Not just shorters3 Feb 2024 09:32
So... DEC is one of a portfolio of shares I own that have fallen for no great obvious reason. Yields are high, bordering on ridiculously so, and cash generation is positive across the board. So why the falls?
Shorters are having a field day on London listed companies at the moment, but they are not the underlying cause of the falls, they are just taking advantage and exacerbating the issue.
The fundamental problem is cash outflow from the London market. The Evening Standard has a story describing it:
https://www.standard.co.uk/business/small-investors-uk-stock-market-record-pace-shares-london-stock-exchange-lseg-funds-investment-us-city-b1136580.html
In an environment where investor money is continually leaving a market, either to find a new home or to cover rising cost of living, then shares with any uncertainty, complexity, or temporary problem fail to compete in attracting enough of the reduced number of buyers in the market to sustain their share price.
Previously blue chip companies are seeing this phenomenon impact their share price, with yields amongst some big UK players now often in double figures due to depressed share valuations. VOD, AAL, DGE, RKT and many others sit on very depressed valuations despite strong cash generation.
DEC's price fall is not something that has happened in isolation. It's perhaps the worst victim of a market wide phenomenon, it's revenue and debt models beyond trivial understanding act as barriers to buyers with a wide choice of high yield options.
None of which means there is anything fundamentally wrong with the company. It doesn't have to maintain the current 30% yield for ever. Even if the yield is just maintained for this year, and there is no sign that won't be the case, there would have to be a further 30% fall in the share price for investors to lose money. With somewhere in the region of 276p dividend per share, the price would have to fall below 624 to lose. If they only manage to hold the dividend for the next two years, the share price would have to be below 350p for investors to lose, at which point the yield would be near 80%!!!
At some point investors have to notice the yield on offer. Right now it probably looks too good to be true and that alone is putting buyers off.
Saying it's unsustainable just because it's a big number without any other rationale for why the company can't continue to generate that much FCF ignores all the company fundamentals and is the wrong way to look at the value here. The recent trading statement tells us implicitly the next divi, and the one after that, and likely the one after that too are secure financially.
Long term the company will inevitably move its primary listing away from london to NY. That's when we may see a dividend cut, but I think that's 2025 at the earliest.
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