Shareholders in small-cap environmental and resources consultancy RPS (LSE: RPS) woke up to a nasty surprise this morning – a 13% plunge in the share price!
There must have been some unexpected bad news in today’s full-year results report. I’ll dig into that shortly, but first, here’s some background information.
Cyclical and vulnerable
First thing this morning, I ventured into the Motley Fool basement to find the archives on RPS. And after blowing off the dust, discovered my previous article on the company written on 14 July 2015 – years ago.
Back then, I was comparing the firm’s tempting-looking valuation with what at the time were the expensive valuations of a pair of defensive stalwarts – British American Tobacco (LSE: BATS) and Unilever.
However, in the article, I admitted that although RPS looked tempting, it’s a cyclical beast, and I said of the investment opportunity: “It could all go wrong if we really are just a spit away from macro-economic collapse!”
And the firm has been demonstrating its cyclicality and vulnerability ever since. The share price has wiggled around, but there’s an unmistakeable down-trend on the chart and today’s 145p represents a decline of around 35% over the period.
Earnings have been volatile – up one year and down the next. And the shareholder dividend is now around 50% lower than it was five years ago. If you’d been holding the shares, you probably wish by now that you hadn’t.
Dire figures
Today’s figures aren’t pretty. Compared to the previous year, revenue slipped by almost 4%, fee income eased back just over 3%, adjusted diluted earnings per share plunged by almost 25%, and the total dividend for the year was cut off at the knees, plunging more than 55%.
Indeed, the company has rebased the dividend down to adopt a “sustainable dividend policy of paying out 40% of adjusted earnings.” Chief executive John Douglas said in the report: “We had to contend with several headwinds which significantly impacted on the results.” But looking forward, he reckons trading conditions in the company’s markets are “generally satisfactory” in 2020 and he anticipates more stable results.
But I’m not tempted to go near the stock. You’d have been better off investing in Unilever five years ago, which is up more than 60% since my previous article, despite its high valuation back then. Sometimes, quality companies can carry their rich earnings multiple.
Today, though, of the three companies mentioned here, I reckon British American Tobacco presents us with the most attractive opportunity. Over the past half-decade, the over-valuation has unwound and now BATS sits about 8% below where it was. But there’s been strong operational progress over the period with revenue, earnings cash flow and shareholder dividends all up.
I think today’s valuation is compelling with BATS, and the company is trading and growing well. My money would go into its shares right now to harvest its fat dividend.