The stock market can be an unpleasant place. Let’s say, for example, that you own shares in HomeServe, the international home emergency insurance and repair business. For years they’ve been good to you by increasing the dividend from 3p to 10p over the last decade and in that time you’ve seen the share price move from 100p to 500p. Those are results worth shouting about. Throughout this time, Homeserve (LON:HSV) has been a relatively steady business, providing insurance and emergency repair services to homes across the UK, the USA, Spain and France and growth looked set to continue with further international expansion. On the face of it then, it seemed to have just what I’m looking for in a company, a consistent growth rate and a robust business.
And then, out of the blue, a statement at the end of October hits you with this:
“Over the past month, HomeServe has been undertaking a comprehensive review of its UK telephone sales operations and procedures including commissioning an independent report from Deloitte. This review showed that there were cases where its sales processes did not meet the Company’s required standards.
Following this review, the Company has therefore decided to suspend all telephone sales and marketing activity.”
That must have scared the life out of a lot of shareholders. In fact it did, because the share price then fell from close to 500p down to less than 250p. Bye bye half of your investment.
The company is now retraining staff and restarting their sales operations but it will incur one-off costs of around £10m and estimated on-going costs of around £10m per year to support the higher standards.
On top of that those renewing customers who slipped through the net while the sales force was shut down is estimated to cost the company £15m in sales in 2013. Analysts are much more gloomy though.
Looking back at past results, HomeServe seemed to be a decent business which, at the right price, may have been a good, defensive investment. Such is the nature of investing and these kinds of events can happen even to good companies; remember ‘New Coke’?
But was 500p the right price?
At that level the dividend yield was about 2.5% which is a little bit below average (the average of my short-list of about 150 companies…
