NEWS

Are dividends in the UK banking sector safe during a recession?

Virgin Money results suggest plain sailing but big investors are cautious

Shareholders in UK banks won’t need reminding of their sudden loss of income during the pandemic after the regulator put a stop to dividend payments.

With the country now forecast to go into recession and gloomy forecasts of up to a 30% drop in the housing market, could we be facing a similar situation in a year’s time?

The recent results from the big high street lenders were generally robust, as rising interest rates allowed them to grow their net interest margins without taking on undue risk.

While provisions for bad loans are rising, they are still well below the levels seen in previous downturns so the question is are shareholders being lulled into a false sense of security?

There was little to worry investors in the latest results from Virgin Money (VMUK), which saw strong growth in loans and deposits and raised its share buyback and final dividend.

In total, shareholder distributions for the year to September are set to reach £267 million or an impressive 57% of the bank’s earnings.

The message from chief executive David Duffy was that credit quality was ‘solid’ with low and stable arrears, and while some customers may struggle in the coming months the bank expected defaults to rise to no more than 0.3% to 0.35% of its loan book over the next year.

The company also said it would aim to pay out 30% of earnings next year and buy back up to £50 million of its shares, prompting a sharp jump in the stock price.

Analysts at Shore Capital predicted a round of earnings upgrades, describing the bank’s guidance for profits and dividends together with its return on capital target as ‘making a mockery’ of its current valuation.

Not everyone is so sanguine about the outlook,

Bank dividend yields

Company

Natwest Lloyds Barclays Virgin Money 2023 dividend yield (%)

6.2% 5.9% 5.7% 4.7%

Table: Shares magazine • Source: Stockopedia

however, even big investors in the sector.

Alex Wright, manager of Fidelity Special Values (FSV), told Shares he had added to his banking holdings during the market volatility caused by the September ‘mini-Budget’ as the rising interest rate environment had made them more resilient to a recession.

However, Wright sees the banks having to raise their loan-loss provisions during a recession either of their own accord or under the Bank of England’s regular stress tests.

In the case of NatWest (NWG), for example, if there were a severe downturn which caused a 5% fall in GDP, a 20% fall in house prices and a 7% to 8% unemployment rate, the bank’s earnings would likely halve and therefore dividends could do the same, although Wright sees little chance of them being cut to zero altogether. [IC]

Signs of life appear in the UK IPO market: Grindr shares gain 330% on debut

Frenzied trading in dating app is reminiscent of the meme stock volatility seen during lockdown

To say that 2022 has been a trickier for companies looking to list on the London stock exchange would be an understatement.

According to consultants KPMG a total of 11 firms listed in the first half of 2022 raising just £0.5 billion which is a whopping 95% down on the £9.9 billion raised in the first half of 2021.

But it’s not just a UK problem. US IPOs (initial public offerings) are down 91% and Europe has seen its IPOs shrink 88% year-on-year as macroeconomic headwinds bite into investor confidence.

Data compiled by Shares shows how the enthusiasm for IPOs has dwindled since the start of 2022. In January there were more than 15 potential listings and as we write there are just three. Many of the mooted new listings this year have failed to join the market.

SPARKS OF LIGHT AMID THE GLOOM

One such company which originally intended to float in October is now making another attempt under a new name. AT85 Global MidMarket Infrastructure Income Trust is targeting investments in mid-market infrastructure assets which are adjacent to the core infrastructure markets.

The company is looking to purchase assets in the three key areas of transport & logistics infrastructure, utility-related infrastructure and digital infrastructure.

It has assets of £98.5 million and a total pipeline of £539.8 million while the company is aiming to issue 300 million shares at 100p per share.

The company has appointed Astatine Investment Partners as investment manager which has delivered a net internal rate of return of 18.1% between February 2014 and June 2022 following the same strategy.

GRINDR SOARS ON DEBUT

Shares in LGBTQ (Lesbian, gay, bisexual, trans, queer) focused dating and social network app company Grindr (GRND:NYSE) more than doubled after making their debut (18 November) on the New York stock exchange.

The shares began trading at $16.90 and surged as much as 323% to $71.51 before closing at $36.50. Trading in the shares were halted 15 times due to huge volatility which saw 2.7 million shares change hands.

The shares came to the market after merging with SPAC (special purpose acquisition company) Tiga Acquisition Corporation.

Grindr is joining the market after a turbulent few month for fellow dating app shares with Tinder owner Match Group (MTCH:NASDAQ) dropping 65% and Bumble (BMBL:NASDAQ) falling 32% year-to-date.

Grindr said first-half revenues grew 42% to $90 million while adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) increased 26%.

The company is pinning it hopes on a unique business model which has a high brand awareness. This allows it to keep advertising spending to just 1% of revenue. The app has around 11 million active monthly users. [MG]

New surge in China Covid cases halts rally in Asia-related stocks and investment funds

Investors are starting to fear the Chinese government will no longer relax its Covid rules

Aresurgence of Covid in China has put a spanner in the works for the big Asia reopening story. Many investors had bid up Asian stocks and Asia-focused funds and investment trusts in recent weeks in anticipation of the Chinese government taking a softer approach to dealing with the coronavirus.

There had been reports of a March 2023 exit plan which could see the introduction of a less stringent policy, with China having already relaxed several Covid measures for international travellers earlier in November.

Greater freedom for people to move around China would benefit multiple industries, hence why Hong Kong’s Hang Seng index jumped 25% in value between 31 October and 15 November.

News that China had suffered its first coronavirus death in six months caused the Hang Seng to retreat more than 3% over two trading days (21-22 November).

What happens in China matters a lot to the global commodities market as the country is such a big importer of oil, gas, coal and metals. It is also a key market for many luxury goods companies who sell products to consumers in this country. [DC]

Why Zoom woes continue as it lowers revenue guidance

Video conferencing platform hit by competition and a return to in-person meetings

VIDEO CONFERENCING FIRM

Zoom Video Communications

(ZM:NASDAQ) may have beaten expectations with its quarterly earnings (21 November) but investors focused on weak revenue guidance instead.

Zoom is one of those pandemic winners which has struggled as the world has moved to a new normality. This is reflected in a current share price of a little more than $80 compared with a 2020 peak closer to $600.

Growth is drying up and this, plus a wider shift by investors out of fast growth stocks as interest rates go up, has resulted in a significant equity derating, with the shares now trading on a little more than 20 times earnings.

Revenue in the three months to 31 October was up 5% year-on-year, down from a 8% growth rate in the previous quarter and the slowest rate on record for the business.

Net income fell from $340.3 million to $48.4 million on a yearon-year basis and the company trimmed its revenue guidance for the year to 31 January 2023, blaming the stronger dollar.

Zoom has been hit both by increased competition as larger and better-resourced rival Microsoft (MSFT) has pumped investment into its Teams platform.

The removal of Covid restrictions means many of the meetings which were happening on a screen are now occurring in person again.

Citigroup analyst Tyler Radke commented: ‘Despite some modest revenue upside, the leading indicators suggested signs of incremental deterioration.’ [TS]

Investors appear to be betting on recovery ELECTRONICS RETAILER CURRYS’ (CURY) share price has managed a meaningful rebound in recent months. This implies the market is becoming more optimistic about the outlook and that a lot of bad news has already been factored into the share price.

Investors will get some insight when the company announces its first-half results on 15 December, which should include comments on its showing during Black Friday and Cyber Monday as well as how wider festive trading is going. Sentiment has soured towards the global food business

This is followed on 18 January 2023 by a trading update covering the Christmas period as a whole. Investors last heard from the company when it announced full year results on 7 July. These showed revenue down 2% to £10.12 billion. Store sales were up 24% but this was offset by a 29% decline in online sales.

Currys benefited from people buying laptops and other electronic goods during the pandemic but recent pressures on consumer spending and the fact that much

How Currys shares have of this earlier spend is unlikely charged higher ahead of key trading period HIGHER Moving to be repeated in the near term have clouded the outlook for the company. However, Liberum analyst Wayne Brown observes that net cash averaged £290 DOWN in the dumps million in the 12-month period to 30 April 2022. He adds: ‘Currys has transformed over the past few years, but there remains a significant recovery and growth opportunity.’ [TS]

Currys

(p) 150 100 50 0 2021 2022 Chart: Shares magazine • Source: Refinitiv

Hilton Food shares in freefall after second warning

SHARES IN HILTON Food (HFG) hover near five-year lows at 546p and are down more than 50% year-to-date after a second profit warning (8 November) in as many months.

This has left a sour taste with investors mindful of the adage that profit warnings come in threes. In its latest earnings alert, the meat, seafood and vegetarian foods packer warned its UK seafood business will deliver a softer performance than initially expected.

While Hilton has made

‘good progress’ in either mitigating or passing through ‘unprecedented’ cost inflation to retailers, slower progress renegotiating pricing with customers, at a time when consumers are feeling the pinch, means full year operating profit will be below expectations. Shore Capital cut its year-toDecember 2022 pre-tax profit estimate by 14% to £54.5 million and downgraded its HIGHER Moving DOWN in the dumps earnings forecasts for 2023 and 2024. The house broker knows that ‘a management team with skin in the game will be hurting’, adding that ‘management has delivered considerable value to shareholders and it knows it needs to reassure to rebuild’.

In the first warning (15 September), Hilton Food stated that annual profits would fall short of expectations due to cost pressures on consumers, soaring seafood raw material prices, rising interest rates and start-up costs. [JC]

Hilton Food

(p)

1,000

500

0

2021 2022

Chart: Shares magazine • Source: Refinitiv