Just Group’s interim results were published this morning (6 Sep 2018). As has been widely reported, they did not declare a dividend. ‘In light of the uncertainty created by Consultation Paper 13/18, the Board has deferred any interim dividend declaration until the position is clarified’.
The share price actually rose slightly, on the back of the statement that adjusted operating profit before tax rose 85% from £67.2m for the six months ended 30 June 2017, to £124.4m for the six months to 30 June 2018.
The auditor’s statement caused little concern
We draw attention to note 1 to the condensed set of financial statements, which sets out the ongoing uncertainty in respect of the final outcome of CP13/18, together with any actions the PRA may take, which could have a materially negative effect on the regulatory capital position and financial condition, operations and prospects of the Group. These events and conditions, along with the other matters explained in note 1, constitute a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern. Our conclusion is not modified in respect of this matter.
This is similar to the emphasis of matter in the recent Solvency Report, although to my knowledge this is the first time the phrase ‘ability to continue as a going concern’ has been used. However, Marcus Barnard, the analyst from Numis, the one who thinks an option is not an option, claimed it was an ‘exceptionally strong’ set of results and that the company had taken a ‘pragmatic approach’ to the issues raised by the PRA’s consultation paper.
Suffice to say for now that, after several hours working through the results, I am baffled about the increase in the adjusted operating profit. It is actually a fall if we take investment losses into account (p.13), but let’s take their word for it that excluding effects of short-term changes provides a better view of longer-term performance etc. But how is the Group calculating this profit? They say it comes from new business written during the period, which would be defined benefit ‘de-risking’ and guaranteed income for life (i.e. enhanced annuities) products. They typically hedge these by investing in higher yielding hence risky assets, yet p.16-17 shows that they have increased their investment in lower yielding assets, such as AAA corporate bonds and gilts.
This makes no sense. How can they make a long-term profit out of assets and liabilities whose returns almost exactly match?
A sure thing?
There is also the reassuring statement (p.5) that
The allowance for mortgage risk included is equivalent to a 28% immediate house price fall together with 0% house price growth thereafter. This is equivalent to a 1.7% fall in house prices every year for the remainder of the life of our mortgage book.
And how plausible is that? How could you lose money investing with the risk of loss practically nil?
Well, listen to my following proposition. I have a portfolio of riskier stocks amounting to (say) £10,000, which have consistently returned 4.5% dividend yield for the last 10 years. Note, that is just on dividends, there has been a capital gain as well, but set that aside. I would like to sell you this portfolio, based on the present value of its expected (dividend) return over 10 years. That would be £10,000 compounded at 4.5%, then discounted back at risk free of 1.5%. That makes its current value about £13,500. Will you buy it from me at that price?
Well no, you say, the future returns are risky. I reply ‘but the yield has been consistently 4.5% since I bought them in 2008, and historical yields have been the same since about 2001. That’s nearly 20 years of solid returns. Not risky at all’.
You scratch your head. Clearly I am right. It is a portfolio of 50 stocks, the dividend payments have been consistent for a long time, and I should add there is considerable academic research suggesting that dividends are highly stable. So it’s a sure thing. Will you pay me £13,500 for my portfolio? You cannot lose.
There is a contact form on the menu, please contact me if you are interested, and I will report back on the results (on an anonymous basis of course).