Stockwatch: a 6.5% yield plus potential for capital upside

Has a mean-reversion in the mid-cap shares of Mony Group (LSE:MONY) now been fulfilled on the downside, offering value in the same way that the price became too pricy a few years ago?

After yesterday’s jump in response to 2024 annual results, the shares are slightly in favour again this morning, up to 202p. The five-year chart looks at a low point and, interestingly, it’s as if a “double bottom” reversal is in place. Are there ingredients for a fresh uptrend besides a 6.5% yield?

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Source: TradingView. Past performance is not a guide to future performance.

This used to be known as Moneysupermarket.com, its stock market name re-jigged as the stock ticker while its trading name remains Money Supermarket – specialising in technology-led, money-saving platforms including several price-comparison websites.

I drew attention to the stock as a “buy” variously from October 2013 at 145p when yielding 5%, switching to “sell” at 340p in July 2017 given the price/earnings (PE) multiple had extended to 25x versus an underlying earnings growth rate expected to slow from near 18%. A dividend yield below 3% looked insufficient support if perception shifted away from growth-share status, and this commercial space had become more competitive.

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It is a classic dilemma when growth shares mature; if the underlying earnings growth rate slows relative to a high rating, profit-taking accelerates as holders rush to protect gains. The shareholder base must replace those who originally bought for growth, to people seeking a material yield. With the 2024 dividend of 12.5p a share expected to rise into a 13p range in 2015 and 2026, the yield is indeed looking attractive at 6.5%, edging towards 7%.

Is this fair pricing for the UK consumer marketplace’s opportunities and risks, and what scope is there for capital upside? Total return investors appeared to take heart yesterday from a buyback programme, declared up to £30 million, albeit negligible for a £1.1 billion company beyond near-term market support.

How long can a revenue/profit disparity persist?

Mony’s annual numbers are respectable in challenged times but remind us how the share is ex-growth, given revenue is a vital component of the long-term value equation. It is up 2% to £439 million which barely matches inflation.

Yet net profit rises a material 11% to over £80 million and operating cash flow by 13% to near £116 million. Basic and adjusted earnings per share (EPS) are up 11% and 5% respectively, although a 3% rise in the dividend to 12.5p feels a tad cautious in terms of outlook. Again, in inflation-adjusted terms, it is near-flat. While covered just 1.2x at the basic EPS level, free cash flow looks to have risen in high-teens per cent to 18.8p implying 1.5x cover.

Perhaps the shares gained yesterday partly because profit is at the top end of estimates, although the share price is still below yesterday’s intra-day high of 205p.

By category, the revenue dynamics are a mixed bag, with insurance, the largest at near 54%, up 7% and rescuing weakness elsewhere. Cashback services at 14% rose 2%, which does not quite match inflation. Money at 22% eased 2%, home services at 8% slipped 7% and travel at 4% eased 5%.

So, a key question is how durable is this outperformance by insurance after premiums in the industry jumped in the last year or so, prompting more scrutiny at renewals (thus benefiting Mony)? Second, if straitened times encourage more saving than spending, it is possibly good for “money” if compromising “home” and “travel”. Or if people do cling to their holidays, obtaining better value is potentially a game changer.

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Influences on these divisions are thus tricky to judge. The insurance side benefited from life and travel more than offsetting declines in car and home as high premiums inflation eased. While growth in borrowing, hence credit cards, boosted money, it was hurt overall by fewer attractive current account deals. Home services saw improvement in energy switching albeit checked by retention offers at renewal for broadband and mobile. Travel – including insurance – was affected by competition, and within cashback a strong performance in insurance was offset by weaker retail.

A strategic review is cited to raise transaction volumes, loyalty and revenues, also exploit cross-sales and renewals. That is good but feels conceptual as yet. Can such initiatives do more than help Mony revenues edge ahead of inflation, which looks liable now to be stubborn at around 3%?

The statement cites “quality customer experience”, but I have not engaged with it. I’ve not felt the need to either because Google and other search engines are sufficient for me to compare price and quality comparisons. At a recent home insurance renewal, I used GoCompare.

So, while these initiatives read well, I find it an open question over to what extent Mony’s overall top line might improve.

Is a 9% fall in operating costs largely a one-off?

The operating and financial review clarifies that a drop in operating costs is “in part due to lower distribution expenses and people cost-efficiency gains”, also reduced amortisation of intangibles. There were lower production costs from TV advertising materials created later in 2023. Yet excluding the amortisation aspect, underlying admin expenses eased only 3% - you could, again, say that this is just pegging inflation.       

The reduction in amortisation came after a prior year review brought forward such costs, hence it feels like an accounting rejig – although not aggressive accounting. It is chiefly related to two acquisitions.

More reassuringly in terms of genuine costs, a member-based approach – with more than a million people in a SuperSaveClub – is reducing the cost of customer acquisition.

As with revenues, I think Mony will need to prove what it can achieve on costs going forwards rather than assume much from the boost in these results. It seems to have got quite lucky with various positives conflating on costs, which explain a slight beat in 2024 profit.  

Looking at the decade-long financial summary table, it still shows a commendable recovery in operating margin to a strong 25.8% after slipping below this in 2020. Revenue growth dynamics are not back to the 2014 to 2019 trend, but earnings remain clean, with scant difference between reported and normalised – and operating cash flow per share is now at record levels. This has helped a year-end net debt position revert to net cash [and was what] prevailed from 2014 to 2018.   

Mony Group - financial summary
Year-end 31 Dec

Source: historic company REFS and company accounts.

Modest director trading in recent months

It is nothing like the concerted director buying, but straight after the results the spouse of a non-executive director bought £10,000 worth of shares at 200p. Last December, the CEO bought £9,578 worth also at 200p. However, in October, the chief risk officer sold £30,100 worth at 198p, although it’s unclear whether this was for personal reasons.

Such behaviour affirms my sense that Mony shares are well-supported, albeit without justification as yet to get greedy. If yields more widely become at risk as employer costs rise and business sentiment weakens, the price could edge up on perception of relatively better dividend security. Mind, with 736 employees Mony does not update on how it will deal with higher costs from April.

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Straitened times are favourable for price-comparison services and the like, but I think Mony needs to show that it can deliver real revenue growth beyond pegging inflation.

Strength of cash flows invites speculation as to a takeover. There is precedent by way of GoCompare – or GoCo as it became on the stock market – going private four years ago in a near £600 million deal. But would this management’s lack of vigour to buy around current market prices make them seriously receptive to a private equity approach?

I conclude with a “buy” stance for income, if needing more evidence for total return.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.