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AA deals dividend blow to Woodford as shares slump

Shares in roadside recovery group and insurer tumble as dividend is cut, with further falls to follow, alongside profit warning.

 
AA deals dividend blow to Woodford as shares slump
 

Shares in AA (AAAA) have slumped after the roadside recovery group and insurer cut its dividend and warned of lower profits. 

The shares tumbled 22.4% to 90.2p after the group announced a final dividend of just 1.4p, well down on last year's 5.7p payout.

That brings this year's total dividends to 5p, a near-halving from last year's 9.3p payout, while future dividends are set to fall even further.

AA said it would now target dividends of 2p per year 'until such a time as the board is satisfied that the profit and free cash flow enable a change in policy'.

The group added profits for 2019 could fell to £335 million, down from this year's forecast of between £390 million to £395 million, as it plans £45 million of further investment.

The news will serve as a further blow to Neil Woodford, who holds the shares in his Woodford Equity Income and Income Focus funds.

Shares in AA have lost two-thirds of their value over the last year, after the company fired its executive chairman Bob Mackenzie for gross misconduct in August alongside a profit warning. The company is among a number of stocks that weighed on Woodford's performance last year, and there appears to be no let-up in the bad news for the manager so far in 2018.

Woodford (pictured) invested in the company at its flotation in 2014, priced at 250p per share, with the stock accounting for 0.8% of his £7.7 billion Woodford Equity Income fund at the end of January and 1% of his smaller Income Focus fund.

He bought more shares on the day of the August profit warning and topped up again in September, taking his holding to more than 14% of the company's shares.

Jefferies analyst Will Kirkness retained his 'underperform' rating on the shares, highlighting that the company's heavy debt load would see the 13% cut to 2019 earnings forecasts translate into a fall of around 30% in earnings per share.

'This, with higher capital expenditure, results in net debt to earnings moving towards eight times,' he said. 'While the dividend cut to 2p frees up some cash, risk reward is too negatively skewed on "show me later" profits.'

Russ Mould, investment director at AJ Bell, said AA's large debt pile had 'left the stock exposed as it faced management upheaval and growth concerns'.

'Management note earnings would have to drop to £200 million to risk breaching banking covenants. If the restructuring is more difficult, expensive or time-consuming than expected then this apparently comfortable position could end up looking more precarious,' he said.

22 comments so far. Why not have your say?

JohnR

Feb 21, 2018 at 14:32

annus horribilis

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colin overton

Feb 21, 2018 at 14:49

With people like Terry Smith when they invest in a share its a seal of quality. When Neil Woodford does it's death now a days. Soon all three of his mutual will be in negative territory since launch, only two at the moment. Will he survive?

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Top Invester

Feb 21, 2018 at 15:04

Some people are in awe of Woodford. He is past it, I would not touch anything he invests in, actually I would go out my way to sell any stock he owns. He is no expert, might as well have company names on a dart board and through the darts to pick them.

When Woodfords shares fall, they do so spectacularly.

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Codger

Feb 21, 2018 at 15:25

It is easy to criticise a fund manager when a share his funds hold does badly.

But what I feel uncomfortable about is seeing that more than 5% of a fund in one company. If the share price tanks, the loss is large. And secondly to find Woodfords funds holds 14% of the AA. When a manager holds such a large share of a company, how can he get out when things go sour?

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Ian via mobile

Feb 21, 2018 at 15:26

I just can’t afford him anymore my long term is getting shorter,jam tomorrow is no longer a reality with him. I’m leaving him as soon as I can.

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Micawber

Feb 21, 2018 at 15:29

There's contrarian value investing for you.........

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Keith Cobby

Feb 21, 2018 at 15:34

Value investing is having a terrible run at the moment. Too many companies are paying dividends from weak balance sheets. Pleased I changed my investments to a total return basis.

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North Star

Feb 21, 2018 at 16:11

There is usually a reason why a particular share is cheap and I worry when some managers stick their neck out and buy what they call value. Quality stocks aren't cheap but better value in the majority of cases.

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Tim Ow

Feb 21, 2018 at 16:51

Sales model broken. They send out inflated quotes hoping people will pay. Then when you tell them you can get it cheaper they fight to give you any discount. Took three phone calls for them to understand and match price available anytime to anyone on web site - and she made my wife feel she was doing her a favour. My wife had been a member for nearly 30 years - she switched to Aviva (RAC) and got the same cover for 30% of the original quote!

The sad thing is my wife only used them twice in all these years so it was easy money for the AA - and yet they did not care. We used to have 4 of us in the AA - now its none - and we wont be going back. The service guys on the road are great. The sales side is badly broken - and that is why they are losing customers

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J Thomas

Feb 21, 2018 at 18:15

There are two reasons I stick with the AA. As mentioned above, the roadside mechanics are normally first class; and AA members receive a 20 - 33.3% discount off parts and labour charges at National Tyres and Autocare. This discount saves me much more than the annual membership fee.

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Bhanus

Feb 21, 2018 at 18:38

Yes. It is a disaster. Having confidence in Neil Woodford's ability in picking high quality shares seemed to be a disaster for the moment. I wonder what justification Neil will give about AA.

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Momoney via mobile

Feb 21, 2018 at 19:43

Is the Woodford fund size just too big to manage now.

Small caps are irrelevant for him and difficult to exit mid caps at pace.

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Peter59

Feb 21, 2018 at 21:17

Welcome to the cult of the "star" manager. I`m glad I`ve avoided the merry go round of who`s in and who`s out. Surely a team of managers working for a respected fund house would be preferable? Or just buy a boring, cheap tracker and enjoy more time with your favourite pursuits!!

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richard tomkin

Feb 21, 2018 at 23:38

Do cars break down anymore ?

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Jeremy Woodhouse

Feb 22, 2018 at 14:54

I'll use my real name

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Jeremy Woodhouse

Feb 22, 2018 at 15:00

Woodford seems to have lost his magical stock-picking prowess. In the past all that he touched "turned to gold". No longer! He appears to be a spent force.

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richard tomkin

Feb 22, 2018 at 15:53

Bet he's not with the AA !

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Top Invester

Feb 22, 2018 at 15:59

About 22 years ago I broke down. They failed to come out. I had been a member for about 10 years. Had my membership refunded and told them I would not touch them with a barge pole ever again. Useless

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richard tomkin

Feb 22, 2018 at 16:55

The AA has never been so good since it demutualised in 1999,since when it was owned by Centrica,to be followed by a whole succession of private equity pirates,until eventual re-listing.Just goes to show how,in the wrong hands,a thoroughly worthwhile and decent organisation dedicated to its members can be brought low by those without any of the ethic of mutuality.

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Oh poop

Feb 24, 2018 at 15:21

I was alarmed to find 17% of wpct was invested in Prothena. I sold my £15k holding and am relieved to have suffered only a loss of around £1k

I think wpct may well go lower before if recovers - if it ever really does.

I think a large part of his past success was due to large holdings in tobacco companies which rose spectacularly. I think he will be hard pressed to replicate this in future.

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Raj K

Feb 24, 2018 at 15:29

Woodford equity has got 128 holdings. How the hell can you know 128 companies baffles me!

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David Whitnear

Feb 24, 2018 at 16:43

It probably would be unwise to exit the Woodford equity funds instead of waiting for the likely recovery of most of his poor picks. Neil Woodford must hold his nerve and not sell out at the bottom which would compound the mistakes.

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