Shares in heavy construction firm BBY (Balfour Beatty) fell 15.3% to 190.50p today after releasing a disappointing trading update. The Independent reports (http://is.gd/cXp4KD): “it warned of a new £75 million black hole in its UK profits and called on accountant KPMG to carry out a forensic review of its troubled UK construction arm.”
Its z-score is in distressed territory, and is the lowest that I have seen it this decade. Its gearing has risen over the decade, too. Stockopedia has flagged it as a short-selling candidate on its Earnings Downgrade Momentum Screen. So it’s all a bit of a mess.
I became interested in BBY a couple of years ago (http://is.gd/6tNBFp), when I noticed that it was one of only two heavy construction companies that that passed the Ben Graham Defensive Investor test. They had doubled their earnings over 10 years, and had at most two downturns in PEs of 5% or more. I thought it looked quite promising at the time, given its reasonable valuation.
Unfortunately, it was not meant to be. Since 07-Sep-2012, the shares are down 32%, compared with a rise of 16% of the Footsie. The shares crashed later that month, but you would still would have lagged the Footsie if you had bought in at September’s cheapest price.
Although BBY had a good track record of dividend growth, I was not tempted to buy in. I believed the company to be “too boring”. It looks as though Mr Market was correct in spotting the poor subsequent performance of the company. BBY is another addition to the growing list of large-cap companies that have been punished severly by the market this year. TSCO (Tesco) is down 44% YTD. Who would have believed that at the start of the year? BBY is down 34%. Money-printing company DLAR (De La Rue) is down 45%. The other supermarkets are, likewise, huge disappointers.
There’s a salutary warning here. Although it is tempting to buy ostensibly solid companies at reasonable valuations, it is by no means obvious that share price knock-downs following poor results represent bargain opportunities. The shares can take years to recover. I think that investors need to ask themselves if they think the company still has good growth prospects. Alternatively, if you are thinking of investing in a turnaround situation, are you convinced that the recovery prospects are actually quite good? If not, then buying because you think the shares are cheap is likely to be a disappointing decision.
Fans of dividend investing need to be very careful. TSCO is a case in point. Backtrace a couple of years, and it would have appeared to have been a no-brainer solid yielder dividend stock. However, the interim dividend has been slashed this year, and given the accounting problems that have emerged recently, it’s completely unclear what the final dividend will look like. Analysts projections suggest that the current projected dividend yield will be 2.6%. This is likely to be a huge disappointment to both current and prospective dividend investors.
My cynicism on dividend investing styles grows.