Hobson: Why I Bought Whitbread Shares

THE WEEK: Morningstar columnist Rodney Hobson believes Whitbread's share price will recover soon and he will be collecting the increased dividend in due course

Rodney Hobson 28 April, 2017 | 1:38PM
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On several occasions I have considered investing in Whitbread (WTB). It is a solid company with a good track record but each time I have baulked at the share price, which has always looked pretty fully valued, and at the vagaries of serving a competitive consumer market.

You are more likely to lose money by following this daft adage

I looked again this week when very strong results were greeted with a crash in the share price. Sensible investors quite rightly looked beyond the mere numbers and homed in on the outlook.

Let’s take the figures first. In the year to March 2, the hotels and coffee shops chain saw underlying pre-tax profits rise 6.2% to £565.2 million from revenue up 8.2%. The total dividend is raised by 6%. That all seems pretty good for a company whose operations are mainly in the UK and thus did not gain as much benefit as some companies have done from forex gains.

Premier Inn is not a problem. It will continue to increase sales if more Brits stay on holiday in the UK rather than buy foreign holidays with dwindling pounds. Part of the gain has come from opening 3,800 more rooms in 25 new hotels but that is only part of the story. Existing hotels grew revenue by 2.3% and occupancy rates of more than 80% are impressive.

What spooked investors was a warning that Costa Coffee outlets are vulnerable to any dip in retail footfall. To use chief executive Alison Brittain’s words; “we could start to see some strain on the High Street”.

Well yes, we may or we may not. Is there any evidence of this so far? Costa reported like-for-like sales growth of 2% in its UK outlets the past year and latest figures show a bounce-back over the past two months after a sluggish January and February. The coffee market is still growing quite strongly, Whitbread claims.

The shares slumped 7% on the day of the figures, which seemed to me to be a gross overreaction, even though the shares had perhaps run ahead of themselves coming up to the results. I decided to buy, hoping to catch the bottom of the slump. That is a difficult aim even for those who sit looking at a screen for hours on end, which I do not, and I am showing a small immediate loss on my purchase.

Nonetheless, I believe that Whitbread will recover soon and at least I will be collecting the increased dividend in due course.

Do Not Sell in May

It must be spring, for I have just heard the first cuckoo calling “Sell in May”. As always at this time of year, I remind investors that you are more likely to lose money than make it by following this daft adage, even before you take into account dividends you have lost by staying out of the market.

Base your investment decisions on current facts, not on arbitrary rules. The UK economy is still growing and plus 3% in the first quarter is much better than we might have expected.

Two sectors indicated this week that the London stock market is the place to be.  

Housebuilders Taylor Wimpey (TW.), which I hold, and Persimmon (PSN) both reported booming sales so far this year. There are admittedly signs that house prices are peaking as the end of the Central London boom starts to filter out but much of the UK still has a lot of catching up to do and demand continues to far outstrip supply.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Persimmon PLC1,420.00 GBX-1.46Rating
Taylor Wimpey PLC148.30 GBX-0.87Rating
Whitbread PLC2,912.00 GBX-0.85

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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