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The starting point for the analysis of Companies A and B, the two dominant UK firms in one sector, was set out in a Newsletter dated 18th March. Over ten years the earnings numbers have been about the same.
Company A’s average earnings per share over ten years is 14.9, whereas Company B has achieved 13.7.
Thus, we might expect B to be priced somewhat less than A if we lay emphasis on cyclically adjusted eps, but not dramatically lower.
However, we find that A is 245p and B is 112p. (MCap of A: £1bn; MCap of B: £415m)
A possible explanation is that B’s more recent earnings performance has been worse that A’s, at 8.1p versus 12.7p. Mr Market may be looking at those earnings numbers and extrapolating forward a much worse earnings trajectory for B than for A.
We have to figure out if that view is justified.
Today we look at some performance statistics.
Dividends
Perhaps the share price difference makes sense if we look at dividends?
| Pence per share | Company A | Company B | |
| 2006 | 18.4 | 9.0 | |
| 2007 | 18.4 | 9.0 | |
| 2008 | 18.4 | 9.2 | |
| 2009 | 11.0 | 9.4 | |
| 2010 | 11.0 | 9.4 | |
| 2011 | 11.5 | 10.4 | |
| 2012 | 11.75 | 10.4 | |
| 2013 | 11.75 | 10.4 | |
| 2014 | 11.75 | 10.4 | |
| 2015 | 11.75 | 10.4 | |
| 2016 | Analysts expecting 11.75 | 6.2 |
Between 2009 and 2015 the dividends were not too far apart.
But this year B’s dividend is about half that of A. If this is an indicator of relative company earnings prospects then the premium price for A might be justified.
But the dividend yield for B is 5.3%, higher than that for A at 4.8%.
Return on total tangible assets
Perhaps A’s managers are much more efficient at gaining a return on the tangible assets they’re entrusted with?
I’ll examine the operating profit made per pound invested in tangible assets (goodwill from takeovers and other intangible assets are excluded because managers generally have little control over these).
Operating profit divided by total tangible assets
| £m | Company A | Company B | |||
| 2011 | 120 ÷ 587 = 20% | 112 ÷ 467 = 24% | |||
| 2012 | 128 ÷ 647 = 20% | 123 ÷ 542 = 23% | |||
| 2013 | 97 ÷ 636 = 15% | 89 ÷ 548 = 16% | |||
| 2014 | 106 ÷ 606 = 18% | 92 ÷ 466 = 20% | |||
| 2015 | 101 ÷ 644 = 16% | 73 ÷ 507 = 14% | |||
| 2016 | 57 ÷ 498 = 11% |
Both companies achieve very high rates of return on tangible assets, with B the best until recently.
Remember we have not deducted debt from total tangible assets. If we do so the return to shareholders’ equity for both is very high.
Profit before tax divided by shareholders funds
| £m | Company A | Company B | |
| 2011 | 114 ÷ 335 = 34% | 93 ÷ 38 = 245% | |
| 2012 | 122 ÷ 366 = 33% | 105 ÷ 68 = 154% | |
| 2013 | 91 ÷ 380 = 24% | 69 ÷ 72 = 96% | |
| 2014 | 101 ÷ 364 = 28% | 75 ÷ 85 = 88% | |
| 2015 | 96 ÷ 368 = 26% | 74 ÷ 77 = 96% | |
| 2016 | 57 ÷ 79 = 72% |
Company B had high borrowing until recently. It was also profitable even after interest. In fact, the financial gearing helped……….
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