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A Solid High Return - Charles Taylor Consulting (CTR)
28/1/2010
(119264)
A Solid High Return
Here we go again – another recommendation of Charles Taylor Consulting (CTR) as a solid high yielder with the prospect of useful capital gains. Sorry if this is growing boring, but it still makes sense.
At 192p, Taylor sells on a prospective yield for 2009 of 7.6%, and a prospective pe of 7.1. The company is committed to maximising returns to shareholders, and there is a strong likelihood of dividends increasing by close to 5% in 2010 and 2011. If that proves correct, the prospective yield for 2010 is 8% (pe 5.9), rising to 8.4% (pe 5.5) for 2011.
The shares are fully listed, so qualify for inclusion in an ISA, meaning that the dividend is subject only to 10% tax, so the high yield is especially attractive.
The management is conservative and highly respected in the insurance market. It has raised the dividend every year since coming to market, and is growing the company carefully, supplementing organic growth by periodic acquisitions.
Taylor provides a variety of services to the insurance market, but does not itself undertake any direct underwriting, so exposure to risks is modest. There is a full description of how Taylor works in my report ‘High Return’ on June 24 when the shares were first recommended (at 185p).
The company delivers regular informative comments on progress, and a trading statement last week confirmed that pre-tax profits for 2009 were likely to meet management expectations, but minority interests and a higher tax charge would mean that earnings were likely to be marginally below expectations.
The yield and earnings forecasts mentioned above come from joint broker RBS Hoare Govett, and those from the other joint broker, Altium, are almost identical. Their forecasts are clearly well informed, and while they do change as time goes by, are usually well up with events. There is no serious reason to question them.
A recent note from RBS is reassuring on the debt/cash position. Net debt rose to £42m in the first half of 2009 following the acquisition of Axiom, which is being integrated nicely into the insurance services support division and is already yielding cost savings. Debt should have been cut to about £40m by the December 31 year-end, and with improving cash flow, net debt is expected to fall more substantially in the next couple of years.
There was a presentation last week highlighting growth opportunities. The most interesting follows legislation which has removed the barrier which prevented local authorities from banding together to form mutual insurance companies. Taylor already provides general management of mutuals for international shipping companies, American workers compensation schemes and such, handling claims and investing funds.
There is a partnership with New Local Government Network to help Taylor reach people at the right level in the 435 local authorities. There does appear to be political will to encourage such developments. The necessary powers are likely to be available to local authorities in October, and there are hopes of useful developments in this market late in 2010 and in 2011.
The insurance services division also looks well placed after the integration of Axiom. And there are hopes that 2011 will bring the opportunity to create a managing agency at Lloyd’s to act as a turn key for new syndicates. Demand is growing and existing providers are full.
There is nothing sensational in any of this, just solid, steady development, which is the main characteristic of Taylor. This suggests that the broker predictions of earnings growing from just under 28p in 2009 to about 32.5p in 2010 and then to around 35p for 2011 are well-founded. Cover for an annual dividend which rises by about 5% each year should be just a shade under twice for 2009 and should then advance.
Broker Altium sticks with a share price target of 330p, while RBS opts for 250p. The full annual results came at the end of March last year, so the approach of the 2009 figures could soon generate more interest in the shares, which touched 232p back in September.
Intriguingly, the BT Pension Fund has been a steady seller of the shares since at least last May, coming down from a stake of over 13%. This week it dipped below 3%, which means it had under 1.2m left. Whether those remain to trickle out – holdings under 3% do not have to be reported – is a matter for speculation. But a collection of American names has just revealed that it has bought an extra 240,000 or so to take a stake up to 13.2%.
If BT’s selling reaches an end, that could allow the Taylor price to advance nicely. While there have been takers for the BT stock, there is not normally a big market in the shares, so it could be that BT’s long-standing selling programme has depressed the price unduly.
With a yield comfortably over 7% and a pe set to fall from just over 7 against a solid trading background, Taylor continues to look an ideal holding in uneasy markets.
I have a holding in Charles Taylor.
Ends
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