It Could Be Time To Sell Balfour Beatty plc And Buy Carillion plc…

Carillion (LSE: CLLN) has given up its pursuit of peer Balfour Beatty (LSE: BBY) and now Balfour’s investors should sell up and side with Carillion, I say.

Balfour has made multiple mistakes over the past 18 months and now it’s becoming hard to trust the company’s management. Indeed, during the past 18 months, Balfour has warned on profits several times, lost its chief executive, Andrew McNaughton and is now trying to sell off the crown jewels, US-based Parsons Brinckerhoff, to pay down debt.

Breaking downBalfour Beatty

The deal between Carillion and Balfour broke down despite Carillion’s sweetened offer and proposed cost-saving synergies.

Balfour’s board of directors unanimously decided that Carillion’s sweetened offer was not in the best interests of its shareholders. Instead, Balfour’s board stated that its turnaround strategy, centred on the sale of Parsons Brinckerhoff, would be better for shareholders in the long-term.

Many analysts have disagreed with this view, as it is widely believed that Parsons is one of Balfour’s most profitable businesses. The sale of the American outfit is expected to raise £700m, which will be used to pay down debt, fill a hole in Balfour’s pension schemes and return £200m to shareholders. 

Some shareholders have pointed out that after this sale Balfour will have a “rock solid” balance sheet. The business will also be UK focused, allowing the company to benefit from a UK economic recovery. Others are not so sure. 

Poor record 

When it comes to past performance, Carillion and Balfour are in completely different leagues. For example, over the past few years Carillon has met and outperformed several self-imposed targets and acquired two additional businesses, Mowlem and Alfred McAlpine, where cost saving synergies comfortably exceeded initial expectations.

Balfour, however, has not been so successful. If you strip out profits from joint ventures and Balfour’s asset sales, underlying pre-tax profits have fallen from £271m in 2011 to £79m in 2013. These figures include £70m of cost savings. During the first half of this year Balfour’s pre-tax profit fell to £22m, from £47m reported a year ago.

Carillion’s pre-tax profit has remained more stable, falling from £143m reported at the end of 2011 to £111m in 2013. Carillion’s management also seems keen to seek out value-creating deals for investors, whereas Balfour’s management is tearing the company apart. 

Attractive income

While Carillion may be a better investment than Balfour, there’s one thing that the two companies have in common, a hefty dividend payout.

Indeed, right now Carillion offers a dividend yield of 5.3% and Balfour supports a yield of 5.9%. For the time being, Balfour’s payout looks secure as it is covered around one-and-a-half times by earnings per share. That said, with Balfour’s profits slumping the company could be forced to cut the payout in order to conserve cash.

On the other hand, Carillion's dividend payout is covered twice by earnings per share, giving the company more room for maneuver. Still, if Balfour and Carillion are not your cup of tea there are plenty of other opportunities out there.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.