In This Article:
Vimto producer Nichols continues to experience tough operating conditions. Although the era of rampant inflation now appears to be over and interest rates have begun to fall, consumer spending nevertheless remains under pressure. And with the full impact of monetary policy easing subject to time lags, investors should manage their expectations when it comes to the near-term share price prospects of consumer goods firms.
Indeed, Nichols’s latest interim results show that its top line declined by around 2pc. While this includes the impact of the company’s out-of-home segment, which is being scaled back in a bid to improve overall profitability, the company’s core UK and international packaged operations were only able to post sales growth of 1pc in aggregate during the six-month period.
Clearly, this is a highly disappointing result. However, the company was still able to increase pre-tax profits by 18pc year on year due to a significant rise in profit margins. The firm’s operating profit margin, for example, moved 220 basis points higher so that it stood at 15.6pc. This was achieved through cost reductions and higher pricing that has been successfully implemented due to the strength of its brands.
The company’s competitive position continued to improve during the first half of its financial year. It made market share gains that provide it with a relatively strong position on which to capitalise on an improving long-term operating outlook. And while this column generally avoids adopting a short-term standpoint, an upgrade to the company’s full-year guidance is highly encouraging.
Rising profits in the first half of the year allowed Nichols to increase dividends per share by 18pc. Clearly, this rise is affordable due to it being roughly in line with its rate of profit growth, while shareholder payouts were covered twice by earnings in its latest full year. However, the company’s wide range of growth opportunities mean it could reasonably be argued that higher profits should be reinvested rather than paid out en masse to investors.
For example, the business is seeking to grow through innovation that includes the launch of new products. It also continues to have scope to expand into new geographies, many of which are emerging economies that offer relatively strong growth prospects over the coming years. Meanwhile, the company has the capacity to further grow market share via higher marketing spend, which proved to be successful in the first half of the year.
In addition, the firm announced a special dividend of 54.8p per share alongside its interim results. For context, this is almost twice as much as last year’s total dividend per share of 28.2p. It could be argued that the special dividend should also have been reinvested in long-term growth opportunities. Indeed, in Questor’s view, special dividends are akin to a zero-sum game because they typically reduce a company’s market value by the same amount as the payout.