Ferguson plumbs cash pile for share buyback as US profits mount
Ferguson, the plumbing and heating group formerly known as Wolseley, has proposed a 10% dividend increase and announced a £500m share buyback, after a year of strong profits growth.
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The FTSE 100 group, which said the disposal of its Nordics business was progressing as planned, reported good trading momentum in the fourth quarter and said the outlook for US residential and commercial markets, where the majority of revenues are generated, "continue to be favourable".
In the year to 31 July, Ferguson produced total group revenue of £17.3bn, including £2.1m from discontinued operations.
Looking at ongoing businesses only, revenue came in at £14.9bn, up 6% on a like-for-like basis thanks to the favourable US residential and commercial markets helping deliver a 7% LFL gain, while industrial markets, which account for 7% of US revenue, were weak in the first half though recovered well in the second.
Acquisitions contributed 2.1% of growth, while there was a minimal gain from one additional trading day and from new branches.
In the UK, the heating market remained "pretty weak", with sales falling in the three of the four quarters, while Canada and Central Europe markets improved in three out of four.
Gross margins widened by 40 basis points due to a better product mix, though there was a 10.1% increase in operating expenses in the ongoing businesses at constant exchange rates, with increased headcount costs, further investment in the business and 2.6% from acquisitions.
Trading profits grew 25% to £1.03bn for ongoing business, or 9% at constant exchange rates, feeding through to a near doubling in statutory profit before tax to £1.18bn from £675m last year.
Headline earnings per share increased 23% to 288.9p or 6.8% at constant rates.
With strong cash flow conversion, but a £256m cash outflow due to acquisitions, directors proposed a final dividend of 73.33p that brings the total payout for the year to 110p, a 10% improvement on last year but below the 113.8p consensus of City forecasts.
"Given our strong financial position, which includes proceeds from recent disposals, we are initiating a £500m share buyback programme which we expect to complete over the next 12 months," said chief executive John Martin, adding that net debt targets remain unchanged.
He said investment will continue in the US to add to Ferguson's service offerings, including updating e-commerce platforms, expanding the fleet and logistics capabilities and "developing adjacent business opportunities".
"US markets continue to be favourable, in particular residential and commercial markets where we generate the majority of our revenue.
"Organic revenue growth in the new financial year has been about 6%. Our business is performing well, we have a strong balance sheet to support our plans and the board continues to look to the medium-term with confidence."
Ferguson shares rose 3% in early trading to 5,013p on Tuesday, lifting them back towards their 5,055p all-time high in the spring.
"Importantly, gross margins rose in both US and UK," said analyst Graeme Kyle at broker Shore Capital, "which we think demonstrates a) pricing power and b) the ability to generate stock profits in rising commodity markets."
He observed that the UK division remains stagnant with volumes down 1.2% but pricing up 2.2% in the reporting period which is in-line with results reported by key competitors within plumbing and heating distribution such as Travis Perkins and Grafton.
"We note that the outlook statement (which remains bullish on US demand) fails to even mention the UK business indicating to us that management may be looking to exit at some stage."