ii view: Compass culls the dividend payment

Over half of the customers it feeds are now closed. Buy, sell or hold?

Covid-19 update

• Suspending dividend payments
• Reducing cost base by around £450 million per month
• Around 55% of its business is closed
• Qualified for Bank of England’s Covid Financing Facility

Chief executive Dominic Blakemore said:

"I'd like to thank the tens of thousands of Compass colleagues around the world who are supporting clients and governments in providing critical and essential services.  Their dedication, combined with the many initiatives around the world to prepare and distribute food to help those most in need, make me extremely proud of the contribution our people are making to the fight against Covid-19.

"We are managing the business to protect the interests of all our stakeholders.  Compass is a strong, resilient organisation that is well-positioned to continue to support our colleagues, clients, consumers and the communities we serve during this challenging period."

ii round-up:

Following on from its mid-March update, canteen provider Compass (LSE:CPG) today outlined further plans to combat Covid-19, including a suspension of its dividend payments.

For the business and industry customers which it serves, accounting for two-fifths of group sales, around 75% are currently closed under lockdown. A similar number of closures have been suffered for its education customers, which account for nearly one fifth of sales.

More favourably, it has been business as normal for both its healthcare and defence and offshore customers which together generate close to a third of sales. In all, just over half or 55% of its customers are currently closed. 

Staff which it has not been able to redeploy have been furloughed, directors pay cut by upwards of 25% and the use of contractors and temporary workers cut to a minimum.  

The impact of lost revenues on half year profit is between 28% and 29%, in line with management’s prior estimate.

Compass shares rose by just over 1%, although are down by nearly 30% year-to-date.  

Normally employing around 600,000 staff, Compass has qualified and drawn down £600 million from the Bank of England’s Covid Corporate Financing Facility (CCFF) and now has total committed credit facilities of £2.8 billion.  

ii view:

Working in over 55,000 client locations in more than 40 countries, Compass is generally viewed as both defensive and diverse. In normal times, schools and hospitals are unlikely to remove their food provision services, even if corporate customers sometimes do. But, due to Covid-19, these are not normal times.

An enviable record of 16 consecutive years of dividend increases, underpinned by steady cashflows, has now been ended. Like many other companies, Compass is now doing all it can to conserve cash, including halting the dividend payment. 

For investors, and with even the likes of consumer goods giant Unilever withdrawing its 2020 financial guidance, uncertainty now reins in a Covid-19 world. Caution is clearly sensible. 

But quality businesses such as Compass should eventually regain their dependability once the world returns to a more normal state. As such, current share price weakness could represent an opportunity for those willing to hold for the long term.

Positives: 

• Diversity of both customer and geographical location
• Cost saving programme sharpened

Negatives:

• Enviable dividend track record ended
• Covid-19 could result in more staff permanently working from home 

The average rating of stock market analysts:

Buy