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The Expert View: Marks and Spencer, Royal Mail and WH Smith

Our daily roundup of analyst commentary on shares, also including Severn Trent and Halfords.

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Click on the arrow to the right of the picture to view the slides. The arrows to the top right then allow you to move back and forth between them.

To see all the slides on the same page, click here.

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Key stats
Dividend yield 7%
Market capitalisation £4,360m
No. of shares out 1,625m
No. of shares floating 1,615m
No. of employees 80,787
Trading volume (10 day avg.) 4.5m
Turnover £10,698m
Profit before tax £1,310m
Earnings per share 1.58p
Cashflow per share 41.05p
Cash per share 13.63p

M&S transformation comes at a cost, says Hargreaves

Marks & Spencer (MKS) is teetering on the brink of FTSE 100 relegation again and plans to put it back on track could come at a steep price for shareholders, says Hargreaves Lansdown.

The high street stalwart is expected to announce a 10% drop in underlying pre-tax profits to £521 million and the dividend is expected to fall to 13.9p.

Analyst Laith Khalaf said a demotion from the blue chip index wouldn’t affect the business performance but it would be a ‘hugely symbolic moment’.

The retailer is still part way through a transformation strategy stretching out to 2022 but the dividend cut means shareholders are not being paid as much to wait, he said.

Khalaf said the tie-up with Ocado was a ‘bold’ move that could unlock growth ‘but it comes at a steep price, with a dividend cut and rights issue in the offing to fund the £750 million buy-in cost’.

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Key stats
Dividend yield 10.4%
Market capitalisation £2,209m
No. of shares out 1,000m
No. of shares floating 998m
No. of employees 159,117
Trading volume (10 day avg.) 4.5m
Turnover £10,172m
Profit before tax £1,019m
Earnings per share 25.75p
Cashflow per share 59.55p
Cash per share 60.00p

Any Royal Mail rally a selling opportunity, says IG Group

Any rally in the Royal Mail (RMG) share price on the back of its full-year results will be a selling opportunity, says IG Group.

Royal Mail is expected to report pre-tax profit of £342 million, down from £565 million the year before, in its annual results this week. The shares have fallen 60% since their May 2018 peak and are now ‘undeniably cheap’, said analyst Chris Beauchamp.

The dividend is uncovered and being paid from cash reserves, which he said was an ‘unsustainable proposition in the long run’.

‘There is very little that can be said about Royal Mail to encourage investors to maintain their optimism,’ said Beauchamp.

‘The fundamental business faces huge challenges, as its core letter and parcel divisions see declining activity and increased competition respectively. Meanwhile, the [market] remains resolutely bearish, and any rally from the current low levels would more than likely be a fresh selling opportunity.’

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Key stats
Dividend yield 2.7%
Market capitalisation £2,166m
No. of shares out 108m
No. of shares floating 107m
No. of employees 13,828
Trading volume (10 day avg.) 0.3m
Turnover £1,262m
Profit before tax £191m
Earnings per share 98.18p
Cashflow per share 137.27p
Cash per share 41.14p

WH Smith boss leaves on a high

WH Smith (SMWH) chief executive Stephen Clarke is stepping down and could herald a new era of overseas acceleration, says AJ Bell.

In his six-year tenure, Clarke oversaw 24% growth in pre-tax profit and a 177% share price rise, although analyst Russ Mould said the real architect was Clarke’s predecessor Kate Swann.

After ‘sharpening’ Swann’s model, Clarke is bowing out ‘at a positive time for the group which is holding up its chin despite ongoing difficult market conditions on the high street’.

‘Clarke’s successor Carl Cowling will no doubt want to stabilise the high street operations and may be interested in finding ways to accelerate WH Smith’s overseas interests and build scale in more locations,’ said Mould.

‘The current blueprint looks like a successful business model to follow.’

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Key stats
Dividend yield 4.7%
Market capitalisation £4,607m
No. of shares out 237m
No. of shares floating 237m
No. of employees 6,265
Trading volume (10 day avg.) 1m
Turnover £1,694m
Profit before tax £864m
Earnings per share 101.86p
Cashflow per share 241.42p
Cash per share 21.63p

Severn Trent avoids dividend cut  

Severn Trent (SVT) investors have avoided a dividend cut but the water company has made it clear it is not just run to keep shareholders happy, says Fidelity.

Annual results from the group will have shareholders ‘breathing a sigh of relief and thanking their lucky stars that the water company didn’t “do a Vodafone”, with the full dividend payout being honoured,’ said analyst Emma-Lou Montgomery.

‘Chief executive Liv Garfield seemed eager to make the point that Severn Trent isn’t just being run to keep its shareholders happy,’ she said.

‘Its green credentials were paraded for all to see as well. Although time will tell whether the pledges it has made trickle through to the eventual use of 100% renewable energy. However, having given themselves until 2030 to deliver doesn’t exactly make their trailblazers.’

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Key stats
Dividend yield 7.6%
Market capitalisation £481m
No. of shares out 199m
No. of shares floating 196m
No. of employees 11,186
Trading volume (10 day avg.) 0.3m
Turnover £1,135m
Profit before tax £114m
Earnings per share 27.54p
Cashflow per share 45.12p
Cash per share 13.56p

Halfords: inflection point is near, says Liberum

Halfords (HFD) has had a hard year but Liberum says it should not detract from the fact it is heading towards sustainable profit growth.

Analyst Adam Tomlinson retained his ‘buy’ recommendation and target price of 325p on the stock after the car parts retailer reported slightly ahead profit before tax in its annual results. The shares were trading at 240p yesterday.

Halfords remains Tomlinson’s favourite ‘recovery play’.

‘Halfords has been hit hard this year but this should not cloud the fact that a return to sustainable profit growth is on the horizon,’ he said.

‘We think the group will soon overcome the legacy of the past having invested heavily in the business over the past five years and with a bold, yet credible strategy under a new senior team, we think an inflection point is in sight.’

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