2016 was supposed to begin on a high note for Royal Bank of Scotland (LSE: RBS) as talks of an early return to dividend payouts and finally breaking the seven year streak of annual losses boosted confidence that the world’s once-largest bank was finally turning the corner. However, these hopes were expertly dashed in RBS’s annual report when £2.1bn in litigation costs in Q4 alone sent it into the red again.
While Q1 2016 saw the bank take a positive step by making its final payment to the government necessary to begin dividends, shareholders may not be receiving any income soon due to the delayed sale of Williams & Glyn. Even worse news is that the bank’s underlying retail bank isn’t as strong as competitors’ with a return on equity of just 10.9% in the past three months. And this doesn’t even account for the billions in under-performing non-core assets the bank is still trying to sell. With a bevy of bad assets to sell and a return to dividend payments once again delayed, I’ll be staying far away from RBS shares.
Wait and see
Formerly high-flying online grocery delivery service Ocado (LSE: OCDO) has come back down to earth over the past year as share prices have dropped nearly 30%. This fall has come despite continued solid results from the company in Q1, including a 15.3% bump in gross sales and 16.9% increase in average orders. The worry for investors is that, like traditional grocers, Ocado will have little room to increase margins once it has attained sufficient market share due to the vicious price wars that have decimated profits across the sector.
The entry of Amazon into the market this year via its tie-up with WM Morrison also served as a warning to investors that competition won’t be relenting any time soon. The saving grace for Ocado could be a long-awaited international agreement with a foreign grocer. Ocado’s enviable knowledge in distribution, online sales and technical prowess could be a major asset in a country where the grocery sector is less cut-throat. Unfortunately, management has made no public comments on their progress, leaving Ocado facing a low-margin future here at home. This is reason enough for me to avoid the company for the time being.
Tread with caution
The past year has been even tougher on Sports Direct (LON: SPD) with share prices down 44% as slowing growth and profit warnings have spooked investors unused to bad news from the retailing juggernaut. Sports Direct has cast the blame on declining high street foot traffic and “unseasonal weather”. This may be a short-term blip, but growth in the group’s core sportswear division slowed to 0.1% in the past half year even before the latest profit warning.
Aside from slowing growth, there are a series of corporate governance issues that raise warning flags for me. These include the large stakes the company has built in numerous clothing retailers, the hiring of founder Mike Ashley’s daughter’s boyfriend to a nebulously compensated role, and the ongoing questions and bad press regarding working conditions at stores. Even though shares are a cheap 10 times forward earnings and the company has a history of success, these governance issues and slowing growth are enough to make me wary of buying shares.