A good place to hide in tough times
South Africa’s major chains now attractive investments
THE SHARES OF almost all of South Africa’s retailers are trading at new record levels – while retail sales in real terms are now only starting to pick up again after falling for many months. Nor is it inflation – the great favourite of all retailers – that’s pushing share prices. In fact, the opposite is the case. Food inflation has for all practical purposes disappeared from their shelves. Nevertheless, the shares of the food retailers are currently far outclassing their much more cyclical peers, such as furniture and building requirements.
Yes, share prices are discounting the future – and the future doesn’t look bad at all. But the tables in which the forward dividend yields and price:earnings multiples of the various retailers are compared show much of the future fat is already built into their current share prices. In brief, the retailers are attractive investments. It’s just a pity we left it slightly too late.
The finance ministers of the world’s leading nations collectively patted themselves on the back last week on account of the increasing indications the world economy is recovering more rapidly than expected earlier. Nevertheless, it’s interesting to note the share price of Wal-Mart, the world’s largest retailer – currently at US$55 – is still more than 10% lower than at its peak in September 2008.
In SA, only Lewis and Foschini among our main retailers still have share prices significantly lower than their 2007 peaks. Nor is it any surprise both those shares are at the top of many analysts’ lists of recommendations of shares to buy now. Especially the peaceful Lewis, at a three-year forward dividend yield of 7,4% is very attractive.
JD Group is the one recognised retailer that still has a great deal to make up. Its shares are now trading at just more than R45, which is still less than half of the glorious R106/share of March 2007. More than just ordinary market forces led to the sharp fall in its share price. However, it looks as if its management is slowly bringing the wild horse under control again. Investors with a high-risk profile would also do well to look at this share.
The food retailers’ share index for the past two years shows stability and prosperity. It’s no wonder asset managers always single out this sector as a safe haven in times of uncertainty. In the past it was also often recommended as a safe parking place for widows’ and orphans’ money.
The four shares that dominate the index – Shoprite, Pick n Pay, Spar and Woolworths – are just as safe as always, but their dividend yields are currently too low for widows and orphans.
The new challenge for this sector is to get used to inflation again over the next year or two, especially probably very low food inflation. Pick n Pay was actually quite keen recently to point to the low increase in food prices as perhaps one of the reasons for it having done so very poorly, especially in the six months between August 2009 and February this year. The group only