Tuesday, 13 August 2013

When Dividend Shares Go Bad: FirstGroup (LSE:FGP)

It's all about the business model...
Investing is rarely straightforward, is it? No sooner have you paid in hard-earned cash for your new best choice in dividend share than the management announces that they are cutting the dividend.

This is the dreaded 'double whammy': not only is your income cut (the most important consideration, after all for a DIY Income Investor) but the share price falls. Negative equity meets the stock market.

How should you deal with this all-too-familiar scenario?

Well, I don't have all the answers - but I can tell what I have done in the sad case of FirstGroup, the bus and rail company. I bought this share initially in April 2010 as I had been in the transport business and was aware of the successful track record that they had built up. However, things did not go particularly well from then on. I reviewed the holding back in February 2012 when the share price had fallen but the company still looked reasonably sound.

There were then various rumours of financial problems in the company and then the ill-fated West Coast Main Line bid, which rapidly descended into farce and loss of market confidence in the company (as well as the Department for Transport).

After slashing the dividend the company then decided to raise capital on the markets with a public offering. All-in-all it was a painful period for the company and its shareholders - me included.

So what to do in such circumstances?

Ultimately I will sell a 'dividend disappointer': after all, the dividend is an act of faith between the company and the shareholder. But I won't usually sell straight away - I'd like to get my money back, if I can (I can hear the financial behaviouralists tut-tutting in the background - yes, I mean you!).

My own approach tends towards holding on and seeing what develops. Because of the DIY Income Investor investment style, which is based on picking up income over the months and years, I am rarely in a hurry. After all, companies sometimes get into financial trouble, even though they are basically sound (as I think FirstGroup is). However, you do need to spend a little time checking that the basic business model is sustainable (for example, I did eventually sell my Northern Rock shares - at a loss, of course).

Being a long-term sort of investor I also look for chances to buy some more shares when the price has fallen, if I think that there is a good chance of a recovery: 'averaging down' in the jargon. This means that if and when the share price does recover I will be able to get out more quickly.

So, in the case of FirstGroup, I did buy my full allocation of the rights issue, making it my largest overall dividend shareholding - something that did, I admit, make me a little nervous, as I am by nature an eggs-in-many-baskets kind of investor.

I held FGP shares in two different accounts and - for better or worse - I manage each chunk separately. So, when the net value of one of those chunks today crept over zero, I sold that chunk: quite a fair-sized amount as it turned out.

For the rest of my holding, I will just sit an wait for the price to recover. I can wait.

[Sale price: £1.1723]

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. An interesting discussion on FGP. It might help the reader if you included some share price information, which would help to explain your decisions. I have posted an article today on the dividend yield trap, which fits well with your article.See http://thejoyfulinvestor.blogspot.co.uk/

  2. Surely by disaggregating the holdings you are no longer averaging down as you are not treating them as one holding. By selling one chunk as it creeps over zero you are left with the original investment at the same loss you would have had even if you had not averaged down.

    Your averaging down and treating the chunks separately seem to be contradictory.

    1. Sorry - I wasn't clear: I had two chunks in different accounts, to which I added rights issues and then I sold one of these chunks plus its rights issue. Still not wholly consistent - but what's a guy full of biases supposed to do?