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Dividend payments can disguise corporate woe
Last summer’s abrupt demise of the News of the World (NoW) came as a complete shock, although it is probably fair to say some did not shed a tear at its passing.
Interestingly, the paper’s sudden end did not, as several commentators predicted, result in a further sizeable volume of sturdy nails being hammered into the industry’s coffin.
NoW readers simply transferred their allegiance elsewhere, much to the delight of other Sunday newspaper publishers who were happy to welcome them with open arms.
But was this just a temporary respite for the NoW’s competitors, a bonus which helped allay short-term circulation fears while the Internet continues its inexorable growth to the point where we are reliant solely upon the worldwide web for our news?
Not only is such an Orwellian prospect deeply sinister, I simply do not believe it will happen.
Like many others I use the internet for frequent daily headline updates, though I could think of nothing worse than using a website for my detailed, in-depth news fix.
If I am sent a lengthy e-mail for example, I print it off rather than read it on-screen.
Similarly, if a BBC website headline tells me that x or y has happened, I want to read about it in my newspaper, not on a computer.
Thankfully for the print media industry, millions of folks are similarly inclined which means newspapers and magazines will continue to be published and distributed, irrespective of what cynics believe.
Which brings me on to Smiths News, the company formed six years ago following its breakaway from high street retailer WH Smith with a specific brief to distribute magazines and newspapers.
From a longer-term business planning perspective, it is significant that Smiths News was created in 2006, a point at which the Internet could hardly be called a budding idea.
It was well established enough for gloomsters to write regularly about publishers being in profound denial regarding the slow death of print media.
Presumably, Smiths’ management were aware of this and of how tough their market would be, yet they were still prepared to take the risk and form a company which last year boasted a turnover of £1.73bn and pre-tax profits of £32m. Next year’s figures are expected to be broadly similar.
Yet though Smiths News may be in an unloved sector, its shares continue to puzzle and enthral in equal measure.
After the NoW closed, Smiths News’ (which was contracted to distribute the paper) shares traded within a narrow price band (83p-86p) until late October. They then surged, to 96p, before tailing off and dropping below 80p before Christmas.
Yet while the price has dropped the company is committed to paying a dividend which, based on the current share price, equates to a gross return of more than 11 per cent.
You would imagine that might be attractive enough to have adventurous investors piling into Smiths News shares, yet most remain wary of colossal dividend payments, suspecting they disguise undisclosed corporate woe.
In Smiths News case, however, the bad news appears to be already in its share price, so confirming its berth in what is looking increasingly like an oversold media sector.