Plumbing firm’s tough action during pandemic pays off

Suspending acquisitions, interim dividends and share buybacks helped keep the company in the black.

Ferguson (LSE:FERG) has delivered an impressive performance for the year, particularly in light of the effects of the pandemic which have brought such difficulties elsewhere.

The weakest performing areas were the UK and Canada, but with 86% of revenues emanating from the US the overall impact was mitigated. 

The US business showed revenue growth of 2.7% and further market share gains, and was able to withstand differing effects from different states during the course of the lockdown, partially through its online offering.

The actions taken at the height of the pandemic mirrored what was being done in many global boardrooms. The interim dividend and share buyback programme were suspended, as was the mergers and acquisitions (M&A) programme, and there was tight control on capital expenditure. 

This had the effect of freeing up additional capital when it was most needed, and having come out of the other side the company is now reaping the benefit of those temporary actions. Overall revenue declines were limited to just 0.9%, and even a pre-tax profit decline of 4.8% was a strong performance in the circumstances.

Indeed, the most striking proof that the financial measures taken have been successful, as well as signposting confidence in future prospects, is the full restoration of the dividend. 

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The full-year payment is maintained from the previous year, which effectively reverses the previous decision to suspend the interim dividend. This returns the yield to its previous level of around 3%, which, although somewhat pedestrian, nonetheless places Ferguson in a minority of stocks which have been able to weather the dividend storm.

Although the resumption of the dividend does not extend to the share buyback programme, the group’s focused M&A programme is back on track. Prior to the pandemic, the group had made six bolt-on acquisitions totalling $351 million (£272.7 million) in areas designed to consolidate various parts of the business. 

With a reduction in net debt during the period and access to over $4 billion of liquidity if required, Ferguson is in robust financial health and has delivered an outlook statement which is optimistic even though the full effects of the pandemic cannot yet be known.

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Strategically, the demerger of the UK Wolseley business remains on track, although in light of the current economic environment the timing is uncertain. As such, while 2021 still seems most likely, the company is also considering other options in the meantime. 

The move to a premium US listing is still very much planned, and UK shareholders should have sufficient time to decide whether to stick with the new look offering.

The share price has tended to reflect the strength of the business and is ahead by 8% in the year to date. 

At the same time, however, the price has significantly outperformed its wider index, having risen by 25% over the last year – and by 81% since the March low – as compared to a decline of 20% for the FTSE 100. 

The results have also been well received and it is likely that the shares are currently up with events. As such, the market consensus of Ferguson as a ‘hold’, albeit a strong one, is likely to remain in place.