Comment: Marston's wrong-foots income investors

18th Jun 2009 15:38

It is only a month since pub group Marston's maintained a dividend payment which many observers believed it could not afford. Perhaps the sceptics were right, seeing as Marston's announced today that it would be asking shareholders to support a chunky rights issue.Having paid out £13m in dividends to shareholders at the interim stage the company is now asking those same shareholders to give it £176m in return for shares available at 59p each, less than half the current share price.All of which begs the question, why did the company not bin the dividend and reduce the size of its cash call? Has the situation changed so much in the intervening month that a right issue became necessary? Probably not, as Marston's said current trading is good. Like-for-like sales in Marston's Inns and Taverns were up 1.1 % in the 16 weeks to 6 June 2009 while trends in the Marston's Pub Company and Marston's Beer Company were much the same as they had been at the time of the company's interim results in late May.So, if the right issue was not "necessary" then the board clearly thought it was "desirable", and in this regard it is difficult to argue with the management's reasoning.The company plans to spend some £36m of the rights issue funds buying back securitised debt at less than face value, which is a "no brainer". The rest of the money will predominantly go on food-led destination pubs as part of its so-called "F-Plan" to serve food to families, females, forty-somethings and fifty-somethings.Pubs of this kind have achieved strong returns for Marston's, averaging 15% earnings before interest, tax, depreciation and amortisation return on invested capital in recent years.As for the dividend, the company intends to pay a final dividend of 3.7p, down from 8.47p a year earlier (5.9p adjusted for the rights issue), and to rebase (i.e. cut) next year's interim dividend as well, consistent with its policy of paying dividends roughly half the level of earnings per share.In other words, management has thrown income investors a dummy. Investors who bought the shares for income - an unchanged full-year dividend would have put the shares on a dividend yield of 9.46% on last night's closing share price - will have learnt that a dividend pay-out that looked too good to be true proved to be just that.Not for the first time investors would have been better off believing what the market was telling them rather than listening to the company's cheerleaders.