In a Which? poll, WH Smith (LSE: SMWH) has just been voted the UK’s worst high street retailer — for the second year running.
The survey, in which 7,700 people took part, examined value for money and general shopping experience. A couple of places behind WH Smith came Mike Ashley’s Sports Direct International.
But despite this low consumer rating, WH Smith has been doing pretty well as an investment, even in these tough high street times. The share price has risen 89% over the past five years, while its index, the FTSE 250, has managed only a 17% gain — and the FTSE 100 is up only 4.5%.
WH Smith has a a great track record of progressive dividends too. Though yields have been running at modest levels of between 2.6% and 3% in recent years (and are projected to remain at similar levels), in actual cash terms we’ve seen inflation-busting annual rises.
Big dividend gains
From the 35p per share paid in 2014, the WH Smith dividend climbed 55% in just four years to 2018, and analysts are predicting a further 15% over the next two years. This has been possible because the company has been growing its earnings ahead of inflation, and the dividends are more than twice covered.
Why the mismatch with the Which? survey? Since demerging its distribution business in 2006, into what has since become Connect Group, WH Smith has built up its portfolio of subsidiaries, and enjoys some strong barriers to entry in its railway station, airport, hospital and motorway service station outlets.
And as if to contrast the troubles facing Thomas Cook, WH Smith reported an 18% increase in travel revenue, with a 7% profits rise in its interim figures this year.
Modest debt, good margins, strong cash flow, and that strongly progressive dividend make WH Smith a buy for me.
Buy this one too?
Looking back at the third-worst in the Which? survey, would I buy Sports Direct shares as a consumer-contrarian buy too?
On first glance, the 65% share price slump over the past five years might suggest there’s a recovery bargain to be had. But it’s been accompanied by erratic and falling earnings. And we’re still looking at a forward P/E as far ahead as 2021 of a high 19 — and with no dividends to compensate for the share price performance.
Ashley has been good at buying up troubled older brands and turning them round in his Sports Direct stores, and some of them have turned into serious financial successes. But at the same time, he’s also taken previously highly esteemed brands and used them as labels for cheap junk.
Recovery?
He has also, famously, taken over the struggling House of Fraser and Evans Cycles, and failed in his bid to do the same at Debenhams, despite building up a large stake in the department store chain.
I can’t help wondering if Ashley’s strong desire to expand his empire by buying up struggling retailers is leading him to take his eye off his core business. And I’m not seeing much in the way of protective barriers at Sports Direct.
It has a simple ‘Who’s the cheapest?’ business model, and there’s some pretty strong competition out there — competition that customers appear to like better. It’s a no from me.
