monabri wrote:After Friday, is anyone considering a swift half top up in GNK?
Considering it, yes. As a company, it's averagish-weight in my 40ish-share HYP - moved from above average to a bit below yesterday, but not enough below for me to count it as significantly underweight. As a sector, it is underweight, basically because it's the only company I hold in the sector - Marston's has always struck me as a less solid performer and has never had a big enough yield advantage to compensate for that on the occasions that I've been buying, and Diageo has had too low a yield on those occasions (which doesn't by any means imply always in the nearly 15 years I've been running my HYP, by the way - I'm sure there were good opportunities that I missed...).
Its yield is high and well covered (over twice on a historical basis) by adjusted earnings, not so well (fractionally under 1.5 times) by basic earnings. Checking the annual report, most (about 70%) of the adjustments are net impairments to property assets - which basically means pubs whose trading performance doesn't justify their book values ("net" because in some cases, previous impairments have been reversed because the pub's trading performance has recovered). That does represent a danger to basic earnings if trading performance drops more systematically, as some posts in this thread have suggested might be happening to a serious extent (the trading statement is IMHO nothing more than an indication that it
might be starting to happen. But the adjustments are not cash losses and so don't directly affect the company's ability to pay dividends - though there might well be indirect effects via its debt - see below.
As moorfield posted earlier in the thread, dividend cover by cashflow looks to be about twice, in line with dividend cover by adjusted earnings (which fits in with the non-cash nature of at least the main adjustments, as I've described above).
I'm not very concerned about the debt as such. Net debt in the annual report is £2,074.5m, which is 107% gearing on NAV (more on NTAV). The debt multiple (how many years worth of adjusted earnings it is) comes in at slightly under 10 times and interest cover at about 3 times on an adjusted basis. Those would be uncomfortably high debt figures for many companies, but the debt is backed up by and secured against £3,455.5m of property assets, and that does make what would otherwise be high debt figures a lot more acceptable - just as individuals can accept much higher levels of mortgage debt secured against their house than of unsecured consumer debt.
Obviously that could be changed by falls in property values. They'd have to be quite big ones to put the company in serious danger, but there are covenants on the secured debt and if they get close to being breached, the company could be forced to use cash to pay down the debt rather than pay dividends. Unfortunately, while the annual report says that there are covenants, it doesn't give any detail I can discern that would allow me to form an opinion about whether the company's current financial position is close to breaching them. I would however definitely expect drops in property values and in adjusted earnings to bring it closer to breaching them. So I can see a risk to the dividend there, but find it hard to assess that risk properly.
So while I'm considering a "swift half top up", as regards any definite decision, no, not yet... Needs sleeping on, especially the question of whether the management are telling it as they genuinely see it or putting a brave face on things with the final sentence of the trading statement:
In the longer term, utilising the benefits of the Spirit acquisition, our brand conversion and cost saving programmes, our robust balance sheet and our strong cash generation will be important levers to help deliver competitive advantage, growth and attractive and sustainable dividends for our shareholders.
Gengulphus
