Sunday share tips: Howden Joinery, BP

In her ‘Inside the City’ column for the Sunday Times, Emma Dunkley was looking at FTSE 250 company Howden Joinery, noting that in the last year its shares had risen 45% to 727.6p, giving it a market value of £4.4bn.

The kitchen company was established by founder and former chief executive Matthey Ingle in 1995, with Dunkley noting it was part of MFI Furniture, which was sold off for a nominal £1 to private equity outfit Merchant Equity Partners in 2006 following a sharp drop in sales.

MFI went on to change its name to Faliform, before becoming Howdens Joinery Group in 2010 after a time spent focussed on expanding Howdens.

Ingle stepped down in 2018 and was replaced by ex-Screwfix boss Andrew Livingston.

“Livingston has only been chief executive for less than two years, but so far he’s shown he can improve the model even more,” Dunkley quoted Goodbody analyst Robert Eason as saying, with Eason pointing to a series of depot openings under Livingston’s reign.

Howdens accounts for about 50% of the market when it comes to the supply of kitchens to builders, and also boasted a health balance sheet, with net cash standing at £234m in November.

The company is also a regular when it comes to buying back shares, completing around £140m of buybacks in the last three-and-a-half years.

Liberum analyst Charlie Campbell believed this year could be a better one for consumers, Dunkley noted, thanks to a rise in real wages.

Analysts were also looking for a solid set of numbers from Howdens on 27 February, with operating profits expected to rise to £254m from £239m.

The company opened around 40 depots in the UK last year, including its first five in Northern Ireland, which brought its total to about 734.

Howdens was also considering an expansion in France, where it had enjoyed a small presence in the last 10 years thanks to several sites in the Paris area.

There were still challenges ahead, Dunkley noted, quoting Eason as saying that their caution “is based on uncertainty around the economic outlook and political risk because of Brexit”.

The shares were trading near their all-time high, with the company’s dividend yield standing at just 1.6%.

“Positive results this month could see shareholders take profits off the table, leading to a dip in the share price. But, longer term, Howden is still cooking up a treat. Buy.”

Over in the Mail on Sunday, Rosie Murray-West said it was not a good time to be in Big Oil for her ‘Midas’ column, asking what the energy giants were to do when shareholders were keen on growing dividends from oil and gas production while activists were chaining themselves to the railings?

For BP, the answer last week was to take a bold stand, Murray-West said, noting that new chief executive Bernard Looney had promised to reduce the company’s carbon footprint to “net zero” by 2050, while continuing to grow its dividends.

It was an attempt to placate everyone, she wrote, after ex-boss Bob Dudley did his best to turn around the company’s reputation after the 2010 Deepwater Horizon disaster and accidents in Texas and Alaska.

Dudley did make some progress in the biofuel, solar and wind sectors, but Murray-West said it was hard to ignore the fact the BP was also committed to expanding its oil and gas production by 20% in the next 10 years.

Looney had “limited room” to manoeuvre, she noted, given BP shares - closing at 457 p on Friday - were barely higher than they were five years ago.

The company had to service $45bn of debt each year, alongside $6.5bn of dividends to pay, with the company making “big promises” to investors about decreasing its debt and increasing its dividends further.

“It is going to cost billions for BP to reposition itself in solar, wind and renewable power generation and transmission,” Murray-West quoted Russell Mould, investment director at stockbroker AJ Bell, as saying.

“This does not sit entirely comfortably alongside Looney's reaffirmation that BP will continue to stick to its existing financial targets.”

But not everyone shared that pessimism, Murray-West added, with analysts at both HSBC and UBS reiterating their ‘buy’ stance on BP after Looney’s statements last week, although HSBC cut its price target to 595p from 600p after considering the cost of his new strategy.

The consensus forecasts from analysts remained a ‘buy’ for BP.

Murray-West noted that for those keen for income, Looney’s reminder that dividends were still important would be a welcome one.

The company’s current dividend yield remained 7%, making the company attractive in its current form for those keen for income.

Russell Mould did warn that a cut to the dividend would be a simple way for the company to work towards its environmental aspirations, although a move like that would make Looney unpopular among shareholders.

“Bumper dividends and a recent strengthening in company results are two reasons to buy the shares,” Rosie Murray-West wrote.

“But any recommendation has to be a cautious one during a time when Looney's words are properly weighed and more is revealed about BP's environmental plans.”

She said it was not yet clear whether Looney's aspiration to be 'net zero' was a sensible, realistic and considered response to pressure from investors.

Those who wanted to go along for the ride would be advised to “study very carefully” what Looney said last week, Murray-West wrote, as well as his words over the coming months, to see whether they understood how he would reconcile the twin aims of pleasing shareholders and the public at the same time.

“Looney is trying to have his cake and eat it, so only the bravest investors who are prepared to hold for the long-term should consider coming to this particular tea party.”