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Wolseley axes dividend

Created:
16 July 2008
Written by:
Jonathan Eley

• Trading profits down 28 per cent in 11 months to end-June

• No final dividend recommended, saving £150m

• Market conditions 'are likely to deteriorate', focus on remaining within bank covenants

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Wolseley's problem is pretty simple. It has made dozens of acquisitions in the US over the past few years, varying from Mom 'n' Pop businesses to fairly substantial chains of outlets, and these purchases were settled largely in cash. That has left the group heavily indebted at the same time as business in the US has taken a sharp turn for the worse, and finance costs have risen. Trading profit in North America practically halved in the 11 months to the end of June.

Shareholders in the UK will pay the price for this ill-advised binge. There'll be no final dividend this year, releasing £150m to help pay interest and repay capital on the company's £2.7bn debt (its stock market value, by comparison, is £1.82bn). Interest payments and finance costs in its last financial year totalled £177m, and they're likely to be higher this year, because interest rates on a substantial portion of the company's debt are based on interbank rates - which have risen sharply. Additionally, a lot of debt is in euros, because of a major acquisition in Denmark. The euro has appreciated against both sterling and the dollar this year.

There's no light at the end of the tunnel yet, either. The company expects trading conditions to worsen further and its main priorities are cutting costs, increasing cash flow and remaining within its banking covenants. These call for net debt to be no more than three-and-a-half times annualised earnings before interest, taxation, depreciation and amortisation (ebitda).

Last year's trading profit, which is broadly the same thing, was £877m, so if debt remained at current levels, annual trading profit would theoretically only have to fall 12 per cent for the company to be in breach. Trading profit is down more than twice that amount over the first 11 months.

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SHARE TIP UPDATE:

Sell

We advised selling Wolseley shares at 709p back in January on the basis of deteriorating trading. The 62 per cent slump since then, to 271p today, makes it one of our best-performing sell tips. But with a weak balance sheet, and the comfort of a dividend yield now gone, there are fewer reasons than ever to hold onto the stock. Sell.

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