The Investment Column: Tomkins should be applauded for this change of heart

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The Independent Online
Tomkins, the conglomerate that makes a bewildering array of products from Mr Kipling cakes to Smith & Wesson guns, is the last company you would call fashionable. In fact it has positively eschewed trendy ideas such as giving spare cash back to shareholders or demerging businesses. Instead, chairman Greg Hutchings was intent on making another large acquisition.

That was until yesterday when Tomkins stunned the market by announcing a radical change in strategy. It is going to spend pounds 100m buying back its own shares over the next few months. And more share buy-backs are on the cards.

Mr Hutching's explanation for the U-turn is far from convincing. He claims that the market is still in a bull run and acquisitions are just too expensive at the moment. But the market was in the middle of a bull run six months ago when a share buy-back was definitely ruled out.

More likely he has bowed to pressure from US investors, which now own a fifth of the shares and traditionally favour buy-backs. After all, the shares have underperformed the stock market by a third over the last few years.

Whatever the real reason for the change of heart, Tomkins should be applauded for its decision. Its cash pile has diluted earnings growth. In fact Tomkins' return on capital employed was just 5 per cent last year, against a cost of capital of around 10 per cent.

These raw figures hide the fact that most of its businesses are making a return in the mid-teens. And last year's pounds 870m acquisition of Gates, which makes fan belts and the like for car engines, has proved a cracking buy. It made an operating profit of pounds 48m in the second half of the year, and margins have risen sharply to more than 9 per cent. The recent pounds 372m of windscreen wiper manufacturer Stant looks another promising buy, and should produce strong synergies with Gates.

Of course Tomkins still has plenty of underperforming businesses.

Once again its US bicycle and lawnmower business produced a poor result, with profits down 17 per cent to pounds 29.7m. A flood of cheap Chinese imports and price-cutting from its main domestic competitor, Huffy, is to blame.

But at least Mr Hutchings is finally willing to shed some of the under- achievers.

Analysts reckon businesses with a turnover of around pounds 500m will be sold, raising perhaps pounds 400m to fund acquisitions and more share buy-backs.

Pre-tax profits for the year to May rose by a third to pounds 432m. Analysts forecast current year profits of around pounds 500m, putting the price ratio of shares on 12. Good value.

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