I CONCLUDED yesterday’s column with two questions: is the investment in the Private Investor portfolio meeting its long-term core criterion and will it indeed be a high and growing income yielder?
The Private Investor portfolio’s core long-term criterion is to achieve a return of bottom-line earnings per share that exceeds the rate of inflation.
The portfolio bought its shares in October 2007 at a market price of R69,66c, a gross price of R71,08 per share. Its normalised headline earnings per share, the bottom line it uses as a gauge, were 570,3c in the financial year ended September 30 2007. In the financial year 2008, normalised headline earnings per share were 630,1c. On the share price of R71,08c, the earnings yield was, therefore, 8,9%, probably just about matching the inflation rate.
In the financial year 2009, normalised headline earnings per share were 499,5c. The portfolio’s return was, therefore, 7%, which did not meet the target inflation rate. There is comfort — more on this below — in the non- cash fair-value put option in its 40% investment in Nokia Siemens Networks. This boosted headline earnings per share to 651,6c, almost unchanged from last year.
The fact remains that, over two years, the portfolio’s investment in Reunert, has not met its core bottom-line earnings per share criterion.
It may, therefore, seem paradoxical, that the portfolio has not only held on to the shares, but that Jean and I have invested more shares in our new high dividend-yielding equity portfolio.
There is no paradox: on Reunert’s investment fundamentals, the company has the potential to achieve long-term annual compound growth of more than 15% in normalised earnings over the long term. This doesn’t mean this will happen. More and worse economic crises are possible. Reunert’s market may collapse. The company’s management could make serious mistakes. However, the market ratings on the current share price, noted in yesterday’s column, confirm that the market view is in line with mine.
The company’s management strength is one of its positive investment fundamentals. Over many years management has been proactive improving the return on assets managed in good times. In bad times — the past financial year has been a feature of poor time — its reactive management response has been swift and sound.
As was reported in Business Day’s Bottom Line yesterday, at year-end the company had a cash pile of R1,6bn at year end in a year in which operating profit was down R400m to R1,14bn from R1,57m the previous year. The sale in NSN is expected to inject cash of some R2,4bn next year . In what will probably be a buyers’ market this gives Reunert the opportunity to buy allied cash- strapped businesses; its cash resources are enviable.
It was also observed in Bottom Line, that Reunert could well decide to give much of the cash to Reunert’s shareholders via a special dividend. This would, of course, be a prize for both the Private Investor portfolio and the high-income portfolio.
I’m not counting on this prize — Reunert’s management know better than I do how to manage its assets. This is why we’re shareholders — still confident the company can meet our investment criteria.