Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Christmas has come early for Thomas Cook Group Plc shareholders. The company has paid a dividend for the first time in five years. But Santa hasn't been too generous.

The travel agency is right to reward its investors. They have endured a torrid time, facing cash calls to recapitalize a business that was overburdened by debt.

At 0.5 pence per share, the proposed dividend equates to a pay-out of 7.7 million pounds ($9.5 million), not excessively covered by post-tax earnings of 9 million pounds. The dividend is a "milestone," according to Chief Executive Officer Peter Fankhauser. But in reality it’s little more than a token gesture.

Not Lounging About
Thomas Cook has cut its borrowings over the past six years
Source: 2011-2014: Bloomberg; 2015, 2016: company reports

Although net debt has undoubtedly come down, dropping to 129 million pounds at Sept. 30 from 868.7 million pounds in 2011, some analysts had been hoping for more progress. There's still 1 billion pounds of bonds falling due over the next five years. That includes a 300 million pound security due next year with a whopping 7.75 percent interest rate. About a third of this has already been repaid.

Coming Soon
Thomas Cook still has work to do to manage its debt coming due
Source: Bloomberg

The company's looking to cut its interest costs by restructuring its debt, shifting it to bank facilities from bonds. Over the past year, it's secured 150 million pounds of bank facilities, on top of the 800 million pounds already available. Drawings on these total 295 million pounds, but as this is being used to meet statutory requirements to protect travelers, they don't count toward gross debt.

Though they've done a good job so far, they're not out of the woods yet. Until they finish their debt restructuring plan they'll be short of the financial flexibility needed to cope with a challenging environment and increase the pay-out to shareholders.

Fankhauser says there hasn't been any noticeable impact from Brexit yet, and summer 2017 holidays from the U.K. are 20 percent sold, about the same amount as at the same period last year. Growth in trips to destinations such as Spain made up for a fall-off in flights to Turkey because of terrorism fears and a 10 million-pound loss at its Condor airline unit. 

No Holiday
Thomas Cook's shares deserve their discount on a forward P/E basis to rival TUI
Source: Bloomberg Intelligence

There may be tough times ahead. The twin pressures of slumping sterling, and the possibility of consumers' incomes being squeezed by inflation running ahead of wages, mean that holidays could be one of the first areas to suffer.

Shares soared more than 10 percent, as investors overlooked the deterioration in underlying earnings before interest and tax to focus on the the dividend decision. 

In light of the tricky conditions, Fankhauser described the dividend as "modest." And it should stay that way.

The yield is just 0.6 percent, dwarfed by about 4 percent for TUI AG. TUI's stronger balance sheet and more unique holiday offerings, such as its cruise business and RIU hotel chain, justify its higher valuation.

There's little in the immediate outlook to close the gap. But Thomas Cook's links with China's Fosun might be the unexpected gift in Santa's sack. Their joint venture could help to boost inbound tourism from China to the U.K., or even eventually lead to an increase in Fosun's interest well beyond its current 10 percent stake -- perhaps a source of future Christmas cheer.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net