Galliford Try ( GFRD) profit warning

[funduffer]

GFRD is obviously not a HYP candidate to buy at present.

I purchased it in March 2016 at £14.35 per share!

At the time, it had a 5-year record of rising dividends, an historic yield of 4.8% and a forecast yield of 5.6% - respectable HYP criteria.

Also, at that time, I didn't consider free cash flow, nor shorting as purchase criteria, but looking back, prior to 2016, the free cash flow cover of the dividend was patchy to say the least. Using the criteria I use today, I would probably not have bought it.

I partook in the rights issue in 2017, thinking the worst was behind them (Aberdeen relief road problems etc), but now I am not so sure.

I continue to hold, but I won't touch the Construction sector again, or any other company in the contracting business (the likes of Balfour Beatty, Keir, Carillion for example).

FD

[MDW1954]

The main warning sign for me is that GT is a contractor.

As a matter of fact, Galliford Try (GFRD) is a Construction and House Building Company.


Ian

Wrong.

I would urge you to study this page:

https://www.gallifordtry.co.uk/capabili ... nvestments

The vast majority of that work is contracting. About £1.7bn of it in the last financial year.

MDW1954

[funduffer]

GFRD in FY18:

Construction: Revenue £1.7Bn, Margin 0.9%
House Building: Revenue £0.96Bn, Margin: 19.5%
Partnerships & Regeneration: Revenue: £0.48Bn, Margin: 5.0%

Says it all really!

FD

[monabri]

Here's the info on dividends paid versus free cash flow per share (we've seen worse!)

source:
http://financials.morningstar.com/ratio ... region=GBR



The operating margin ~5% is pretty duff (Unilever's is 3x that with a typical Gross margin of 40%+ versus GFRD's ~10%).

If/When they move out of Construction - they lose more than half their revenue. How long it will take them to exit will be key - it might take several years. Who would buy that side of the business (hence they may need to service existing contracts) - it's "work", but it's problematic work which is not worth doing from a margin point of view - it's simply "job creation" which dilutes management attention away from the more profitable parts of the business. The next question though, is what happens when the housing market turns? Maybe they should continue in the construction business but only submit robust bids - if they don't get the work - let some other sucker take the contract.


edit : Schroders - Gross Margin ~80% , operating margin ~25%
Thought - It might be worth compiling a table of margins for different businesses - a fat margin provides some safety factor and it would weed out some of the companies that are "just managing".

[Dod101]

I have to say that Construction but not house building sounds to me like a contractor and the fact that they were participants in the new bridge over the Forth Estuary and that they had a part in the Aberdeen Bypass is a pretty clear indication that whatever they may be called they are substantial contractors in the usual sense of the term. So I would call them a contractor and housebuilder (in that order). I would not touch them with a bargepole and did not.

monabri is right. The insurance business used to be like that but after many years of underwriting losses, they became more professional and nowadays, an underwriting profit is required, ie the combined ratio needs to be well under 100%. The construction business is fraught with risk and the contractor should be pricing that into his bids but he obviously is not because they still see the 'winning' of the contract as the important bit but it is not; it is running the contract in accord with their bid pricing and of course getting that right in the first place.

Dod

[Crazbe7]

The construction business is fraught with risk and the contractor should be pricing that into his bids but he obviously is not because they still see the 'winning' of the contract as the important bit but it is not; it is running the contract in accord with their bid pricing and of course getting that right in the first place.

From someone who has never attended a tender settlement meeting in their life.

My thirty-five years of UK and International contracting experience would indicate you are wrong in your 'winning at any cost mentality'.

Why continue to comment on a business sector with which you have NO knowledge. Your continuing ill-informed interventions are embarrassing.

Crazbe7

[Dod101]

Strangely enough international contracting seems to do better. I do not know why. In the UK, all I can say in response to crazbe is that attendance at what he calls a tender settlement meeting has not produced that many successes.

I am very sorry to upset his no doubt well intentioned professionalism and I have no wish to cast unnecessary aspersions but the evidence is there for all to see. Cost over runs, time hold ups and every so often a profit warning. Is that called 'success'? Admittedly there have been few design disasters that I know of but that is not what we are talking about. It is financial success not wonderful design and world beating technical outcomes. I have no idea if that is the case from a tender settlement meeting or not but they do not seem to produce decent financial results, or at least not enough to outweigh the failures.

Dod

[tjh290633]

The construction business is fraught with risk and the contractor should be pricing that into his bids but he obviously is not because they still see the 'winning' of the contract as the important bit but it is not; it is running the contract in accord with their bid pricing and of course getting that right in the first place.

From someone who has never attended a tender settlement meeting in their life.

My thirty-five years of UK and International contracting experience would indicate you are wrong in your 'winning at any cost mentality'.

Why continue to comment on a business sector with which you have NO knowledge. Your continuing ill-informed interventions are embarrassing.

Crazbe7

Well said. Competent contractors build adequate contingencies into their price, and treat any deviation from the specified quotation as a variation to contract, for which high prices are charged. It is always said that contractors make their profit from variations.

The other essential element is the negotiating margin. That's the bit you expect to dig into during negotiation and hope to preserve some of it to increase contingency. An old friend learnt a hard lesson in Poland when he neglected to build the margin into his price. He had to eat into the contingency to win the contract, as at the end the negotiator's boss arrived, looking for a further 5% off. As the negotiator's pay reflected the amount of discount she had been able to obtain.

The other possible source of savings is by seeking alternative and cheaper sources for materials and equipment to be supplied, or by leaning on subcontractors for lower prices. The danger is that subcontractors go bust and those engaged to complete the work have you over the barrel. The traditional way of avoiding this situation was to seek at least 5 quotations. There could be two outliers, one low from a company that needs work at any cost and a high one from a firm which does not want the work. You discard those two and negotiate with the other three. Carillion's problem was allied to underpricing, and probably lack of financial control.

TJH

[Walrus]

The construction business is fraught with risk and the contractor should be pricing that into his bids but he obviously is not because they still see the 'winning' of the contract as the important bit but it is not; it is running the contract in accord with their bid pricing and of course getting that right in the first place.

From someone who has never attended a tender settlement meeting in their life.

My thirty-five years of UK and International contracting experience would indicate you are wrong in your 'winning at any cost mentality'.

Why continue to comment on a business sector with which you have NO knowledge. Your continuing ill-informed interventions are embarrassing.

Crazbe7

Unfortunately the evidence is there for all to see in the UK market. Margins have been competed down to such an extent that contract wins and volumes are all the more important. Unfortunately it would appear that risk provisions for contingencies have been underoriced in these industries. Not an investment for me

[Crazbe7]

Dod

While it would be amusing for me to ascertain your knowledge of international contracting - I SUSPECT YOU COULD WRITE IN ON THE BACK OF A POSTAGE STAMP - this post has been about Galliford Try as a HYP share now and in the future.

In my opinion, contracting is too cyclical for an HYP and I do not include any contractors in my HYP.

I hold shares in contractors and infrastructure ITs, but outside my HYP, so off topic here.

Crazbe7

[MDW1954]

I have to say that Construction but not house building sounds to me like a contractor and the fact that they were participants in the new bridge over the Forth Estuary and that they had a part in the Aberdeen Bypass is a pretty clear indication that whatever they may be called they are substantial contractors in the usual sense of the term. So I would call them a contractor and housebuilder (in that order). I would not touch them with a bargepole and did not.

monabri is right. The insurance business used to be like that but after many years of underwriting losses, they became more professional and nowadays, an underwriting profit is required, ie the combined ratio needs to be well under 100%. The construction business is fraught with risk and the contractor should be pricing that into his bids but he obviously is not because they still see the 'winning' of the contract as the important bit but it is not; it is running the contract in accord with their bid pricing and of course getting that right in the first place.

Dod

Of course they are a contractor. That is why I corrected the "matter of fact" assertion that they are not a contractor. They are a contractor; they are a contractor; they are a contractor. End of.

My view is that the risks of contracting outweigh the attractions of housebuilding. And for those of us with memories of 2008/2009, housebuilding wasn't that comfortable an an area to be in, with profits, share prices, and dividends all collapsing in unison.

I have zero exposure to this sector, and expect it to remain that way. The one -- possible -- exception is St Modwen, but that would require a healthy collapse in share price to bring it into HYP territory, so that is OT for this board, for now.

MDW1954

[MDW1954]

GFRD in FY18:

Construction: Revenue £1.7Bn, Margin 0.9%
House Building: Revenue £0.96Bn, Margin: 19.5%
Partnerships & Regeneration: Revenue: £0.48Bn, Margin: 5.0%

Says it all really!

FD

Exactly. And housebuilding is cyclical. Over 50% of the business is on a margin of 0.9%, and the rest of it is cyclical.

What a great investment opportunity. NOT.

MDW1954

[AsleepInYorkshire]

I'm sensing some pain after the recent fall of the Galliford Share price. Obviously some have incurred losses.
I'll tread carefully as I have no wish to appear offensive in light of the last. And I have no wish to be any less than constructive.

It may help to explain the GT business model a little further. They are neither a house builder or a contractor. They are both. They also have an infrastructure arm along with a partnership arm. The aim of the model is to create and accept a blended margin which delivers a more consistent yearly return whilst at the same time effectively insuring each element from cyclical swings. In addition the cashflow gains from the contracting arm should allow a reduced demand on borrowing facilities throughout the group. Although the latter will not be as significant in the current climate of low interest rates.

The inherent beauty of contracting is it's often cash positive and needs minimal financing. If I may pick a trite example. Imagine the average supermarket business. The building needs to be paid for, the shelves stacked and the staff employed and trained before the first £1.00 comes back through the tills. Closer to construction the same is true of the house builder. Buy the land, put the roads and sewers in, build a sales area and a site compound and then hope to sell a new home. Both the latter are significant drains on capital.

To the best of my knowledge Galliford Try, like all contractors operate an internal system to approve all final contract bids before submission. The costs of preparing a bid for a £50M contract will be in the broad range of £100-200K. Many contractors do not absorb risk within their price and often submit a risk register with their bid clearly excluding specific items. Asbestos is a good example.

I've deliberately chosen asbestos because, if I recall correctly, Carillion accepted the risk of asbestos on the Liverpool Hospital Contract. I'm not party to why they elected such an approach.

However, for the most many contractors will accept reduced margins if they are assured that a contract will run cash positive.

In my humble opinion, the Galliford model does actually appear to be doing what it says on the tin. But added to their woes regarding the legacy issues of the Bridge and the Aberdeen Road they also have other legacy issues from their purchase of Miller Construction.

And as I've said before I can sit back in my armchair and take a position of knowing it all. But that's easy after the event and I don't know much of the detail.

It should also be noted that in 2015-2016 labour rates increased quite dramatically. As a generalistion it can be said that as contractors enter a recession they make money as their cost base reduces. However, as they exit the recession at the other end the reverse is true.

I've taken the liberty of adding a link to a webpage that may be of interest. It's a little out of date but I think it conveys some of the points I've mentioned above.

Top 100 Construction Companies

https://www.theconstructionindex.co.uk/ ... anies/2017

Trouble at the Top

https://www.theconstructionindex.co.uk/ ... 17-top-100

The largest customer for the construction industry is Government. Roughly 80% of all turnover. Since the vote to leave Europe many construction projects have been delayed whilst "Brexit" is sorted out. In the meantime the construction companies are retaining their employees.

The perfect storm or if you prefer "Headwinds that have turned into Gales"

Brexit
Skills shortages
Legacy issues
Rising labour costs
Low interest rates

In my opinion that Galliford have turned a margin is due mainly to their diversified business model. They have not strayed outside of the construction envelope although the larger fixed price contracts appear to have been a risk too far.

I think the Board cannot avoid some criticism regarding their inability to bottom the Bridge issues. Looking forward Graham Prothero's review should identify any other issues that "may" need to be "outed". Subject to finding nothing of any significance then he's got two simple options (again in my opinion)

1 ) Pay a dividend, full anticipated or reduced (if reduced I speculate about 60-65p full year)
2 ) Pay no dividend on the pretext that the balance sheet needs to be protected/strengthened

I have one small reservation. Galliford's debt levels have increased and (regardless of how they got there) it may be time to reduce them and protect the long term health of the business. If Galliford's Board agree they may well want to see option 2 (above) embedded into year end results.

AiY

[funduffer]

Thanks AiY, very useful and interesting comments.

I think you should be AwakeInYorkshire, rather than AsleepInYorkshire, and I should become ConfusedInYorkshire!

(Yorkshire being the land of my birth and current residence)

FD

[monabri]

I think what galls people the most is the rabbit out of the hat surprises ( see IanTHughes post #216366 earlier).

Does anyone here know more about their programme reviews....frequency, depth of review, metrics used to measure progress ( e.g. Earned Value Management )?

[Crazbe7]

Does anyone here know more about their programme reviews....frequency, depth of review, metrics used to measure progress ( e.g. Earned Value Management )?

Every contractor will have daily, weekly and monthly review meetings at varying depths of review covering all aspects of the works in some form with typical metrics used to measure progress / highlight poor performance etc. It would be utterly tedious to explain in more detail. It's the kind of response you write on project controls for a tender submission.

The focus on these discussions has been on pricing and risk management. What has not been highlighted are the various forms of contract used by a client - construct only, design and build, PFI etc. and the interpretation of these by the contractor.

Typical areas of contention are:- Interpretation of disallowed costs/Cost of rectifying defects/Cost of Change/Risk and opportunity management/Interpretation of compensation events

Very simplistically things can be going swimmingly because a contractor believes he is entitled to a compensation event{s} but they are declined by a clients professional team. Suddenly you are writing down the contract and looking for arbitration and or a legal solution.

Typical areas where contractors make significant errors prior to contract award are;-

Measurement of the works at tender stage
Measurement of temporary works
Outputs - too optimistic
Resource requirements - too low
Poor technical solution
Management of consents and approvals - Client and Third Parties - eg utilities, local authorities, land owners etc.
Commercial/contract reviews

The tender management/approval process should minimise these risks but no process is perfect. I suspect that within Galliford Try these processes were not suitable for mega projects, but the main write-downs have been in JVs with established major contractors. Unlikely all of the above were missed. I suspect, but do not know, that the contracts for Aberdeen and Kingsferry were more onerously applied than anticipated - same client.

Crazbe7

[Gengulphus]

I have not investigated the reason for the Rights Issue but I do agree that, if capital is being raised for a profitable venture then no, it is not on its own a red flag for an HYP. And it certainly is not a sign for a current holder to ditch the shares. No, if I was to go back in time and look at GFRD with a view to a purchase, the dividend decrease would have warned me off but, without that cut, the Rights Issue would have been further investigated before making a decision.

I think it worth adding something that I'm pretty sure you're aware of and understand, but that some readers may well not. It's that almost all rights issues by dividend-paying shares result in an actual decrease in the dividend paid per share. The reason for that is that if a shareholder doesn't take up their rights (which is effectively buying shares, for a right plus the subscription price each) or sell their rights, then the company effectively sells their rights for them shortly after they lapse at the end of the rights issue (*). Those rights were created in the first place at the start of the rights issue, when they were split off from the shares as they went ex-rights, and that split effectively transferred part of the value of the pre-rights issue shares to the rights: if you look at what happens overnight as the shares go ex-rights, you'll find that the share price suffers an ex-rights drop, as a result of which the value of the shareholding falls by about the value of the newly-created holding of rights, so that the overall value of the portfolio doesn't change any more than normal overnight share price fluctuations would change it.

So looking at the overall effect of the rights issue from start to finish, on the assumption that the shareholder does no selling or effective buying, it is effectively to take part of the value of the original shareholding, package it up temporarily as rights, and then sell it. Or more briefly, the company is effectively selling part of the shareholder's original shareholding on the shareholder's behalf, whether the shareholder wants them to or not. This is very similar to what happens if the company pays a special dividend (or more rarely, a capital distribution) to the shareholder and simultaneously consolidates its shares, when the shareholder is down a certain number of shares due to the consolidation and up the amount of the special dividend in cash - i.e. in effect (and for almost all practical purposes other than taxation), a forced sale of that number of shares for that amount of cash. Not exactly the same situation - for the special dividend + share consolidation, the part effectively sold is a fraction of the number of shares, while for the rights issue, it's a fraction of the value of each share - but that's basically a cosmetic difference on the fact that part of the shareholding has effectively been sold.

The general rule about corporate actions and dividend-per-share figures is that whenever possible, the company adjusts the previous year's dividend-per-share figure to compensate for any changes its corporate actions cause to the number of shares held by a shareholder who neither bought nor sold during the year, basically to make the reported dividend percentage increase reflect the change to the dividend income received by such a shareholder. For example, a share that does a 2-for-1 share split adjusts its prior-year dividend-per-share figure by halving it, because a shareholder receiving that halved dividend on their now-doubled number of shares would receive the same amount of dividend income from their shareholding as they did the previous year. The company uses that adjusted prior-year dividend-per-share figure as their baseline dividend per share going forward.

They cannot do that in either of the cases I give above where the company has effectively sold part of every shareholder's holding on the shareholder's behalf, because that is counted as the shareholder having sold for this purpose. So when the company has done such a corporate action, there is no such thing as a shareholder who has neither bought nor sold. The next best thing is to do the calculation for a shareholder who has reversed that sale as far as possible by using the proceeds they've received to buy back the part of their shareholding that was effectively sold, or at least as much of it as it is reasonably realistic to assume that a shareholder might be able to buy back in practice. Even that isn't something the company can do entirely accurately, due to the varying effects of share price fluctuations on different shareholders, but they can generally produce a reasonably close approximation by assuming a particular reasonably realistic price from around the time of the corporate action. So they do that, and they also assume no trading charges because the shareholder has the opportunity to effectively buy free of trading charges by taking up some of their rights, and they count the change in the number of shares due to the assumed purchase as one caused by the corporate action.

In the case of a special dividend + share consolidation, the consolidation ratio is normally (though not quite always!) chosen so that the amount of special dividend received by a shareholder is close to the market value of the shares lost to the consolidation - i.e. so that the effective price of the effective sale is close to the current market price of the shares. That means that the company can not-too-unrealistically assume that the shareholder can make a purchase that buys the number of shares lost to the consolidation with the special dividend. That means that counting both the effective sale and the assumed purchase, there is no net change to the shareholder's number of shares, and the result is that there is normally no prior-year dividend-per-share adjustment for a share consolidation that accompanies a special dividend or capital distribution, even though there is one for an unaccompanied share consolidation.

In the case of a rights issue, the splitting-off of the rights as the shareholding goes ex-rights does not alter the number of shares held, and the assumed purchase made with the lapsed-rights payment (**) increases the number of shares held. So the total effect of the rights issue is to increase the number of shares held by the shareholder they assume for the adjustment, just as a share split or bonus issue would. And so they do make an adjustment downwards to the prior-year dividend as they would for those corporate actions, dividing it by the same ratio as the number of shares is assumed to be multiplied by. That adjustment is generally called adjusting for the "bonus element" of the rights issue in company reports and results announcements, I think because it's most closely analogous to the number-of-shares increase caused by a bonus issue (***).

Anyway, the adjustment to the prior-year dividend-per-share figure is usually greater than the dividend increase (if any) that the company intends to pay to the shareholder they're assuming - i.e. one who does no buying or selling other than buying to cancel out the effects of effective sales compulsorily made by the company on the shareholder's behalf. The net result is that when there is both a corporate action that does an effective sale and such a dividend increase, the unadjusted dividend usually drops from year to year - and of course, when there is such a corporate action and no intended dividend increase, the unadjusted dividend always drops from year to year. Hence my assertion at the top of this reply that almost all rights issues by dividend-paying shares result in an actual decrease in the dividend paid per share.

So basically, there are two ways to look at the what-happens-to-the-dividend issue for rights issues. If one literally does nothing in response to rights issues, then one's number of shares doesn't change and so the actual dividend-per-share change from year to year indicates what happens to the dividend income one receives from the holding, which will almost always be that it falls. But one usually receives some compensation for the loss of income in the form of a lapsed-rights payment, and one can generally make more certain of that payment by selling the rights as soon as possible, because that makes the amount you receive less subject to a less long period of share price fluctuations (though note that those fluctuations can generally just about as easily be to your advantage as to your disadvantage).

Alternatively, you reinvest the lapsed-rights payment (or proceeds from an earlier sale of rights) in the company's shares, and then the dividend increases or decreases reported in the company's reports and results announcements tell you roughly what happens to your dividend income. Or as a slight variant, you reinvest them in some other holding you prefer, in which case you've basically shifted some of the holding's dividend income to being generated by another holding, presumably because you think it will improve the overall portfolio dividend income, by making it bigger, safer or both.

I was going to end this post by applying the above to Galliford Try, but my attempt to do so ran into something I wasn't expecting in Galliford Try's reports, and what I wanted to say rambled on a bit. So I've cut that bit out of this post and will post it next.

(*) "Effectively" because it's not actually possible to sell rights at that stage, there no longer being any market for them. So what the company does instead is normally that it sells the shares the rights could have been taken up for, takes the subscription price out of the proceeds (and selling costs come out of them as well, as for any sale) and distributes the remaining proceeds to the owners of the lapsed rights as a lapsed-rights payment. This produces a good approximation to what the rights could have been sold for, had there still been a market for them at that stage. Much less normally, the share price has fallen to the point where nothing or less than nothing would be left after deducting the subscription price and selling costs from the proceeds of selling the shares: in that case, the company requires the underwriter to meet its obligation to pay the subscription price for the shares if it can't be raised either from shareholder subscriptions (in the normal case that the rights issue is underwritten, otherwise the company simply fails to raise the capital it wants) and doesn't pay any lapsed-rights payment, and not receiving anything is again a good approximation to what the rights would have been worth if there had still been a market for them.

(**) There is the issue of what price to assume the purchase happens at. In the case of a special dividend + share consolidation, it's basically when the consolidation ratio is set, while in the case of a rights issue, it's from about the time that the shares go ex-rights (I'm not certain about the exact time and price used, but it's then or about then). In each case, the actual cash payment will probably be a few weeks later. This isn't a significant problem if the share price doesn't move significantly in those few weeks, nor is it one for shareholders who can borrow money short-term reasonably easily and cheaply. The latter includes just about all major shareholders, and so the company assumes that shareholders can make the assumed purchase at very close to the price it assumes, essentially at no more than the trading costs the company is regarding as negligible anyway. In addition, in the case of a rights issue, one can get access to the cash value of the rights as early as shortly after the shares go ex-rights if one wants, at the cost of an extra broker commission, by selling the rights. So it is generally feasible for all but very small shareholders (for whom that extra commission greatly affects the effective sale price) to make something close to the purchase the company assumes if they want, though they will have to stir themselves into more active trading than strictly necessary to do so!

(***) Though I would note that the points on which it is more closely analogous to a bonus issue than to a share split are technicalities that are almost always completely irrelevant in practice to shareholders, such as that share splits reduce the nominal value of a share while bonus issues and rights issues don't affect it. And that IMHO "bonus element of the rights issue" and "bonus issue" are rather tactless terminology, because shareholders don't get any financial bonus out of either: a shareholder in a company that does a 1-for-1 bonus issue ends up with twice as many shares as they started, but the share price roughly halves and so they see no financial gain or loss other than that caused by normal market fluctuations, while a shareholder in a company that does a rights issue and does nothing whatsoever about it ends up with the same number of shares as they started with plus a lapsed-rights cash payment, but with a share price that has dropped by roughly enough to cause their holding's market value to drop by the same amount as that cash payment. So they also see no financial gain or loss other than that caused by normal market fluctuations, and they'll very reasonably regard the lapsed-rights payment as compensation for the drop in their holding's value rather than as a bonus... But tactless or not, "bonus element of the rights issue" and "bonus issue" are very well-established terminology, so we're probably stuck with them!

Gengulphus

[Gengulphus]

As I said in my last post, I tried to apply the general principles about adjustments to prior-year dividend-per-share figures to Galliford Try. I've ended up distinctly puzzled about their 2018 annual report's "Dividends" note to the accounts, which says (reformatted by me to come out reasonably well on TLF):

"8 Dividends
The dividends per ordinary share for 2017 in the tables below have been restated by adjusting those previously reported by an adjusting factor of
0.11147 to reflect the bonus element in the shares issued under the rights issue which completed on 16 April 2018.
...
The following dividends were declared by the Company in respect of each accounting period presented:

"

If one looks at the preceding interim report, one finds that it actually declared the interim dividend as 28p, and the 2017 annual report's dividend figures were 32p stated already paid for the interim and 64p declared for the final. All of those dividends went ex-dividend before the rights issue went ex-rights - the closest was the 28p interim, which went ex-dividend on March 15th 2018, while the rights issue went ex-rights on March 28th 2018, and so all three of them should have been adjusted - but only the 32p interim and 64p final have been, to 29.0p and 57.0p respectively. So that's my first reason for puzzlement - why haven't they adjusted the 28p interim dividend?

I'm not quite certain whether the adjustment factor of 0.11147 is supposed to mean that they're assuming a shareholder who bought to try to cancel out the effects of the effective sale would end up with 11.147% more shares, so that the adjustment needed to dividend-per-share figures was division by 1+0.11147 = 1.11147, or that the adjustment needed to dividend-per-share figures was reduction by 11.147%, i.e. multiplication by 1-0.11147 = 0.88853. But the former adjusts dividends of 32p and 64p to 28.8p and 57.6p, while the latter adjusts them to 28.4p and 56.9p (all when rounded to one decimal place). Neither of those are the figures the company gives of 29.0p and 57.0p, which is my second reason for puzzlement.

My best guess about the explanations is that they've failed to adjust the 28p interim through sheer oversight, and that they've divided by 1.11147 and rounded to no decimal places (i.e. to the nearest penny), then quoted the rounded result to 1 decimal place, i.e. spuriously accurately. If I'm right, neither is up to the standards of due care and attention that I think I should be able to expect in a company report. And I think I'll use www.dividenddata.co.uk's adjusted figures instead of the company's. They adjust the 32p interim, the 64p final and the 28p interim to 28.79p, 57.58p and 25.19p respectively - they are entirely consistent with dividing by 1.11147, and result in them concluding that the total dividend fell by 14.10% between the company's 2016/2017 and 2017/2018 financial years. One of the very rare occasions I've encountered where I feel forced to the conclusion that a secondary data source is more reliable than the company itself!

The company has said that they've made those reductions in accordance with their new dividend policy of making dividend cover be 2.0 - i.e. declaring dividends equal to 50% of EPS (specifically pre-exceptional EPS, which I think is basically what other companies more commonly call adjusted EPS together with an implication that all the adjustments they see as worthwhile are exceptional). They do seem to be roughly following that new policy, though the latest interim of 23p (which is 8.7% down on the previous year's adjusted 25.19p) does seem rather high compared with 50% of the first half pre-exceptional EPS.

IMHO such a dividend-cover-driven dividend policy does require a rather different attitude from shareholders than the more usual progressive ones. On the minus side, it's makes the company a less predictable source of dividend income - with a progressive policy, one can generally rely on the company to dig into its reserves to keep growing or at least maintaining its dividends when it's going through a bad patch (and hopefully to build reserves up again while it's going through a good patch), while a dividend-cover-driven policy has no such expectation. I.e. the company does some 'income buffering' for its shareholders, which HYPers might well welcome. On the plus side, it gets rid of the temptation for directors to desperately hang on to the progressive policy too long when going through a very serious or prolonged bad patch, resulting in big dividend cuts, complete dividend cancellations or maybe even unnecessarily endangering the company's survival. One can generally expect to get rather more dividend reductions from a company with a dividend-cover-driven dividend policy than from one with a progressive dividend policy, but also that they'll generally be smaller reductions - I would generally regard a cut by less than 20% from a company with a progressive dividend policy as very unusual, less than 30% as pretty unusual, and 40% or more pretty likely by the time the directors decide they really cannot sensibly hang on any longer, whereas companies like Sainsbury and Galliford Try indicate < 20% year-on-year reductions are not to be regarded as unusual for a company with a dividend-cover-driven policy that's experiencing problems...

So I think my attitude as a HYPer will be that a dividend-cover-driven dividend policy is basically a "you'll need to do a bit more income-buffering yourself" caution about the company - bigger but not dissimilar to that associated with companies that declare their dividends in foreign currencies due to exchange rate fluctuations.

(*) Again, for a shareholder who bought to try to cancel out the effects of the effective sale, and it can only be an approximation - it does depend on exactly what such a shareholder did and when.

Gengulphus

[Gengulphus]

GFRD in FY18:

Construction: Revenue £1.7Bn, Margin 0.9%
House Building: Revenue £0.96Bn, Margin: 19.5%
Partnerships & Regeneration: Revenue: £0.48Bn, Margin: 5.0%

Says it all really!

Anyone who wants a better (though doubtless still incomplete...) view of "it all" should take a good look at note 2 "Segmental reporting" to the accounts in their 2018 annual report. They will for instance get a considerably better, though decidedly ambiguous, picture of where the majority of the company's business lies: by turnover, 58% from Construction, 26% from Housebuilding, 16% from Partnerships & Regeneration, 1% from PPP Investments and Central (which I think means activities not clearly attributable to any of the others), but by profit before tax those figures are -25%, 95%, 13% and 16% respectively (neither set of percentages adds up to exactly 100%, due to rounding). Each of those sets of percentages shows a clear picture of the majority of the business, but the two pictures are nowhere near identical!

That sort of confused picture is aggravating - one would much prefer things to be simple. But often reality is complex... The sensible thing to do about such complexity in practice is to face up to it, not decide pretty arbitrarily that one particular apparently clear picture is completely correct and the others completely wrong (or not even to look at the others).

Just to be clear, I'm not trying to say that funduffer's post was doing that - I realise that "Says it all really!" is also rather ambiguous! It's more that I get a distinct impression of an oversimplified picture of Galliford Try's business in a number of posts, and funduffer's post provided a useful quote for me to follow up on.

Gengulphus

[Gengulphus]

Of course they are a contractor. That is why I corrected the "matter of fact" assertion that they are not a contractor. ...

I think you mean the "matter of fact" suggestion rather than assertion, because as a matter of fact, the only "matter of fact" assertion in this thread at the time was "As a matter of fact, Galliford Try (GFRD) is a Construction and House Building Company.". That assertion might fairly easily be read as contradicting the remark it was made in reply to that Galliford Try is a contractor, but doesn't actually do so: a company can easily contract to do a piece of construction work, and thus be both a contractor and a construction company with regard to that part of its business...

Gengulphus