Why you should rather bank on Woolies

Re­tailer prom­ises bet­ter stan­dard of re­tire­ment liv­ing

Finweek English Edition - - FRONT PAGE - VIC DE KLERK vicd@fin­media.com

AT ITS CUR­RENT price of 2900c, or­di­nary Wool­worths shares of­fer a bet­ter in­vest­ment op­por­tu­nity than Stan­dard Bank’s at 9600c. So, Vic, why are you com­par­ing ap­ples and pears? Af­ter all, one busi­ness is a lo­cal re­tailer and the other, in terms of mar­ket cap­i­tal­i­sa­tion, is South Africa’s big­gest bank.

The story goes a long way back. For many years in the pages of Finweek I sang the praises of Stan­dard Bank as a fine in­vest­ment and it was also one of the cor­ner­stones of my own port­fo­lio. The mo­ti­va­tion was sim­ple: Jaco Maree, the group’s CEO, was one of the first bankers who com­mit­ted him­self to an an­nual group profit growth rate of in­fla­tion plus 10 per­cent­age points. So if in­fla­tion was 5%/year we’d have profit growth of 15%/ year. That’s vir­tu­ally heaven on earth for some­one sav­ing se­ri­ously for his re­tire­ment. Any “guar­an­teed” growth that beats in­fla­tion by such a fat mar­gin is sim­ply es­sen­tial to any port­fo­lio.

But then the bank­ing sec­tor world­wide stum­bled over the sub-prime hur­dle and in SA the won­der­ful aura around the bank­ing sec­tor also evap­o­rated overnight. Bad debt rose sharply and the chief source of profit growth – new mort­gages to an in­sa­tiable res­i­den­tial prop­erty mar­ket – dis­ap­peared com­pletely. The hang­ers-on – the so-called mort­gage orig­i­na­tors, who for many years en­sured there was a steady de­mand for new loans – were never heard of again.

In­stead of the usual ex­cel­lent re­sults, Stan­dard Bank re­ported a loss in profit in both its 2009 and 2010 fi­nan­cial years. At its an­nual meet­ing in May this year, Jaco Maree re­ported on the first four months of the new fi­nan­cial year and said: “Nor­malised head­line earn­ings were slightly lower than for the same pe­riod last year” – that’s not in­fla­tion plus 10%.

Maree then put for­ward a whole slew of ex­cuses why the group’s busi­ness was bog­ging down al­most ev­ery­where. In fact, it’s start­ing to look as if the group is spe­cial­is­ing in dream­ing up ex­cuses rather than try­ing to at­tain the profit growth of in­fla­tion plus 10%, as promised ear­lier.

Of course, the banks did reach that tar­get at the time when the an­nual growth rate in credit ex­ten­sion to the pri­vate sec­tor was more than 20% and ev­ery­body still be­lieved prop­erty prices would con­tinue grow­ing for­ever. Now the SA Re­serve Bank is re­port­ing growth in credit ex­ten­sion of only around 5%/year, which is about the same as in­fla­tion. In this cli­mate it’s dif­fi­cult to be­lieve SA’s bank­ing sec­tor (yes, all of the Big Four made the same prom­ise) can still sus­tain growth of in­fla­tion plus 10%/year. With­out that kind of growth the shares no longer prom­ise a com­fort­able re­tire­ment.

But let’s get back to Wool­worths. In Fe­bru­ary this year I was again search­ing for op­por­tu­ni­ties for div­i­dend farm­ing on the JSE. And then Wool­worths caught my at­ten­tion. It had then just de­clared an in­terim div­i­dend of 50,5c/share and, on the ba­sis of my cal­cu­la­tions, I urged Finweek read­ers to buy the share im­me­di­ately at the then price of 2650c, on the ba­sis of the prospect in­vestors would earn div­i­dends of at least 180c/share – or 7% – over the next 13 months. That’s bet­ter than a de­posit at a

bank and there was also a pos­si­bil­ity of the group’s share price ris­ing over that pe­riod.

A good cap­i­tal profit plus good div­i­dends were what could be ex­pected. In the end, the in­crease in Wool­lies’ share price ex­ceeded all ex­pec­ta­tions and it’s now trad­ing at 2950c/share, while the 50,5c div­i­dend is also in the bank.

You don’t come across that kind of good for­tune of­ten on the JSE. So I went in and dug a lit­tle deeper into Wool­worths’ busi­ness. Re­cently, I even bought some of their nicely pre­pared food. (That’s quite a move up­ward for some­one who nor­mally pa­tro­n­ised the R5 Stores in the past and still drinks wine from a box.)

Its lat­est set of fi­nan­cial re­sults and the prospects for Wool­worths are also a plea­sure to read. For the fi­nan­cial years to June 2009 and June 2010 the group chalked up profit growth of 13,8% and 25,8% re­spec­tively. That’s quite a change from the two profit de­clines re­ported by Stan­dard over the same two years.

Af­ter Wool­worths suc­ceeded in achiev­ing good growth fig­ures of 9,8% in turnover and 22% in profit for the six months to 31 De­cem­ber 2010, CEO Ian Moir pre­dicted sim­i­lar in­creases for its full fi­nan­cial year to 30 June 2011. Its fi­nan­cial year has just ended and Wool­worths will soon re­port on it and, hope­fully, also de­clare a fi­nal div­i­dend for the year of 80c/share. That’s some­thing those in­vestors who took my ad­vice in Fe­bru­ary and bought the shares at 2650c can look for­ward to. For those who didn’t, it’s still not too late – do so now be­fore its new re­sults are de­clared.

But let’s get back to the ap­ples and pears. Two weeks ago I wrote about my “non-guar­an­teed” re­tire­ment port­fo­lio in

Finweek. Al­most 20% of my in­vest­ment was in Wool­worths. No way, my col­league Bruce White­field said. Stan­dard Bank is a far bet­ter in­vest­ment than Wool­worths. And he also warned I wouldn’t be able to buy much at Wool­worths with that lit­tle 50,5c/share div­i­dend. Thanks for the ad­vice, Bruce, but the graph of Wool­worths’ share price ver­sus Stan­dard’s shows why I’m still quite happy with my in­vest­ment that may prom­ise a bet­ter stan­dard of liv­ing later on.

IAN MOIR An­other good div­i­dend to be de­clared soon

JACO MAREE They are start­ing to make a busi­ness of ex­cuses

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