Quindell PLC - frustrating, but stay with it!

Good afternoon,


Quindell PLC is in doubt one of the more frustrating shares that I've traded and invested in. I used to trade the company reasonably actively, but now I've moved it over to my long term pension portfolio (disclaimer - I own shares in the company). Regardless of how annoying the longs may find it, I still believe that it's definitely worth sticking with.


Quindell winds people up (shorts and longs) for any number of reasons (I am going to get to the good part):


1. Quindell is a religion:


- I've met very few people who trade or invest on AIM for a living who don't have a very strong opinion on Quindell. This is understandable when you consider that some will have been in Quindell since the low levels of 3p and consequently will have effectively watched their stock market baby grow up and get their degree from Oxford, while others will have gotten in a little late to the party at 30-40p and be highly frustrated with their losses.


- Then you have the shorters, who will use any tactic they can to push the price lower and they will almost always succeed with this practice int he short and medium term, because people tend to act brashly in response to fear - hence why bear markets will almost always last a lot longer than people expect them to.


2. Quindell is still volatile regardless of consolidation:


- For those of you who've read my article entitled: Quindell PLC Post Consolidation - 

http://themaskedaimtrader.blogspot.co.uk/2014/06/quindell-plc-post-consolidation.html 

- you may be able to appreciate that there's a certain amount of irony in me stating this, as I'm almost directly contradicting myself.


- In theory, post consolidation we should have seen reduced volatility, however, in reality it's done little to actually improve the situation hugely (although I do think it is still better than it previously was). This leads me to my second bugbear.


3. Quindell is under significant intra-daily support and resistance line bashing by algorithmic trading:


- I'm normally not the type to jump onboard the  "this stock is being manipulated" bus, but what I would say is that having analysed the trades intra-daily, you can see a clear pattern of sells by automated systems, when key support or resistance levels are reached, thus causing further volatility.


- This increased volatility (or not decreased volatility) by automated trades is as a result of each price tick being of a lower relative percentage compared to pre-consolidation meaning that support and resistance levels are not as strong as they once were pre-consolidation. In other words, it's like shooting a bullet through hundreds of pieces of paper rather than a few pieces of corrugated card.


Why should you stay with Quindell then?


In my opinion there's pretty much only one thing we need to know and a load of others that help us to pacify our worries (see the trading update out on the 14th of July):


The dividend cover for the first year of dividend payments (2013) was 25.35, on a total dividend of 0.1p per share.


While this is a pretty simple number to look at, it tells us a few very important things and effectively asks the question "is this dividend yield sustainable?":


1. A dividend cover of 2 or more is seen as pretty good.


- With a dividend cover of over 25x, for an equal dividend to be released the answer is certainly yes, that yield is sustainable, but this point actually gets better, because it means that if the Quindell board of directors were to double dividend payout, you would still have a cover of 12.675 and if they quadrupled it you would have a cover of 6.3375.


2. Now, based on the trading update we saw on the 14th July I think we can take out the following points:

 - Adjusted EPS of circa 30 pence up 82% (H1 2013:  16.5 pence)

 - Basic EPS, EBITDA and Profit Before Tax are all expected to be ahead of their respective adjusted numbers.

- This means that we can probably assume an earnings per share figure for the year end of around 70p, which is pretty good for a company with a share price of around 190p. 

- However, we can turn the dividend cover on its head and turn it into a payout ratio (EPS/DPS), which gives us a number for 2013 of around 4% - which is tiny!

- This means that if we factor in a very high dividend cover and a very low payout rate there's a lot of potential movement upwards in terms of future dividend yield.

- Now, I'm not going to put a number on what I think we can expect to yield from Quindell with the next dividend, but it looks like we could expect strong dividend growth for the future and when we combine this with the current PE ratio of 6.7 Quindell continues to read as an exceptionally good book.

Good luck traders,

The Masked AIM Trader