Pennon Group Half Year Results 2020/21

[pyad]

From these accounts:

Sector leading dividend growth with dividend per share up 2.7% to 6.77p

and:

Dividend per share 6.77p (interim y/e 31/03/2021) 13.66p (interim y/e 31/03/20)

Thus clearly there has been a 50.4% cut so what's going on?

Footnote no.11 at the end of the report explains it:

6.59p of the interim dividend for H1 2019/20 of 13.66p relates to the Continuing Group based on the proportionate value of the Continuing Group to the total group including Viridor

The claimed 2.7% rise is based on a calculation of a notional 6.59p interim div for last year without Viridor. In fact though there was no 6.59p payout, only the 13.66p.

So when does a 50.4% cut become "sector leading" 2.7% growth? Whether or not there will be some compensation for shareholders for this "growth" from the Viridor sale proceeds remains moot but note that it was never guaranteed. The circular to shareholders concerning the disposal said this:

...The remaining element of the Net Cash Proceeds, after deducting the amounts used to reduce net borrowings and
reduce the pension fund deficit, will be returned to shareholders subject to other value creating investment opportunities
that may arise for the Continuing Group...

[Arborbridge]

Well, I mustn't grumple too much. PNN has given me a return of 11% pa even at today's lower price.
Far better than some I can think of!

Grumble, that's a new one. I'm sure it's something done by a pendant.

[daveh]

I don't understand some of the comments on this thread. Pennon have just sold Viridor, a massive waste business for which they got £3.7bn in cash.

It was clearly very profitable. Left with a smaller business, is it any surprise that the dividend is smaller?

MDW1954

No surprise at all. The complaint is two fold.

1) they have sold the very profitable and growing bit of the company that was helping to pay the dividend, clearly at a profit (but did they get what it was worth?
2) they have reneged on their promise to return those profits to shareholders and they haven't said what they are going to do with the cash instead.

I was expecting the ongoing dividend to be less, but was also expecting a large special dividend/capital return plus share consolidation to account for the smaller size of the ongoing company. If they were going to or had made earnings accretive purchases with the cash I might be happy with that depending on what they had purchased.

At the time of the sale of Viridor they intimated that the cash would be used for a mixture of add on company purchase(s) and a return to shareholders. So far all that has happened is that they have reduced shareholders returns

[Arborbridge]

I don't understand some of the comments on this thread. Pennon have just sold Viridor, a massive waste business for which they got £3.7bn in cash.

It was clearly very profitable. Left with a smaller business, is it any surprise that the dividend is smaller?

MDW1954

It's a moot point whether they should have sold off that part of the business in the first place, but there was always the vague suggestion that there could be some pay off for investors - always carefully worded, of course, but it can hardly be surprising that in return for selling off the business there would be some sort of compensation for investors.

The second point is the fluid approach to the truth (as explained by Pyad) which is worthy of Trump. A reduction in my dividend has become an increase in their warped minds. It wouldn't surprise me if further investigation found that the Directors had rewarded themselves handsomely for this action.

We've swapped a very successful part of the business to buy another water company, by all accounts, and taken on more debt to do so (if Miner is corrrect) despite saying they are paying down debt - whether that was a good move only time will tell. However, an attraction for many would have been the fact that PNN had two strings to its bow. Advertising that you have money to burn is never a good starting point for shopping: everyone knows you have well lined pockets.

The difficulty for any HYPer at the moment is that we really do not know where we are, and won't know for many months more by the sound of it - that's after already been on ice for about a year already. Admittedly, hot ice with the rise in price, but not good to have the decision making period extended when we expected something cut and dried by this autumn.


Arb.

[Gengulphus]

The reason Pennon Shares are down is that they have reneged on their pledge to return cash to shareholders following the sale of Viridior. ...

Where did they make such a pledge? I've found the following in https://investegate.co.uk/pennon-group- ... 06466703G/ (the announcement of the sale):

"The Pennon Board intends to use the net cash proceeds to reduce Pennon's company borrowings and make a return to shareholders, whilst retaining some funds for future opportunities."

and the following in https://investegate.co.uk/pennon-group- ... 10154282S/ (the announcement that the sale had completed):

"Pennon will now review the most efficient and effective method of returning value to shareholders, alongside considering earnings accretive market opportunities. Any potential investment will be assessed in terms of value creation and the impact on shareholder returns, income and growth, as well as the impact on customers and other stakeholders. Any use of capital to pursue an investment opportunity will be compared with the alternative of returning that capital to shareholders, maintaining our strong focus on financial discipline. We aim to update shareholders on this review at Pennon's half year results announcement in November 2020."

I don't see any pledges to return cash to shareholders in either of those, just aims, intentions and pledges to review the opportunities and update shareholders about that review in these results. And they have updated shareholders about it, e.g. when they say:

"We believe there is significant value potential for shareholders from the reinvestment of the Viridor sale proceeds in the UK water sector. The Group has significant funds available of £2.7 billion and we are working extensively to narrow down the potential opportunities. At this stage we are continuing to assess whether any opportunities are executable and can deliver attractive financial returns."

It may of course be that they made a pledge to return capital to shareholders that I haven't seen - but if so, I'd appreciate being told where they did so! But until and unless such a pledge is identified, I'd suggest that asking their investor relations people pointed questions about when they expect to complete the review and come up with recommendations about what to do with the cash that they put to shareholders is a more productive course of action than making accusations of reneging on pledges.

Gengulphus

[MDW1954]

Gengulphus,

Exactly. I don't hold, but it's a company that I certainly follow.

Pennon has just committed major surgery on itself, and it seems most unlikely that it will deliberately want to remain half its former size. IMV, the money most certainly won't be returned to shareholders.

MDW1954

[Arborbridge]

I don't see any pledges to return cash to shareholders in either of those, just aims, intentions and pledges to review the opportunities and update shareholders about that review in these results.

Gengulphus

That's as I remember it - there were no pledges as such, but more of a hint that there could be something here directly for shareholders. However, they definitely dangled the carrot that we should wait and see what grand plan and treats could be in store for shareholders.
This announcement has (to judge by the market reaction) been seen as something of an anti-climax to many months of sitting on our hands. Many investors must feel fairly fed up with a management who flogged off half the company which was doing very nicely and which diversified its risk, then created the risk of overpaying for a similar or worse investment in another water company by advertising how much it had to splash and where.
It must be a 50:50 decision now as to whether it's worth investing more time in this waiting game, or just thank PNN for the capital increase and move on to something more rewarding on the income side. It wouldn't be hard to double the dividend yield.

Arb.

[Gerry557]

Pennon was effectively two companies, Water and Waste

Waste has been sold and they are looking what they can do with the proceeds over and above what has already been announced. (Pension top ups, debt etc)

With half the company gone, then dividends (and earnings) will also be less cos you are only getting the Water side now. Even though the Water side has increased its dividend by 2% or whatever. (Its not exactly a half but its easier to picture) So no point comparing this years W divi with last year W+W divi. (21.11p post waste sale)

So do they buy something, they are looking obviously but I hope they dont overpay just to do a deal otherwise why not keep the Waste? If they do buy, then dividends might go back up again as its a bigger company again with more earnings and hopefully more dividends to pay PNN shareholder than NewCo previous shareholders.

If they cant get something with good metrics to buy, then they should return surplus capital. We can all start fighting over how that should be done. A buyback (Oh no!) a special (maybe) pay off all the debt?? (really) or a mix and match of everything.

If they do give us back our money we are likely to end up with a fiver in your pocket and half a share based on todays £10 share price and that divi buy yield will rocket back up from 2% to 4%. The media will talk "massive windfalls" again, Joe Public will then buy to be apart of it all and get some of this free money. Joe will be left totally disappointed when his windfall is his own money back.

They might even do a 2 for 1 consolidation to keep the same share price, another thing for Joe to moan about Im sure as he will have half the shares now to boot!.

[Gengulphus]

Pennon has just committed major surgery on itself, and it seems most unlikely that it will deliberately want to remain half its former size. IMV, the money most certainly won't be returned to shareholders.

I wouldn't say "most definitely", though I do think that spending all or most of it on an acquisition and paying out at most a token amount of it to shareholders is the most likely course of action. My reason is that while the company's directors won't want it to deliberately remain half its former size, major shareholders might feel differently. In particular, if the company only comes up with acquisition ideas that they don't like, they'll end up preferring the company to return cash to the cash sitting around unproductively in cash deposits - and if enough major shareholders feel that way, they'll be able to get their way, if necessary by voting in directors who are more sympathetic to their objectives (not that it's at all likely to actually come to that, because if it becomes clear to directors that it's a choice between accepting that the company remains half its former size, or losing their jobs and the company still remaining half its former size, it's pretty clear which choice they'll take...).

So basically, Pennon's directors will eventually come under pressure from major shareholders to come up with better things to do with the cash than returning it to shareholders, failing which they'll want it returned so that they can find better things to do with it themselves. At four and a half months since the Viridor sale completed and Pennon actually came into possession of the cash, it's probably a bit early for that pressure to have built up very much - acquisitions do take time to scout out, evaluate and produce concrete proposals for. But I suspect the pressure will be building up now, and if Pennon haven't come up with a proposed acquisition that is to major shareholders' liking (ones that aren't are unlikely to see the light of day...) by the time the finals are due in a bit over six months' time, with the AGM looming, its directors will probably reluctantly come to the conclusion that returning capital to shareholders is the best course of action.

Gengulphus

[Arborbridge]

I used to enjoy visits to the dump, for it is run by Viridor. That's my pension being earned there...

I went again today: Grrrh!


Arb.

[kempiejon]

I used to enjoy visits to the dump*, for it is run by Viridor. That's my pension being earned there...

C'mon C21. *Community Recycling Centre.

[Arborbridge]

I used to enjoy visits to the dump*, for it is run by Viridor. That's my pension being earned there...

C'mon C21. *Community Recycling Centre.

It's just a dump. I agree it is more complex these days and they do a good job, but that's what they will always be - anything else smacks of inventing fancy words for the sake of it. Like "logistics" in place of hauliers and many other inventions.

As with the pub menu: the more words they add the more they think they can charge.

Arb.