Best UK stocks with cash to weather the coronavirus
Only a handful of FTSE 100 stocks boast more cash than debt, putting them in the strongest position to weather what looks like a troublesome 2020 amid the coronavirus outbreak.
Coronavirus to test balance sheets in 2020
The coronavirus outbreak is bringing economies around the world to a halt and painting a bleak picture for many businesses in 2020. The UK government has said it will inject hundreds of billions of pounds to prop up the economy and promised to provide financial aide to companies that need it.
But businesses are still understandably nervous about how they will stay afloat if self-isolation and social lockdown becomes the new normal, the economy remains effectively on pause and business remains subdued for a prolonged period of time.
Access to credit and debt is now more vital than ever, and most companies in the FTSE 100 have large debt facilities to draw-down if they hit trouble.
However, a very small group boast one of the best defences a business can have right now: a war chest of cash to draw upon if needed, whether that be to pay staff and bills, keep up with rent, pay suppliers or to absorb a severe drop in sales or profitability. Still, there is only a handful of companies that have more cash than debt.
How will dividends be funded?
For investors, the strength of the balance sheet isn’t just a sign of how well a business can survive in uncertain times like these, but whether or not a stock can afford to maintain its dividend payments when it is suffering from a temporary downturn.
A slew of London-listed stocks have already suspended or cancelled dividend payouts to bolster their cash balances for the tough times that lay ahead this year, including chemical firm Elementis, gambling software provider Playtech, housebuilder Crest Nicholson, bookmaker William Hill, and hotel group PPHE. Others, such as software giant Sage Group, have also stopped buying-back stock from investors.
Investors should expect more companies to follow suit over the coming months as the impact of the coronavirus becomes clearer, and those that are determined to maintain dividends despite the economic backdrop may well have to fund payouts with debt.
Below is a list of blue-chip stocks that have strong balance sheets that could help them weather the storm and come through the other side of the coronavirus outbreak.
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What are the best UK shares to watch?
- Housebuilders: Barratt, Berkeley, Persimmon and Taylor Wimpey
- AB Foods
- AVEVA Group
- JD Sports
- Ocado Group
Our round-up of the best UK stocks with strong balance sheets starts with housebuilders. While the housing sector will be hit in the short-term, longer-term demand is unlikely to wane, and these companies should have enough cash to cover dividends in the meantime.
Also on our list is Ocado, one of the biggest FTSE 100 risers over the past couple of years. Demand for online groceries continues to surge, and Ocado’s overseas partnerships putt them in a good position to capitalise internationally.
Read on to learn more about the best UK shares to buy with cash in pocket.
Housebuilders: Barratt, Berkeley, Persimmon and Taylor Wimpey
An analysis of the FTSE 100’s balance sheets reveals only one sector is swimming in cash, and that is the UK’s largest housebuilders. The four housebuilders in the FTSE 100 have over £2.8 billion in net cash, according to their latest figures. Berkeley Group has £1 billion in net cash, Persimmon £835 million, Taylor Wimpey £545 million and Barratt Developments £434 million.
The coronavirus has brought the UK housing market to halt. People can’t conduct viewings, surveyors can’t conduct key surveys, and both sellers and buyers don’t want to make such big financial decisions in such uncertain times.
The fact the government is offering financial assistance for both homeowners and renters demonstrates the fragility of the market. Still, overall long-term demand for housing shouldn’t change and the housebuilders have strong fundamentals to bounce back when the economy begins to recover.
Berkeley Group, which predominantly builds in London, Birmingham and the South of England, has already made a U-turn on its plan to raise shareholder returns over the coming years, clawing back £455 million that would have gone to shareholders.
Importantly, the company has ‘postponed’ the increase to payouts and has stressed it ‘still intends to make the enhanced returns but will reassess this in our full year results announcement in June, by when it is indicated the effect of Coronavirus will be more measurable and certain.’
Still, with the biggest cash hoard in the industry and an extra £750 million in debt available, Berkeley is financially sound and being cautious. Still, it is the only UK housebuilder – and one of the only members of the FTSE 100 in general – to have guaranteed normal dividend payments to continue this year. All other housebuilders have postponed or cancelled them.
Despite their net cash positions, share prices in all four housebuilders have plunged amid the coronavirus crash.
Rightmove, the website dealing with properties for sale and for rent, has affirmed the negative impact the coronavirus is having on the UK property market.
The company reported its ‘busiest month ever’ in January and said last month that ‘there have been no signs so far of a drop in buyer-activity or interest in the housing market’. But it still had a cautious outlook for the remainder of the year.
‘The market has been waiting for several years for a window of certainty, and 2020 seemed set to be the year when many would look to make a move and satisfy their pent-up housing needs.
However, the current fast pace of the housing market could now be temporarily affected by the spread of the Covid-19 coronavirus,’ Rightmove said on February 28. ‘We expect that housing market statistics, like other economic indicators, could be prone to volatility over the spring and summer.’
It provided an update on March 18 that revealed the company has provided some financial relief for its agency customers by allowing them to defer payments for up to six months and said traffic to the website had ‘continued to be strong’.
While it said it had no clarity or visibility going forward, Rightmove has committed to its dividend this year, stating it has ‘a highly cash generative model and benefit from a very strong balance sheet’. It has, however, temporarily stopped buying back shares.
That is understandable considering it spent £88.6 million on shares and £60.2 million on dividends in 2019 but ended the year with £36.3 million in cash. Rightmove says its debt-free approach is one of its major strengths, but shareholders are safe in the knowledge that it has that option should it ever need it.
AB Foods is best known for running clothing chain Primark, but the company also has arms involved in groceries, ingredients, sugar and agriculture which has provided some diversity that will help it weather any downturn in 2020.
Primark accounts for just under half of the company’s overall revenue and contributes 61% of adjusted operating profit. All of its stores are now shut, which it says will result in £650 million in net sales being lost every month they remain closed.
The company has said it can’t provide guidance for the year because the situation with Primark ‘remains uncertain’. However, its other businesses, although smaller and less profitable, have proven more resilient. ‘Importantly, in aggregate we have not seen a material impact in our sugar, grocery, ingredients and agriculture businesses,’ the company said.
AB Foods has a diversified business and £800 million in net cash as well as ‘significant undrawn bank facilities’ to fall back on if it needs to, which should safeguard returns this year.
AVEVA, which supplies software for engineering and industrial applications, had a bullish tone when it released a trading update on February 20 ahead of the end of its financial year to the end of March 2020.
The company noted the disruption the coronavirus had caused in China and said sales had taken a knock as a result, but said the country only accounted for 5% of total revenue. It said: ‘At a group level AVEVA had a good start to the fourth quarter and the order pipeline for the remaining weeks of the financial year (to the end of March) is solid.’
The company had £58.6 million of net cash and ‘no long-term debt’ at the end of September last year, after it paid £46.8 million in dividends and forked-out £21.6 million on acquiring MaxGrip, suggesting it can comfortably cover payouts going forward.
The question now will be how the outbreak will impact the business in the new financial year, especially as it has spread to other countries that represent bigger markets for AVEVA than China.
The retail sector was already struggling and now their online and delivery capabilities are being tested. JD Sports has already managed to largely buck the downtrend seen in retail but it is not immune from the coronavirus outbreak.
JD makes 78% of its revenue from its retail stores, meaning it is highly exposed to the drop in footfall and custom. The athleisure and footwear seller said on March 24 that virtually all of its stores in the UK, US and Europe were shut. Although it is still operating online, it admitted this is a ‘comparatively small mitigation in terms of overall profit contribution.’
Still, while the economic consequences of the coronavirus could prove the final nail in the coffin for retailers that were already in trouble, JD Sports is one of the only major London-listed retail stocks that has more cash than debt.
‘The board is satisfied that the combination of a strong balance sheet, net cash resources and the substantial working capital facilities available to the Group in its various territories are more than adequate to meet the cash deficiencies which may reasonably be anticipated during the closure periods in our various territories,’ said JD.
Its latest figures said it had £118 million of net cash – although that was the case on August 3. In the year to the end of February 2019, JD Sports paid out £15.9 million in dividends
Plus, the threat coronavirus poses to the retail industry could help JD complete its acquisition of Footaslyum after the Competition & Markets Authority (CMA) provisionally blocked the £90 million deal in early February, citing it would lessen competition.
JD Sports had argued the competition posed by sporting brands like Nike and Adidas, both of which are increasingly bypassing retailers to sell their apparel and footwear directly to consumers, as well as other high street members like Frasers Group (formerly Sports Direct), meant the purchase of Footaslyum wouldn’t affect competition in the market.
Footasylum’s chief executive Barry Brown has said the business needed the investment and help that JD was offering the business even before the coronavirus outbreak started, according to fashion publication Drapers.
Drapers also said JD Sports had argued the CMA should take the potential impact of the coronavirus into its review. ‘The CMA notes that any assessment of Footasylum’s performance absent the merger would need to take account of exogeneous factors such as the spread of the Covid-19 virus.
This is likely to impact retailers such as Footasylum in two ways. Firstly through a decline in footfall at its stores and secondly potential supply chain issues. If, for example, a major brand has a reduction in supply available to it of key products they are likely to favour their own [Direct-to-Consumer] channel ahead of retailers,’ JD said.
The chief executive of Adidas, Kasper Rorsted, recently said the sporting goods and athleisure industries were not a priority for people right now, as they focus on purchasing staple products and tightening their purse-strings for the uncertain times ahead, and that will prove true for firms like JD too.
Still, the fact it has consistently outperformed the wider market and has a stronger balance sheet suggests it will fare better than its rivals over the forthcoming year.
Ocado Group's online grocery business, which it runs under a joint venture with Waitrose, said it has experienced the same spike in demand as other supermarkets and food stores – so much so that it had to temporarily stop registering new customers and closed its app to get a grip on the situation.
‘While this has placed the business under unprecedented strain, we are taking all measures to ensure that our service remains as close to normal as possible and to meet as much of the demand as we can,’ Ocado said on March 19.
Retail revenue in the 13 weeks to the start of March jumped 10%, and said growth in the initial weeks of March were ‘double that of the first quarter’. It did, however, warn that the stockpiling by customers, or ‘forward buying’, would have to unwind at some point. The closure of its app seems dramatic but Ocado is only delivering what it can rather than disappoint customers in a time of need. Ocado has said its ambition to deliver 10% to 15% growth in grocery revenue in 2020 is ‘unchanged, at this point’.
Partner M&S issued a stark warning to investors on March 20 that it was suspending dividends and cutting costs as it expects its home and clothing divisions to struggle this year, but has underlined the strength of the grocery sector by redeploying more staff to its venture with Ocado and stating ‘we expect our food business to trade profitably throughout.’
However, Ocado is ending its 20-year relationship with Waitrose later this year in favour of its new partner, Marks & Spencer’s. Ocado has said preparations to switch this September ‘are on track’.However, Ocado is ending its 20-year relationship with Waitrose later this year in favour of its new partner, Marks & Spencer’s. Ocado has said preparations to switch this September ‘are on track’.
Ocado’s online grocery business is likely to be running flat-out for the next few months and its capacity will be tested. Plus, the coronavirus outbreak will also highlight the need for retailers to adopt Ocado’s automated warehouse technology that helps reduce reliance on labour.
The company has £142.4 million in net cash in February 2020, almost treble the £50.2 million it had a year earlier. Cashflow in the supermarket sector should remain resilient in the short-term, while Ocado’s automation technology will only benefit from the coronavirus outbreak in the long term.
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