WH Smith's sales dip, but profits rise and shareholders get a 15% dividend hike.
I've never thought of WH Smith (LSE: SMWH) as a particularly exciting place to shop, but its shares have various attractions for value investors. In fact, I'm tempted to take the plunge myself.
Up goes the dividend
Let's have a look at the appeal of WH Smith, based on its interim results released on Thursday for the six months to 29 February. Despite the well-publicised troubles of the UK's retailers, WH Smith seems to be in a sweeter spot than most.
The FTSE 250 firm recorded half-year revenues of £665 million, down 3% on the £686 million for the six months to 28 February 2011. However, despite this drop in turnover, profit before tax rose by £2 million to £66 million.
As a result, diluted earnings per share leapt nearly 14% to 40p. This allowed WH Smith to hike its interim dividend by 1.1p to 8.3p, an increase of more than 15%.
Swanning along
Although high-street operating profit was flat at £47 million, WH Smith's travel division put in a robust performance, lifting operating profit by £2 million (8%) to £27 million. Impressively, the retailer also improved its gross margin by 1.3 percentage points, thus raising its profit per sale.
Kate Swann, WH Smith chief executive and the leading lady of Britain's high streets, remarked:
"We have delivered a good performance with profits increasing in the first half of the year. In Travel we have grown operating profit by 8% and have made further good progress in our international channel with 80 units either open or agreed. Our High Street business continues to deliver strong cash generation, with gross margin improvement and costs tightly controlled.
"Looking ahead, we expect the trading environment to be challenging, however we are a resilient business with a consistent record of both profit growth and cash generation and we have opportunities for growth in the UK and internationally."
Ticking all the right boxes
I'm one of those old-fashioned investors who believe that companies should be run for the benefit of their owners, rather than existing to enrich their boards of directors. In this respect, Kate Swann and her team are doing a great job in admittedly difficult trading conditions.
For example, WH Smith's dividend payout has climbed from £23 million in 2008-09 to £26 million in 2009-10 to £29 million in 2010-11. What's more, it is likely to be a few million more this year. In addition, WH Smith has taken advantage of its strong cash flow (£63 million in this half) to purchase £33 million of its own shares in buybacks since last August.
Furthermore, the company has a rock-solid balance sheet, reporting net cash of £53 million at the end of February. This net cash makes it a very rare beast among FTSE 350 firms, especially retailers. However, its closed final-salary scheme had an actuarial deficit of £113 million as at 31 March 2009, which WH Smith is reducing through contributions of £11 million a year until 2019.
Show me the value
As I write, WH Smith shares trade at 527.5p, down 19.5p (3.6%), which values the group at over £730 million. At this price, this household name trades on a forward price-to-earnings ratio of 9.2 and offers a generous dividend yield of 4.8%, covered a healthy 2.2 times.
With a single-digit rating, a high, well-covered and rising dividend, net cash and a strong management team, what's not to like? Thanks to these solid corporate characteristics, WH Smith will be around long after weaker rivals have gone to the wall.
Hence, its shares should prove attractive to value hunters and dividend seekers!
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