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Investing on a low income.

Christmas clean up – Sorting out my portfolio

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My portfolio was a mess! With many of my early investing mistakes still present in my portfolio I finally decided to bite the bullet.

I CLEANED UP!

All investors evolve over time. We learn from our mistakes and adapt our strategies accordingly. But, what should you do if past mistakes are still evident in your portfolio?

It can be a painful process, that costs money in the short term BUT if a stock’s fundamentals mean it no longer fits with your overall strategy, couldn’t the capital tied up in it be deployed somewhere else? Continue Reading

“Investing is just like gambling” No. It really isn’t.

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The first thing I often hear when people learn that I’m an investor is that’

“Isn’t that just glorified gambling?”

Fed up of constantly explaining why it isn’t, I decided a blog post was necessary.

The main reason why many think that investing is a form of gambling is because they don’t know the difference between trading and investing. Continue Reading

Take pleasure when others spend big – Debunking their spending

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Sometimes, frugal living is tough, and one of the hardest things about frugal living is watching others spending big.

It’s sometimes hard to watch as your friends go on expensive holidays, buy expensive cars (mostly on finance) and enjoy the finer things in life.

BUT, we should take pleasure when others spend big! Continue Reading

6 tips to remain social at uni whilst saving money – Eating out.

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One of the biggest challenges I face at uni is how to save money but remain social.

I’m often asked by friends to go out for food, coffee, trips and of course nights out!

If you say no in these situations, you’re going to spend your time in uni with little friends.

So here are three useful ways in which I save money whilst remaining social.

Eating out  

  1. When asked to eat out, always try to do so before 5:30pm.

    The vast majority of restaurants have great deals on between lunch time and the evening period. Take advantage of this.

  2. NEVER split the bill amongst friends.

There’s nothing more annoying than going out for food, ordering a salad and tap water then ending up paying for Sandra’s steak and glass of wine.

  1. Do your homework and bring the correct change.

    This is a great trick I learnt during my first year. By looking up the menu online you can bring the correct change (or really close) to the restaurant. This avoids the bartering of;

    “Let’s just split the bill, it’s easier”
    “ Yours was £8 so just chuck me a tenner”

    Simply give your share of the bill and relax.

  2. Don’t let anyone buy you a drink.

    This may seem counter-productive. I mean, who doesn’t want a free drink? The problem when someone buys you a drink is that it creates an atmosphere where you socially ‘owe’ the other person a drink.

    When it comes to the dessert and they fancy another pint or a coffee, guess who’s paying!

  3. Stick to tap water

I know, I know. It’s lame, but I’m seriously fed up of paying £2.50 for an orange juice or pint of coke.

  1. Stick to one course

Again, a lame choice but by sticking to one course you can cut your bill in half.

Some of these tips are more obvious than others but stick to these tips and you won’t bust your budget on dining out.

Being frugal doesn’t mean being unsocial.

Keep an eye out for my next article on frugality: How to remain social at uni whilst saving money: Nights out.

A perfect storm, valuation + Brexit – Big declines are coming.

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The market has been on an outstanding streak as of late. Shrugging of Brexit and an interest rate rise in the USA to get close to its all time 7000+ high last Thursday. But, I feel that the market is about to enter an exciting period of decline.

Finally, it seems that common sense is prevailing and the market is waking up to realise that it’s grossly over valued.

JUST TAKE A LOOK AT THE FTSE’S 5 YEAR P/E!

screen-shot-2016-09-12-at-09-13-06

As we can see from the above graph, the FTSE’s price to earnings ratio has spiked massively from bumping around under 15 to over 35.

Simply put, the FTSE has been driven by demand as opposed to underlying earnings growth from its constituents.

A quick glance at some FTSE constituents valuations will further illustrate the eye watering prices being paid by investors for stocks in pursuit of yield and in hope of earnings growth.

Brexit will smash high p/e stocks.

Investors have shaken of Brexit nerves but this is only relative to pre-brexit market levels that were already overvalued. (As shown on the FTSE 100 5 year illustration above)

When investors buy high p/e stocks they are buying future growth prospects. These prospects and material. Simply best guesses. When these don’t deliver, these stocks will tank.

Why?

Consumer confidence has dipped since the Brexit vote but action by the BoE has helped steady nerves.

screen-shot-2016-09-12-at-09-25-06With a clear decline since Brexit, BoE action has led a recovery in consumer confidence since then, but confidence remains in negative territory.

Further to this, Brexit hasn’t even happened yet and the full effects of the vote are yet to be realised.

I believe that investors are relying on a false self sense of security simply hoping that the UK will get a good deal and that BoE action will avoid a recession. BUT, once article 55 is triggered and the negotiations properly begin consumer confidence will once again decline.

When consumers lack confidence they don’t tend to spend money on non-essentials. Instead, they consolidate.

With less money being spent by consumers, inflated p/e ratios suddenly become harder to justify as uncertainty weighs on forecasted earnings.

Just look at what happened to ABF’s share price on the news that Brexit related events would weigh on profits;

screen-shot-2016-09-12-at-09-30-46

 

So what do these two things have to do with each other?

The first section of this article outlined that the FTSE 100 was grossly overvalued on a historical basis even before Brexit.

The second section of the article outlined declining consumer confidence that will lead to lower consumer spending. With lower spending and more economic uncertainty due to Brexit, high p/e stocks will find it hard to meet their forward valuations.

Applying this logic one could conclude that the FTSE100 will find it hard to justify its high valuation and correct to a more historical average of a p/e ratio of around 15.

Kicking the FTSE while it’s down?

Another worry for the FTSE lies across the atlantic, in the USA.

I have argued for quite some time that the FTSE’s valuation is also being propped by income seekers buying high yielding stocks. This is why I sold BP.

Although future rate rises keep getting kicked down the road by the federal reserve, great unemployment data from the USA may lead to a rate rise sooner rather than later.

If US rates were to rise, investors may begin to switch their money from these risky high yielding stocks to safer bank accounts to fulfill their appetite for capital appreciation.

Conclusion

The lesson remains, never try to time the market. Even with p/e ratios this high, I have still been buying.

But, I think the declines of Friday and Monday are exciting signs of a correction that will hopefully lead to an over reaction on the downside for many excellent, but pricey, dividend stocks!

I’ve got my eye on picking up some stocks;

USA stocks: JNJ + MCD
UK stocks: RB, ULVR, WHTB

Don’t panic! This is an exciting time for dividend investors. TIME TO GO SHOPPING!

Undervalued stock? Don’t wait for a correction BUY NOW!

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  • Perceived ‘discounts’ obtained by waiting for a stock’s price to drop are often less than anticipated due to missed dividends
  • Is the discount obtained from waiting for a stock to drop worth the risk of not owning it at all?
  • This article will show how waiting just 3 quarters for a 5.5% discount erodes the real discount by 2.2%
  • Investors waiting for a price to drop are fighting against time and the market.

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“The market is overvalued”

“A correction is looming”

“We’re going into recession”

These are some phrases I’ve become used to reading, especially over the past few months.

Some ‘investors’ it would seem, are putting of buying shares due to their perceived valuation of the market.

But investors should always remember that;

Time in the market beats timing the market”

Why you shouldn’t try time that market

When I first started investing, I went at it – trying to time the market and shares.

I would insist, for example, that I would only buy a stock, let’s say ‘stock x’ if it dropped from £1 to 90p (a 10% discount).

But what I soon realised is that most shares wouldn’t drop, and the market correction that I was predicting along with many analysts just wasn’t happening.

In fact, market corrections have been predicted for over two years now.

We’re still waiting.

If it’s undervalued buy it – even ‘if it has further to drop’.

Let’s take a real life example.

A friend of mine really wanted to buy some shares in Kraft Heinz in January last year. The shares, having just come back from a price below $70 looked attractive, but he told me that he’d wait until the shares dipped below $70 again before buying in.

That never happened and now the shares sit at close to $90.

A great company with an attractive yield missed, simply for a few $.

A current example is Flower Foods which currently sits at just above $15. At this price, the stock has a dividend yield of 4.2% and is trading at low p/e multiples compared to its history.

Yes, the company currently has a few issues but I was amazed to see investors saying they are “waiting for the price to drop further”.

Some speculators have noted a current legal issue facing the company and the way it employs its drivers as a factor for further price reductions.

This is a dangerous strategy which ignores the fact that the shares are currently overvalued. There’s a very simple message for these investors;

Let’s take a look at how much is saved by waiting for a mear 5% drop in the price of a stock.

 

 

Flower foods at $15.71 vs Flower foods at $14.85

 

Let’s say an investor will only buy Flower Foods below $15. I bought in at $15.71, therefore if the investor manages to predict the market (against the odds it would seem) and buy in at $14.85 then he/she has achieved a 5.5% right?

Wrong.

Here’s why that number is in fact only 3.3%

flower

 

 

Point one shows the shares at $23.50. At this price, I would not have considered purchasing the shares, deeming them to be too expensive.

At $15.71 on February 12th , the share’s are looking undervalued and I decide to pull the trigger and buy. (Let’s say 100 share to keep the maths simple).

Scenario 1 Buying in February ($15.71 a share)

In March I receive a dividend of $0.145 per share.

March income = $0.145 x 100 = $14.50

I reinvest the dividends on the 18th of March (payment date) to purchase 0.77 share’s of Flower foods.

In June I receive a dividend of $0.16 per share.

June income = 0.16 x 100.77 = $16.12

I reinvest the dividends on the 23rd of June to purchase 0.9 shares of Flower foods.

In September I received a dividend of $0.16 per share.

September income = 0.16 x 101.67 = $16.27

I reinvest the dividends on the 8th of September (for illustrative purposes as dividend is paid on the 9th) to purchase 1.07 shares of Flower Foods.

I now have 102.74 share’s of flower foods for my initial $1,571 investment.

Scenario 2 – Buying in August ($14.95 a share)

On August 11th share’s drop below $14.95 so investors who waited for the shares to drop below $15 buy.

They buy 100 shares for $1,495.

The investor receives the September dividend of $0.16

September income = $0.16 x 100 = $16

The investor reinvests the dividends to purchase 1.05 shares of flower foods.

The investor now has 101.05 shares of flower foods for their $1,495 investment.

Result

Cost per share;

Me: 1,571/102.74 = $15.29 a share
Investor 1: 1495/101.05 = $14.79 a share

% Difference

3.3% saving in favour of ‘investor 1’

So, it appears that taking the risk of the share price increasing has saved investor one a mere 3.3%,

But, extend this over a few more quarters and the margin of discount decreases.

Here was an example of three quarters of dividends, what if the wait was over 6 quarters.

The lesson is simple, the longer the time period, the more the cost of not investing is.

I like to be sure, so why not lock in that undervalued dividend paying stock and get your money to work!

This time investor 1 got lucky. But will Flower foods drop below $13.50 or $10. Who knows? Frankly, I don’t want to wait to find out.

Conclusion

The longer one waits before buying a dividend stock, the more the cost of not investing becomes.

The above example begs the question, Is waiting for the price to drop really worth risking a guaranteed purchase of an undervalued company?

Isn’t it better to lock in a deal and put my capital to work with a 4.2% yield as opposed to the close to 0% I’d get in the bank at current interest rates?

 

The devastating effects of a damp student let.

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There are so many things students need to get right before coming to uni.

We have to make sure we have to make sure we have all the textbooks for the year ahead, enough money to scrape by on and that we bring everything we need from home!

But, there’s one aspect of student life that’s often overlooked.

Housing.

Your student house is where you’ll inevitably spend most of your student life and getting the right house is key for health and in turn motivation.

Renting a damp house could have devastating effects on your health and finances, as I found out.

My single biggest mistake.

In June this year I made the biggest mistake of my student life.

I didn’t do the necessary checks, got excited by the size of a bedroom and ended up renting a damp house.

On the 8th of June I moved in, along with all my belongings to the new house.

What proceeded was the worst 2 months of my adult life.

 

First signs of damp

To start, everything appeared fine, I moved into a large space and all was well.

I unpacked, stored my things, opened a celebratory glass of wine and celebrated what I thought was a ‘gem’ of a find.

Smugly thinking I’d gotten a good space for the price I was paying, reality soon smacked me in the face.

Slowly but surely, over the next few weeks I found I was waking up feeling very tired.

I couldn’t help but feel like my mind was clouded and that I was slowly but surely losing my enthusiasm and edge.

Thinking this was just a case of a cold, flu or poor diet I soldiered on without knowing that the particles of bacteria filling the house could have been seriously affecting my health.

It was only when my parents visited that I became aware of the damp. When my mother visited the flat for the first time she immediately exclaimed that “It smells of damp in here”.

Unbeknownst to me, I had acclimatised to the horrible, stingy damp smell filling the house.

Further investigations with a damp meter showed very high levels of damp in the property, especially the living room.

 

Things get worse

After reporting the damp problems to the estate agents involved, it was weeks until they finally agreed that there was both penetrating and rising damp at the property.

Those terms, alien to many students, simply mean that there were two causes of damp tag-teaming my health!

After returning from a three week trip to China, (staying in a dry property) I was met with a stinky damp house ready to take on my health again.

The wallpaper in the living area began peeling, the tops and bottoms of the walls were visibly wet in the corners and sat in the middle of this room was me, breathing in damp that made the pollution in Shanghai feel like fresh country air.

As an asthmatic, my breathing became much more laboured over the coming weeks as the landlord eventually agreed to let me move out.

By now I was waking up tired, napping at 8pm and suffering from a very clouded memory, meaning that I was struggling to study for my dissertation.

Chesty coughs became a problem in the following weeks and I became a much less patient, irritable person to all.

I was going into work in damp smelling clothes, with baggy eyes and low energy levels. Not the impression I really want to be making to my peers.

Desperate to get out of the house, I would often sit for hours in coffee houses, the uni library and walk aimlessly around Swansea just to feel I could breathe. I spent tens of pounds on coffee and junk just to escape – not what the frugal student wants to be doing!

Moving out

Finally, just four days ago, I moved house.

Having to take the first dry suitable property we saw means I had no room to negotiate on price.

I also had to pay another admin fee and am now left with two lumps of money in deposit protection schemes as I eagerly await the inevitable unreasonable deposit reductions from the landlord of the property – that students inevitably suffer.

BUT, My first night sleeping in a dry room was pure bliss. Waking up a few days after I felt like I has been reborn. I had energy again, enthusiasm and most importantly the drive needed to complete a degree.

Whilst it would be very hard for me to prove that damp caused the symptoms I suffered over the past two months, I am convinced it was the source.

No student should be made to suffer damp housing – don’t get caught out!

 

Avoiding damp 

I viewed several properties before moving from the damp one, making sure I got it right this time.

I noticed two ‘tricks’ that may have been used by agents and landlords trying to mask damp.

It’s worth you keeping these in mind when viewing properties.

 

  1. Newly painted properties.
    If a property has been newly painted then this could make damp much harder to spot. The damp house I moved into had been freshly painted meaning that the damp patches weren’t visible upon viewing.
  2. Does the property smell strongly of anti-odour spray?
    Another trick that may make it harder for students to spot damp in a property is when the property has been sprayed with anti—odour sprays such as ‘oust!’ before viewing, thus masking the musty smell of damp.

Here are some signs of  damp that you may want to look out for;

  1. Visible algae and mould – especially in the corners of rooms. (Ask if you can move sofas and tables to check corners)
  2. A musty, damp odour
  3. ‘Lifting’ wallpaper
  4. Changes in plaster up to one meter above floor height

If you’re really keen you could even buy a damp meter although the accuracy of these varies (especially with cheap ones not used in the industry).

Lessons

As students we are faced with a mountain of challenges and a damp home will make this a lot worse.

The NHS has a useful page on the effects that damp can have on your health:

Having to move house mid-study can have devastating effects both financially and academically.
A damp house could be the difference in grades attained, I have no doubt that the ‘clouded’ mind I experienced affected my ability to perform academically (Luckily I had no exams).

Final word

This blog details my own experiences and it’s worth noting that I have absolutely no qualifications or experience in dealing with/detecting damp.

If you think your student let is suffering from damp then please seek advice from your Students’ Union/University advice centre, The housing charity Shelter or the Citizens advice Bureau.

The tips contained in this article are things that helped me and may not necessarily be helpful to others.

 

BT shares: A complete overview for 2017.

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Introduction

If you’re looking for a complete overview of BT Shares then you’ve come to the right place!

In this article, I’m going to discuss BT as a business, the wider telecoms market and whether BT shares are a compelling investment.

On the lookout for some cheap dividend stocks after the Brexit flash crash I picked up some BT shares but they have since gone on to decline by around 18%.

Whilst I’m not a huge fan of the stock, especially after the accounting revelations, I’m confident in holding it for its dividend and future potential.

With BT shares down 36% in a year, could this be a buying opportunity?

Why have BT shares dropped so much?

As I’m sure most are aware, BT’s share price went down by over 20% by the end of January and are down by around 36% overall this year.

So, Why have BT shares gone down?

  1. The Italian accounting scandal

BT recently became aware of some historical accounting inaccuracies in their Italian arm.

Initially, they estimated that the cost of the inaccuracies would come in under £150m but after an independent audit the cost has tripled to over £450m.

Following this, the head of BT’s European division was relieved of his duties leaving BT’s reputation in Europe tarnished.

2. The end of big IT contracts

The previous Labour government embarked on an ambitious IT spending spree to upgrade the UK’s tech infrastructure.

These contracts included improving internet speed and connectivity.

With these contracts now coming to an end, BT, especially it’s Openreach arm, will find it tough to replace this reliable and substantial cashflow.

The good

Quadplay!

I’m always quick to emphasise that stocks should be bought on current facts and valuations. One should always do their best to avoid ‘betting’ on future earnings and predictions.

But, recent moves from BT have gotten me excited!

BT recently bought the UK’s largest mobile network EE for £12.5bn. A hefty price!

This acquisition puts BT in an enviable market position. The company now offers Telephone, Broadband, TV and Mobile and are focusing on rolling these products into one convenient package for customers.

We have already seen a glimpse of the future potential of these synergies by BT’s offer of a free BT sport app for EE customers for six months.

Openreach – Clarity at last!

Regulatory issues surrounding BT’s Openreach servicing branch have caused headaches for the company over the past few years.

But, the telecommunications regulator deemed a spin-off unessacary, and BT have since negotiated a controlled and partial spin off of its Openreach arm.

Openreach will have its own board, and make its own investment decisions but BT will still retain control over Openreach’s budget and will remain the 100% owner of the cashcow.

This retention, along with quad-play, will allow the group to continue to enjoy competitive advantages over its competition in future.

The main attraction – dividend.

One of the main attractions for me is BT’s dividend.

Currently yielding 3.55% (ttm) BT offers a decent dividend yield.

The company has been rebuilding their dividend since 2008 and have achieved a 5 year growth rate of 13.6%.

The payout ratio currently sits at close to 50% meaning that the company has room to grow its dividend even if results disappoint somewhat.

The company has managed to grow its EPS by 10% over the past 5 years meaning that dividend growth is sustainable in the medium term if EPS continue to grow by the same rate.

In fact, I expect synergy savings from the EE acquisition to start kicking in and increased customer retention to outpace the increasing costs of TV rights (although this is pure prediction).

Screen Shot 2016-09-01 at 11.17.17

The Bad

Football rights – a red flag?

BT is currently up against Sky when it comes to bidding for football rights. The intense competition has lead to the costs of football rights skyrocketing!

BT recently spent £1.8bn to snap up football rights to broadcast on BT sports including a £300mn fee for champions league football rights.

This has helped reduce the level of broadband customers switching to Sky but has come at a heavy price with the cost of football rights soaring 80% due to the bidding war.

My main concern here is the limited number of cost cutting measures that Sky and BT could employ in order to offset the rising costs of football rights.

With BT’s debt pile already stacking higher, this continued bidding war is of major concern and is one it may well lose in the long term vs a mammoth like Sky.

Disruptors

Moving forward, we may see services such as Netflix and Amazon prime begin to bid for TV rights that could drive costs higher again.

Amazon recently made a bold move in signing the trio of Jeremy Clarkson, Richard Hammond and James May, formerly of Top Gear for an exclusive online series The Grand Tour.

They are reportedly paying a hefty £3million + per episode.

It’s inevitable that Amazon and its rivals will eventually move into sports broadcasting, pushing up the price of rights further.

With BT investing heavily into its quadplay stratergy for customer retention a loss of any single element could derail its stratergy.

The Financial Times has a great article about how the football rights battle is heating up; Further reading: http://www.ft.com/cms/s/0/f5af4fde-5404-11e6-9664-e0bdc13c3bef.html#axzz4IzkHkEZV

Debt

The acquisition of EE certainly did nothing to improve BT’s already pressurized balance sheet.

In 2016 Net debt has increased by £4,726m. This included the £3,464m cash consideration as part of the EE acquisition and EE net debt of £2,107.

What is  also worrying is the massive £7bn pension deficit that BT is carrying. Although it’s most generous of schemes, a relic of state ownership, ‘The BT Pension Scheme (BTPS)’ is now closed to new members, the BTPS still has around 35,000 active members, 197,500 pensioners and 69,000 deferred members.

A 16-year deficit contribution plan has been agreed. Under this plan, BT has made deficit payments of £875m in March 2015, £625m in April 2015 and £250m in March 2016. A further payment of £250m will be made in 2016/17, bringing the total for the three years to 31 March 2017 to £2.0bn.

This mammoth deficit isn’t going anywhere soon and is a major concern going forward with a further £5bn of payments still to make in order to close the gap.

With BT continuing to pour billions into this seemingly unfillable hole investors are right to be skeptical about future free cash.

Screen Shot 2016-09-01 at 10.52.20

 

Should I buy BT shares? – Valuation

What attracted me to BT shares was its valuation compared to the FTSE100, but this isn’t to say that the stock is cheap.

BT shares currently look attractively valued and appear a compelling investment. BT’s current 10 year p/e ratio is 12.8 (excluding 2009 due to negative earnings). The company currently trades at a p/e ratio of just 10.0 meaning the shares appear undervalued.

With the added value of EE and Quad-Play, I feel that BT has evolved rapidly as a company over the past two years and is now much better placed to tackle competitors as it was previously.

Previous valuations for BT do not reflect its current state.

This is evidenced by a widening of margins, despite TV rights battles. With further cost saving measures ahead and an increase in customer retention I am confident these margins can be maintained.

BT operating margins: (Source:GuruFocus)

Screen Shot 2016-09-01 at 10.43.14

 

 

Summary

BT has placed itself in an enviable competitive position with the acquisition of EE.

EE and BT are both well known brands with good reputations. Rolling telephone, broadband, mobile and TV together allows BT to increase barriers to exit for customers, allowing increased customer retention.

Debt remains a worry for BT. With a seemingly never ending pension black hole and increased spending on football rights, investors need to watch the balance sheet closely.

BT’s margins continue to expand, giving me confidence in the company’s ability to successfully battle competitors.

The recent collapse of the share price have left BT shares looking very attractive with the dividend being maintained.

The fallout from the accounting scandal and the infrastructure will take years to fully pass but the dividend remains in place and I still feel BT is best placed in the market to ride out the current market troubles and competition spike.

I rate BT shares a cautious but risky buy.

 

 

Why BHS collapsed + what will rise from the ashes?

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After reading countless articles jeering the demise of the ‘iconic’ BHS, I can’t help but think that the company had it coming for a long time.

Not to sound too harsh, I deplore the loss of 11,000 jobs, in which staff worked as hard as they could, going the extra mile to save the ailing business.

Let me be clear, it’s the company’s top brass that got it terribly wrong and I can only hope that most staff can find jobs in the companies that come to replace now vacant BHS stores.

Failure to invest

Sir Phillip Green knew what he was doing when he sold the company for £1 to a group of inexperienced ‘entrepreneurs’. He was abandoning a sinking ship, unwilling  to go down with it or to invest some of his £5.8Bn fortune to revive the BHS brand and offering.

The firm ultimately collapsed after its new owners failed to secure £70m for a turnaround. £70m I’m sure that would have been easily found from Sir Green’s fortune.

In the end, potential investors and lenders knew that BHS was dead in the water and refused to back an ailing brand that lost its significance with customers a long time ago.

What was BHS’s brand in the end?

The artificial changes that the purchasing group made in its final days simply weren’t enough.

Whilst the new branding (1) was a nice touch it was already too late, a cosmetic measure for a company critically burdened by high overheads and an astonishing pensions deficit.

It does raise the question as to the company’s identity in its final few months. The new BHS(1), Bhs (2) or British homestores (3)?

BHS1 BHS2bhs3

 

The failure to establish a consolidated brand that customers could identify with was symptomatic of a complete failure by management to make the retailer relevant again.

As confused as they company’s branding was its in-store offering. Instead of focusing on its core offering the company expanded its offering in a desperate attempt to gain market share. BHS moved into Perfume and food, further confusing consumers and moving into already occupied territory!

Its venture into food was somewhat bizarre as rival M&S already dominated this space. Their confused venture was defined by their stocking of discount Happy Shopper products alongside ‘premium’ brands. A perfect symbolism of the company’s failure to settle on its offering and identify its target market.

Its perfume offering also ventured into a space already dominated by Debenhams and Boots. I’m shocked at what value management thought they could add by stocking perfume alongside homewear.

In the end, instead of focusing resource into branding and customer initiatives the company expanded and was left severely outgunned by rivals Debenhams, M&S and John Lewis.

Just take a look at advertising spend;

 

Screen Shot 2016-08-27 at 16.52.41

 

Source: Marketingweek.com

Not surprisingly the underinvestment in the company’s brand and offering lead to an abysmal YouGov Brand Quality Metric with the company achieving a score of 12.3, way behind rival Debenhams (38.8) and M&S (59.5).

What next for BHS stores?

In the end, BHS ended up like Woolworths, a tired brand that failed to move with the times. The attempts to offer everything ultimately lead to delivering on nothing and now customers can look forward to useful and significant offerings on the highstreet.

As, of the ashes of the old Woolworths, companies such as Poundland, B&M bargains, Iceland and Wilko came to occupy the derelict stores the same will happen again.

With countless online polls showing shops such as H&M, Zara and GAP as prefered occupiers for BHS stores I expect the reality to be harshly in contrast.

It will be retailers such as SportsDirect, Poundland, B&M bargains, Home Bargains and Primark that will rise from the ashes. These are the growing brands of today’s impoverished demographic still scared by 2008.

As we can see from the below table from Satisa which outlines acquisition of stores out of bankruptcy by company between 2009 and 2014, the preferred pics of the public are nowhere to be seen.

Screen Shot 2016-08-27 at 17.22.19

Summary

The demise of BHS gives us no more detailed insight into the state of the UK’s retail sector as Woolworths did.

Being an ‘Iconic british brand’ just doesn’t cut it.

Stores must offer an appealing core offering and value for money.

When faced with troubles, the answer is consolidation of core offering as opposed to expansion into various offerings.

As bitter a pill as it may be to swallow for those with disposable income, Poundland is the future of the empty BHS stores as they were with Woolworths.

 

 

 

An in depth look at the UK mail sector and Royal Mail

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Royal Mail.

Since the government put Royal Mail shares on the market in 2013, investors can be quietly happy with their returns.

Investors who bought in at day one at a price of 330p a share would have seen a return of just over 35% to date, excluding dividends.

With good dividend stocks at decent prices hard to come by in the FTSE, I thought I’d take a closer look at Royal mail.

With an attractive growing dividend, this may be one for dividend growth investors to look out for.

Background

What makes Royal Mail so interesting is that it’s a former state-owned monopoly which is still in transition from public ownership to private ownership.

The company still holds an effective monopoly in the letters market but are battling heavy competition in the parcel market.

Royal mail operates under two main divisions;

UK Parcels, International & Letters (UKPIL)

UKPIL operates in the United Kingdom collecting and delivering parcels and letters through approximately two main networks, the Royal Mail Core Network and Parcelforce Worldwide

General Logistics Systems (GLS)  .

GLS operates in continental Europe and the Republic of Ireland and has a ground-based deferred parcel delivery network in Europe. GLS provides parcel and express services, as well as logistics solutions.

A brief history;

In 2006 Royal Mail lost its monopoly on the UK parcel market when it became open to competition from companies such as UKMail, DPD and Hermes.

Although Royal Mail also lost its monopoly on letters in 2005, competitors just don’t seem interested in this ever shrinking market. The withdrawal of Dutch competitor Whistl in 2015 left the company effectively unopposed.

In 2013 Royal Mail was offered to investors for 330p a share, thus privatising one of the last surviving state owned companies in the UK.

The overall postal market

Royal mail’s two markets can be defined by the following statements;

Declining letter volumes and increasing parcel volumes.

In 2013, Royal Mail commissioned a review into future volumes from Pwc. The results can be seen below;

Screen Shot 2016-08-25 at 15.10.20 Screen Shot 2016-08-25 at 15.10.15

As the graphs clearly indicate, the UK has an increased demand for parcel services but a decreasing demand for letter services.

These trends are also clear in other developed countries and there are no signs of a reversal.

With a decline in mail volume, Royal mail is rightly positioning itself for the growth in parcels and cutting costs.

The parcel market and Royal Mail’s positioning

As we can see from the chart below, Royal mail continues to enjoy the lion’s share of the UK parcel market

Screen Shot 2016-08-25 at 15.23.40
Source: Royal Mail PLC 2015-2016 results

But, this dominance is declining year on year as is evident above.

The overall parcel market grew 6% growth  in 2015 and Royal Mail estimates a further 4% volume growth moving forward. This growth has allowed Royal mail to grow parcel volumes despite its declining market share.

Whilst focus on the parcel market appears to be a winning strategy significant hurdles exist that I’ll outline below.

Problems

The problem with Royal Mail’s strategy is the intense competition they face in the industry.

This is evident from the meager 1% revenue growth achieved from a 3% increase in parcel volumes. This is a worrying sign of declining margins to come.

If this trend is to continue then clear challenges await for the company;

2016 results show that the 1% increase in parcel revenue was offset by a 2% decline in letters revenue.

With the majority of Royal Mail’s revenue coming from its letters division this continued decline will slowly erode the balance sheet unless growth in other areas (mainly parcels) pick up.

Screen Shot 2016-08-25 at 17.40.15

As we can see from the above table taken from the company’s 2014-15 trading results Total letters accounted for £4,567mn of revenue as opposed to £3,190 for parcels.

Screen Shot 2016-08-25 at 17.43.40

The continued decline in letters revenue (although less than expected) as evidenced in the company’s 2015-16 trading results above creates a pressure on the company to deliver on parcel growth.

Even as the parcel market grows and parcel revenue increases it seems tough for Royal Mail to make a net gain on their overall revenue due to declining letter revenue.

Another revenue worry I have moving forward is the Royal Mails obligation to offer a universal service which means delivering to some very rural areas without the ability to charge more.

This is in stark contrast to competitors who can simply cherry pick the most profitable urban regions and rely on Royal Mail for ‘the last mile’ delivery. Royal Mail has hit back by ramping up the charges for this service but competitors have complained to the regulator Ofcom. With such murky legal waters ahead this certainly casts a shadow over the business.

Profit on the other hand looks promising if we strip transformation costs with profit up 5% in 2015.

Postives

Royal mail has done an outstanding job of turning the company’s finances around.

Debt is down significantly since 2012 and the company continues to make significant efficiency savings;

Screen Shot 2016-08-25 at 15.51.56

(Source: Ft Markets, Royal Mail Plc)

The group has also managed to shed 3,500 jobs since 2015 whilst also increasing productivity by 2.4%. These are promising signs for a company that needs to shed costs fast in order to maintain margins (especially in parcels) in a competitive market.

The company’s cash flow looks worrying at first glance;

Screen Shot 2016-08-25 at 16.09.57

But when you consider the transformation costs the company has occurred the weak cash flow becomes understandable.
Transformation costs in 2015 were £191mn, and the company projects further costs of £160mn in 2016-2017.

Most impressively is the operating profit margin now being achieved by the company as a result of these transformation costs with the profit margin jumping from 4.7% in 2014 to 6.1% in 2015.

Dividend

Royal mail offers a tempting dividend yield of 4.2% and sits comfortably at a payout ratio of 54% from results filed in May.

With room for movement in the payout ratio the company could continue to increase its dividend payments even if earnings disappoint.

The company is also committed to a ‘progressive dividend policy’ meaning that dividend investors can be confident of continued dividend increases in the future.

Value

Due to the scale of transformation costs it’s difficult to efficiently value the shares based on EPS.  Transformation costs in 2016-2017 are expected to come in at around £160mn.

Instead, I decided to use a dividend discount model to value the company’s shares.

As revenue is going to be difficult to expand in such a competitive market (and relative to management’s past performance) I see cost cutting measures as the main source of EPS growth for the company moving forward.

After a big dividend jump from 2014-2015 I expect dividend growth to stabilize at around 5% due to the above mentioned factors.

I factored in a 10% discount rate to account for the risk of our capital

The dividend discount model gives me a fair value of 442p a share. Meaning that this stock appears 15% overvalued by this metric.

Summary

Royal mail management is doing all it can to streamline the business moving forward, yielding impressive results with productivity and margins on the up due to a successful transformation strategy. But, there is only so far that transformation can go before the company is unable to continue to make large savings through efficiency.

The worry from then on would be the poor increase in parcel revenue relative to parcel volume achieved as this metric tends to point towards narrowing margins.

There’s too much uncertainty for me to buy the stock at this price but if the company goes on to continue to dominate the parcel shipping sector, investors should be handsomely rewarded with dividend growth and capital gains.