Capita Shares Are Worthless

Published by Nick Mackintosh on

  • Deterioration of company financials
  • Not only does the company generate no cash, it has more debt than assets
  • In a liquidation, this means the company is worthless, as creditors will be paid first
  • The company eliminated its dividend in January so investors no longer receive income, what about Directors pay?

losing-money

A true representation of what an investment in Capita looks like.

Introduction

For this article I’m going to give you a brief rundown of the company and how you can spot the warning signs that could save you from losing a lot of money.

Capita PLC (CPI:London) is the largest business process and outsourcing company in the UK, with clients in central government, local government and the private sector.

CPIsegment

Image created by myself with information taken from the Annual Report Presentation 2017.

Quality (Or Lack Thereof)

Just a simple google search can show the shambolic business operations of Capita and how its clients had been left disappointed, its no wonder they have been in financial trouble for a while.

NHS Outsourcing
https://www.bbc.co.uk/news/health-44123207

Meg Hillier, chairwoman of the Commons Public Accounts Committee, said trying to cut costs while modernising the service was “over-ambitious, disruptive for thousands of doctors, dentists, opticians and pharmacists and potentially put patients at risk of serious harm”.

Dr Richard Vautrey, chairman of the British Medical Association’s GP committee, said it was asking NHS England how it planned to resolve the “shambles” of Capita running the primary care support services.

BBC Licence
http://www.bbc.co.uk/mediacentre/statements/tvl-collection-capita 

“We are very disappointed by the conduct of Capita’s interviewing managers in this particular case which is not in line with the high standards we expect and does not reflect the policies in place. We have asked Capita to investigate urgently and ensure swift and appropriate action is taken.”

Warning Signs

I have a stock screen I’ve built which I use to analyse companies within the FTSE, this helps narrow my search so I can do due diligence on the companies that pass. If after my research I find that I’m impressed I’ll look to add it to my Stocks and Shares ISA where I keep my dividend stock portfolio.

In my defense I have a mainly USA based portfolio, so when I published for Seeking Alpha, it was mainly on USA companies. So even though the company has been in trouble for atleast 3 years, I didn’t mention it until November 2017. My article, U.K. Stocks For 2018 Part 1, has this to say about Capita.

Capita was a redflag due to an 84% drop in net income, a severe margin squeeze and non-cash items propping up the cash flow.

The share price was at £4.81 in that article, meaning I could have still saved you from a 67.56% drop if you hadn’t already sold! Let me list some of the warning signs that you need to be aware of if you plan to invest in individual companies.

Negative information regarding Capita in the news

The links provided above are pretty self-explanatory, nothing to add here!

Stagnant top line, decreasing bottom line

As mentioned with the links above, its pretty hard to grow a business when everyone is aware of how bad you are!

2013 2014 2015 2016 2017
Total Revenue (M) £3,851 £4,372 £4,674 £4,357 £4,168
Operating Income £230 £371 £180 -£16 -£451
Operating Margin 5.97% 8.49% 3.85% -0.37% -10.82%
Net Income £172 £240 £56 -£89 -£527
Net Income Margin 4.47% 5.49% 1.20% -2.04% -12.64%

To give you an idea of the company’s steady decline, Capita’s £180 million in operating income in 2015 was the same as in 2005, 10 years with no results to show for it.

Cashflow Statement Warning Signs

CPIcashflow.png

Dividends Not Covered By Free Cash Flow

2013 2014 2015 2016 2017
Free Cash Flow Per Share £0.28 £0.31 £0.27 £0.39 £0.02
Dividend Per Share £0.265 £0.292 £0.317 £0.317 £0.111
Free Cash Flow Payout Ratio 94.64% 94.19% 117.41% 81.28% 555.00%

The true figures are even worse than whats listed above, since this accounts for non-cash items, for example in 2015 Capita’s net income of £207 million could barely afford to pay for the day-to-day operations of its business, since the capital expenditures were £204 million. If dividends to shareholders cost the company £201 million and it only has £3 million left, where does the money come from? It comes from cash in the bank and it only had £29 million! Therefore the company has to sell its short-term investments, sell assets, or increase debt to find the rest to pay the shareholders!

Balance Sheet Warning Signs

CPIbalance

The Aftermath

Image taken from Yahoo Finance

If you invested in Capita 20 years ago, your shares have not appreciated at all, all you have to show for them 20 years are the dividends you received over that period. If you were unlucky enough to buy at the top for £13.20 a share, you would be sitting on a loss of -88% based on todays share price of £1.56.

The company has raised £681 million from its shareholders at a steep discount of £0.70 per share, and in my opinion thats just throwing good money after bad. Investors have done this to reduce their average cost per share in the hopes that the company recovers enough for them to make a profit and sell.

Since the company announced the removal of the dividend in its Annual Report in January, shall we take a look at how Capita’s Directors have behaved in terms of their pay to see if its aligned with shareholders who actually own the company?

In 2016 when the company generated a loss of £89 million, did the Directors of the company receive a bonus at the shareholders expense? You bet they did!

CPIremun2016

Page 100, Capital Annual Report 2016

I checked the same for 2017 and I’m pleasantly surprised to report that no bonuses were issued! Still doesn’t excuse them for the previous year though, I guess they couldn’t afford the risk of being caught with their hands in the cookie jar.

Conclusion

CPIdiv

Image provided by dividendmax.com

Capita was a dividend growth company before its fall from grace, this meant that investors had a false sense of security in believing the company was safe place to collect rising income in the form of dividends.

If investors blindly bought shares in the company without doing the research, even though there were plenty of warning signs, there is a strong likelyhood that they are sitting on some heavy losses in terms of share price and no income to soothe the pain.

It’s my opinion for investors to avoid Capita at all costs, it could one day be profitable again after implementing its turnaround plan with its new CEO, but why take that risk?

 


Nick Mackintosh

My name is Nicholas Mackintosh and I’m the Creator and Founder of HelpingTheLittleGuy.com I created this website to help anyone looking for a way to save and earn more with their money. Knowledge is given freely in order to give you a fair shake in a system that is determined to keep you poor, preventing you from having the lifestyle you deserve.

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