One of the reasons I invested in Pets at Home (LSE: PETS) was the attractive income potential. Lately, the Pets at Home dividend has been hovering at around 6%–7%.
But the company had signalled that a change was on the way when it comes to allocating its capital.
Today (27 May), the FTSE 250 firm issued its results and laid out more detail of what that looks like.
A sharp dividend cut
In short, it looks painful. The prior year’s dividend per share was 13p. That has now been cut to 7.4p, a fall of 43%. This is presented as being part of a move to “rebase” the dividend to 50% of earnings per share. In practice, it means a big cut on this occasion.
The dividend may not be this size in future, depending on what the earnings per share are.
Was this needed?
I do not think 50% of earnings per share is a particularly high target. I would prefer the board took a more ambitious approach when it comes to the dividend.
The income prospects here are one of the things I think have helped support a weakening investment case during a period of underwhelming performance. The share price is down 26% over the past 12 months and 57% over the past five years.
I expect cutting the dividend like this will lead some income investors to sell, potentially hurting the share price.
Last year, the company’s cash flows from operating activities were £191m. At £59m, the cost of paying equity dividends represented just 31% of those cash flows. Meanwhile, £25m was spent on share buybacks.
In other words, I do not think this dividend cut was inevitable. It is a strategic choice the board has made. As a Pets at Home shareholder I do not like what this signals about the importance the board attaches to the dividend.
Business showing signs of improvement
One reason the Pets at Home share price has gone down in recent years is uneven business performance. The vet practice business has been growing but the retail side of things has struggled to maintain sales.
Full-year figures for the company last year showed a 1% fall in revenue. The vet division grew, but the retail operation suffered from declining revenues.
Pre-tax profit fell 28% and free cash flow 26%. Clearly, there is a lot of work still to be done here
But the company has a lot of strengths, including its well-known brand and a loyalty scheme with over 7m active members.
A turnaround plan is in progress to try and fix the retail business. The company expects to continue growing its vet practice business this year and return the retail business to growth. Indeed, it expects to outstrip market growth in its retail division.
I’m unhappy
I continue to see real potential for the business. But I already have a surfeit of struggling retailers in my portfolio, from B&M to Lululemon Athletica. I bought Pets at Home primarily for its dividend and that has now been slashed.
So I will not be buying any more Pets at Home shares. I can get a better yield from other shares I see as lower risk.
Should you invest £5,000 in Pets At Home Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Pets At Home Group Plc made the list?
Christopher Ruane owns shares in Pets at Home, B&M European Value Retail and Lululemon Athletica.
