AMVESCAP, the fund manager, is deeply mired. Sinking equity markets between 2000 and 2003 were unpleasant enough but the market-timing scandal has turned what was an unlucky streak for Amvescap into a full-blown crisis of confidence.
Any dividend cut is nasty. The one unveiled yesterday brings the $450 million (£250 million) that Amvescap will have to find to extricate itself from the market-timing scandal, into sharp relief. A sum of $450 million is a large amount of anybody’s money. But if Amvescap has cut the dividend in order to meet the cost, it is shown to be relatively large even in the context of the substantial size of this FTSE 100 firm.
The dividend cut also speaks volumes about the longer-term prospects for the business. Little of what is spoken, moreover, is of any comfort. Dividend cuts normally take place only if there is a fundamental shift in long-term prospects. Even though it is equivalent to a whole year’s worth of Amvescap profits, the $450 million does not constitute such a shift. Companies with solid trading prospects will swallow one-off costs even on this scale.
Investors might assume that Amvescap is using the cost of straightening out the market-timing tangle as a pretext for cutting the dividend. Investment markets, after all, have changed in character over the past three years. Asset values have fallen, fund managers’ commissions have narrowed and Amvescap’s profits have declined. An uncut dividend would have been less well covered by Amvescap earnings. But if the market-timing costs are set on one side, Amvescap’s dividend cover would have remained in excess of two times. By present standards that is by no means threadbare if one assumes that the current underlying level of profitability can be maintained. But can it? The dividend cut may have come about because US investors take a relaxed attitude towards dividends. And Amvescap, based in Atlanta, is steeped in American ways. But that is an explanation, not a commendation.
Takeover hopes constitute the most realistic prospect for near-term share price advance. Amvescap’s current market value is only about 1 per cent of funds under management and that might attract interest. Those who can dismiss the takeover thought should sell.
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DMGT
TO JUDGE by yesterday’s trading statement, Daily Mail and General Trust, the publisher, is in decent shape. Advertising revenues grew by 8.5 per cent in the 11 months to the end of August at its national titles, which generate about 28 per cent of group profitability. Advertising revenues from the regionals, which account for 37 per cent of annual profits, did not do quite as well, but the 5.8 per cent rise over the same period is still perfectly respectable. The London Evening Standard sold 8 per cent fewer copies in the year to the end of August, compared with the previous 12 months. But the continuing success of Metro, the commuter freesheet, compensated for the fall. Overall circulation numbers are holding up well.
If DMGT can sustain revenue growth at the sort of rates seen recently, while maintaining or increasing margins of profitability, the shares will be worth every penny of the 722½p at which they now trade. But the reported increases in advertising revenues, as DMGT acknowledges, come against a background of weak demand in the comparable period. While the company is on course to attract rising revenues in the coming months, the going will get tougher.
A £90 million investment programme upgrading press facilities, now coming to an end, will help. The new plant gives DMGT much improved capacity to print in colour and generate the premium rates that flow from giving advertisers colour exposure. In the short term, however, the cost of the plant renewal will hit profits. There is also a medium or long-term risk that the greater availability of colour sites will dilute DMGT’s power to charge premium rates for the space.
The consensus of analysts’ opinion is that DMGT will deliver double-digit earnings and dividend growth in at least the next couple of years. Meanwhile, the shares are trading at a level in line with the media sector on a p/e ratio of 15.5 and giving a yield of 1.7 per cent. The rating leaves DMGT with little room for error but the shares are worth holding.
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Eidos
EIDOS may have given investors plenty of warning in June that all would not be well with full-year results, published yesterday, but the extent of the computer games maker’s decline still took the City by surprise. The expectations were that the company would break even. In fact, it chalked up a £2 million loss.
Eidos is operating in an increasingly competitive market, particularly in the US where a 32 per cent sales decline was almost single-handedly responsible for the company’s loss. But the problems go deeper than that. It appears that too many Eidos products are simply not good enough to satisfy consumers. The company admits that its results were disappointing and that several key new game releases missed sales targets.
The computer games industry has consolidated in recent years as the games have become increasingly sophisticated. This has enabled the likes of Electronic Arts and Activision, the world’s two biggest players, to increase annual revenues by 24 per cent and 26 per cent respectively, between 1996 and 2003. By contrast, Eidos grew revenues by an average of 3 per cent a year over the same period.
The key question, however, is whether all this will encourage or discourage the bidders that the company has said are circling. It makes sense for Eidos to link with a bigger group. Its Lara Croft character, one of the few digital “personalities”, also makes tempting prey for a bidder. Bet that the bid comes. Buy.