I don’t know about your shares, but my portfolio was thumped during this month’s market sell-off.
The drubbing prompted me to consider whether I should remain invested in my racy growth stocks and contrarian recovery plays — or seek out some alternative opportunities instead.
My latest SharePad trawling has therefore centred on dividends — which for many of us are the gold standard of investing dependability.
I mean, employ the right directors at the right business, and shareholders can sit back, relax and enjoy consistent payout advances…
…regardless of what happens to the stock market, the economy and just about everything else!
All told, illustrious dividend companies should provide us with much more reliable returns during market ructions than a collection of more speculative shares.
Well, at least that is the theory!
The market’s most dependable dividends
In this SharePad search, I decided to pinpoint the market’s most dependable dividend payers — companies that have lifted their payout every year for at least the last ten years.
I also wanted their annualised dividend growth rate from the last ten years to be at least 5%.
And finally, I wanted to limit the search to companies that offered a forecast payout yield of 4% or more.
I reckoned the combination of an extended history of dividend growth alongside a respectable income yield would lead to some satisfactory names to investigate…
…in case of further market ructions!
Pinpointing PayPoint
SharePad returned only eight names that matched my three criteria:
PayPoint stood out because its forecast yield actually topped 5% and the business offered the bonus of operating with net cash.
Furthermore, PayPoint was a familiar name.
You see, years ago I used to manage a real-money ‘share tip’ portfolio for another financial website — and PayPoint was one of the holdings. In a minute, I will recap how that investment would look today.
But first, let’s double-check PayPoint’s dividend history.
The chart shows 13 consecutive dividend lifts
SharePad provides us with this lovely chart:
PayPoint has in fact lifted its dividend for 13 consecutive years following the group’s flotation back in 2004. Current broker forecasts suggest another three years of dividend lifts are in the pipeline, too.
Mind you, the rate of dividend growth appears to have slowed significantly of late.
SharePad’s Forecasts tab indicates future payouts may advance at just 2% a year:
However, switching to SharePad’s Dividends tab shows us the payment of several special dividends (in purple below/blue on screen):
So, perhaps these additional payouts explain why the ordinary dividend is not expected to increase that much — surplus cash is also being returned to shareholders through a series of extra payouts.
334 million bills paid with cash at local shops
Let’s dig deeper into PayPoint, starting with what the firm actually does:
The business was established during the 1990s to operate a network of payment terminals for corner shops and convenience chains.
The terminals handle cash payments for utility bills, TV licenses, mobile top-ups and the like — and PayPoint collects a small fee from each transaction.
I know what you are now thinking — who these days pays bills by cash at the local shop?
Well, last year PayPoint’s 28,000 UK terminals handled 334 million bills with a total value of £6.7 billion.
As such, a not-insignificant part of the population — who I dare say are not stock-market investors! — continue to utilise PayPoint’s payment services.
True, the use of cash is diminishing. PayPoint’s 2018 annual report admits:
“Cash payments relative to all other payment methods is in steady decline. In 2006, 62% of all payments were cash; in 2016 this reduced to 40% and by 2026, it is predicted this will fall to 21%.”
And yet that earlier dividend chart implies the business has been thriving.
From what I can tell, a combination of…
1) higher bills (which equates to higher commissions);
2) expansion into Romania (where cash usage is high), and;
3) development of other shop services (such as EPoS systems, card-reader payments and parcel deliveries)
…has all helped profits climb higher to fund those greater payouts:
Last year, some 30% of PayPoints’s net revenue was produced by services other than UK cash transactions for bill payments and mobile top-ups.
If only all companies could be so sensible
I have used SharePad’s ace spreadsheet facility to double-check PayPoint’s accounts. I simply selected ‘Export data’ from the Sharing tab…
…and I quickly made a few calculations for myself to judge how the company has performed.
In this case, I downloaded PayPoint’s cash flow statements. I then created two extra columns on the right, which total up the last five and ten years for each item:
The ‘change in working capital’ line caught my eye.
During the last five and ten years, PayPoint’s changes to stock, debtors and creditors have on aggregate generated a positive cash movement — that’s quite unusual, and favourable for shareholders.
(These movements basically mean the terminal service generates cash for PayPoint before the company’s own bills have to be settled.)
Elsewhere, I see aggregate capital expenditure is higher than the associated depreciation and amortisation charged to reported earnings.
However, the differences — £25m over five years and £34m over ten years — are not too worrying when the respective net cash from operations come to £254m and £416m.
(I also like how PayPoint has not been dependent on acquisitive growth to expand. True, the firm has spent £37m on acquisitions during the last ten years, but it has raised £36m from the sale of various businesses, too.)
I have totted up PayPoint’s dividends further down my spreadsheet:
It seems to me PayPoint has returned almost its entire free cash flow to shareholders via dividends. If only all companies could be so sensible!
Despite the generous cash handouts, PayPoint’s balance sheet has consistently carried lots of cash and little or no debt:
I should add that PayPoint’s reported cash balance includes money held on behalf of the firm’s clients:
So, the cash shown can’t all be earmarked for future dividends.
The boss has signalled special dividends until 2021
Let’s now turn to PayPoint’s directors, and discover exactly who has stewarded the magnificent dividend:
Dominic Taylor is the man in charge, and the 2018 annual report confirms he has been chief executive for 20 years. Such long-time loyalty is generally a good sign for investors.
I also like the fact Mr Taylor enjoys a worthwhile 3%/£19m shareholding:
Perhaps that personal investment has led to the exemplary dividend history. I mean, Mr Taylor received payouts (ordinary and special) totalling a very useful £1.8m for 2018.
Alas, I can’t say Mr Taylor is underpaid for his work…
….but at least he is one of the few chief execs who collects more in dividends than he does from his wages, bonuses and other benefits.
As such, I would like to think Mr Taylor would do everything possible to continue distributing the generous payouts…
…and I see PayPoint’s annual results released during May provided good evidence of his dividend agenda. The statement said:
“Our additional dividend programme of £25 million per annum continues until 2021 alongside our ordinary dividend policy”
So special dividends of approximately 36p per share are set for the next three years. That seems bullish to me.
Wonderful returns on equity and an apparent 44% turnover crash
Two features stand out from PayPoint’s Summary tab:
First, the wonderful returns on equity (ROE), capital employed (ROCE) and capital invested (CROCI).
The chart below shows PayPoint’s appealing ROE levels, and underlines how the company does not require large sums on the balance sheet to produce high earnings:
The other feature from the Summary tab is forecast turnover showing a 44% collapse.
So what is that all about?
Well, PayPoint calculates its own ‘net revenue’ figure and uses that — rather than ordinary revenue — to judge its top-line performance.
Using ‘net revenue’ looks fair to me. The following is extracted from PayPoint’s 2018 annual report:
“Net revenue is revenue less the cost of mobile top-ups (where PayPoint is principal), SIM cards and other costs incurred by PayPoint which are recharged to clients and merchants. These costs include retail agent commission, card payment merchant service charges and costs for the provision of call centres for the mobile phone business clients.
Net revenue reflects the benefit attributable to PayPoint’s performance eliminating pass-through costs and further assists with comparability of performance where PayPoint acts as a principal for some clients and as an agent for others.”
As such, broker estimates feeding into SharePad also use ‘net revenue’ instead of ordinary revenue, which therefore creates that peculiar 44% decline. In reality, forecast net revenue of £120m for 2019 is equal to that reported for 2018.
Total dividends of 450p would have paid back the initial investment
I mentioned earlier that, years ago, I used to manage a real-money ‘tip sheet’ portfolio for another financial website — and that PayPoint was one of the holdings.
I still remember the sceptical face on my editor when he first read my PayPoint recommendation — he too wondered whether anyone still paid their bills by cash at the corner shop.
Anyway, I now find it fascinating to look back at how the share price has performed since that day during February 2010. Here is the chart:
Not bad. But the share price tells only half of the story.
You see, while the price has since gained approximately 480p, faithful investors have also collected total dividends of 450p:
A 930p total return from an initial 370p share price seen eight years ago — equivalent to a 15% compound annual growth rate — appears very satisfactory to me.
Of course, I doubt PayPoint’s shares can deliver anything like that level of total return during the next eight years.
Nonetheless, the firm’s record does show how somewhat ordinary businesses that boast extraordinary dividends can become very handsome investments…
…assuming you can hold your nerve during any market sell-off!
Until next time, I wish you happy and profitable investing with SharePad.
Maynard Paton
Disclosure: Maynard does not own shares in PayPoint.
