Widows and orphans stocks have largely disappeared from the SA investment landscape, decimated by mergers, acquisitions, exceptionally poor management decisions and long-term economic blight.
A classical quality of this stock category is the regular and reliable provision of a decent dividend, combined with a slow and steady rise in market value over the long term. They tend to be fairly boring stocks that are often overlooked by media hype.
The widows and orphans moniker is derived from these stocks being attractive destinations for retirees, often widows, or for estate planners and managers who manage trusts for orphans.
These shareholders are invariably small, unsophisticated investors who have neither the time nor the expertise to follow more exotic forms of investment.
The quintessential stock representing this category in SA used to be cement producer PPC. Until about a decade ago it was a member of the greater Barlow Rand group and provided reliable, regular earnings and dividend growth without shooting the lights out. It was deadly dull, but investors loved it. However, it then became victim to systematic destruction of its simple yet effective operating model.
Faced with increasing competition on its home turf, it embarked on an ill-conceived and exceptionally poorly executed expansion drive into the rest of Africa. Boardroom acrimony added to the toxic brew that finally enveloped the company. Over the past decade it has lost 98% of its value and is now trading at about 67c. No dividend has been paid since 2016 and a largely reconstituted board has been put in place to sort out the mess left by the previous regime. Even if PPC can be salvaged, it is highly unlikely it will ever regain its status as a reputable and sought-after widows and orphans stock.
Huge premium
Probably the best example of a widows and orphans stock was the late lamented SA Breweries. The exception that proves the rule, it was never boring. Back in the day it was effectively an industrial holding company with beer production at the centre.
And even when it embarked upon its global expansion drive in the late 1990s that culminated in it being bought out at a huge premium in 2016, it was still turning out huge value for its investors across the board. It was a unique company with a unique culture and we may never see its like again.
British American Tobacco fulfils many of the criteria for inclusion as a widows and orphans stock apart from its socially unacceptable products. Its share price is 125% higher than a decade ago and highly predictable cash flows are readily transformed into regular, reliable dividends.
Then there is Remgro. Besides a pandemic hiccup, dividends have been rising nicely for many years. Due to its wide diversification, it is unlikely to ever really outperform but ensures a degree of insulation against problems in any single company or industry. Boring stock, strong balance sheet. My caution is that it does not have appealing offshore revenue streams.
Regrettably, there is not much left in SA. For those wanting regular and reliable dividend payers, best look at the US, for example the large multinational pharmaceutical companies. Stay with strong balance sheets than can ride out protracted economic storms; a business model with a wide economic “moat”; and progressive dividend policies that allow for strong distribution growth over time.
Paul Theron of Vestact says there no longer really are stocks on our local exchange to pitch to widows and orphans, and the risks due to our currency and economic outlook are too high.
We both agree that individual investors — of all ages — are best advised to head offshore and buy something solid. He likes Visa or Amgen. And if you are stuck in a rand-denominated investment vehicle, consider an offshore index tracker of the S&P 500. “Sounds rather defeatist, but it is what it is,” he concedes.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.