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Smart Investor: my verdict on WH Smith
Boasting 1,100 shops, many of them in highly desirable locations, WH Smith has shown resilience during the downturn. Smart Investor gives his verdict on the shares.
FTSE 250-listed WH Smith (SMWH.L) is a household name, and the chances are that the vast majority of readers will have bought something from its shops at some point in their lives. The company was formed in 1792, when Henry Walton Smith and his wife Anna opened a small news shop in Little Grosvenor Street, London.
Since then, the company has passed through several generations of Smiths, acquired a number of other companies and, in 2006, it announced the demerger of its retail and news distribution businesses. This created two separately listed entities: WH Smith (formerly the retail business) and Smiths News (SNWS.L) (formerly WHSmith News).
Today, WH Smith operates more than 1,100 stores, mostly in the UK, comprising 586 travel outlets at airports, train stations, hospitals, workplaces and motorway service areas plus 611 high street stores. It employs 16,000 people and, with a market capitalisation of £782 million, is the 231st-biggest UK listed company.
WH Smith’s performance over the past five years may seem somewhat surprising given the challenging economic environment in which it has operated. Net profit has been steady (if unspectacular), ranging from £53 million in 2007 to £73 million in 2011.
This equates to an annualised rate of growth over the five-year period of 6.6% and, when an average return on equity (ROE) of 35.6% (and 46.8% last year) is taken into account, WH Smith seems to be performing remarkably well.
Furthermore, the company has no debt. As mentioned in the previous article on AMEC, this makes the ROE figure seem even more impressive, and shows that the company is highly profitable.
On the radar for income seekers
Meanwhile, a dividend yield of 3.74% is slightly above average and does not wholly rule out the company for income seekers. A payout ratio of 43.8% is fairly reasonable, with dividends per share having almost doubled since 2007. In addition, free cash flow is impressive and averages £75.6 million over the past five years, and average net profit hit £63.6 million over the same period.
In terms of an economic moat, the past five years highlight that WH Smith is a resolute business that is able to maintain impressive levels of profitability during challenging trading conditions. Much of its success can be attributed to its highly prized locations, where customers are not particularly ‘switched on’ in terms of value for money.
For instance, outlets at train stations, hospitals and airports are likely to be visited by people who require a product at that particular moment and for whom convenience is arguably more important than price. This allows WH Smith to increase its margins.
A tale of two retail divisions
However, although the travel part of the business may be fairly resilient, the high street division is less so. Its trading peaks around Christmas and focuses on the sale of books, newspapers and stationery. Such items are not only generic, but are subject to substantial competition on price, with consumers favouring the lower price option.
As such, the company has expanded online (via funkypigeon.co.uk) and attempted to sign various exclusive agreements with the likes of Kobo e-readers and the Richard and Judy Book Club.
With shares currently trading at £6.01, this equates to a moderate price-to-earnings (P/E) ratio of 11.7. This is fairly attractive when the quality of the company is taken into account, although understandably it does not scream value when the FTSE 100 is at 5,700. Meanwhile, the price-to-book (P/B) ratio is very high at 5.4. Clearly, this is one for the Buffetts among you and not the Grahams.
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