I usually include high-yielding shares in my Stocks and Shares ISA. But there’s one — Frasers Group (LSE:FRAS) — that doesn’t pay any dividends.
That’s not because its loss-making. The retailer made a profit after tax of £501m in the 53 weeks to 30 April 2023.
Instead, the company prefers to retain its cash to “preserve financial flexibility” and seek “growth opportunities for the business“.
To encourage this, Frasers’ chief executive, Michael Murray, has an interesting remuneration package.
Like most FTSE 100 bosses, he’s entitled to a healthy annual salary (£1m) supplemented by share options. But Murray has waived his salary. And is focussing all his attention on achieving the target that will enable him to cash in his options.
And I can see why.
Sky high
If the company’s share price reaches £15 by October 2025, and remains there for 30 trading days, he will be awarded 6,711,409 shares. At £15 each, these would be worth £100.7m!
The stock currently changes hands for around £7.80. He therefore needs to double (approximately) the value of the company for his to become a multi-millionaire.
And Frasers has a good track record of growth.
Through a combination of organic expansion and a series of acquisitions of famous brands, the company’s share price has increased 150% since October 2018.
The clock is ticking
But time is running out.
Unless something dramatic happens soon, I can’t see the company adding over £3.5bn to its market cap within two years.
On 17 October 2023, it announced that it intended to buy SportSCheck, a German company, with annual turnover of €350m. But that’s equal to only 5% of Frasers’ 2023 sales.
Perhaps more significantly, it’s been buying stakes in a number of other retailers. It now owns 23.0% of ASOS and 15.1% of boohoo.
There’s speculation that it wants to buy both. But they won’t come cheap.
Their combined market cap is currently around £840m.
Both have struggled recently although they are now profitable once more. But their expected earnings are still small and are unlikely to make a huge difference to Frasers’ stock market valuation, if they are acquired.
The company currently trades on a price-to-earnings ratio of around seven. To add £3.5bn to its valuation, it therefore needs to find another £500m of profit.
The average of analysts’ expectations is for ASOS to make a profit before tax of £14m in its next financial year. And for boohoo to have EBITDA (earnings before interest, tax, depreciation, and amortisation) of £70m.
Other options
Frasers has recently bought shares in electrical retailers Currys and AO World, but these are also relatively small.
It also has a minor shareholding in Hugo Boss, which it reduced in January 2023. However, it retains a 25% put option over the company’s shares although this doesn’t contribute to its ownership percentage, or give it voting rights.
It’s therefore not clear to me how Murray will reach his £15 target.
But due to the enormous sum at stake, I’ve no doubt he’s going to give it his best shot.
I’m therefore happy to have Frasers in my ISA even though it doesn’t generate any income. But if its share price doesn’t reach £15 within two years, I’ll be looking to sell and find a high-yielding stock to replace it.
