Today I want to introduce you to Shepherd Neame. This stock brings to life many of the ideas we've been discussing in The Right Side over the last few months.
Ideas like trustworthy management, simple corporate structure and accounts, consistently increasing dividends. And most importantly I see Sheperd Neame as a great long term stock to tuck away for the future.
Let me explain why this is one of my all time favourites.
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Great businesses don't need the City
I always think of Shepherd Neame like an old family friend. It's a family owned brewer from Faversham in Kent and it really isn't like most stocks around. For starters they aren't even a PLC (Public Limited Company)... now that's odd. Most shares (traded on exchange) have to be PLCs. It's a legal requirement if you want to raise money from the public.
But Shepherd's have never raised money from the public. It's a family firm, established way back in 1698 and the only reason the shares are traded is to allow shareholders (mainly family descendents and key staff), to trade their shares. For us, it means that we have the opportunity to get some exposure to this unique family brewer.
And those are the first two things I love about this company. Number one, the company is still run by the family in the interests of its shareholders. This minimises one of the worst issues about shares in public companies... and that is management's interests being misaligned with shareholders.
Secondly, Shepherd's doesn't need the so-called expertise' of the City men - they've never raised finance from the City, so they've not been tempted into some of the City's silly ideas... ideas which are usually designed to earn fat fees for the City institutions.
Why family firms can make great investments
Many investors have deep concerns about family firms. They say that nepotism leads to incompetent management and that family feuding can lead to awful decisions. And then there are strategic issues... some guys want to cash-out', while others want to grow the firm.
All I can say is I've not seen much in the way of family issues with Shepherd Neame - certainly nothing that's affected the smooth running of the business. Maybe it's because the company has passed through so many generations and the shares are so well dispersed that these things have been diluted away. Or maybe it's just because this business is incredibly well run.
The way I see it you get an excellently run business with years of experience and none of the problems that normally arise from self-serving management (and their City chums).
I met the former CEO Bobby Neame about 15 years ago. A straight talking chap whom I trusted almost immediately. Bobby's handed the reins on to Jonathon Neame who's certainly nobody's fool - a trained barrister, he worked as a management consultant in industry before working his way through the ranks in the family firm.
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A few facts and figures
The pubs game has been challenging over the last ten or fifteen years. But this well run business has continued to grow as long as I've known them. This is testament to a great management team and their long-term outlook to business.
Just look at how the NAV (the book value of the business) has increased every year for the last five years.
Five year turnover, earnings per share and NAV
And as Punch struggles, guess who's been buying some of their pubs... yes, you've guessed it, The Family'.
On Wedneday 22nd December, Shepherd's were £9.00 to buy, (traded on Plus Markets, not on the main London Stock Exchange), most brokers trade Plus markets, though there may be some restrictions on certain types of account.
You can download a copy of the full year accounts here. When I look at them, I know immediately where I stand. The accounts are intelligible from the get-go. They're written in plain English with minimal use of management jargon.
If you want to compare them to Punch, then go ahead, you can download Punch's complicated report here. Punch takes 10 pages before they even get to the opening chairman's statement. By the time they get to the financial accounts (page 53), Shepherd's have already finished (less than 50 pages - though I do concede even here, the lovely historic photos aren't strictly necessary).
As for a valuation, Shepherd's isn't what you'd call dirt cheap. On a P/E of 18 times and a dividend yield of 2.5%, you're paying for this quality outfit. I'd actually say that the shares are pricing in a profits recovery (things have been tight over last few years)...
That said, they've got £9.20 of assets backing up each share. So based on Wednesday's price, you're getting in at less than book value.
If you want to buy into a conservatively run business that has been trading for over 300 years with tremendous track record, then this could be a great bet. The shares have come off a £15 high and now trade around £9. If profit margins recover to their previous levels expect the share price to recover too.
This is the sort of stock you can tuck away and forget about. Let The Family' look after your investment for you.
Shepherd Neame
Ticker: SHEP
Mid price: 875p
Market cap: £112m
52 week high/low: 945p/700p
Five year performance: 2005 +52.73% | 2006 +37.9% | 2007 -25.18% | 2008 -47.12% | 2009 +35.27% | 2010 (to 21st Dec) -5.41%
Punch Taverns
Ticker: PUB
Mid price: 74.1p
Market cap: £476m
52 week high/low: 101.5p/51.7p
Five year performance: 2005 +22.95% | 2006 +50.65% | 2007 -40.23% | 2008 -92.41% | 2009 +19.13% | 2010 (to 21st Dec) +8.35%
This article was first published in the free investment email The Right side. Sign up to TheRightSide here.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
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