Smiths News: Cash Cow Or Investment Dog?

5th Apr '23 by Mark Simpson

9 comments 2801 reads

In a recent article, I screened for stocks that are cheap on a free cash flow basis. Several companies stood out as worthy of a more detailed look. This week I am looking at one of them: Smiths News (LON:SNWS) . This Company was also one of Ed’s 2023 NAPS Portfolio stocks, so followers of that strategy will also be keen to understand the company further.

Summary

Smiths News has a geographic duopoly in newspaper distribution to newsagents. They operate primarily in the South of the UK, with Menzies as the leading newspaper distributor in the North.
This partial monopoly, together with long-term contracts, means the Company is able to pay out a hefty dividend, which is approaching a 9% yield at the current share price.
However, physical newspaper distribution is a declining business. The Company's attempts to diversify have been mixed. The purchase of Tuffnell's parcel distribution business for £113m was ultimately a failure. It was divested in 2020 for a mere £15m in deferred consideration.
New management has successfully focussed on the core business and small expansions such as the distribution of Carabao drinks to newsagents. However, these are unlikely to make up for the decline in the core business in the short term.
This makes the business a "melting ice cube". As such, the best valuation is via a Discounted Cash Flow, not via a price-earnings ratio or similar metrics.
A Discounted Cash Flow analysis shows that the company looks fully valued on its current revenue decline trajectory. However, the stock will still appeal to income investors who are willing to accept little to no capital gains over the long term in return for a 9% dividend yield. Or those who believe the revenue decline can be reversed.

Profile

Smiths News is a Main-Market listed distributor of mainly newspapers and magazines. It primarily operates in the South of England, where it effectively has a geographic monopoly. It started life as a demerger from WH Smiths in August 2006. In 2014 it rebranded itself as Connect Group, having purchased Tuffnells Parcels Express in late 2014 for more than £100m in an attempt to diversify away from its core declining business. However, the parcel delivery business, operating in a highly competitive industry, suffered several years of poor performance under the group's stewardship. Several good ideas, such as "Pass My Parcel", which allowed online shoppers to…

Unlock with Email

Unlock with Google

Already have an account?
Login here

tomomo

5th Apr '23

Very interesting -- though slightly depressing to a shareholder. Thank you.

peterg

Thanks, interesting.

I think there may be a bit more potential upside than you imply. They are reducing net debt at a very good rate. They could well have no net debt within a year /18 months at present rates. Which would allow an increase in dividend. If that happened, and they resisted the tempation to invest elsewhere, which given the Tufnell experience would not be likely to be seen positively, then the yield could grow even further. That would be likely to draw in new income investors, so some capital appreciation, at least short/medium term is quite possible.

Man of Steel

Thanks Mark - helpful analysis of the situation. This is a share I hold.

I have to admit that I don't much like the business given its rather gloomy prospects, but that dividend is so seductive, particularly in the current market environment. Whilst I don't hold out much hope that the business will find new sources of income, past experience has shown that the decline in this sort of large incumbent is often slower than expected. So, I hold, somewhat reluctantly, poised for a swift exit should the performance start to deteriorate.

Norfolk'n'Good

6th Apr '23

Smiths News (LON:SNWS)

Thank you Mark for a very thorough article on a long term favourite hold of mine.

I guess the attraction of this investment is the high levels of free cash flow generation that should lead to the elimination of all debt in around 18 months time. This in turn should not only allow for an increase in dividends but also improve eps with the significant savings in finance/interest costs.

Hopefully the subsequent improvement in both yield and eps will then be a catalyst for a share price re-rating around which time, failing any obvious new income stream(s), I will be making my exit. In the mean time, as Superman eloquently puts it below, the dividend payout is 'so seductive'

DigGold

7th Apr '23

Great article, not just the coverage of an interesting share but the description of the analysis and analytical process. Clear, educational and invaluable for considering other stocks too. Thank you.

Aislabie

It is interesting to consider Smiths (LON:SMIN) which is, as shown above, struggling to find relevance, alongside the exciting growth at Kitwave (LON:KITW) which must be serving a very similar customer base. I would have thought that a merger/takeover must in the minds of each. I hold neither but am very interested in Kitwave and would prefer them to be the survivor.

Epitychia

11th Apr '23

I used to spend a lot of time reading newspapers. Not so much these days. Not exactly sure why, perhaps don,t like the political agenda. Also i find as i know more these days and find a lot of articles very superficial and some are downright wrong. Have a feeling journalism has declined, perhaps because there is so much less money available in this area these days.

raggedtp

Very well researched, thank you, Mark, and your DCF analysis much appreciated (even if it did chime with my assumptions and targets!) Yup, holder at this level, who sold half when it briefly touched 55p. It's quite hard finding 30+ safe high-yield investments. I hold a spectrum of them, from Legal & General (LON:LGEN) to Gemfields (LON:GEM) , via Diversified Energy (LON:DEC) and NextEnergy Solar Fund (LON:NESF) , but other suggestions welcome!

Femi Odunsi

An insightful analysis. Thank you.

Smiths News: Cash cow or investment dog?

Summary

Profile

Unlock the rest of this article with a 14 day trial

About the Author

Mark Simpson

9 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...