GKN may have slashed its dividend but it looks well placed to bounce back.
Of the first thirty constituents of the UK's oldest stock market index, the FT30, which dates back to 1935, GKN (LSE: GKN) is one of just two firms surviving in their present form.
But just like the other survivor, Tate & Lyle (LSE: TATE), GKN has hit a recent rough patch, and its shares are well down from their June 2007 peak of 412p. Last night they closed at 65p -- a dreadful performance, but at least up from the low of 57p pence to which they had sank a few weeks ago.
It's not too difficult to see why GKN’s share price has slumped 84%, a decline that firmly brackets it with banks, builders and property companies. GKN, too, is exposed to the credit crunch.
No longer the Guest, Keen & Nettlefold that was famous for its nuts, bolts and screws, GKN today is a diversified engineering business. Unfortunately, that diversification includes a strong automotive presence as a supplier of products such as drive shafts to the world's car industry, and a similar 'off road' presence supplying manufacturers of construction equipment.
Jobs and dividends cut
Neither industry is faring well at the moment, to put it mildly, and GKN has been force to close factories and lay off employees. Lay-offs and plant closures have even affected its aerospace business, where demand has so far remained reasonably strong, with sales up 22% in 2008. Across the group, 3,450 jobs went in 2008, and a further 2,400 will go in 2009.
Overall, GKN's profit before tax was down 35% for the year ending 31 December 2008, and the directors scrapped the final dividend. In 2007, investors received an interim dividend of 4.3 pence per share, and a final dividend of 9.2 pence -- totalling 13.5 pence per share, up from 12.8 in 2006, and 12.2 in 2005. In contrast, 2008's interim dividend of 4.5 pence per share was all that investors received. Ouch.
While never an especially firm favourite of the Fools on our High Yield Portfolio discussion board -- it's more of a FTSE-250 share than FTSE-100 share, and engineering companies haven't been popular with followers of this strategy -- GKN had begun to feature in discussions as its declining share price brought it into 'high yield' territory. By and large, the scrapping of the dividend put paid to that.
But there's still life in this share
But it's far too soon to write GKN off. 250 years old this year, the company still employs around 40,000 people in 30 countries around the world, and has some of the world's biggest businesses as its customers. Full year operating costs will be down £190 million, thanks to job reductions and restructuring -- a figure not far short of 2008's £201 million operating profit.
Better still, it's growing the aerospace part of its operations, and on 5 January this year acquired Airbus' wing component factory in Filton, Bristol, which makes parts for the full range of Airbus aircraft. Over the year, says the company, it won US$3 billion in new aerospace work.
Furthermore, the cancellation of the final dividend -- in common with present practice in other company boardrooms -- reflects prudence, not panic. Earnings per share for 2008 declined by 32% from 35.1 pence to 23.8 pence -- less than half the 67% decline in the dividend per share.
The company entered 2009 with net debt of £708 million, with a further 'headroom' of £402 million available to it in terms of committed bank facilities and bonds. Nevertheless, eliminating the dividend helps to reduce borrowing requirements, as well as fund the restructuring. "Our focus is further reducing our cost base and preserving cash," says the company's chief executive, Sir Kevin Smith.
In short, GKN is far from a basket case, and is firmly on my 'watch list' having strayed deep into value territory.
More from Malcolm Wheatley:
