Share the love … buy your mother stocks that will grow steadily. Illustration: Simon BoschTricky things, Christmas presents, especially for your mum. How many facials and cookbooks does she need? And why punish her for your lack of creativity?
This year, do something different. Buy your mum something that will last and grow over the years. Then, when she’s ready, she can sell it and do what she wants with the proceeds.
Shares are a great Christmas present. Trouble is, there aren’t many bargains in Australia right now. Intelligent Investor’s Buy list sported 34 companies just more than a year ago. Now it features 14.
But, like many people doing their Christmas shopping on overseas websites, you’ll find bargains in Europe and the US. And one or two safe bets here.
So here’s the gift idea: make use of our strong currency and buy your mum a cheap overseas stock. Failing that, a reasonably priced local retailer will make a great stocking filler.
Now, you don’t want your mum worrying. Steer clear of any of those dodgy resources and technology stocks. Buy her enduring franchises that will grow steadily and pay her a decent dividend.
Woolworths is a good example. While Coles’s revival is getting all the media attention, Woolies remains the superior business, with far higher margins.
Metcash is the company losing in the battle between these two giants. Stick with the best: Woolies.
On a forecast price-earnings ratio of 17, it isn’t especially cheap but the fully franked dividend yield of 4.3 per cent will come in handy.
If mum is a little more adventurous, how about its British equivalent, Tesco? Tesco, the company where Woolies gets most of its great ideas, trades on a price-earnings ratio of just 10. It also boasts a 4.5 per cent dividend yield.
Ah, you say, mum might be OK with a local stock, but an international retailer? Too risky.
So here’s your argument, to be gently presented over a few wines and a bit of turkey.
Tesco is now the world’s fourth-largest retailer and dominates British grocery sales. Its Clubcard loyalty scheme and stunningly successful move into private label (40 per cent of its products are now Tesco-branded) have boosted its British market share from 10 per cent in 1990 to 31 per cent today.
The group’s operating margin of 5.8 per cent is well above its British and international peers, and 30 per cent of its operating profit comes from an international operation.
No wonder, you explain, that earnings per share have risen at an average annualised rate of 11 per cent in the past decade.
If she’s still not happy, you have two aces up your sleeve.
First, tell her Tesco is, in fact, a massive property portfolio with a retailer attached. The property is on the books at £22 billion ($33.8 billion), but management estimates it has a market value of £37 billion. The company’s net debt of £6.8 billion pales into insignificance in this context.
Tesco’s market capitalisation is about the price of its property portfolio. Tell mum she’s getting the supermarket business free.
Second – and this will be fun – tell her she bought in cheaper than Warren Buffett.
After the company announced a profit downgrade in January, Buffett increased his stake to more than 5 per cent of the business, paying a price that’s potentially a few percentage points more than you paid just before Christmas.
How good is that? She got in at a price cheaper than the world’s greatest investor. (Yes, you paid for it, but still.) If the only words your mum hears from your pitch are ”profit downgrade”, you’ll need to explain why Tesco is so cheap. You’ll need to admit this is a textbook case of a high-quality business going through tough times – that’s why it’s cheap.
But Buffett, like you, believes these problems are temporary.
The company is also a good hedge against inflation, which might be important if Britain resumes quantitative easing.
And, with the Australian dollar strong against the pound, Tesco offers useful currency diversification should the dollar eventually weaken.
If Tesco turns things around in a few years, your mum can sit on the dividends or cash in a little of her stake and take a trip to Britain to inspect her investment.
That’s got to be better than another facial, hasn’t it?
This article contains general investment advice only (under AFSL 282288). Nathan Bell is the research director at Intelligent Investor, intelligentinvestor上海夜网m.au.
The original release of this article first appeared on the website of Shanghai Night Net.