares in the bank are still at 330p, ‘UKFI’s now infamous 4 August exit price’, the bank has been a top performer since the August crash.

 

He also argued that the delay to the buy-back of shares should not be taken negatively. On 30 July, RBS decided to defer the commencement of a return of a capital surplus to shareholders until 2017.

 

‘It has actually been the top performing FTSE 100 bank since the market trough of 24 August – up 7%,’ he said.

 

‘We think there is plenty more to go for. Our perception is that many would-be investors have interpreted the decision to postpone RBS’ share buyback until at least Q1 2017 as de facto confirmation that the scale of capital return is illusory.

 

‘We entirely disagree; or prior forecast of £10 billion in 2016, becomes £12.5 billion in 2017.’

 

Gordon added that the delay, which has been implemented to ensure the bank passes stringent stress tests of which the results are due in December 2016, should not worry investors.

 

‘We strongly disagree with this ‘timing decision’ but so be it – we expect to spend much of the next 18 months simply marvelling at the sheet size of the RBS’ capital surplus and wondering why it is just sitting there gathering dust,’ he said.

 

‘In our view, the RBS story offers steady incremental encouragement. The two truly transformational pieces are the disposal of Citizens Financial Group and the decimation of its corporate and institutional banking division.

 

‘With Citizens, RBS is already down to a 21% stake and plans to exit in full this year. Corporate and institutional offers a steady flow of small ‘milestones’.’

 

Gordon retained a ‘buy’ recommendation and target price of 395p on the stock.

 

Will the Living Wage just be “the tip of the iceberg for UK employers”?

Otmane El Rhazi from Mindful Money » Shares.

Retailing giant Next has become the latest group to anticipate that the Living Wage will increase costs in its outlets, expecting prices to rise 6% in total by 2020.

But it only attributes a 1% rise to the effects of the Living Wage.

The introduction of the Living Wage means minimum wages will be set at £7.20 an hour for over-25s from April 2016, forecast to rise to £9.35 in 2020.

On Tuesday Whitbread warned it will have to increase prices in some of its chains, which include Costa Coffee, Premier Inn and Beefeater Grill, to meet the costs of the Living Wage.

With Kingfisher, owner of B&Q, and JD Sports issuing results next week, investors may not have to wait too long to hear some more corporate predictions on the impact of the Living Wage.

Laith Khalaf, senior analyst at Hargreaves Lansdown highlighted that Next also identified the biggest cost associated with the introduction of the Living Wage is actually increasing the wages of staff who actually earn above the Living Wage.

Like most employers, Next will want to maintain pay differentials between its lowest paid staff and more senior employees. Consequently it estimates the cost of bringing employee pay up to the Living Wage to be £11m in 2020 but the cost of paying more to employees earning above the Living Wage to be £16m.

Khalaf said: “This corroborates the analysis of the Living Wage conducted by the Office for Budget Reponsibility in July, which estimated that around 3.25m people earning above the Living Wage would get a pay rise, compared with 2.75m people earning under the Living Wage.”

Next also warned of a possible ‘inflationary loop’ which could ensue from the Living Wage as it is pegged to the national average earnings which it may push upwards.

Khalaf said: “Paying employees the minimum wage could be the tip of the iceberg for UK employers, because increasing salaries for the lowest paid has a knock on effect on the wage demands of other workers. No junior manager is going to be happy if they are being paid the same as the newest trainee. This is likely to result in an upward drag on salaries, as companies filter progressively smaller wage increases up the pay grades. Employees earning at, or just above the Living Wage can expect to feel the biggest benefit, aside from those who have had their pay brought up to the new minimum.”

While Khalaf asserted that the Living Wage is going to increase the pay of millions of people, which is hugely positive, he added that there “may be a cost which can be counted in jobs, prices and profits”.

He said: “We are beginning to see companies warning they are going to have to increase prices to cope with the additional cost of the Living Wage, and we should expect more announcements of this sort. The high street retailer Next rightly identifies the risk of an inflationary loop, stemming from the fact the Living Wage is linked to average earnings, which it should push up. With inflation at close to zero this doesn’t look like an issue worth worrying about right now, but in five years’ time, an inflationary wage spiral may present more of a problem.”

Next shares are a ‘hold’ as it reassures investors with a 7.1% rise in pre-tax profits

Otmane El Rhazi from Mindful Money » Shares.

Next’s latest set of results cheered investors after it reported a 7.1% rise in pre-tax profits to £347.1m and reassured the market over the impact of the higher minimum wage

On Thursday in its half-year results, the High Street stalwart also announced a 2.7% rise in sales to £1.9bn, with full price sales rising by 3.5% which was slightly better than expected while the interim dividend was raised 6% to 53p.

Within the report Next said it expects the government’s new living wage to lead to a £2m increase in its wage bill next year and ultimately to add £27m a year by 2020. The group said it believes that is manageable but prices might have to rise 1% if there are no improvements in productivity.

Sales and profit guidance for the full year were unchanged and the company expects better sales in the second half, partly due to weaker comparative figures from last year. Following the update, by 1.41pm its shares had edged 15p higher to 7,690p. But over the past two years, the retailer has enjoyed a 51% share price hike, while over 12 months the stock is 7% higher.

The broker consensus towards the stock is presently pointing to a ‘strong hold’, marking a slight improvement in sentiment over the past three months. Analysts at both Canaccord Genuity and Investec have reiterated their own ‘hold’ recommendations while Cantor Fitzgerald is more bullish and has Next down as a ‘buy’.

Ian Forrest, investment research analyst at The Share Centre recommends Next as a ‘hold’ for “medium risk investors seeking a balance of growth and income”. He said: “The news shows Next continues to perform well and will have reassured investors that the impact of the new higher minimum wage should not be significant for the company.

“The company continues to expand its stores and online presence and, investors will note, Next is returning a significant amount of cash to investors in the form of special dividends. With much of this already reflected in the shares, we prefer Marks & Spencer in the sector due to its more attractive valuation.”

St Leger’s Day adage: were investors right to sell-out in May this year?

Otmane El Rhazi from Mindful Money » Shares.

With the St Leger’s festival imminently arriving, Graham Spooner, investment research analyst at The Share Centre, explores whether the historic tactic has benefitted investors this year…

As we approach St Leger’s Day 2015 this Wednesday, equestrian enthusiasts can look forward to the oldest classic horse race in the world, first run in 1776. For investors this day identifies with the strategy of “sell in May and go away, stay away ‘til St Leger’s Day”, which is based on the historical seasonal decline in the markets.

Earlier this year, we suggested five ‘buys’ for investors that might have defied this perceived logic. Looking back, how would you have done if you have sold up for summer? And how did our five shares fair against their benchmark index?

Over the period the FTSE 100 fell by around 12% and the FTSE 250 by close to 3%. Breaking it down a little further it will come as no surprise that if your portfolio was geared or overweight mining and oil shares or exposed to other global markets and especially emerging markets then selling in May would have been a very rewarding strategy. For anyone else with a more balanced UK portfolio, then once dealing costs have been taken into account, it may not have been quite so clear cut.

Our five shares to consider over the summer were; Booker, Marston’s, Easyjet, Compass and Restaurant Group.

Starting with the two blue chip FTSE 100 constituents, Compass fell by exactly the same amount as the index – mostly on the back of slowing demand from the offshore oil & gas industry. Easyjet outperformed the index, helped perhaps by the ones who sold and booked their flights to go away, but was still down by around 2%. There was better news from one of our mid-cap selections. Whilst Restaurant Group was down by 3% and Marston’s was down 5%, they both did no more than follow their benchmark. The star performer was Booker which rose by 26% against a 3% fall in its benchmark. The group’s May results, accompanied by the acquisition of Londis and Budgens, were well received and the latest trading update in September has helped underpin the fine performance of its shares.

In summary, our five picks (with the help of Booker) would probably have made you a little richer. The evidence for selling in May in recent years is hardly overwhelming. However thanks to China, this year will be viewed as one that would in general have rewarded investors. Another saying is that hindsight is a wonderful thing. We would recommend that investors look at what is best for their portfolio and not literally base their investments on old sayings, proverbs, adages or folk law.

Shares in Morrisons tumble as group reports hefty fall in profits and store closures

Otmane El Rhazi from Mindful Money » Shares.

Shares in Morrisons slid by 5% in early morning trading as the troubled supermarket announced a hefty 47% drop in half-year profits before tax to £126m.

On Thursday morning, the group’s stock was down 8.6p or 5% at 167.3p by 08:52 as it also revealed plans to shut 11 stores, which could potentially mean a loss of around 900 jobs.

It also said that over the six months to 2 August 2015, like-for-like sales tumbled 2.7% compared to the same period in 2014.

This followed an announcement on Wednesday that Morrisons was selling of 140 of its M local convenience stores for £25m.

The FTSE 100 listed group’s new chief executive David Potts who joined the business in March this year said the immediate priority is “to deliver a better shopping trip to stabilise trading performance”.

He outlined the firm’s “six strategic priorities” as

• To be more competitive
• To serve customers better
• Find local solutions
• Develop popular and useful services
• To simplify and speed up the organisation
• To make core supermarkets strong again

In a statement issued with its results, Potts added: “Our six strategic priorities will then deliver improvement in the core supermarkets, where we have the greatest opportunity.”

“It will be a long journey. We approach the challenge with energy, confidence and many strengths, particularly our strong balance sheet and cash flow, which enables investment in improving the customer shopping trip.

“As previously guided, we expect underlying profit before tax will be higher in the second half of 2015/16 than the first.”

Whitbread a hold says the Share Centre

Otmane El Rhazi from Mindful Money » Shares.

The Share Centre has rated brewer Whitbread as a hold, as the firm grew by 11% in the 11 weeks to August 13th when compared to the same period last year.

Whitbread says that it is on track to deliver full year expectations as well as its ambitious growth milestones with its interim results are due out on October 20^th.

Ian Forrest, investment research analyst says: “Many large UK employers are currently facing the challenges of mitigating the costs of the recently announced higher living wage. Whitbread announced today that it is developing plans to achieve productivity improvements, efficiency savings and selective price increases.

“For investors, we are continuing to recommend Whitbread as a ‘hold’. This is due to its good growth, future prospects and the overall attractiveness of the business model. Much of this is already largely reflected in the shares, which means they are not as good value as other companies in the sector. Our preferred travel and leisure stock for investors is Restaurant Group.”

Top British stock picks for HRH – BAE Systems, St James’s Place & BT

Otmane El Rhazi from Mindful Money » Shares.

As we approach the commemoration date for Britain’s longest reigning monarch, Ian Forrest, investment research analyst at The Share Centre, picks three long lasting British stock picks for investors…

BAE Systems

As a defense equipment company, which is a major supplier to Her Majesty’s Armed Forces, BAE Systems is a long-term stock for investors to watch. In the UK, there is a need to retain our own defense manufacturing capability and BAE Systems has proved a good long-term option for investors. It is important to note that prospects in the sector have improved, as orders from other countries remain strong.

As a medium risk stock with a good dividend, we are currently recommending BAE Systems as a ‘buy’ for investors seeking a balanced portfolio.

St James’s Place

This wealth management firm is a good long-term investment. The group has proven its worth and this looks as though it is due to continue, with positive growth prospects in both the UK and Asia. The growing need for individuals to make their own retirement provisions and the changing demographics in the UK are also helping the group. St. James is an apt name in this context given that it is also the name of the senior royal palace and the royal court.

For investors interested in this insurance sector group, we are currently recommending its shares as a ‘buy’ for those willing to take a medium level of risk and wanting to achieve or add to a balanced portfolio.

BT 

Charles II originally founded this great British fixed-line telecom group in 1660. Originally part of the Post Office, BT employs good long-term prospects thanks to its dominance over expanding broadband Internet usage in the UK. The group is also furthering its activity in TV and mobile services, which should deliver further growth and bolster its position at the center of the UK telecoms sector.

As with our other two long-term British stocks, we are currently recommending BT as a ‘buy’ for investors with a balanced portfolio seeking a medium level of risk.

Should you bet on the St Leger Day adage as a sure-fire tactic for investment returns?

Otmane El Rhazi from Mindful Money » Shares.

Should you place your bets on the St Leger Day adage as a sure-fire tactic for investment returns? Not always, urges Fidelity Personal Investing.

With the famous St Leger Day race-taking place on Saturday, 2 September, Fidelity Personal Investing analysed the returns for the FTSE All Share between 1 May and 1 September since 1995.

It found positive returns between these dates in 11 out of 21 years meaning investors would have lost money if they had been out of the market, disproving the theory of selling over the summer.

FTSE ALL SHARE		1995	1996		1997		1998		1999	2000	2001		2002	2003	2004
Return (1st May – 1st Sep) %							-14.47		-1.65		-8.98		-17.93
Did the adage work?		No	No		No		Yes		Yes	No	Yes		Yes	No	No
FTSE ALL SHARE	2005	2006		2007		2008		2009	2010	2011		2012	2013	2014	2015
Return (1st May – 1st Sep) %		-0.13		-0.99		-6.51			-2.09	-9.61					-10.15
Did the adage work?	No	Yes		Yes		Yes		No	Yes	Yes		No	No	No	Yes

Tom Stevenson, investment director, Fidelity Personal Investing said: “The St Leger Day adage is a bit of a non-starter. Our figures show it is totally hit and miss since 1995 and investors would have been left out of pocket 11 out of 21 times.”

While this summer may have been a classic Sell in May year. All around the world, investors who sat out the May to September period will be celebrating due to China’s stock market crash and the problems in Greece. Stevenson however warned that in volatile times doing nothing is often the best approach, especially when some of the best days in the market can often follow hot on the heels of the worst days.

The costs of trading in and out of the market should also be taken account of – frequent dealing is costly.

“It is very difficult to foresee whether we are in the early stages of a real bear market, or coming to the end of a short-term correction.  Either way, investors need to remember that blind faith in an old adage and being out of the market could mean missing out on strong performing days which can have a significant impact on your returns. Far better to focus on your long-term saving goals and stay invested,” he added.

Why shares in services group Bunzl are a ‘buy’ for lower risk investors

Otmane El Rhazi from Mindful Money » Shares.

Graham Spooner, investment research analyst at The Share Centre, explains why he is backing Bunzl…

Amidst recent market instability, support services group Bunzl is one for lower risk investors to consider. Solid interim results in August reported an 11% rise in profits to £147.1m, along with a 7% rise in revenues.

There was also good news for investors with an increased interim dividend of 11.7p – also up 7%.

Bunzl’s approach of making acquisitions to boost revenue and profit continues to work well, and has led to its aforementioned improved dividends and a strong share price performance over the last four years.

The company has a global presence, which has protected it from regions that have suffered more in recent times, such as Europe. The weakness in sterling against the dollar should also further benefit the group’s results.

Bunzl is a defensive pick in volatile times, as it provides a range of essential products such as plastic cutlery, toilet rolls and cleaning products.

The group has had continued success during tough times, and we regard it as being a well-managed business. We are currently recommending the group as a ‘buy’ for lower risk investors with a balanced investment objective.

 

Mindful Money’s weekly shares watch: Next, Barratt Developments & Morrisons

Otmane El Rhazi from Mindful Money » Shares.

Given the ongoing buoyancy being enjoyed by the UK’s property market, investors will want to hear Barratt Developments is keeping up with demand when it reports its full-year results on Wednesday.

Following its July trading update, brokers are anticipating that the results should bring few surprises, with attention potentially focused on any accompanying current trading comments.

The past 12-months alone has witnessed the FTSE 100 firm’s shares soar by 72% and for his part, Graham Spooner, investment research analyst at The Share Centre is currently calling the stock a ‘hold’.

He says: “The improving trend over the last few years has helped the company return to a net cash position for the first time since the financial crisis. Like many other companies in the sector, they plan on returning some of this to investors through special dividends. Investors should remember that the sector has held up well in the recent market turmoil.”

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers highlights that aided by increased completion volumes, a greater proportion of builds on higher margin land and underlying house price inflation, “management have guided to an estimated 45% increase in pre-tax profit to around £565m”, up from £390.6m last year.

Prior to the results, and given the already significant rise in the share price, the analyst consensus opinion currently signifies a ‘strong hold’.

Thursday sees High Street stalwart Next report its half-year results. Having already delivered better than expected first half sales at its July trading update – up 3.5% – the focus falls on profits and accompanying management outlook comments.

The group’s shares are up 5% over one year and by 1% over the last six months. Looking ahead to this week’s update, Bowman notes: “First half pre-tax profit is forecast to rise by around 5% to £342m, with management currently guiding towards full year sales in the range of +3.5% to +6%.”

Before the results, analyst consensus opinion denotes a ‘hold’, a sentiment Spooner echoes.

He says: “Shares in the high street clothes retailer have outperformed the market since its last trading update in July. At that stage it delighted the market by revealing better than expected sales in the first six months and raised its full year profit guidance.

“Investors will be keen to hear any update on full year expectations and will focus on the performance of the mail order business as well as the high street stores. Next is due to pay a special dividend in November and investors will be looking for news on any further special dividends to come.”

Morrison Supermarkets also reports its half-year results on Thursday. The troubled supermarket has seen its stock nosedive by 19% over the past six months and Bowman expects that a business assessment from new chief executive, David Potts, who joined back in mid-March, will lead the agenda.

Bowman says: “Evolution rather than revolution in the company’s strategy is broadly expected, with continuations of existing initiatives such as property disposals and the postponement of convenience store openings likely.

“First half pre-tax profit is expected to fall by around 30% to £125m, pressured by falling sales.”

Ahead of the announcement, and despite a near 20% decline in the share price over the last six months alone analyst consensus opinion continues to point towards a ‘sell’ however Spooner has faith and has labeled it a ‘hold’.