Wednesday 20 March 2013

Portfolio Buy: Balfour Beatty (LSE:BBY)

It's a real problem for a DIY Income Investor knowing what to invest in at the moment.

First, the Pound has fallen, so going abroad is expensive. Second fixed-income securities are fully priced because of a combination of low interest rates and Quantitative Easting. Finally, cash returns are dismal.

So, the only place to go seems to be back to high-yield dividend shares.

Balfour Beatty plc is about infrastructure. It is the second biggest construction and engineering company in the UK and the fifteenth biggest in the world and is involved in UK and international projects in rail, road, utility systems and buildings markets.

The current dividend yield is 5.4% with dividend cover of 2.5% (the dividend is up a token 2% on the previous year). The p/e ratio is low - under 10.

The Final Results for 2012 are pretty uninspiring, with revenue marking time and profit margins sliding. The golden nugget at the heart of the operation is their portfolio of PPP (public/private partnership) contracts, which have been revalued at  £3/4 billion, following a couple of lucrative sales.

However, a sign that all is far from well is that they are withdrawing completely from the rail business in Europe. But this company is involved in so many infrastructure sectors all over the world to make this exit probably no more than a blip on its overall progress. It is reassuring that they are willing to make difficult decisions like this.

The big elephant in the room is the pension fund, with a deficit of a £1/3 billion; this deficit has increased substantially in the year. This will continue to be a drain on company cash (currently £1m per month).

Having said all that, this is a punt on UK and - more importantly - international infrastructure investment, which in turn will be affected by government finances and business expectations of future growth. 2013 may continue to be a difficult year but there are some signs that infrastructure investment may take off later in the year.


[Purchase price: £2.595 per share]

Update 28/3/13. The share price fell around 10% since purchase - close to an all-time low. I think this is unnecessarily pessimistic, so I have doubled up. Purchase price £2.35 per share.

Update 29/4/13. Profit warning issued, mainly due to poor UK market performance, although overseas results are expected to be broadly 'in-line'. So it looks like I got my timing completely wrong! Disappointing, but I will continue to hold.

I am not a financial adviser 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. I am a long term holder of BBY and although recent performance has been weak I shall continue to hold. The geographical spread is good and, barring management stupidity, should bode well.

  2. Hi DIY,
    I hold BBY in my HYP. My HYP criteria is FTSE100 only, but their is no other construction company in FTSE100, so had to opt for BBY.

    You mentioned its second largest construction company in UK, who is first ? (not including housebuilders).


    1. Thanks Reg

      You are right, it is the largest construction company in the UK - but getting smaller. I've amended the post (that'll teach me to check my facts...).

      "For instance, the UK's biggest construction group, Balfour Beatty, has sustained growth on the back of its impressive expansion abroad. But in the UK it has cut 650 staff from its 12,000-strong workforce this year, and closed 35 offices."

  3. I have been toying with the idea of BBYB ( the Prefs). Yielding 7.65% now, but convertible at 100p in 2020. That cuts the yield to about 5.75%. There were £112m outstanding in 2011. That is a lot of cash to find in 7 years, & it would save £11m pa to redeem them, but what if they can't find that amount of cash? Any thoughts?

    Thanks - El.

    1. Hi EI.

      Interesting - I'll have to look into that. If the current yield is only 5.75% then the market must be fairly comfortable. However, potentially more upside with the dividend share?

  4. Certainly more upside in Ords, you're right. I suppose they could issue £112m in bonds in 2020 at the prevailing rate

  5. Curse that big pension fund. Might be worth checking what it's invested in. I'd personally like to see some interesting stuff, including equities. You might get a bail out. I'd run a mile if long-dated bonds! :)

  6. Hi, Income Investor,
    Thanks for your great site which I enjoy immensely. May I ask if you have decided to block access to your portfolio page? I quite understand if you have, but I find it fascinating and an invaluable benchmark, as I'm sure do others. Any chance of re-instating it for us?
    All the best. Ron M

    1. Hi Ron

      Not sure why you couldn't access - but should be OK now. With a current total return of around 28% for FY2012/13 I wouldn't want to hide it!

    2. Maybe it's my Mac but all the headings are live except Portfolio. Is there another way in to it? An url that works?

  7. Works for me. But try the direct link

  8. Hi Income Investor,

    I'm fairly new to your blog, but it's giving me plenty of things to think about. I'm already a holder of BBY and am tempted to top-up, however, I'm unsure about the dividend cover. You state dividend cover of 2.5%, but Sharescope & ADVFN both show it as 0.5 (Although could be the same source!) Where did you obtain your figure from?

    1. Hi

      Quite right to be cautious. The figure I quoted was based on Digital Look

      The Final Results also quote that figure - but note that it is based (I think) partially on a re-valuation of the PPP contracts.

    2. Thanks, I see they're forecasting dividend cover to be 2.0 times.

      Sometimes, it's tricky to work out whose figures are correct. Doubly annoying, when you've paid for a service, but can't always rely on the figures. :(