Who’d have thought FirstGroup (LSE: FGP) shares would have been one of the UK’s most successful investments? I certainly didn’t.
The FTSE 250 bus and rail operator’s share price is up 38.27% over the last three months and while annual growth of 11.65% isn’t quite as exciting, longer-term investors are on a roll.
The private sector provider of public transport runs First Bus, the UK’s second-largest regional bus operator, and First Rail, the UK’s largest rail operator with contracts for Avanti, Great Western Railway and South Western Railway. Passengers may gripe about UK rail services, but FirstGroup investors have little to complain about.
From bus lane to fast lane
If I’d invested £5,000 in the company three years ago, I’d have seen my money grow by 346.75%. Today, I’d have a whopping £22,338. While that kind of return grabs the eye, hindsight won’t help me get any richer. The big question is where the FirstGroup share price goes next?
Last month, the £1bn group reported that adjusted attributable profit had more than doubled to £82.1m, beating expectations. Net debt of £3.9m in 2022 turned into a net cash position of £109.9m, despite heavy investment to electrify its bus fleet.
This helped reverse disappointment over the government’s move to nationalise FirstGroup’s TransPennine Express (TPE) service in May, after months of cancellations and woeful service. In a further blow, FirstGroup has been hit by repeated rail strikes and the unions aren’t done yet.
Despite its share price success, the stock isn’t expensive trading at 14.1 times earnings. While it only yields 2.5%, that’s nicely covered 2.8 times by earnings, giving plenty of scope for growth. Also, it only resumed its dividends in 2022, after dropping them during the pandemic. That year, management paid 1.1p a share. It jumped to 3.8p in 2023, a rise of 245%.
The yield is forecast to keep rising to hit 2.84% in 2024 and 3.15% in 2025. Management has further rewarded shareholders with a £75m share buyback programme. It’s planning a £115m follow up, subject to shareholder approval.
I’ll bide my time with this one
Inevitably, there are threats. Train strikes are dragging on. Losing the TransPennine Express contract due to poor performance is embarrassing. Government policy towards the railways could change if Labour wins the next election. Plenty in the party would support more nationalisations, although leader Sir Keir Starmer seems likely to face more pressing priorities.
Yet today, momentum is with FirstGroup. Despite that, I’m struggling to whip up the enthusiasm to buy it. Bus and rail isn’t the most exciting area and passenger numbers could fall if we get a recession. Last year, group revenues fell £829m to £4.76bn. Its operations requires a huge amount of investment, as its decarbonisation efforts show.
That brilliant three-year performance may be misleading. Much of it is down to a post-pandemic rebound, as Covid lockdowns hit FirstGroup hard. A repeat performance is unlikely. I’ve added it to my watchlist and will keep close tabs on its journey. I won’t buy FirstGroup today, but that could change if it stays on the right track.
