Currencies

The threads maker is cutting costs while investing to defend a leading position in its specialist field, says Russ Mould

SINCE this column’s initial look at Coats, the industrial threads maker, a year ago, shareholders have reeled in a return of nearly 10pc, including dividends, while the broader London market is more or less flat.

Judging by the solid first-half results released late last month, the FTSE

250 stock looks capable of providing further capital gains and dividends for patient investors.

Stated profits slipped slightly but that was down to $15m (£11.7m) in costs relating to December’s acquisition of Patrick Yarn Mill and the initial expense associated with the company’s productivity programme, “connecting for growth”.

Adjusting for these items and for currency movements, sales rose by 5pc, operating profit by 12pc and earnings per share by 19pc. The

chief executive, Rajiv Sharma, and the board also sanctioned a 14pc increase in the interim dividend to $0.50 a share. The yield is still small, at some 1.6pc for 2018, but progressive dividend increases are planned if all goes well.

Strong growth in Asia and some price increases in the industrial arm underpinned the improvement in operating profits, even if the crafts market remained tough in America. A $3m drop in pension costs was also welcome, as Coats completed the merger of three defined benefit schemes.

Moreover, the connecting for growth programme is ahead of schedule and looks primed to deliver net cost benefits of $10m this year, rather than the $5m initially expected.

As a result, full-year profit forecasts continue to nudge higher, which is no mean feat in this testing environment, as Coats invests and innovates to defend and deepen its market-leading positions in its specialist field. The shares are not as cheap as they were but 14 times expected earnings is not expensive for a stock whose momentum seems to be building nicely. Questor says: hold

Ticker: COA

Share price at close: 81.60p

Update: Card Factory

This column’s patience with Card Factory, the greetings card and gift wrap retailer, has been exhausted by the latest trading alert, which saw the chief executive, Karen Hubbard, shave some 4pc off analysts’ profit forecasts

and warn that a strong finish to the year would be needed to make even the downgraded estimate.

To sugar this latest bitter pill, blamed on bad weather, weak consumer confidence and margin pressure, the boss did at least reaffirm plans to pay a special dividend of 5p to 10p per share to supplement the regular distribution, which analysts expect to be 9.8p this year against 9.3p in 2017.

At the bottom end of the range that makes for a total of 14.8p a share and a yield of more than 8pc on a stock that trades on a price to earnings ratio of barely 10. But there are two problems here. Though this is no fault of the team at Card Factory, this column has been bitten before by stocks that offer fat yields where a drip-drip-drip of bad news means that share price falls more than offset the benefit of the dividends.

In addition, the steady stream of downgrades means that cash flow cover for the dividends is getting thinner. Add depreciation and amortisation to operating profit for £90m of cash generated then subtract £11.5m in capital expenditure, £17m in tax and £3m in interest. That leaves £57m.

The ordinary dividend will cost £33m and a 5p special some £17m, for free cash flow cover of just 1.1 times. That is thinner than ideal even without any further profits disappointment, which seems possible in the current environment.

While it is disappointing to bail out at 179p, some 26pc below our autumn 2016 entry price, two special dividends of 15p apiece, one 2.9p interim dividend and two final payments worth 12.7p in total limit the final damage.

But any threat to future special dividends could remove a potential prop for the share price. It’s time to say goodbye.

Questor says: sell

Ticker: CARD

Share price at close: 185.80p