Falling profits and slashed dividends can leave companies suffering from bobbing cork syndrome, says John Lee

I was a Provident Financial shareholder in the 1980s — selling out of the subprime lending business for a modest profit in 1991. Over the years I have kicked myself many times for not staying aboard what became a great and reliable growth stock, arguably one of the safest and most certain on the market.

Provident’s recent share price collapse came as a bolt from the blue which hit shareholders (not to mention the managers of equity income funds) very hard, demonstrating once again that all equity investment carries risk. With the dividend passed, debt collection systems to be rebuilt and the potential for regulatory fines, heaven knows what its share price should be — there are just no yardsticks, so they bob about like a cork on the water.

I face a similar, though smaller and less well-publicised scenario in my own portfolio with publishers Quarto. A combination of poor first-half results, a mix-up over market profits expectations, dividend passing, plus high debt levels brought the shares plummeting down. The bobbing cork syndrome again — clearly there will have to be some form of refinancing or restructuring in the future.

My belief, however, is that there is a good profitable underlying business here. Indeed, it was encouraging to see that an overseas bidder appeared, seemingly willing to offer a figure acceptable to the board, although talks have since been terminated. Time will tell.

Apart from Quarto, virtually all of my other holdings are trading well although there has been some “price drift” from peak levels. This is not surprising, given the understandable profit-taking following the very sizeable profits that will have been made at companies I hold including James Fisher, Lok’n Store, Nichols, FW Thorpe, and Treatt over recent years.

Shares like these have delivered for me by virtue of my patient strategy, benefiting from the double whammy of rising profits plus an upward re-rating — a combination which really propels the share price northwards.

When liquidity is available I top up my existing holdings. In recent weeks I have been buying more shares in Charles Taylor, the insurance services group, and Tarsus, the events and exhibitions company. Both companies are steadily growing organically and by sensible acquisitions.

Too many investors chop and change their holdings. I have benefited from staying put. I first bought into Gooch & Housego, the photonics technology specialist, in 2004. That investment now shows a 13-fold appreciation. It has been a similar story since I first bought UDG Healthcare (formerly United Drug) back in 1994.

Dividend flow has always been a key element in my strategy, and I have recently benefited from a clutch of interim increases — more than doubling at palm oil producer MP Evans, and rising by a pleasing 12.5 per cent year-on-year at Concurrent Technologies, the manufacturer of computer boards for critical applications.

There was also a 6 per cent rise at Air Partner, the air charter broking group. Anpario, which supplies natural agricultural feed additives, produced a maiden interim dividend of 2p. FW Thorpe, the aforementioned lighting manufacturer, continued its outstanding record of annual increases with a further 21 per cent rise.

So looking to the future, are there any dark clouds on the horizon? I would suggest there are three: first, of course, the real and very serious possibility of conflict on the Korean peninsula. Not a great deal that the private investor can do, other than pray!

Second, the fallout from Brexit. Still not possible to gauge the likely effects on individual companies at this stage, but thankfully virtually all my holdings are well-established globally. Indeed, Tarsus has nothing at all in the UK (other than its stock market listing).

Third, the never-ending uncertainties over the economy, politics and taxation. I am conscious that I am writing an investment column rather than a political one, thus I will choose my words with care.

But I detect a wind of change blowing from right to left with the rise of Corbyn-populism causing other parties to shift their ground in response. In the short term, I do not see any major taxation changes, although I would not rule out a modest increase in capital gains tax (CGT), even from the present government.

However, I see an increasing interest in taxing capital rather than just income from the other parties and I anticipate this debate gathering momentum as the next election approaches.

Looking back at the recent Labour party conference, I think it would be fair to say that the interests of private investors were not accorded the highest priority. People will make their own assessment of Labour’s future policies, but I would regard the current very favourable treatment of inheritance tax relief on qualifying Aim stocks to be seriously at risk, to say nothing of the “free” CGT allowance, or the generous £20,000 amount that can be invested tax-free into an Isa each year.

My point on the former is that many Aim holdings in portfolios like mine are standing at their current historically high levels, in part because of existing taxation relief. Any change or withdrawal could result in very sharp share price corrections.

John Lee is an active private investor and author of “How to Make a Million — Slowly”. He is a shareholder in all the companies indicated.

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