Qualiport

The Qualiport gets an unwanted dividend.

On Monday morning, as announced in last Friday's buy report, we bought 722 shares in Marks & Spencer at 5,535p each. Add to that (£3,996.27) stamp duty and commission of £55.97, and that gives us a total new cash injection to the Qualiport of £4,052.24. Of course, the additional money we are inputting has no effect on the overall returns to date of the Qualiport. If and when the share price of Marks & Spencer goes up (we hope that's a "when" and not an "if"), the incremental profit will show up in the portfolio's returns.

Luckily for us, the share price of M&S has only gone up since we bought the shares. I say "luckily" because over such a short period of time, any share price appreciation or otherwise is purely down to just that. In contrast, over a long period of time, measuring many years, we'd like to think luck has got less to do with an appreciating investment. We'll see.

As you can see from the Qualiport numbers, since inception in December 1997, the portfolio has risen by about 47%, almost entirely due to the appreciation of Rentokil Initial. This may look odd, especially given that our other two investments have hardly moved since purchase. But, it is perfectly correct.

We didn't start this portfolio with some imaginary amount of money and start investing it over time. This is a real money portfolio, and like any other investors we'll be cheering on the success of our companies. We didn't have £20,000 or £50,000 ready to splash into the stock market in December last year. About £4,000 was as much as we could muster. If we had of gone down the imaginary route, the returns would have looked very much different. Here's an example, starting with say £50,000.

Day 1

Market value of shares..... £4,000
Total Cash......................£46,000
Total...............................£50,000

Day 120

Market value of shares.....£6,000
Total Cash....................£46,000
Total.............................£52,000

In this example, we only had 8% of our portfolio invested in the market. Although that amount appreciated by 50%, it made relatively little difference to the overall value of the portfolio. If, instead, we had of invested the full £50,000 into our one share, our total return would have been up by 50%.

From day 1 until we bought our second share, the Qualiport had all of its money invested in just one share -- Rentokil Initial. Our returns were 100% entirely dependent on the performance of that one share. If it had all gone pear shaped, we would have been sitting on a big loss in percentage terms for the Qualiport.

If you are starting a portfolio from scratch, like we were, it is likely that you will use a similar investment technique to the one used here. It may appear risky, as initially all your eggs are in one basket. However, you should be intending to invest in a well-diversified group of shares over a period of time that will ultimately give you a solid base on which to build. A short-term gain or loss when 100% of your portfolio is invested in one share, whilst potentially large in percentage terms, will ultimately be small in monetary terms. We plan to keep inputting new money into the portfolio over time, hoping to benefit from the full effects of time and compounding growth -- the friends of all stock market investors.

Whilst we're on the accounting for the Qualiport, on Tuesday we received our first dividend cheque for our holding in Rentokil Initial -- the princely sum of £33.96. This has been added to our portfolio's cash balances.

Oh what to do with the £33.96 from Rentokil? On our original total investment in the company of £4041, this is a paltry return of 0.84%. I used to think receiving dividend cheques was great, but now I'm not as excited. Once I decide to invest an amount in the stock market, I know that I should not expect to touch that money again for at least 5 years. I'm not investing it in the market so that I can receive a regular income via dividends. If I wanted or needed to go down that route I would consider other types of investments, such as government bonds, the building society or guaranteed high yielding shares (if such a thing exists). So, if I don't need any income from my investments on which to live, surely the company would be better off retaining all earnings in order to fund future expansion. If you think about it, it is a slightly ludicrous situation whereby Rentokil's net debt is £410m and yet they are paying out a total of £87m in dividends in respect of the 1997 financial year. The company would be better off if they sent the money to their bank manager than giving it to me.

The fact that Rentokil does pay a dividend when it is in debt is no real reflection on the management of the company. In the UK, it is customary and expected that all profitable companies pay their shareholders a dividend. This is historical, and is mainly done to please the institutional investors -- the Wise. In the past, pension funds have been able to claim back the 25% tax credit, hence it was relatively tax efficient for them to get regular income in the form of company dividends. However, for the individual investor, dividends are a very tax inefficient way of receiving income.

With the abolition of the tax credit for pension funds, now is the time for companies to start cutting back on their dividend payout ratios. In fact, at the Fool, we encourage all our companies not to pay us a dividend. We don't want £33.96 sitting in a bank earning 1% interest -- we'd much rather our companies reinvested that money back into each of their businesses at the much higher rates of return they can generate. Only when they run out of ideas to expand the business will we want our money back in the form of dividends. If and when that scenario happens, hopefully we'll already have sold our shares in the company as we don't particularly want to be invested in a company that hasn't got any decent expansion ideas. This is definitely not the case now with Rentokil Initial, EMAP or Marks & Spencer.

The Foolish campaign has begun -- "No More Dividends."

The Next Step

We are still scouring the country for potential Qualiport companies to join the motley three. Here's what we are looking for…

• A company with a strong brand name and a competitive advantage.
• A company with high, and ideally increasing, profit margins.
• A company with minimal working capital requirements.
• A company which is a strong cash generator.
• A company which has a high return on equity.
• A company which has a proven past growth record.
• A company which has identifiable future growth prospects.
• A company which is attractively valued.

Should be a doddle. Please post all your suggestions to the Qualiport message board. See you Friday.

Bruce Jackson (TMF Googly)

Qualiport Numbers

Today's Numbers                   Date            13/05/98


          Change     Bid
          pence       £

RTO        0.03      3.73
EMAP      -0.08     12.36
MKS        0.08      5.66         


Rec'd        #     Stock      Buy      Now    % Change   £ Change

19/12/97   1565  Rentokil     2.55     3.73     46.3%       1.18
17/04/98    337  EMAP     11.85    12.36   4.3%       0.51
11/05/98    722  M & S        5.535    5.66      2.3%       0.125


19/12/97   1565 Rentokil  4,040.63  5,837.45 44.5% 1,796.82
17/04/98    337 EMAP   4,043.37  4,165.32    3.0%      121.95
11/05/98    722  M & S     4,052.24  4,086.52    0.8%       34.28

Cash                                    33.96

Total                               14,123.25


                Day    Month    Year    History

Qualiport       0.6%   -0.4%    45.2%    48.4%
FTSE 100        0.3%    0.8%    16.3%    19.0%
FTSE All Share  0.2%    1.4%    17.3%    19.7%