I have all kinds of different investments in my Stocks and Shares ISA, but they all have one thing in common. I’m expecting a good return from the underlying business over time.
Right now, B&M European Value Retail (LSE:BME) looks set to return over 12% of its current price to investors in the next year. So should I look to buy it for my ISA?
Dividends… and more dividends
Over the last 12 months, B&M has returned 30p per share to investors in the form of dividends. With the stock currently trading at £2.40, that implies a 12.5% dividend yield.
At that level, the company only needs to maintain its current distribution for shareholders to get their money back within eight years. It’s hard to find that anywhere else at the moment.
B&M’s dividend comes in two parts. The first is the regular distribution (which itself is split into two parts, paid in December and August) that accounts for around half of the overall dividend.
The firm has also fairly consistently paid a special dividend in addition to this. This is typically paid in February and accounts for the other half of the 12.5% yield.
Ongoing challenges
A 12.5% yield means investors arguably don’t need the company to grow much to get a good return. But they do need it to avoid going backwards and there are a couple of things to note on this front.
One is that this has proved challenging over the last few years. Sales growth has faltered and while a challenging environment for retailers is part of the reason, not all of it is the result of this.
Another is that the dividend has, in fact, been lowered recently. The 30p per share B&M returned over the last 12 months actually represents a 14% decline on the previous year.
Dividends are never guaranteed with any stock. But it’s definitely worth noting that the company’s recent difficulties have manifested themselves in the form of lower returns for shareholders.
Falling shares
The dividend might be down 14%, but the B&M share price has fallen 45% over the last year. As a result, the yield is now significantly higher than it was 12 months ago.
As a long-term investor, I don’t mind a falling share price. I’m not looking to sell my investments any time soon, so as long as the cash keeps coming from the business, I’m happy to hold on
It’s also worth noting that the firm’s distribution is well covered by its free cash flow. Over the last 12 months, the company has generated £556m and returned £300m to investors.
In other words, it should take more than slow growth for B&M to find itself in a position where it can’t maintain its dividend. And that’s an encouraging sign.
Should I buy B&M shares?
I think it’s hard to deny that B&M shares look cheap at the moment, but the recent sales results do concern me. And they’re reflective of a wider issue, which is that I’m not sure what sets the company apart from other retailers.
In my view, this is the most important thing when it comes to long-term investing. So until that becomes clearer, I don’t see myself buying the stock in my ISA.
