Friday 4 January 2013

Portfolio (Partial) Sale: Smiths News (LSE:NWS)

'When to sell' is always a difficult decision. Unfortunately we are hard-wired to grab a profit and hold on to a loss - and I am guilty of that bias as much as anyone else.

However, I do try to control my animal urges a little with my 'sell rule', although I don't pretend that it is a definitive answer. Anyway, a portion of my NWS shares from my DIY Income Investor portfolio has gone back to Mr Market for a nice 50% profit.

As I have described in other posts, my 'sell rule' is an attempt not to sell too early. I try to wait for two conditions:
  • the share price has risen so that the capital gain is equivalent to at least 5 years' income (i.e. dividends or coupon)
  • the current yield is lower than the portfolio average (currently running at about 5.5%)

The logic (such as it is) is that I want my money to work hard generating income and if the above conditions are met I can effectively bank 5 years income (or more) and put the money straight back to work at a higher yield.

Over the holidays, one of my bundles of Smiths News shares (my then largest shareholding) hit a multiple of over 6 times annual income and its yield fell to 5.2 (not a bad yield but I can probably do better) - so I hit the 'sell' button.

But I'm still holding some NWS shares because it looks like a good recovery story. Smiths News was split off from the High Street’s WH Smiths in 2006 and focused on the newspaper and magazine distribution side of the business. It has since diversified in a number of different niche businesses and the overall business now includes:
  • Newspapers and magazines - the traditional core business (but where like-for-like sales are falling)
  • Physical and digital books, including acquisition of Bertram Books and latterly Dawson and Houtschild, with a focus on educational books
  • Educational and care products, including the recent acquisition of Hedgelane a distributor of education products
  • Media and marketing, including what might be a risky adventure into providing rail and airline in-journey entertainment
The Preliminary Results published in October show a company firing on all cylinders, with profit and cash all up substantially - and nearly a quarter of ‘proforma’ profits (i.e. estimated) from the diversified non-traditional activities. Gross margins and underlying sales have risen substantially in the books businesses. And profits have also risen in the News business despite a slight decline in revenue. Moreover, the company delivered £25m in cost savings, and a further £15m of cost savings are targeted over the next three years.
The full year dividend was increased by 8%, the sixth year that there has been an increase. Smiths News’ forecast dividend yield is 5.8%, which is covered a healthy 2.2 times by earnings and the forward P/E ratio is still only just over 7. On the ‘down’ side, debt has increased by 50% (to £100m - on turnover of £1.8 billion) but this has been primarily to fund the acquisitions, which seem to be cash- and profit-accretive.
For what it’s worth, Investor’s Chronicle had Smiths News as its income tip of the year for 2012 - and it has now doubled in price since the beginning of the year. Yet it is still one of the highest yielding ‘quality’ income shares (yielding around 5.7%). Yes, it is currently focused in a declining market sector: newspaper and magazine distribution. But the company has made cost savings and is using its cash to fund investment in new areas with a target of taking ‘non-news’ profits to half of the total by 2016.
So - still quite an attractive business to own a share of as a DIY Income Investor, so I continue to hold despite taking some profits.

[Sale price: £1.65]

A version of this blog appeared previously on Citiwire Money.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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