The ‘life’ of Saga (LSE: SAGA) as a public limited company has not been a happy one since it listed on the London Stock Exchange five years ago. Today’s plunge to around 68p, as I write, means the Saga share price has fallen around 63% since the Initial Public Offering (IPO).
Grim reading
The company has a well-known name and provides cruises, holidays, insurance, personal finance and publications for the over 50s, but today’s full-year results report makes grim reading. Revenue for the trading year to January slipped back just over 2% and underlying earnings per share declined by 5.1%. But there are positives too. Net debt fell by 9.4% and net cash from operations moved 2% higher. So far, nothing to fully justify today’s horrendous plunge in the shares.
The unadjusted figures show that profits plummeted deep into loss-territory because of the firm taking an almost £330m hit from a charge to cover amortisation and impairment of intangible assets because the directors “re-assessed the carrying value of the goodwill relating to the Group’s Insurance operations.”
But I don’t think even that in isolation is enough to explain the move. However, one item in the figures does. The directors slashed the total dividend for the year by almost 56% and rebased future payments lower – yep, that probably did it, and it’s a game-changer for me.
I think the decisions that directors make about a company’s dividend are very important for shareholders. We can tell a lot about what they think of current and anticipated trading. In this case, the news is bad, in my view.
Saga plans to pay out around 50% of earnings with the dividend in “the next few years.” But the company expects “a combination of margin pressures and other factors” to push profitability “significantly below” what it has been recently.
The directors didn’t see it coming
It seems that the directors didn’t see this coming and reckon they’ve had to make some “difficult decisions.” Seen in this light, I think the big impairment charge looks ominous, and I hope it doesn’t lead to further write-downs later. Indeed, such negative spirals can reduce share prices to fractions of former levels.
Chief executive Lance Batchelor explained in the report that Saga is up against “increasing challenges” because of the “commoditisation” of its markets, “especially in Insurance.” The firm has been feeling the pain from both customer numbers and profitability. Batchelor said: “Saga cannot grow without a clearly differentiated offering to its customers.”
Well, Batchelor’s certainly blown my previous investing thesis out of the water! I was worried about exactly those issues he highlights following previous profit warnings from the company. But I said in an article in January that although the cyclicality of operations, the high dividend yield and the falling share price bothered me, “there’s just too much going on in the company and the brand is too strong for me to turn my back on it.”
It turns out that the strength I thought I saw in the brand is an illusion. Saga is at the mercy of price competition with an undifferentiated offering after all. I won’t bore you with Saga’s turnaround plans. but will end on saying I’m avoiding the share now.
