Is Saga now a bargain, down 35% today?

One item in today’s full-year figures from Saga plc (LON: SAGA) is a game-changer for me.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »