Computacenter
Directors of Computacenter, the supplier of hardware and services to business, face a choice not uncommon in these times. You have had a difficult couple of years, made the necessary cost savings, and business is coming back fast.
Do you spend the increasing profits rewarding shareholders with higher dividends? Or do you invest in building up the business by acquisition, taking advantage of more reasonable asking prices?
Computacenter has £100 million in the bank, allowing for cash it cannot spend, and borrowing facilities of about the same that are easily accessible. There are two founders still on the board with about half the shares between them who might have a view. The decision, fortunately, does not need to be taken yet; Mike Norris, the chief executive, admits that the company needs to install its new across-the-group IT platform before any significant deal can take place.
He also admits that, even if this proviso did not exist, there is little around at present. That might change; alternatively, some of the money might be returned to investors.
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Last year corporate customers came back strongly after deferring their IT spend in 2009. In that year Computacenter exited areas such as selling to retailers and other business providers in which the company could not compete with its bigger US rivals. It has also decided to concentrate on the areas that it does best, such as providing help-desk services, data centres, and servicing networks of computers around business customers.
Last year also saw the troubled French subsidiary return to a marginal profit, though progress here will be slow and reliant on one big customer, the French armed services. A small acquisition earlier this year will at least help. Across the group, sales of new products climbed by 14.7 per cent at constant currency levels, while the annual contract base for servicing existing networks rose by 7 per cent to almost £540 million.
Profits before tax and one-offs were 21.8 per cent higher at £66.1 million on revenues 10.7 per cent higher at £2.68 billion. A final dividend of 9.7p brings the total to 13.2p, a hefty 20 per cent increase.
The company is always cautious about looking forward, and first-quarter results this year will have to compete with strong trading a year previously, which included a large one-off contract. The shares, at 436p, are on less than 12 times this year’s earnings and remain a firm hold.
Standard Life
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Also facing the decision on whether to return cash to shareholders or opt for future growth, along with Computacenter, are the UK’s big insurers. Aviva said last week that it had liberated £1.7 billion to be used to fund growth in Britain and the Continent.
The Pru on Wednesday boasted a £1.7 billion surplus, used both to reward shareholders and to expand further its Asian division. Now along comes Standard Life with its own reasons to generate cash.
Operating profits for 2010, up 7 per cent at £425 million, were ahead of forecasts. The dividend, 6.2 per cent higher at 13p after a final of 8.65p, was more than the City had been expecting. But where Standard Life missed expectations was in cash generation, which came in 6 per cent lower at £289 million. This helps to explain yesterday’s 7 per cent fall in the share price to 227p.
Standard Life has spent £201 million in the last year alone updating its technology and marketing. The insurer is trying to dispense with the old model of being paid based on the returns it makes investing other people’s money.
About 75 per cent of the business is now based on fees it makes on managing assets, so the more money that comes in the door, the more it makes. This lessens exposure to the markets.
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David Nish, the chief executive, is also preparing Standard Life for the retail distribution review, which among other things will abolish upfront commissions to brokers.
He has his eye on managing company pension schemes, particularly once these begin to become compulsory from 2012. Mr Nish is promising he will start bringing in higher revenues and profits from 2012. Standard Life is clearly ahead of the game readying itself for these regulatory changes. The threat to it comes if others catch up quickly. Hold for now.
Dignity
Here is a weird paradox. The number of deaths in the UK annually has been falling since the 1970s, but the number of undertakers continues to increase. The reason is probably that it is the sort of service business that is relatively easy to start up, in a sector that is highly fragmented.
This means the bigger firms such as Dignity have to maintain market share against the independents while the market itself is declining. Despite continued investment in new facilities, the number of burials Dignity carried out last year was static, at about 64,500.
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Investors will not be complaining, either at 2010 pre-tax profits, up 11 per cent before tax to £40.4 million, or the returns they have seen. Dignity uses the reliability of future revenues — people will not stop dying — and assets as security to raise long-term debt to be returned to shareholders.
Last year a special dividend of £1 a share was paid, including what would have been an interim, and investors will also receive an 8.88p final. Since the 2003 float they have seen almost all the 230p float price returned this way or in dividends, and they still have shares worth about twice their original investment in real terms.
The next big payout is a few years hence. Dignity shares, up 20½ p at 738½p yesterday, now sell on less than 15 times earnings. Future growth looks limited, but worth tucking away as a defensive stock.
Mexican Bolsa
Which is the worst performing share in all the publicly traded stock exchanges this year? According to Mondo Visione, the consultancy, the Mexican Bolsa, down 6.6 per cent in the first two months. This may have to do with the decision by the exchanges of Bogotá, Lima and Santiago to combine into the continent’s second largest. This seems to be a truly merged market; it leaves the London-Toronto alliance and that between New York, Paris and Frankfurt now in train, mere changes of ownership, in the shade.