Thursday 15 June 2017

Only Connect! (Portfolio Buy)

Only connect!...Only connect the prose and the passion. - E. M. Forster

The election and Brexit have helped to knock Sterling and the Stock Market sideways - although the DIY Income Investor portfolio (which is quite international) has perked up in the last few days, hitting record values, at least when measured in Sterling.

As part of the recent flurry of deals, I have gone for something more UK-based - using the usual 'painting-by-numbers' approach.

For those new to the DIY Income Investor approach, here is the quick summary of how I pick a dividend share (I also buy fixed-income bonds). Finding good sustainable income going forward is the key, with the aim of finding capital gain on something that is underestimated by the market (but at the same time, trying to avoid buying a 'problem' company).

The process, in brief, is as follows:
  • Do I want something new or is there something that I already hold that I want more of? (It is usually less work to check up on an existing holding)
  • Rank the FTSE 250 or 350 by dividend yield (see the Toolbox above
  • Check the numbers on the highest yielders (that I don't already own) looking for:
    • dividend yield - obviously - and dividend history
    • the management's level of commitment to the dividend level going forward (if it is a little cryptic, that is a 'red flag')
    • reasonable dividend yield (around 1.5 at least)
    • low p/e ratio (usually under 10)
    • reasonable cash flow (any major manipulation of the profit figures should be a 'red flag'
    • sustainable business model
    • recent share price fall (which might possibly being the market's over-reaction to some bad news)
    • reasonable level of debt (including pension obligations) - this is often a little difficult to work out quickly

I do not actually spend enough time doing this due diligence, which means I sometimes pick up 'losers' (like - but overall my record is not too bad over the years (and life is too short, anyway).

So, my most recent acquisition - after going through the above process - is Connect  Group plc (LSE:CNCT)  a UK-based distribution company operating in a number of markets (including the former Smiths News, which I held for a while - and made money on). The company's numbers seem to tick all my boxes: yield over 7%, reasonable dividend cover, p/e under 10 etc, - but what was the reason for the fall in the share price?

The latest results to February 2017 are not exactly sparking - but they are not disastrous either. The Education and Care business seems to the problem area, as they are selling that. I like the innovation of Amazon returns - as this aspect of Internet shopping has always been its shortcoming.

So, with a combination of nostalgia for Smiths News and an attractive pattern of numbers, I thought it was worth a try.

[Purchase price: £1.26]

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. There is an (almost) fail safe theory that anything above a 7% yield is a signal that a dividend cut is expected, while anything above 8% is almost nailed on. Connect is approaching 9%

  2. Hi, with the share price continuing to drop is there any way to ascertain if the dividend is likely to be cut?

    Is there a reference source to see if the share is being 'shorted' - I understand Carillion was heavily shorted before its complete share price collapse


  4. from the referenced article:

    What you do not want to see is a company that has high financial gearing (lots of debt) combined with operational gearing (whereby a 1% change in sales triggers a much bigger shift in profits).

    so, how does this company measure up?