Stobart Group: High dividend but flawed strategically

Stobart Group (LON:STOB) is a diversified outfit with a market capitalisation of approximately £550m. This dividend paying midcap’s primary trading activities include – a) aviation (it owns London Southend airport), operating flights, and baggage handling; b) waste-derived fuels; c) providing rail, civil, infrastructure engineering and management services. 

“We will continue to support the funding of the dividend from proceeds of property asset disposals and investment realisations in the short term,” were the words of its Chairman at the presentation of Stobart Group’s 2018 annual report.  

The way I view it, burning cash to buy back shares and funding dividends out of asset sales, are not sensible and prudent steps by management, and instead indicate desperation to keep hold of shareholders while earning per share (EPS) remains non-existent.

However, there are promising signs of future revenue and returns, with last fiscal year’s dividend yield at 5.467%. In its aviation division, new and strengthening relationships with other airlines, greater use of its baggage handling service, commencement of flights from a second airport in Carlisle and services for private jets are huge pluses. 

Offsetting, this however are significant costs of discontinuing its FlyBe operation (run and managed by Stobart under the airlines branding) in favour of easyjet and Ryanair, that was announced last year. It followed the subsequent bid - in January - for struggling Flybe, with Virgin Atlantic and Cyrus Capital.

Meanwhile, Stobart Group's Rail and Civils division’s negative EBITDA following a review and subsequent downgrading of the performance of its contracts, raises the question of how many of its other assets’ future performance might be similarly downgraded.

The company faces multiple external risks beyond its control that could materially impact profitability. Take for example its energy division. According to the company’s interim report for period ending Aug 2018: 

“The continuing challenges around the commissioning of third-party power stations means that, although volumes sold have increased year-on-year, our infrastructure has been under-utilised. Two major plants in Widnes and Tilbury have experienced unplanned outages during the first half of the year.

“Commissioning also started later than expected at Margam and Templeborough and the development of Port Clarence has slipped to early 2019.  Consequently, we continue to work hard to maintain the integrity and viability of the supply chains we have created for these plants resulting in non-underlying costs of £2.2m.” 

Conclusions: Steer clear 

For: Low gearing; very high dividend yield   

Against: Share price is 2x Tangible Book Value and 1.5x Book Value, negative operational revenue; no profit; no interest cover; negative EPS and RoE; intangibles around 33% of Book Value; each £1 of share price earns £0.87 in revenue; ongoing litigation claims.

Overall: Look beyond high dividend and you’ll find its worth avoiding.