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AA shares break down after dividend cut

Roadside assistance group AA slashed its dividend as it plans an investment spree to turn its business around. The change of direction will cause some short-term pain.

Garry white employee

by
Garry White

in Features

21.02.2018

Today, AA’s new chief executive Simon Breakwell did some kitchen sinking and slashed the company’s dividend. The aim is to inject new funds into its business to try and halt the slide, but the plans hit the shares hard. The shares have been falling since April 2015, but today’s medicine prompted a near-30% fall in early trading.  

There was obviously some disagreement at the top of the group over strategy. The company’s executive chairman, Bob Mackenzie, was fired in September 2017 for “gross misconduct” after he punched a male colleague at a hotel bar during an off-site strategy meeting. Mr Mackenzie's role was then split in two, with senior independent director John Leach appointed chairman and former Uber Europe boss and Expedia founder Mr Breakwell as chief executive.

The company’s dividends will now be limited to 2p a share until "the board is satisfied that the profit and free cash flow enable a change in policy". Last year shareholders received an annual payout totalling 9.3p a share.

With the freed up cash, the group plans to put more investment into “connected car” technology. In its interims, AA said that its first-half numbers were hurt by “erratic work load patterns on an inherently fixed cost base”. This digital move should help on this issue.

Management aims to get more of its customers to install electronic telematic systems, which detect problems before they happen, allowing the AA to fix it first and avoid calling out a costly roadside assistance van. “It will take the AA from a company helping when you break down to one actually predicting when you might break down in the first place,” the company added. There will also be an expansion of its insurance operation and investment in its digital operations. This will, however, result in profits falling as much as 15% in the current financial year.

The move will also help reduce its net debt, which stood at a lofty £2.69bn at the interim stage, compared with its market value now of just over £500m.

"These investments, while reducing our short term profitability, are vital to our long term success,” Mr Breakwell said. “I am confident the priorities we set out today will transform our products and service offerings to our customers by creating a truly innovative and differentiated product proposition which will deliver long-term shareholder value.”

The company floated in 2014 with a valuation of £1.4bn, so its performance has been disappointing for IPO investors. The new plan appears to make sense, but it will be all in the implementation. Investors will want to see both debt reduction and growth in the top line sooner rather than later.

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