No Pain, No Gain: May the venerable Whitbread rise to the occasion
Saturday 26 July 2008
Time to add a little ballast to the No Pain, No Gain portfolio. Since brewer Scottish & Newcastle's enforced departure, it has lacked the heavyweight presence of a Footsie constituent. Indeed, it has only two fully listed shares – Mears and Rentokil Initial.
The obvious replacement would be another major brewer. But Scottish was the last of the breed. Incessant takeover activity has left Britain without a top player. True, Diageo owns Guinness, which is probably one of the best-known beer brands in the world. But the Johnnie Walker to Gordon's behemoth is mainly a wine and spirit purveyor. I would never be surprised if Guinness was floated as a separate company or sold if a tempting offer arrived.
Britain's two biggest brewers are now Greene King and Marston's. But they are not big enough for Footsie consideration. Although both seem keen to re-create the roles once played by the likes of the old Bass and, of course, Scottish, they do not yet enjoy national spreads. Even so, the shares of these so-called super-regionals are intriguing. I am tempted by Marston's mouth-watering yield. Still, for this round I should, for balance, buy a Footsie stock.
The portfolio has enjoyed cheerful rewards in the past from big brewers. Allied Domecq and Scottish produced rich pickings when they fell victims to takeover bids. And Bass, as Six Continents, produced a short-term gain before it was split into two – InterContinental Hotels and Mitchells & Butlers. Despite the more sobering climate, I remain a fan of the booze business.
My hope is that Whitbread, once a big brewer, will be a worthy successor to my brewing heritage. Around the turn of the century, it ended more than 250 years of beer production to concentrate on retailing. Then it unloaded 3,000 pubs. It has since dabbled in gyms, up-market hotels and various restaurant brands but is now largely concentrating on budget hotels, pub restaurants and the Costa Coffee chain – a combination that may not be recession-proof but is not too far away.
The last trading update was relatively encouraging with like-for-like sales up 7.1 per cent in the first 13 weeks of the current year. Premier Inn, its budget hotels chain, is clearly attracting trade from more traditional hotels, as its more affordable prices entice businessmen and holidaymakers. Its coffee shops are low-ticket outlets, and the Beefeater and Brewers Fayre pub restaurants, probably the most vulnerable of the three, do not eat up cash like some establishments do.
In its last financial year, Whitbread produced pre-tax profits of £135m against a £338m inflated by asset sales. Adjusted profits were £210m (£166.5m). Interim figures should appear in October.
In recent times it has been active in buying back its own shares. It has often paid top whack. The shares almost touched £20 last year; as I write they are 1,105p. Perhaps it should have kept its cash in the bank. Nevertheless, its balance sheet is strong, with gearing at 33 per cent, a comfortable figure in these cash-strapped days. Unless it indulges in a major acquisition, there is little danger of Whitbread having to endure the humiliation experienced by HBoS, which purchased its own shares at £10, only to launch a cash call at 275p.
I realise Whitbread could be regarded as a surprise choice. The credit crunch is, of course, a worry, but it is a solid, well-run group with a progressive dividend policy. On present form it is selling at around 13 times prospective earnings.
With the shares at 1,105p, many of the worries that are tormenting the stock market are already in the price. The dividend yield, around three per cent, is, compared with some blue chips, on the low side. For example, BT, unlikely I think to cut its dividend, yields about eight per cent – the sort of return once confined to shares with their future behind them. BT shares, if light years away from their dot.com peak, are certainly not in that category.
The arrival of Whitbread lifts the portfolio's strength to 13. I am a superstitious old soul and I am not happy resting on such an unlucky number. After all, negotiating the stock market without encountering too many disasters requires an element of luck. Consequently, another recruit should arrive shortly.
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