Why you should rather bank on Woolies
Retailer promises better standard of retirement living
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