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Income Investor: a quality share to test my investment urges
Citywire's Income Investor columnist holds a high-yielding, top-performing share. But it would be inconsistent not to sell.
I’m in a bit of a dilemma over Smiths News (SNWS.L) shares and this is causing me to question my underlying investment urges.
Smiths News was split off from the High Street’s WH Smiths in 2006 and focused on the newspaper and magazine distribution side of the business. It has since diversified in a number of different niche businesses and the overall business now includes:
- Newspapers and magazines: the traditional core business (but where like-for-like sales are falling)
- Physical and digital books, including the acquisition of Bertram Books and latterly Dawson and Houtschild, with a focus on educational books
- Educational and care products, including the recent acquisition of Hedgelane, a distributor of education products
- Media and marketing, including what might be a risky adventure into providing rail and airline in-journey entertainment
The company's preliminary results statement published in October show a company firing on all cylinders, with profit and cash all up substantially – and nearly a quarter of ‘proforma’ profits (i.e. estimated) from the diversified non-traditional activities. Gross margins and underlying sales have risen substantially in the books businesses. And profits have also risen in the news business despite a slight decline in revenue.
Moreover, the company delivered £25 million in cost savings, and a further £15 million of cost savings are targeted over the next three years.
The full year dividend was increased by 8%, the sixth year that there has been an increase. Smiths News’ forecast dividend yield is 5.8%, which is covered a healthy 2.2 times by earnings. The forward P/E (price to earnings) ratio is still only just over 7.
On the ‘down’ side, debt has increased by 50% (to £100 million – on turnover of £1.8 billion) but this has been primarily to fund the acquisitions, which seem to be cash and profit accretive.
'Income tip of 2012'
For what it’s worth, Investor’s Chronicle had Smiths News as its income tip of the year for 2012 - and it has now doubled in price since the beginning of the year. Yet it is still one of the highest yielding ‘quality’ income shares (yielding around 5.7%).
Yes, it is currently focused in a declining market sector: newspaper and magazine distribution. But the company has made cost savings and is using its cash to fund investment in new areas with a target of taking ‘non-news’ profits to half of the total by 2016.
So – still quite an attractive business to own a share of as an Income Investor.
But my problem is this: I have two holdings, bought at different times. One is showing a near 40% capital growth and one is showing a slight capital loss.
I don’t often sell but I have a metric that suggests when to do this: I divide the capital gain by the annual income and if that gets beyond a factor of 5 (i.e. a gain of more than 5 years’ worth of income) and the yield is lower than my portfolio average (which is around 6%) I will think about selling and putting that money to better use. Well, for Smiths News that metric has hit 6 in the last few days, reinforcing the message that the market may be a bit exuberant. And, like most investors, I would be disappointed not to have sold on the market high.
So, for one of my holdings in Smiths News the message is a clear: HOLD. But for the other holding it is a potential SELL. Yet they are both the same security. What does this say about my investment approach? Inconsistent? Or is that an inevitable part of investing?
If you've enjoyed this article, why not visit DIY Income Investor's blog? The views in this article are the author's own, and do not constitute advice.
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by Gavin Lumsden on Dec 19, 2013 at 15:26