Smart Investor: how has Whitbread performed?

Among all the business chatter that is banded about, there is probably only one maxim that I like to apply to investing: under promise and over deliver. Over the years it has served me well as I have rarely expected too much from my investments.

This not only means I am pleasantly surprised at least some of the time, but also that I am forced to be extremely patient when portfolio profits are sluggish, which helps me to keep animal emotions at bay.

This has proved to be extremely useful over the past year or so, as the stock market has struggled to tread water.

Looking back on Whitbread's performance

Looking back on an article I wrote on 22 July provides evidence of the above. The article was on FTSE 100-listed Whitbread (WTB.L), and I stated that the company ‘should be viewed as a relatively attractive investment’. However, I ended by saying ‘just don’t expect too much’. So, how has it performed over the past year or so? Was I being too cautious?

The simple answer to the first question is ‘very well’. The answer to the second question is ‘yes’!

When the article was written, Whitbread was trading at £15.74, with the FTSE 100 at the heady heights of 5,935. Since then, Whitbread has performed extremely well, and is now selling for £19.96 per share. This is a gain of 26.8% and, when dividends of 51.25p per share are added to this capital gain, the total return from Whitbread is 30%.

This compares very favourably to the FTSE 100, which has fallen to its current level of 5,475. This is a fall of 7.75%, but when a yield of 3.5% is added, this improves to a loss of 4.25%. Clearly, Whitbread has hugely outperformed its index.

Buy, sell or hold?

In terms of performance, Whitbread had a successful year to 1 March 2012. Net profit increased from £222 million in 2011 to £266 million in 2012. This gives a return on equity of 20.7% and, as I stated in the previous article, this is made all the more impressive when the company’s low level of financial gearing is taken into account. The company’s debt-to-equity ratio remains at just 42%, with interest cover still very strong.

As for an economic moat, this remains largely intact, with free cash flow and a dividend yield of 2.6% being a tad disappointing. As with last year, operating cash flow is ravaged by huge capital expenditure and, although dividends were increased by 15.1% versus last year, this still equates to a payout ratio of just 34%.

Moving on to value, this is where Whitbread again entices but does not prove to be exceptionally attractive: it does not scream value. A price-to-earnings ratio of 13.2 is not expensive (especially when the company’s viability and performance are taken into account), and a price-to-book ratio of 2.98 is higher than last year’s 2.38.

Therefore, I must come to a similar conclusion to last year. Whitbread should be viewed as a relatively attractive investment; just don’t expect too much. Of course under promising is easy – let’s hope it continues to over deliver.