Multi-asset house Seneca Investment Management added to its long-held position in retailer Marks & Spencer (MKS) on weakness Wednesday after its £750 million deal to buy half of Ocado’s (OCDO) UK retail business.
M&S said it would fund the deal with a fully underwritten £600 million rights issue, while cutting its dividend by 40% to a predicted 7.1p per share for 2018/19. The market clearly did not like the news, with shares falling almost 13% to close trading on Wednesday at a seven-week low 265p.
Hitherto an income favourite amongst UK retail investors with a yield of around 7%, it didn’t go down well in that area of the market. As Laith Khalaf, senior analyst at Hargreaves Lansdown, noted, “income investors don’t like dividend cuts of that magnitude, and are prone to dump a stock if it doesn’t continue to meet their need for a decent yield”.
One shareholder that slammed M&S for the move was Paul Mumford of Cavendish Asset Management. He claimed it “seems an extravagant use of shareholders’ money” for a joint venture that may or may not work.
“It’s uncertain how much this deal will actually benefit the retailer in the long term,” he adds. “This is partly due to the limited range and variety of products that M&S offers, making it more of a top-up shop than a weekly shopping destination.”
However, the deal does make sense. Even Mumford accepts the motivation behind the deal is obvious. The future for retail is online and M&S has struggled with its own offering.
Now, it’s got a proven portal and the opportunity to leverage Ocado’s 700,000-strong customer base is a benefit, too. It may be a high price to pay but, as Khalaf points out, it’s exchanging that cash for what is a valuable asset.
M&S Dividend Cut "Not a Disaster"
And Richard Parfect, fund manager at Seneca, was deterred neither by the heavy investment in the business, nor the dividend cut and bought “a little bit of M&S” on Wednesday.
“We are long-term investors and, while there’s a bit of uncertainty over the rights issue later this year, if you look at what the right thing is to do for these companies, I don’t think it’s a wrong move,” he says.
“Clearly it’s going to use a bit of capital but in terms of putting the company on a strong footing I think it’s probably the right thing to do.”
Parfect says Seneca’s experience investing in online investment platform AJ Bell when it was a privately owned company has shaped their thinking when looking at listed companies, too.
Founder and chief executive Andy Bell made many different decisions on whether or not to invest in the business through different market conditions, explains Parfect. “At no point was Andy thinking ‘what would the market think of this decision?’,” he continues.
“That’s just not an issue and that is the right way to run a company. It shouldn’t matter how the market views this – do the right thing for the company and shareholders in the long term.”
Clearly, that’s easier to do when you don’t have a share price to protect and are running a private company invested almost exclusively in by institutions with long-term time horizons. But it seems a fair way to run a company, particularly in a sector being structurally challenged.
On the dividend side, the cut is just that – a cut. “It’s not a disaster; it’s not disappearing,” adds Parfect. The share price at the time of writing would put the current financial year’s yield on the stock at 2.6%. And M&S said the payout will rise in line with earnings over time.
Marks & Spencer is a holding Seneca’s funds, which invest in individual UK equities alongside funds and investment trusts, have had for a long time – “long and wrong, you could say”. “There’s a good company there waiting to get out,” says Parfect.
While the personnel changes at the top-level of the company have come slowly, they have been “edging in the right direction”. In particular, the September 2017 appointment former ITV head Archie Norman as chairman was a good move.
Clearly, we’ll have to wait and see how the Ocado deal works out for M&S, but it could be one of the catalysts needed to snap the losing streak that has seen the share price fall by over half in almost four years.
