The market gave a warm response to results from Carrs Group (LSE: CARR) this morning, pushing the shares up 4% to 144p and taking the 10-year gain to 150%.
A major disposal of one of Carrs divisions this year has strengthened the balance sheet and delivered a substantial capital return to shareholders. It not only bodes well for the future of this 131m mini-conglomerate, but also shows how value can be unlocked at othermulti-divisional companies, such as FTSE 100 giant GlaxoSmithKline (LSE: GSK).
Value delivered, prospects good
Carrs disposed of its flour mills business for 35m gross (25m net). Todays results show net cash at the year end of 8m compared with net debt of 27m six months ago. However, since the year end, the company has paid a special dividend of 16m (17.54p a share) and made an acquisition for a net consideration of 6m, so the implied net debt is currently 14m.
Nevertheless, this level of debt is modest and gives Carrs the opportunity to invest in its remaining agriculture and engineering businesses and to make further complementary acquisitions as and when appropriate.
Stripping out the earnings from the flour mill business, Carrs delivered adjusted earnings per share of 10.9p for the year (up 7% on the previous year), giving a price-to-earnings ratio (P/E) of 13.6. Meanwhile, a well-covered ordinary dividend of 3.8p gives a handy yield of 2.7% with plenty scope for expansion.
Carrs performance was robust in what was a challenging year for the agriculture and engineering sectors generally. The recent acquisition will be earnings neutral for the first year, but with organic investment and further acquisitions on the cards, growth prospects look highly promising for the medium term. As such, I believe a P/E of 13.6 represents good value and I rate Carrs a buy on this rating.
Look forward, not back
Compared with the 150% rise in Carrs shares over the last 10 years, GlaxoSmithKlines rise of less than 15% over the same period is rather poor. Of course, Glaxo is known as a generous dividend payer, but when you consider Carrs ordinary dividends and the special payout following the flour mills disposal, the FTSE 100 firms total return still lags well behind.
Some of Glaxos major shareholders, including the redoubtable Neil Woodford, have been critical of the companys strategy over the period. There have been calls for Glaxo to unlock value for shareholders in the manner that Carrs has done with the sale of its flour division.
Woodford reckons Glaxos three divisions pharmaceuticals, vaccines and consumer healthcare would be valued more highly as standalone businesses by the market than they are combined together as a conglomerate. I think theres considerable potential for a value-creative demerger of one or more of Glaxos divisions at some point. But I also believe that the group as it is now could perform far more strongly in the next 10 years than it has in the last 10.
This is because Glaxo has just been through a tough period of patent expirations, but has now turned the corner, with revenue and earnings set to return to growth this year. At a current price of 1,540p, Glaxo is on a prospective P/E of 15.5 with a 5.2% dividend yield. For a top blue chip, with value that could be unlocked at some point by corporate activity, I believe the shares are very buyable at their current level.
The joy of cash
Dividends — ordinary and special — are tangible rewards for investors, and I expect Carr’s and Glaxo to deliver handsomely in the coming years. Another company I would urge you to check out has been identified as a dividend champion in the making by the sharp-eyed analysts at the Motley Fool.
Last year’s payout from the company was hiked by 10%, covered 3.1 times by earnings, and projections by our experts indicate the dividend can march securely higher in coming years. You can read their full analysis of this company in a FREE without obligation report called A Top Income Share From The Motley Fool.
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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
