As I’ve mentioned several times before, 2018 was not a vintage year for my model portfolio.
It wasn’t a terrible year either, but there were more bumps along the way than I would have liked.
One of those bumps was caused by N Brown, the size 20+ and age 50+ clothing retailer, when it cut its dividend in half.
For several years, N Brown has been working through an extensive project to transform itself from a home shopping catalogue business into a world class online-first retailer.
In fact, N Brown’s ongoing transformation was largely why I invested in the company.
Uncertainty around the project’s outcome (could N Brown really transform itself, or was it destined to go the way of so many obsolete catalogue businesses?) was depressing the share price, making the valuation appear cheap.
And by ‘cheap’ I mean the company had, among other things, a market leading position in its niche, a 4.2% dividend yield, a 10-year growth rate of 8.7% and average returns on capital of 11.2%.
N Brown appeared to be an above average company with a below average price, so I invested.
With 20/20 hindsight, I now realise that was a mistake. Not a huge mistake, but a big enough mistake to make me spend most of December thinking about where I went wrong, and what I should have done instead.
There were several key issues, such as my use of ‘normalised’ earnings instead of reported earnings, failing to look at profit margins or being overly willing to invest in turnarounds and transformations.
But as somebody once said, mastery is the result of years of effort, mistakes and learning.
And having made a mistake, I now think I’ve learned the relevant lessons.
You can see how these lessons apply to N Brown, and potentially many other dividend-paying companies, in an article I wrote for Master Investor magazine:
N Brown: Dissecting a dividend cutter