Monday 20 February 2012

Portfolio Review: First Group (LSE:FGP)

High-yield dividend shares form part of Level 6 of the DIY Income Investor Income Pyramid. As the fortunes of these companies change, so does their eligibility for my portfolio. So it is worth reviewing the portfolio selection, at least annually.

So, is First Group (or FirstGroup, as they like to call themselves) still moving in the right direction?

The dividend yield is certainly juicy - current historical yield is over 7%, with dividend cover at 1.9. There is some disagreement at different financial websites on the p/e ratio: but taking the 2011 earnings per share (41.2p - as reported by DigitalLook) divided by the current share price (300p) gives a 'current historical' p/e of around 7.3 - which usually represents quite good value. Forecast p/e is similar. The share price on a marked downward trend over the last six months, indicating that the market is uneasy about FirstGroup's prospects.

According to their own website: "FirstGroup plc is the world's leading transport operator with revenues of over £6 billion. We employ some 125,000 staff throughout the UK and North America and transport some 2.5 billion passengers a year. We are Britain's largest bus operator running more than one in five of all local bus services. A fleet of nearly 8,000 buses carries 2.5 million passengers a day in more than 40 major towns and cities."

They should perhaps say they are a passenger transport operator - buses, coaches and rail. Dealing with people - rather than cargo - always has its own problems: it is highly regulated, with relatively low barriers to entry and therefore not terribly profitable overall. The winners in this sector are the efficient operators in lucrative niches.

FirstGroup has a hefty portfolio of rail franchises in the UK, including regional, intercity and commuter services - First Great Western, First ScotRail, First Capital Connect, First TransPennine Express and First Hull Trains. They also operate the Croydon Tramlink network on behalf of Transport for London, carrying some 28 million passengers per annum.

They are also big in the US and Canada (as FirstGroup America Inc.), where they operate Greyhound - the only national coach service in both the US and Canada and a range of contract businesses including Yellow School Buses.

So the group clearly has a valuable skills set in this sector. However, the passenger transport business is highly regulated and frequently needs subsidy to make it pay. The pressure on subsidy can only increase in both the UK and North American markets.

In it's latest Management Statement, (you can listen to the broker call here) FirstGroup notes:
"As previously indicated, the weak economic environment continues to present challenging trading conditions, particularly in Scotland and the North of England, where a significant portion of our urban operations are concentrated." And the non-Greyhound US business seems to be struggling.

However, there are some bright spots: rail operations provided a like-for-like passenger revenue increase of 8.0% and the Group is bidding for two new franchises: Thameslink and Great Western. The Greyhound business is strong with like-for-like passenger revenue increasing by 5.9% during the period.

The company expects to "remain focused on cash generation to support capital investment, debt reduction and dividend growth of 7%".

So, FirstGroup looks like a competent business focused on cash generation although facing continuing problems both in the UK an in North America. But the management statement does not give any grounds for panic and the company is committed to its dividend. I think that makes it a HOLD for me, as I already have a large enough holding. If you are thinking of jumping in, keep an eye on the price trend.

(Revised 21/2/12 - thanks to reader comments)

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Hello,

    Where are you getting a P/E of 16+ from Mr? gives FGP a P/E(ttm) of 11.39 and DigitalLook has figures of between 7 and 8 for Mar 11, Mar 12 and Mar 13.

    I love your investment style and web site incidentally and look forward to new investment/share ideas.

    1. Thanks for the heads-up Anonymous.

      I got that number (which is still there - I checked) from the Daily Mail website (which uses a data feed from Money AM):

      As you point out, these p/e numbers can vary quite a bit depending on the source & method used used. Maybe FGP is a better deal than I thought!

  2. Hi Moneyman,

    Just noticed a Nil Paid Right issue on FirstGroup.
    What are you thoughts, I'm not sure if it's just throwing good money after bad now that the price has crashed.

    Scared Investor.

    1. The fall in share price has been surprising. However, the price of the rights issue looks cheap, so I will be buying. Not for everyone, however.