SABMiller is right near the top of my list of companies to buy. It’s one of the most successful companies in the FTSE 100 and has nearly tripled in value since the financial crisis. Earlier this year the shares peaked at more than 3,600p, although they’ve since dropped by around 15%. So they’re cheaper than they were, but are they cheap enough?
The company’s financial results speak for themselves:
Revenues, earnings and dividends have grown by an average of more than 13% a year over the last decade. Compare that to the average FTSE 100 company which has managed only 3.7% a year over the same period.
One definition of a defensive investment is that it produces growing profits and dividends in every year. Going by that definition SABMiller gets an almost perfect score. It’s been profitable and dividend paying in every year, and only failed to grow profits and revenues once in the last ten years.
That’s way more defensive than the average company and the financial crisis shows up as just a brief decline in revenues, while earnings and dividends per share continued their upward march without pause.
An outstanding company
It would be difficult to argue that SABMiller was anything other than a spectacular success story; one which, given the defensive nature of its business (it’s one of the world’s leading brewers), seems likely to continue for many years and decades to come.
But no company is worth an infinite price, and higher prices mean more risk of loss and lower returns for investors, so it’s critical that the price is right.
An attractive price?
As usual I’ll measure SABMiller using a cyclically adjusted version of the PE ratio, known as PE10 because it looks at price relative to the last decade’s earnings rather than just the latest earnings.
The standard PE is of very little use when you’re trying to determine the returns of an investment over a five or ten year time horizon, which is the horizon that most investors should be using.
Far too many people focus on what’s going on today, this quarter or this year. What matters is that the company has a good chance of being profitable, paying dividends and growing over a period of years, and that the price is reasonable given its past and future prospects.
Using PE10, SABMiller’s shares at 3,142p are 36.2 times the company’s average earnings over the past 10 years. Compare that to the FTSE 100 average PE10 which is 14.5 and you can see that SABMiller is very expensive indeed.
So much for earnings, what about dividend yields? Defensive investors love dividends and with SABMiller they get the somewhat measly payout of 2.1%. A passive investor buying the FTSE 100 can get an income of 3.6%, which is a 70% improvement on 2.1%.
Paying up for quality
However, some things are worth a higher price, and some things at a higher than average price can still be a bargain. This is obviously the case with SABMiller.
With a much higher than average growth rate and far higher consistency and defensiveness, it’s clear that this company’s future growth rate could be way beyond the market average. So it’s worth a premium, but how much of a premium?
If I compare SABMiller to other similarly successful companies in the FTSE All-Share I can see how its current share price stacks up, in terms of PE10 and yield, growth and consistency.
Using the new UK Value Investor interactive stock screen it’s a simple matter to narrow the whole market down to companies with a 13% or greater 10 year track record of growth, and a quality (i.e. consistency) rating equal to SABMiller’s (a 95% hit rate of growing revenues, earnings or dividends every year).
The screen tells me that there are 21 such companies out of 218 companies in the market that have a 10 year unbroken track record of dividend payments.
I can then sort those companies by PE10, looking at who is cheapest relative to past earnings, and it isn’t SABMiller.
I’ll highlight two alternatives that you may be familiar with.
The first is MITIE, the FTSE 250 outsourcing company, which has a 10 year growth record of 13% a year and a 97% track record of annual growth (i.e. almost perfect). MITIE is currently offering a yield of 3.5% (about the same as the much slower growing market average) and is priced at 18 times the 10 year average earnings, or about half the price of the equally fast growing, equally consistent SABMiller.
Or what about Reckitt Benckiser, which offers a 3% dividend yield (30% better than SABMiller’s) to go along with its 17% a year track record of growth (also 30% better than SABMiller’s). It also has a perfect 100% record of growing revenues, earnings and dividends in every one of the last 10 years, despite the financial crisis.
SABMiller still too expensive
So it seems to me, at least from this initial high level review, that SABMiller’s shares are still too expensive, even though they have fallen by around 15% in recent months.
They are expensive relative to the general market, but that’s to be expected because SABMiller is much more than an average company. What’s worse is that the shares are expensive relative to other companies that have a similarly outstanding track record of success.
Although the tripling of value for SABMiller shares since the financial crisis is impressive, it means that the gains have already been made. Any buyers at today’s price may instead see poor returns, with a significant risk of major losses, for years to come.