Markets upbeat, Direct Line’s dividend shock, Barratt sounds the alarm on housing market, JD Sports impresses and Sainsbury’s enjoys record Christmas

“Ahead of US inflation numbers on Thursday, markets were relatively upbeat with a good showing on Wall Street last night which spilled over into a positive sentiment among investors in European stocks,” says AJ Bell Investment Director Russ Mould.

“It helped that a speech by Federal Reserve chair Jerome Powell yesterday didn’t contain any shocks which would cause investors to worry about markets even more.

“The FTSE 100 moved 0.3% higher to 7,714, driven by strength in miners and banks and despite a big sell-off in the insurance sector following Direct Line’s nasty profit warning which then spooked investors in Admiral. JD Sports’ upbeat trading statement helped to drive renewed interest in the retail sector and extended a trend that gathered pace last week when Next said it had experienced a good Christmas.

“Next and B&M enjoyed share price gains, while investors bid up shares in mid-caps Currys, Marks & Spencer and ASOS.

“Among smaller companies, publisher Reach dived 25% after experiencing a big downturn in advertising. This would suggest companies are being very cautious with their promotional spending amid uncertain economic conditions. For Reach it means the need to find more ways to cut costs.”

Direct Line

“Spare a thought for the insurance industry which is going from bad to worse. After suffering from inflationary pressures which made it more expensive to cover the costs of repairing vehicles that had been in an accident, insurers are now having to contend with a winter of discontent.

“Direct Line has warned that the icy and snowy weather resulted in elevated levels of road accidents, meaning there has been a big queue of customers claiming on their motor policies.

“The bad weather conditions have also triggered a rise in claims for home insurance customers experiencing burst pipes and water tanks.

“If that’s not bad enough, the downturn in the commercial property has been worse than Direct Line expected, leading to a big drop in the value of its investment property portfolio.

“It still has a hangover from the summer where the hot weather led to a rise in subsidence-related claims.

“This is all beginning to sound like the train operators who complain about the weather either being too hot and the sun bending the rails or too rainy or windy which puts leaves on the line. Where’s Goldilocks when you need her?

“If you thought everything bad has gone wrong for Direct Line, it’s important to consider the knock-on effect of these events. Questions are going to be asked about the strength of the company’s balance sheet and whether it has enough capital. The company admits that its capital coverage is now at the lower end of its risk appetite, so might we see a big fundraise soon?

“Saving money by not paying a dividend is one way to preserve cash yet the thousands of pensioners owning the stock for income won’t be happy. Direct Line has historically been a generous dividend payer and a lot of people have got used to a growing stream of cash rewards from the business.

“Last August it declared confidence in being able to sustain regular dividend payments but hinted at nervousness over the market conditions after scrapping the second part of a £100 million share buyback programme announced earlier in the year.”

Barratt Developments

“The biggest surprise from Barratt Development’s very gloomy statement is that it’s taken this long for collapsing confidence in the housing market to show up fully in its numbers.

“While the extreme dislocation in the mortgage market which followed the mini-Budget can be characterised as a one-off event, higher borrowing costs for purchasers are here to stay.

“The big drop in Barratt’s order book reduces visibility but should not come as a shock. When people are being warned house prices are going to fall by double digits in percentage terms, why wouldn’t they put off any purchase and wait and see if their dream home becomes a bit more affordable.

“Barratt just needs to wait and see how bad things get. The company at least has a strong balance sheet to provide a buffer against weak trading and reward investors for their patience with dividends.”

JD Sports Fashion

“The trends suggest clothing retailers have held up well over Christmas with JD Sports following in Next’s footsteps as it announced bumper festive trading.

“This is a story of the survival of the fittest. Weaker retailers have fallen by the wayside as the likes of Next and JD have come to the fore – the latter even enjoying highest ever weekly sales in the run-up to Christmas.

“This is testament to the continuing appeal of the brands which fill JD’s stores and to a youthful consumer who are often living at home and therefore don’t have utility bills, rent or a mortgage to pay.

“JD is also benefiting from improved availability of products and easing shipping costs – two headwinds which had an impact on profitability in 2022.

“All eyes will now be on a big investor day at the beginning of February when JD will be expected to update on its digital strategy and what it intends to do with its increasingly large pile of cash.”

Sainsbury’s

“Supermarket chain Sainsbury’s having a record Christmas is undoubtedly impressive given a difficult consumer backdrop but there remain pressures on consumer spending to come.

“A winter World Cup helped as people bought in booze and food to watch the games and given this was the first ‘normal’ Christmas since the pandemic it seems people were in the mood to party if they could afford to.

“An increase in guidance for cash flow feels significant and Sainsbury’s market share gains suggests that it may have proved a relative trading down candidate for people who would otherwise have shopped at Waitrose or Marks & Spencer.

“However, Sainsbury’s ownership of Argos could be an Achilles heel – it performed creditably over the Christmas period but it is more exposed to discretionary spend than the core groceries business.”

These articles are for information purposes only and are not a personal recommendation or advice.