As the publisher of the Daily Mirror faces up to the mounting cost of phone hacking, city analysts are confident the bill will not be “terminal” – but if the number of claims spiral it could cost investors their dividend.
On Thursday, Trinity Mirror, publisher of the Daily Mirror, Sunday Mirror and The People, was ordered to pay £1.2m in compensation to eight phone-hacking victims in a case seen as a benchmark for future potential payouts.
The scale of the awards stunned the publisher which was immediately forced to more than double its compensation fund to £28m.
Less than a year ago, Trinity Mirror calculated it needed a pot of just £4m.
Alex DeGroote, an analyst at Peel Hunt, said that the £28m figure is “neat” in that it is a ceiling of what is financially comfortable for Trinity Mirror.
“Trinity Mirror generates £40m in free cash flow every year,” he said. “The dividend costs about £10m so they have a £30m surplus which neatly covers the latest provision figure. However, the guidance on costs has not been at all accurate. If this escalates further, forcing them to go to £50m for example, the dividend might start to look vulnerable.”
The publisher has fought hard to get back into financial shape since being hammered by the recession, the reward for investors was a first dividend pay out since 2008.
“Trinity Mirror is in good financial shape, it has been a hard-won road to get back to having a good balance sheet,” said DeGroote. “If they had to sacrifice the dividend [in the short term], they would get a kicking by shareholders.”
Trinity Mirror is considering seeking an appeal to challenge how the damages in the test case were calculated to try to reduce the average of £150,000 per damages payout and therefore its overall bill.
“The scale of the individual damages is significantly higher than expected,” said Citi analyst Thomas Singlehurst in a note.
Citi points out that Trinity Mirror could face anything from 70 to several hundred more potential claims, which it estimates could cost from £10.5m to £60m in damages and not including significant legal costs.
“In either case, the risk is not terminal,” said Singlehurst. “Trinity Mirror has now reached a point whereby it is net cash [has no debt]. But it is nevertheless an unhelpful overhang, especially as it may be many months, even years, before it is fully resolved”.
DeGroote points out that even if Trinity Mirror can continue to soak up damages claims using the £30m-per year it spins off in free cash, the payouts mean the publisher has less to invest in its operations.
Earlier this month, Trinity Mirror revealed that advertising revenues fell 14% in the first four months of the year.
“At the moment the [phone hacking] provision is neatly covered [financially] and so the share price reaction has been rational,” said DeGroote. “But what does it mean for their ability to invest? Their print advertising is down 14%, they clearly need to invest in the business. Anything that imperils their ability to invest in the business is clearly a bad thing.”
Trinity Mirror’s share price fell 4% on Thursday and a further 3.14% on Friday, as nervy investors digested the ramifications of the compensation payouts.
The publisher’s share price was up 1.3% in morning trading on Tuesday.
