Investors have been waiting for a Marks & Spencer Group (LSE: MKS) turnaround for years now, but they seem to be forever disappointed. Are we expecting the wrong thing?
Earnings per share have pretty much remained flat in recent years, from 31.9p in 2013 to a barely unmoved 30.4p for the year ended April 2017. We have 28p-29p pencilled-in for the next couple of years, putting the 331p shares on P/E multiples of 11 to 12.
First-quarter results released Tuesday paint a familiar picture. At £2,532m, total revenue for the period showed a 2.7% rise, with UK revenue of £2,259m up 2.6%. Food revenue rose by 4.5%, but Clothing & Home is still struggling to turn itself around with a 0.5% drop — and total like-for-like UK revenue slipped by 0.5%, with Clothing & Home down 1.2%.
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Improving margins?
On the up side, Clothing & Home full-price sales were up around 7% (and no clearance sale, as there was a year ago), so those broadly flat sales might even convert to an improvement in profit.
M&S has been opening more Simply Food outlets too, and concentrating on what you do best is a good strategy in my book.
That brings me to my alternative view of the company. If, instead of looking for a recovery stock and expecting a turnaround to steady earnings growth, I consider M&S as a plodding but stable payer of dividends, I see it in a different light.
Dividends have grown a little, from 17p in 2013 to 18.7p, and there are slight rises forecast between now and 2019. With the share price having fallen over the past couple of years, we’re looking at yields of around 5.6%. That looks good to me.
Steady cash
Although I generally don’t like investing in managed funds, buying shares of the companies running them can be very profitable — and I’m a big fan of investment trusts, which have a number of advantages. One is the flexibility they enjoy over handing out cash to shareholders, enabling them to maintain a reliable long-term dividend plan.
That’s precisely what MedicX Fund (LSE: MXF), set to soon convert to a real estate investment trust, has been doing. The company invests in purpose-built primary healthcare properties, mostly GP practices and pharmacies — and that provides steady NHS-guaranteed rental income, often with inflation-linked rises.
The first half of the current year saw a 5.1% rise in rent receivable, which is well ahead of inflation, and that should help the firm to an anticipated full-year dividend of 6p per share under its progressive dividend policy.
On today’s share price of 89.5p, that would amount to a very nice yield of 6.7%.
Sufficient cover?
The only apparent downside is an underlying dividend cover of only 70%, but there are a couple of things that should offset that worry. Firstly, MedicX offers a scrip dividend scheme, and the cash doesn’t need to be found for those taking their dividends as shares (which is surely the best thing to do for long-term gain).
The company says it is “committed to increasing dividend cover over time“, and points out that cover at any one time depends on “the balance between debt and equity capital and the number of assets under construction“. A planned debt drawdown to fund some Irish developments should increase cover too.
I see MedicX’s dividends as reliable, and I think the shares are attractively priced.
