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P/E - Personal rules + valuation - Printable Version

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P/E - Personal rules + valuation - DividendDragon - 03-28-2015

Hi everyone,

I have a dilema! Currently I have a set of 'investment rules' that I stick to which are focused upon stock valuation and the dividend.

For example to give a brief overview:

P/E below or at 10 year average
P/E below around the 20mark (this varies depending on stock + sector e.t.c)
General uptrend in EPS
A constant increase in dividends.
A payout ratio below 65%

I have found these set of rules have worked very well for my current investments of well established companies such as

MCD
MSFT
XOM

e.t.c

BUT I've been looking at ABF.Plc (Associated British Foods) the owner of Primark.

It has a very large P/E of around 30 but shows signs of rapid growth, low debt (consistently paid down since 2011), a 10% dividend growth rate (5year) and a payout ratio of around 45% (set to decline to only 42.5% next year and then 32% if analysts are correct)

Their product isn't yet saturated with the Primark brand expanding rapidly over Europe and making an entrance into the US. The current European ventures have proved very successful.

The stock has been hit hard lately by the struggle of the Euro and the current Greek situation putting the Eurozone on edge.

Given my investment timescale of around 30-40years is this something I should be taking a risk on? I feel comfortable that the company can continue to expand.

Anyone here 'brake' their investment rules on certain stocks?
Anyone have an opinion on ABF and high p/e high growth stocks?

Any help would be greatly appreciated.

Lewys

RE: P/E - Personal rules + valuation - ChadR - 03-28-2015

For a growth stock that pays a nice dividend, I will break my P/E rule of under 20. Within reason. I'll go up to 25 and 30 on a rare occasion. Much higher than that and you're paying for the rosy future and the future might not be so rosy. Visa and AMex fall into this category for me. Waiting for a dip before I buy them. I've missed out on some impressive gains, but I'm too conservative to chase the high flyers.

RE: P/E - Personal rules + valuation - Dividend Watcher - 03-28-2015

I think your guidelines are pretty good but I'd look at more factors.
  • Debt/Equity or Debt/Total Capital - It may be higher than seems safe but is normal for the debt loads for this company in the past and for its peers. For example, utilities in the US have a high debt load but that is normal for this capital-intensive industry and as long as it's in-line with its peers I'm OK with that.
  • Current Ratio (Current Assets/Current Liabilities) - Again, is it normal for the company and its peers? I personally like it above 1.5 but there are many industries where it is consistently below that. For example, General Mills' (GIS) current ratio is around 0.8 yet it has been that way for over a decade and most of its peers have similar records.
  • How long has the company been in business? Is this an upstart with a P/E of 30 (eek) or have they been through several recessions that have tested management's abilities.
  • Do peers have similar stats? Do they all have high P/Es and similar growth rates or is there some 'story' that has elevated ABF's expectations.
  • Is their some new product line that is promising to bring big revenue and earnings increases that will materially affect the bottom line? Peter Lynch in One Up On Wall Street talks about Hanes bringing the Leggs panty hose to market having a big affect on total sales and earnings. If P&G (or someone else) had done the same, it would have barely moved the needle. Secondly, if so, are many people you know talking about it or buying it?
  • Have you read their annual reports? What's management saying? Is it plausible?
  • What's cash flow doing? Is it too growing at a rapid pace? Do they have a lot of cash on the books?
  • If numbers seem out of line in one year, are there non-cash charges (such as depreciation or writeoffs) in the earnings reports to explain it and does it seem it will inhibit the company's growth?
These are just some of the other factors I look at. There may be others as I go through the financials and read some more in the press. The more you know, the more questions you may have and also the more comfortable/uncomfortable you may feel about the company.

That being said, I found a dearth of information over here on this side of the pond. I couldn't even find a company profile that described the business in my short search. My brokerage has no information about the company except a few headline listings. I could hardly find anything on Yahoo.com except this in an article talking about currency rates:

Quote: Discount fashion retailers who purchase the majority of their inventory from China using U.S. dollars are facing a difficult decision— reduce margins or pass the rising cost of supplies on to their consumers.

Companies like H&M Hennes & Mauritz AB (OTC: HNNMY) and Associated British Foods plc (ADR) (OTC: ASBFY), the parent company of Primark, purchase well over half of their inventory from Asia in U.S. dollars.

Now, investors wonder if the stores' loyal following will continue if the rising costs are passed onto customers.

I quickly went to their web site and see that not only food & ingredients, they also sell clothing (which the article was talking about). Retail/fashion & soft goods is a fickle market and problems there could affect results materially. [pun intended]

If it were me, I'd be especially worried about opening a position at a P/E of 30 unless earnings have been growing at a commensurate high rate (probably 16% or more) for a long period of time -- 5 or more years. In that case, everyone already knows about it and the price has been bid up such that a couple a bad quarters could be an eye-opener for you.

As Chad said, V or MA may fit in this category but for me their yield is too low. You're young so maybe you're willing to take the chance.

RE: P/E - Personal rules + valuation - EricL - 03-28-2015

I don't see anything wrong with opening a starter position in the company if it is a stock you are comfortable with and think you will want to own for a long time. If price drops and gives you an opportunity at a 20 PE or whatever you consider fair value, you can always double down and fill your position up.

RE: P/E - Personal rules + valuation - DividendDragon - 03-28-2015

Having a read of your SA blog has helped a lot Eric
Thanks

RE: P/E - Personal rules + valuation - EricL - 03-28-2015

(03-28-2015, 01:30 PM)Lewys120 Wrote: Having a read of your SA blog has helped a lot Eric
Thanks

You're welcome. Comments like that are the reason I keep writing them.

RE: P/E - Personal rules + valuation - DividendDragon - 03-28-2015

Directly related to my dilemma at the moment too.

I think I'm going buy a small position in ABF and see how it goes.