Shares: Spar may be dull, but it's a stable staple investment
Business Live - Nov 14th 2011, 08:55
The results of the Spar Group for the year ended September 30 2011 were not exciting. Year-on-year, diluted headline earnings per share were just 3.3% higher at 522.8c from 506.3c. With the declaration of a final dividend of 235c, total dividends for the year were 377c, 4.1% higher than in the 2010 financial year.
With the prospect of a challenging environment for consumer spending, it is probable that the company may perform only modestly better in the 2012 financial year. Nevertheless, there is a strong argument that investing in the "staples" retailing sector via Spar could be a better investment than cash or near-cash investments.
Under hefty competitive price pressure, the company's management investment fundamentals have remained sound. This is confirmed by the company's return on assets managed.
Spar has no long-term debt. The company's receivables are largely due from franchisees. Its liabilities are mainly what it owes for the stock it holds and which it turns as quickly as it can.
Its operating assets are invested in stock, warehousing and distribution. It is expanding its own stores, but this operation is in its infancy and made a small loss in 2011. Franchising remains its core business.
The company's dividend policy is to distribute 70% of bottom-line earnings to shareholders, and, if there is a cash surplus, to buy back shares from this. At year-end, net bank overdrafts were R18.5-million compared with R445.9-million at the previous year-end.
The company's assets and cash are, therefore, healthy.
The share's price is around R98. So, based on diluted headline earnings per share of 522.8c, the market rates the share on a price-earnings ratio of 18.8, an earnings yield of 5.3% and a dividend yield of 3.9%.
This brings us back to share-versus-cash. Near-cash, say in a fixed one-year deposit, can yield around 5.2%. But this return is taxable, and assuming the investor already enjoys the tax-free interest exemption at the top marginal tax rate, the cash yield will be 3.1%.
The cash return will be crumpled by inflation. Spar's turnover and bottom-line earnings should counter the effect of inflation and, over time, shareholders can expect a higher earnings and dividend yield. If, in its 2012 financial year, Spar does not improve earnings, the share is comparatively more attractive.
All this does not imply Spar is the best of the staples retailers or even the best of retailers. However, on value, it has blue-chip flavour. I hold some Spar shares and also have shares in Pick n Pay, which have not been doing very well lately.
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