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Mondi is among the top blue-chip risers this morning after putting its money where its mouth is with a special dividend to highlight confidence in the outlook and try and make October’s profits warning water under the bridge. A more profitable second half (profits up more than revenues; margin expansion) than the FY likely helps give management the confidence to not only hike the final dividend (+12% to 42c; full year dividend +9% to 62c) but also offer a whopping €1 on top to reward loyal shareholders already beneficiaries of an impressive long-term uptrend.
The special dividend has understandably perked interest among income seekers having boosted the shares’ yield from a middle-of-the-road and safe US Treasury-like 2.9% to a rather more attractive 7.6%. It also puts the shares up there with the generous UK housebuilders, Insurers, Telcos and, of course, Utilities. That said, the sustainability of the Utilities’ returns is debatable and Telcos have failed to offer anything near the long term capital appreciation of the two aforementioned sectors, or indeed Mondi itself.
After October’s profits warning management would only offer this special dividend if it was confident in the outlook and views the current financial position as strong enough to wear the cash outflow and not jeopardize future commitments, including small-mid-sized acquisitions. It’s good news to hear of upward momentum on pricing as well as cost pressures – a combination of economic recovery and commodity market upturn – remaining manageable, given that the latter was partly to blame in October.
What’s holding the shares back? Firstly, October’s pre-profits warning highs remain elusive, the shares under pressure from falling highs resistance since. That said, the 2016 trend of rising lows is still intact. Comments on FX headwinds (USD weakness, rand and emerging market currency strength) are also an issue, although if the USD continues to surge on US growth and Fed over-tightening concerns, these would of course calm. Lastly, there’s the natural fear that today’s special is indeed just that. A one-off. Not to be repeated in 2019.
Mike van Dulken, Head of Research, 2 Mar 2018
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
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