It’s not easy being picky. I’ve just spent the morning looking at Mothercare and still can’t decide whether I like it or not. It’s either a speculative screaming bargain, or a value trap with a UK business which could suck cash out of the good part of the business (the high growth international bit).
After shoving the Mothercare paperwork to one side, my thoughts turned to beer… and then I noticed SABMiller’s recent report. Their string of good news made me smile and reminded me why I like to stick with ‘best of the best’ companies and leave the Mothercares of the world to those far more intelligent than I.
In case you don’t know, SABMiller is one of the world’s leading brewers, with over 200 brands, 75,000 employees and a listing in the FTSE 100.
A quick look at the results over the last ten years shows that it’s a monster compounding machine and the recession has done very little, if anything, to slow them down. If you flick through the results via your favourite info-portal you should be impressed.
But there’s more to investing than just saying “wow look at that growth”, so let’s get down and dirty with a systematic approach and a calculator, and use a few standards that Ben Graham himself thought of, and which are time tested and infinitely sensible.
Invest in a diversified group…
Of course this bit depends on what you’ve already got in your portfolio. In my case I don’t own any beer/wine companies but I do own Robert Wiseman Dairies which sells milk, but I can’t see any meaningful crossover between those two markets so that’s okay.
Geographic diversification can sometimes be a nice bonus so that the portfolio isn’t too affected by the problems of any one region. In this case, SABMiller are a global company selling beer mostly to North and South America, Europe and Africa, which helps tick that box.
Of large and prosperous business…
SABMiller is in the FTSE 100, so it’s huge. As for prosperous, there are various ways of measuring this but some of them could include the fact that it:
- hasn’t made a loss in ten years
- always pays a dividend
- has grown at something like 13% a year, VERY consistently for many years
- has returned over 24% a year on each pound retained within the company
That’s a record very few companies can match.
Which are conservatively financed…
With an interest cover typically around 6-7 times earnings it uses quite a lot of debt for an ‘average’ company. However, it is not an average company. Revenues, earnings and cash flow are all very stable and a strong and it operates in a defensive sector. This level of debt should pose little or no problem unless we all become tee-total overnight, which seems unlikely.
With a long history of continuous dividend payments…
It ticks this box as well, and on top of that there are no cuts to the dividend, only increases which have been in the 10-15% range for a long time. Very good.
The price paid should be reasonable in relation to the company’s long term average earnings
Ben Graham said various things about this in his career, but a very simple and sound approach was to not pay more than 20 times the earnings of the past 10 years. To pay more than 20 times the proven earnings power of the company was, in his opinion, to speculate that the company would have an endlessly glorious future ahead of it, and more importantly, that Mr Market would forever have a rosy view of the company and its future.
And this is where the investment case begins to unravel.
SABMiller is undoubtedly a fantastic company and will very likely have a great and glorious future, but the market is replete with examples of great companies that made investors nothing but losses because they overpaid (Vodafone is a favourite example of mine).
At 2,140p the company is priced at around 32 times the average earnings of the last decade. The current yield is also only 2.6%, providing scant downside protection should Mr Market change his mind.
With earnings of 116p it doesn’t seem out of the question that, given enough gloom, Mr Market could send the shares back down to 1,000p. Even if next year’s earnings turn out to be 130p (as per current estimates) we could still see the shares at 1,300p.
Great company, not so great price
I have a simple screen and sort system which I pretentiously call my Defensive Value Rank. It looks for companies that have a 10 year record of earnings and dividends and that are also currently profitable and paying a dividend. Amazingly enough, only about 130 companies out of the 1,000 or so companies listed on the main market get onto this list.
Of those 130, SABMiller comes in at number 93 because of that low yield and high price. In comparison, the FTSE 100 comes in at number 52, just above the halfway mark.
Sadly, SABMiller may be a great company but it isn’t a great investment at this price, in my opinion.
I’d rather put my money somewhere else. Of course, with a company this good I’ll be keeping my eye on the price and if it drops enough I’ll bite Mr Market’s arm off to get a piece.
Other opinions
What do the pros think? Investors Chronicle says the price is ‘high enough’. Morningstar have it around ‘fair value’ and the broker consensus from Sharescope is ‘strong hold’. So it looks like nobody has it as a screaming buy, but it’s definitely an ‘add to watch list’ company.
I did a little number-crunching on your behalf, using a nifty little proggie that I use. Over the last decade, I reckon the annualised gains in revues are 16.3%, operating profits 21.5%, adjusted EPS 15.6%, dividends 14.3%. Whichever way you slice it, that’s pretty good.
The debt situation doesn’t seem so bad. Interim net profits were 863m, and net debt is 4bn. z-score is 3.2, so looks OK from a debt POV.
I see its PER is 15.9, which is a little inconvenient, but not insane. There’s a lot of good quality shares out there at the moment trading at very reasonable prices, so maybe it’s a shade too pricey. But it’s still an interesting choice.
I think the only thing I’d disagree with you about is “not pay more than 20 times the earnings of the past 10 years.”. If you’re looking at a junk company, then fair enough. But SAB isn’t a pile of junk. A company that is able to consistently and reliably compound earnings at high rates is always going to look too expensive by that measure.
BTW, I’m looking at p182 of Intelligent Investor. He says a price no more than 15X earnings for the past three years. I love the old-style writing of Graham’s work. I wish I had the 1949 edition, I hear it’s got some interesting twists to it.
Hi Mark. I don’t use 20xPE10 as a hard rule, but as a general guideline there are very few companies that deserve a valuation much higher than that. Tesco sits at 18 times, AstraZeneca 14 times, Vodafone 15 times, so I don’t think you have to buy junk to get under 20 times. SABMiller is twice the price of those companies so it needs to be better than those companies and consistently so for many years to deserve that premium!
My favourite bed-time reading is Graham (is that too sad?). I adore his style and would use it if I could, but I’m sure I’d sound like a pompous idiot. I have the ’49 edition and prefer it as it’s ‘cleaner’ than the later editions where he kept adding stuff over time.
PS your favourite company PACE seems to be on 8 times PE10… bargain?
I think Buffett likes the ’49 edition the best, too. I have the ’73 edition. I really love the way the book feels and looks, and the old-fashioned way he writes. I also love the old-world names of the companies he writes about. I’ve heard a lot of grumblings about the latest version, as Zweig seems to have made a travesty of it. The should really reprint the 1949 edition. I’m sure it would be popular.
Ah, yes, Pace. And getting cheaper all the time. Bless.