First Group in Trouble - Weak Balance Sheet Unsustainable Dividend,

A profit warning at the end of last month has shattered the confidence of many investors. With lots of debt, a weak UK bus division and the prospect of losing some or all of its rail franchises, the market seems to have made its mind up: FirstGroup’s juicy dividend is not sustainable. FirstGroup’s main problem can be summed up in one word: debt. After taking on loads of debt by buying those American bus companies during 2007 and 2008, the company was left with a weak balance sheet. Things have not improved since. The company has not generated enough surplus cash flow to pay down debt to sensible levels. Unless FirstGroup can retain a large chunk of its current rail profits, a big dividend cut is probably on the cards. And this might be very hard to achieve. Two of its rail franchises – First Great Western and First Capital Connect – expire in 2013. Competition for these franchises is tough, with lots of foreign interest. It is unlikely that current profit levels can be maintained even if its franchises are retained. Given that a lot of FirstGroup’s problems seem to be self-inflicted, it raises the question whether another management team could do a better job. The company has some good assets that could see the company broken up and sold off. Read More>>>