A Rare Retailer With Net Cash

Published in Company Comment on 20 April 2012

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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4spiel 20 Apr 2012 , 12:18pm

I see a lot of readers in the shops and too few buyers

batholemew 20 Apr 2012 , 1:25pm

I had a look at WHS about a month ago, I like the way they have been able to consistently been able to buy back shares and pay dividends.
However I am slightly concerned by the decrease in net assets over time, their tangible assets and inventory levels having fallen over the last five years despite quite a few openings. Can anyone explain this or is it a potential sign of under investment in their current stores that could catch up with them tesco style at a latter date?


theRealGrinch 20 Apr 2012 , 2:51pm

I dont like the off balance sheet pensions liability in the notes.

CunningCliff 20 Apr 2012 , 2:52pm

Since 2007, WH Smith has returned £377 million in cash to shareholders in dividends and shares buybacks. That's more than half of its current market cap of £730 million!


CunningCliff 20 Apr 2012 , 2:53pm

shares buybacks = share buybacks

Soicowboy 20 Apr 2012 , 3:06pm

Wha'ts not to like?

As with all retailers, you should check out off-balance sheet liabilities in the form of operating leases.

From the FY results:

'The Group's stores are held mainly under operating leases that are not capitalised and therefore are not included as debt for accounting purposes.'

'The business has an annual minimum net rental commitment of £166m '.

Should you choose to capitalise this onto the balance sheet then it is not quite so pretty.

andrew97d 20 Apr 2012 , 4:47pm

The own a lot of valuable freehold sites and historically have almost exclusive rights to many travel locations.

CunningCliff 20 Apr 2012 , 6:55pm

Nice observation, soicowboy.

Then again, WHS clearly has the operating income to meet these lease rentals with a high degree of comfort. That's more than can be said for many weaker retailers and those that have already crashed. More retail collapses to come? Definitely, IMHO.


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