Investors can cash in as cost of money goes into free-fall

Time of article published Jul 26, 2003

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As the threat of inflation metamorphoses into the spectre of deflation, the prices of all things everywhere fall, including interest rates - the cost of money.

In all economic scenarios there are ways to make money and the opportunities are there for those who nimbly seek them out.

With deflation lurking, the relative attractiveness of some shares receives a welcome double whammy. Their cost of capital falls and this has an immediate effect on the bottom line. This is especially true for capital intensive and highly geared companies.

Adding further to investor interest is the fact that dividend streams start to look very racy when compared with the yield on bonds, fixed deposits and money market accounts. The dividend yields on some quality stocks are moving towards the after-tax yields on bonds and in some cases have overtaken them. Under these conditions one should expect quite a substantial rerating of these shares. Investors are receiving the same income and an option on an increasing share price thrown into the bargain.

So what should you look for? Obviously the company must have a strong balance sheet and an established track record. This normally means increasing profitability every year. After you have checked balance sheets and income statements going back a few years, look at the dividend cover and dividend payments.

The dividend cover refers to the ratio of the profit made to what is paid out in dividends each year. If this is conservative, say 20 percent (that is, the dividend is covered five times), then the dividend is more likely to be increased and maintained in future.

An ideal candidate is a company with a conservative dividend payment history, but one that increases its dividend payments each year roughly in line with steadily increasing earnings per share.

Pick 'n Pay Stores is a classic example. Over the past five years earnings per share have grown at a compound rate of 22.3 percent and dividends at 25.4 percent. On top of this, it is most pleasing to note that over the past five years both earnings per share and dividends have increased each year uninterruptedly. Dividend cover over the same period has decreased from 1.6 times to 1.4 times, reflecting the slightly faster annual increase in dividend per share.

And the infamous "poisoner" does not seem to be upsetting the grocery cart; in fact many shoppers are giving Pick 'n Pay increased and sympathetic support - in some Johannesburg stores like for like sales are up by over 20 percent.

Pick 'n Pay is also planning to open over 100 new stores in the next 12 months. On top of this it appears the Australian operation could start adding meaningfully to results soon.

- For the record, the quote attributed to Will Rogers, the early Western star, at the end of last week's column was in fact made by Jim Rogers, the former partner of George Soros.

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