5 stocks to watch in May

Marks & Spencer can expect greater interest than usual in its annual results announcement, due on 21 May, thanks to the cyber incident that has greatly disrupted its business over the past 10 days or so. Other companies to report this month include the telecoms groups BT and Vodafone, National Grid and Land Securities, the commercial property landlord. 

This article is not a recommendation to buy or sell these investments; it is purely insight into some of the companies that announce results over the next month.  

Marks & Spencer 

M&S has been making headlines for all the wrong reasons in recent days. A suspected cyber attack – the company’s announcements have referred only to a ‘cyber incident’ – has stopped customers from ordering online and at times from making contactless payments. Some workers have been laid off; others have reportedly been unable to work from home. The disruption has lasted more than a week and the share price has fallen by about 8% since the incident was first reported. However, analysts at Barclays said on Monday that ‘the direct impact on sales and profit still strikes us as unlikely to be very material’. 

While investors will certainly hope for a resolution of the problems before the company announces its annual results on 21 May, we may hear more then about what caused the disruption and what it plans to do to prevent a repetition. The disruption will have no bearing on the results it is due to publish that day, which relate to the financial year to 29 March.  

City analysts are upbeat; Barclays for instance forecasts a 6% rise in annual sales to £13.9bn and an 18.6% increase in ‘underlying’ profits before tax to £850m, following rises last year of 9.4% and 48.6% respectively. That £850m would be considerably more than the £810m that one broker forecast for the full year before the interim results, as we reported when we previewed them in October. The increases in sales and profits reflect the deep-seated transformation that M&S has undergone over recent years. Barclays also forecasts a big jump in the dividend to 4p a share (3p last year). 

The fall in the share price as a result of the suspected cyber attack follows another (swiftly reversed) slump in March after Asda’s announcement of price cuts and fears that they would spark a price war. Barclays’ analysts said: ‘Some sort of share price reaction is not surprising to us, but we certainly feel that M&S should be relatively well protected from Asda given the stark differences in their customer propositions.’   

They added: ‘We reiterate our overweight stock rating on M&S, with an unchanged price target of 440p. Given the strength of M&S’s top line [sales] – especially in food – we consider its 11 p/e [price-to-earnings] multiple for the year ahead as compelling.’ 

Marks & Spencer’s annual results are on 21 May. 

More on Marks & Spencer 

National Grid 

Perhaps those who follow National Grid’s results announcement in two weeks’ time will, following Monday’s widespread power cuts in Spain and Portugal, be looking first for reassurance that the same will not happen here. Shares in the operator of Spain’s electricity grid fell by more than 4% on Wednesday after reports that it might be liable to pay compensation. 

Although on nothing like the same scale, Britain’s own electricity network suffered a high-profile failure in March when a fire at a substation near Heathrow led to the airport’s closure and affected supply to thousands of homes. That substation is owned by National Grid. On the day of the fire, analysts at UBS, the bank, wrote: ‘Reliability of GB transmission is generally high (99.9999% reliable). But today’s outage is very high profile. Hence, it’s likely to trigger political and therefore regulatory scrutiny of [the] company [National Grid] and sector, as [the] August 2019 London power cut did.’ That blackout affected almost a million homes in London and elsewhere and led to fines on three power companies, although not National Grid.  

Analysts at Barclays said National Grid had ‘a duty to provide a secure network, with financial penalties for negligence up to 10% of licensed turnover, subject to the severity of the incident, the company’s response, and any mitigating factors’. 

Away from the remote possibility of severe blackouts, the company is expected to announce turnover of £19bn for the year to March, down from £19.9bn, and adjusted pre-tax profits of £3.8bn, down from £4.1bn. Analysts predict a dividend of 46p a share, which would mean a yield of 4.3% at the current share price of £10.80. 

UBS said the share price, after a good run since early January, was ‘up with events’ and cut its long-standing ‘buy’ recommendation to ‘hold’. It trimmed its price target to £11.50, although it said the appointment of a new chief executive, announced this week, was ‘positive’ thanks to her ‘experience … delivering large complex capital projects’. 

National Grid’s annual results are on 15 May. 

More on National Grid 

Land Securities  

Fewer offices, more homes: this, in a nutshell, is the planned shift in its property portfolio that Land Securities announced in February. Currently it has about 65% of its assets in offices and just over a quarter in shopping centres, along with some leisure assets and retail parks and a small amount of residential property; it aims to shift to less than half in offices by 2030, with a quarter in homes and the remaining 30% or so in shopping centres. 

It is not so much turning its back on the office because of post-pandemic hybrid working; rather it is seeking better, more stable returns from housing. A graph it showed investors when it presented its plans made the point well: it showed both residential and commercial rents tracking inflation nicely before the financial crisis but then a marked falling behind of commercial rents, while rents on homes continued broadly to keep pace with inflation (which the company expects to persist). Developing, buying and selling office blocks is more speculative and at the mercy of shifts in valuation; the company now aims to focus more on generating income and income growth. 

The plan involves the scaling back of office development and the sale of about £2bn worth of existing office space, although few big London office buildings have changed hands in more than two years. Investors will therefore be on the lookout for any updates on this when the company announces annual results in two weeks’ time. If Landsec manages to sell offices at the value at which they are held on its books, it could be a ‘catalyst’ to get the share price moving, according to analysts at Bank of America. 

The City expects earnings per share of 50p, almost unchanged from last year, and a dividend of 40.5p, compared with the previous 39.6p. 

When it wrote about Landsec two weeks ago with the shares at 533p, Bank of America said it was ‘among the cheapest [property] stocks in Europe at [an] 8% dividend yield and 40% discount to NAV [net asset value]’. The bank has a ‘buy’ rating on the shares and a price target of 700p. Following a rise in the shares to 604p they now yield 6.6%. Please note this yield is not guaranteed. 

Land Securities’ annual results are on 16 May. 

More on Land Securities 

Vodafone 

In some respects, progress has been made at Vodafone since we previewed its interim results six months ago. The sale of its Italian business for €8bn has completed and the merger of Vodafone’s UK arm with Three has been approved by regulators. Once that deal too completes, we should be at the end of major structural change at the telecoms group.  

But despite all that, the shares have gone nowhere: they stood at 72p when we wrote that preview and today are barely changed at 73.9p. In fact they have failed to make any progress since the end of the dotcom boom and bust more than two decades ago. 

Perhaps investors’ caution can be explained in part by the short-term financial consequences of the merger with Three UK. According to a recent research note from Bank of America, the capital expenditure and restructuring costs following the merger will cause a big drop in the unit’s cash generation for the first few years, although by 2030 the merger is expected to have a positive effect on cash flow. The temporary pain is exacerbated by weaker performance from Vodafone’s German operation, one of its largest, as a result of increased competition.  

Overall, Bank of America expects weaker dividend cover to be the result, and therefore no prospect of growth in the divi for the next couple of years. Then, once the benefits of the merger begin to flow, the payout could start to rise, the bank says, perhaps by as much as 90% or so by 2030.  

The 5% yield at the current share price means that investors are being ‘paid to wait’, but in the words of Bank of America ‘the wait is now longer’ and it has cut its rating from ‘buy’ to ‘neutral’. 

Vodafone’s annual results are on 20 May. 

More on Vodafone 

BT 

Vodafone’s share price may not have moved much over the past six months but BT’s certainly has. When we previewed its interim results at the end of October the shares stood at 138p but the price at the time of writing is 172.7p, a rise of 25%. Just like Vodafone, however, the shares have essentially gone nowhere since they bottomed out after the dotcom crash. 

The recent rise comes despite an absence of significant developments at the company. At the interim stage BT reported a 3% fall in sales and said it expected revenues for the full year to fall by between 1% and 2%, although it maintained previous expectations for profits (on the ‘adjusted EBITDA’ measure) and cash generation. It left that guidance unchanged when it published a third-quarter trading update at the end of January. An announcement from the telecoms regulator in March reiterated an existing policy of gradual deregulation of BT’s Openreach arm as competing networks cover more of the country, while the company will have cheered some customers in the same month when it scrapped plans to abandon the BT brand in favour of EE. 

The consensus among City analysts is that BT will report sales of £20.4bn when it announces its full-year results in three weeks’ time, alongside adjusted profits before tax of £2.3bn, broadly unchanged from last year. Earnings per share are forecast to be fractionally lower at 18p while the dividend is likely to be flat at 8p a share, in line with BT’s policy ‘to maintain or grow the dividend each year’. If those figures prove correct, the shares trade at a price-to-earnings ratio of 9.6 and a yield of 4.6%.  

BT’s annual results are on 22 May. 

More on BT 

Other companies due to report in May include Sage and 3i.