Slashed dividend sends share price off-the-rails
Stagecoach shares fall as it reports drop in profits
- UK bus and rail operator slashed its dividend as it reported a drop in pre-tax profit by 4%
- Investors have put brakes on its shares this morning as they fall over 6%
- While The Share Centre holds no formal recommendation, we would avoid this stock for now
Stagecoach Group, one of the biggest bus and rail operators in the UK reported full year results this morning that reflected the very difficult year it has had in its rail operations.
Group revenues dropped by 18% to £3.2bn reflecting the end of the South West Trains franchise in August. Last month there was the much publicised renationalisation of the East Coast franchise which has only very recently been rebranded under the old London North Eastern Railway brand. As indicated by management at the time, the company made net exceptional charges in relation to this to the amount of £81.9m leading to adjusted pre-tax profits dropping by 4%.
Although investors were already braced for bad news ahead of these results, the shares dropped by over 6% at the open. Citing the need for the dividend to be well covered from non-rail cash flows, management slashed the dividend for the full year from 11.9p to a rebased value of 7.7p, and allowing for sustainable growth thereafter. This reduction of the dividend may have been more drastic than expected but there was additional disappointment from management’s view that the rail business would continue to face declining profits while being exacerbated by new franchise bidding activity. Its bus operations however are doing well both in the UK and North America.
Investors in Stagecoach have been stung by management’s ambitions, over promising and under delivering. But Stagecoach would correctly argue that it has been a victim of the lack of infrastructure investment from Network Rail which led to the subsequent difficulties faced with the East Coast franchise. This will be a lesson for both private companies and public bodies to “get the maths right” at the time of bidding for franchises.
At the moment, if you currently hold Stagecoach the positives from the bus operations are soured by the rail division and the consensus view is that 2019 will still be a tough year where earnings will fall further from 2018 levels. We do not have a formal recommendation on Stagecoach but we would take the opinion that it is best avoided for the time being.
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