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The peddler of car parts and bicycles has issued four profit warnings in two years, blaming the changeable weather along the way, while its shares have halved to 171p, giving it a value of £340m.
Chambers noted that the main reason it had not been more of a “bloodbath” was the company’s dividend, although he said the City was starting to believe that particular “sacred cow could be sacrificed”.
Stapleton, after assessing where the sore points were in Halfords, decided it needed investment, and last November he promised to increase spending to £60m per year from £40m.
However, as trading conditions worsened, he brought it back to £31m for the year, and left the company’s generous distribution alone.
Halfords paid a dividend of 18.6p per share last year, and given the poor performance of its share price, it now trades on a yield of 10.8% – quite the premium on the 5% average for the FTSE 350.
But if the board did make the call to cut the dividend, the shares could be in for even stormier seas ahead.
Chambers noted that Halfords’ shareholder register is dominated by income funds, which – as Marks & Spencer discovered when it slashed its dividend this year – do not take kindly to such decisions.
But Stapleton does have the right kind of thinking, Chambers said, noting that given everyone from Amazon to Home Bargains sells wiper blades and de-icer, his decision to focus on services makes sense.
Halfords has more than 300 centres where it can service customers’ cars, and if they don’t want to leave home, one of its vans can come to them – making it the ideal business to target “time-pressures, under-skilled millennials”.
But the company has just a 2% share of the auto services sector, which is still dominated by independent garages, with the “harsh reality” being that its pre-tax profits have dropped for four years in a row, sliding 24% to £51m last year.
“The Halfords directors, now led by Keith Williams, who also chairs Royal Mail, face a tough choice: brace themselves, cut the dividend and place their faith in Stapleton’s long-term vision; or hunker down, keep the shareholders happy and hope the retail storm passes,” Sam Chambers said.
“Either way, this looks like a situation that is going to get a lot worse before it gets better. Avoid.”
Over in the Mail on Sunday, Joanne Hart was looking at whether there were any companies left languishing from the Neil Woodford saga that could be worth backing for her ‘Midas’ column.
She noted that most of the non-dividend payers in the wound-up fund were biotechnology businesses, with little chance of shareholders seeing their cash again for years.
“They may be excellent companies but, right now, they are loss-making and fall into the ‘jam tomorrow’ camp,” Hart said.
Redde, meanwhile, had “considerably more mileage” in its shares, she said, noting that the Woodford fund owned 28% of the company in June and still had a near 20% holding now.
The company makes its money by providing drivers with replacement cars and repair services when their vehicle is damaged in a collision.
It has deals with a number of large insurers and dealerships, so when their customers call in to report an accident, they are referred to Redde.
The firm has a fleet of more than 10,000 replacement cars, and works with a network of garages to ensure repairs are completed efficiently, and also manages claims for insurers.
It also works with big companies, handling damaged fleet cars and vans, and features a legal division that deals with motor injuries, employer liability and negligence claims.
The company was known as Helphire, but was restructured and renamed by chief executive Martin Ward in 2013, who also changed the dividend policy, meaning almost all profits are paid out as dividends.
In the year ended 30 June, Redde paid out a dividend of 11.65p, giving the stock a yield of more than 10%.
Hart noted that such high yields often ring alarm bells for investors, but she explained that Redde was different as the generous payments were part of a deliberate policy, with the board committed to ensuring the business still had enough cash for its needs.
Redde did hit a bit of a roadblock earlier in the year, when it lost a contract with a large insurer, leading to a plunge in its share price to 90p from 180p.
Other contracts had since been won, however, although Hart said they were not yet fully reflected in the share price, and as such it presented quite the opportunity for investors.
“Redde is linked to the Latin word restoration, helping drivers to get back to normal,” Joanne Hart wrote.
“With the stock at £1.14, the word is relevant to investors as well. Redde is a strong business with an attractive dividend and the shares should move higher.
“The Woodford stake is large but big investors have been expressing an interest in the stock so the holding should be sold off relatively smoothly.”
