6 stocks to watch in May

As record profits accrue at the oil giants, calls for returns to shareholders grow louder. How will BP respond? Elsewhere, as prime property is forecast to realise annual returns of 10%-plus does this mean the tide could be turning for the hitherto washed-up real estate sector? And what next for Marks & Spencer as it beefs up its grocery positioning, wrestles with Ocado and sets its sights on a new digital era for its increasingly younger customer base?

Here is a round-up of some of the stocks to keep an eye on in May as these companies issue their latest results or trading updates.

This is not a recommendation to buy or sell these investments and is purely insight into some of the companies that will be announcing results this month.

BP

If you’re already smarting at the record profits the oil giants have accrued as households have forked out increasingly large amounts for their gas bills, you might want to look away now. BP is in line for a $700m windfall, thanks to a new tax rule.  New regulations brought in on 6 April will see it pay 25% rather than 35% on the surplus funds it takes from its company pension plan; which for BP stands at a current surplus of a whopping $7.9bn.

BP is not alone, thousands of company pension plans in the UK have amassed surpluses over the past 18 months. The government’s aim, with the tax charge change, is to incentivise pension investment in areas that can help the economy. Its thinking is that well-funded pension plans could potentially generate more surplus, which could then be used by employers and benefit members, by investing in return-generating assets.

Back to the nuts and bolts of what BP does and investors will also be looking for more good news. Delivering the oil giant’s second-biggest profit in a decade back in February, newly-installed chief executive Murray Auchincloss, who served as chief financial officer under his predecessor Bernard Looney, made quite an entry. He also announced an expanded share buyback scheme.

BP intends to buy back $1.75bn of shares in the first quarter and has made a further commitment to return at least 80% of surplus cash flow to shareholders through future buybacks, up from a previous target of 60%. It intends to repurchase at least $14bn in stock over the course of 2024 and 2025, it has said.

Shell, whose own earnings beat expectations by a fifth in the first quarter when it reported on 2 May, prompted calls for more cash to be returned to investors. It though has maintained its share buyback scheme at $3.5bn in the first quarter.

Not all shareholders are happy with the path BP is taking though either, when it comes to its future strategy. It has been reported that activist investor Bluebell Capital Partners, which owns a small stake in BP, says the oil major is going green too soon and isn’t capable of going head-to-head with other players in the highly-competitive renewables market. Bluebell has written to the company’s board, requesting that it ditch the commitment as well as other key parts of its transition strategy.

However Auchincloss remains resolute, having said BP’s five transition businesses – biofuels, convenience, charging, renewables and hydrogen – will stay. The pace of investment in each though will “flex”, he says, depending on demand and potential returns.

To help cut BP’s emissions, Looney initially pledged to reduce oil and gas output by 40% by 2030 but pared that back to a 25% cut in February last year.

BP is now targeting a 25% cut in oil and gas production from 2019 levels by 2030, instead of the 40% announced three years earlier. BP is the only oil giant committed to cutting oil and gas production in the sector and will be producing around 2m barrels a day at the end of the decade.

But instead of cutting oil and gas production, Bluebell wants BP to increase it from today’s 2.3m barrels per day to 2.5m in 2030. It also says halting investment in renewables and continuing to invest only in the sort of low-carbon areas that make sense alongside its traditional business, such as bioenergy and hydrogen, would lead to a huge increase in payouts to shareholders; of a cumulative $16bn by 2030, according to its estimates.

BP’s Q1 results and latest dividend announcement are due out on 7 May.

More on BP

Land Securities

Could prime office real estate start to realise annual total returns of up to 11% over the next five years?  According to research from BNP Paribas Real Estate UK, that’s possible. Forecasts that prime retail in and around key luxury shopping streets in Central London, such as New Bond Street, are also anticipated to hit 4% per year over the same period, will please investors in Land Securities.

The owner of the famous Piccadilly Lights in London’s West End and one of the UK’s biggest landlords, Landsec saw the value of its £10bn portfolio drop 3.6% in the six months to September. Having been at the mercy of higher interest rates for a while now, a turnaround at the company, which owns shopping centres, urban developments and London offices, would be welcomed by investors who have watched as rents have fallen for much of the past six years.

Indeed, Landsec chief executive Mark Allan says he sees the current climate as something of a buying opportunity. Having sold off £1.4bn of property before prices fell, the FTSE 100 group could indeed be well-placed to snap up “opportunities that will no doubt arise as the new higher-for-longer reality is now more widely accepted”.

Deciding to sell when they did was a shrewd move. The properties Landsec sold off were mainly large office buildings in the City of London, where the value of its remaining buildings fell just over 9%. Noting a clear split in the wider London office market, Allan said it was undoubtedly “large corporate headquarters type space” that was most at risk from declining office demand as companies shift to working from home. Although as any hybrid workers know, that is an ever-changing scenario.

At the top of Landsec’s shopping list are prime shopping centres. Landsec said that after six years of falling retail rents, as the physical store retailers fell victim to the online retail sector, rents have started to rise – by around 2% with existing tenants.

Land Securities full-year results are due out on 17 May.

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British Land

Confidence is in great supply at British Land, another of the UK’s largest landlords. It turned down the offer of a replacement tenant after Meta pulled out of a major London office lease. British Land said it could re-let the space itself at higher rent.

After the Facebook owner paid £149m to break its lease on the eight-floor building near Regent’s Park that it never moved into, British Land decided to take the building back because office rents have risen since the original deal was signed in 2021. While Meta had agreed to pay £70 per square foot back in 2021, British Land said the square footage is worth closer to £90 today.

British Land has reason to be confident. It said its office vacancy rate was about 4%, half the London average. Tenants signed leases for 368,000 sq ft in the past six months at rents 7.5% higher than valuers’ estimates. In its last set of half-year results, British Land said it expected rents will grow at the top end of its previously guided range in 2024 across its portfolio of London offices, UK warehouses and retail parks.

Low office occupancy remains a problem for the sector, but growth in forecast rents of 3.2% over the six months under review offset a 2.5% slide in property values, pushing average rental yields 23 basis points higher.

That hasn’t pleased investors and British Land’s shares are almost 20% lower than they were a year ago. But much as with Great Portland, the question is whether that is a fair value or in this case has been oversold.

British Land full-year results are due out on 22 May.

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Great Portland Estates

Over at Great Portland Estates the real estate investment trust (Reit) last posted a deepening of pre-tax losses for the six months to 30 September, as its valuation plummeted by £220m.

At the half-year stage it posted an £80.6m fall. The effect on shareholder value has been profound. From 31 March 2022 to 30 September this year, Great Portland’s EPRA earnings on net tangible assets per share plummeted 22.2% from 835p to 650p. It’s a poor performance, but Land Securities and British Land also saw their comparative earnings fall 16% and 22.3% respectively over the same period.

However, both Landsec and British Land are more likely to have turned a corner than Great Portland, having factored in the bulk of that value drop to their September 2022 interim figures. The opposite is true for Great Portland.

The question for investors is whether Great Portland’s share price already reflects this. Its discount to net asset value (NAV) would suggest it might have. However, it also has a lower dividend yield than Landsec and British Land, and with consensus forecasts predicting a drop in dividends in 2025 and 2026, investors need to ask whether Great Portland’s shares are trading at fair value, or not.

Another pertinent question Great Portland investors might like to ask themselves is whether Landsec and British Land’s smaller, nimbler counterpart, more focused on central London, particularly the West End, could actually be better placed in the current climate.

Great Portland Estates full-year results are due out on 23 May.

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Marks & Spencer

Marks & Spencer, the once great British retailer and now equally great British comeback story has staged a recovery nothing short of impressive under the leadership of Stuart Machin, who took the reins just under two years ago.

With its FTSE 100 position reinstated after a four-year hiatus and with three years of its five-year plan to lift market share, profits and operating margins, left to go, M&S is clearly back in business.

And it’s in fashion and food that it’s making the biggest strides. The latest analysis by data provider NIQ shows that M&S having previously been neck and neck with Waitrose, with an equal share of the UK grocery market, is now in the lead, and has seen sales rise 9.3% year-on-year in the 12 weeks to 20 April.

M&S has opened more of its popular food shops, going from 253 grocery sites six years ago to 319 now. It still has around 244 full-line stores, which it plans to cut to 180 by 2028. It has been closing the less profitable of these since 2017.

One fly in the ointment is its spat with Ocado. Ocado has threatened legal action over the withholding of a final performance-related payment agreed as part of their online joint venture.  Although the tie-up has undoubtedly helped M&S grow market share. Ocado saw sales rise 12% in the three months to 20 April, making M&S and Ocado two of the fastest-growing retailers in the UK.

There’s still work to be done. Digital, including data and IT, is an area where much of the reshaping is yet to come. M&S’s plans here are to enhance the app and double its usage to 5m customers within the next two years.

Marks & Spencer full-year results are due out on 22 May.

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Pets at Home

If there’s one thing that’s going to get pet owners’ hackles up, it’s over-inflated veterinary bills. No self-respecting pet owner wants anything less than the best medical care for their fur baby, but there’s no denying these pet owners are increasingly being left green around the gills when they’re landed with the bill.

Such is the issue that the UK competition watchdog has launched an investigation into the veterinary market.  The Competition and Markets Authority’s concern is that a decade of rapid consolidation has potentially left 16 million pet owners overpaying for medicines and prescriptions for their pets.

Almost 60% of veterinary practices are owned by a handful of large companies today. That compares to just 10% in 2013, according to CMA data.

The regulator has identified that collectively, six large operators, one of which is Pets at Home, have snapped up 1,500 of the UK’s 5,000 practices. As one of those under scrutiny, shareholders in Pets at Home have understandably become increasingly nervous about the potential outcome for the business.

Without a doubt, a CMA market investigation is a big risk for all the companies operating in the sector. Pets at Home has so far said it was “disappointed” by the CMA’s findings and that its vets had “clinical and operational freedom” to choose their own pricing and services.

Pets at Home asserts that while it is a national brand, its veterinary practices are led by individual vets who choose their own pricing as well as which services and products to offer.

For Pets at Home, the veterinary business is only one part of the picture. The broader group includes everything from food to accessories.

There is no denying that for Pets at Home the expansion of its veterinary services business has produced a veritable cash cow. Sales at the group’s veterinary business now exceed £10m a week.  A radical overhaul, that affects the competitiveness of its profitable veterinary services business, could be a real blow to its bottom line.

Pets at Home full-year results are due out on 29 May.

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Five-year share price performance table

Past performance is not a reliable indicator of future returns.

Source: FE, 1.5.19 to 1.5.24 Basis: Total returns in GBP. Excludes initial charge.