Before getting into FirstGroup as an investment, you might be wondering what I’m doing buying shares when the global macro-economic and political backdrop is so grim. Let’s review the sorry state of affairs.
Greece is basically bust, Ireland and Portugal are on the on the ropes and a recent spike in Italian and Spanish bond yields indicate that those countries’ public finances might soon start to unravel. Bear in mind that these countries, especially Italy, truly are too big to fail and far too big to save. One mooted option is for German taxpayers backstop the eurozone bond market through the vehicle of a eurozone-wide bond to enable peripheral countries to borrow much more cheaply and to stop the contagion spreading to core countries like Italy. This would have to be coupled with tighter political union and financial oversight of members. Without a bold and powerful solution, which right now looks unlikely, the survival of the eurozone and the single currency, at least in its current form, is certainly in serious question despite last week’s stop-gap Greek bailout.
Across the Atlantic, the US housing market continues it’s multi-year collapse, employment figures are grim to awful and Republicans are playing chicken with the US debt ceiling in an effort to score political points ahead of next year’s election sending further jitters that the US might default [temporarily] on its debt before an agreement is reached with Democrats.
In Asia, indications are that cracks are beginning to appear in the Chinese economy from a housing bubble in Shanghai to wage inflation to plummeting national reserves as the US dollar continues to tank on the back of poor macro-economics, near zero interest rates and massive money printing.
So with all the doom and gloom, why buy shares in any company now?
One is that, as I discuss in The Child Millionaire, the future is both unknown and unknowable and with our ultra long-term Child Millionaire perspective of 40+ years it is better to ignore the background noise and keep on investing to take advantage of both time in the market and pound/dollar cost averaging. Ten, twenty or thirty years from now, massive short-term swings in the markets will look like mere ripples and to sit on the sidelines now because of a myopic fear of next week or next quarter will all but guarantee that you won’t start a Child Millionaire Portfolio and that any cash you have will be eroded by inflation, which in the UK is running around 5%.
The second reason is more compelling. It’s the fact that despite what ‘the market’ is doing, there are always top-notch dividend aristocrats out there that are worth buying. In this respect, ‘the market’ is just an aggregate smokescreen that, in its herd-like mentality, obscures compelling investments. So in other words, I bought FirstGroup because it’s a compelling investment, ‘the market’ be damned.
So what’s the story and what are the numbers?
FirstGroup is a transport behemoth operating in the UK and North America. It runs various train lines in the UK , one in five public buses carrying 2.5 million passengers a day, me included. It also owns Greyhound which is a mainstay of affordable transport across North America where it also operates a staggering 57,000 yellow school buses that transport millions of children every single school day. All told, the company’s trains and buses move 2.5 billion passengers a year and with its huge public and school bus contracts, it operates with a financial reliability akin to a utility. Furthermore, its customer base and thus its revenue are pretty impervious to the economic cycle – it you can’t afford a school or public bus what choices do you have left?
So what about the financials?
Revenue has increased from £3.708 billion in year end 2007 with a dividend of 15.5 pence per share to £6.429 billion for year end 2011 with a dividend of 22.12 pence per share. The past five years of dividends tell the tale we like to hear.
Dividends for year ending 31 March:
2007: 15.5 pence per share
2008: 17.05 pence per share
2009: 18.75 pence per share
2010: 20.65 pence per share
2011: 22.12 pence per share
2012 (guidance): 23.6 pence per share
A few weeks ago the company reiterated its commitments to debt reduction, capital investment, and crucially for investors, it plans to hike the dividend by at least 7%. Guidance for the year ending 31 March 2012 is 23.6p per share with more expected in 2013.
On 20 July 2011, I picked up 150 shares at 349p per share for Mia’s portfolio for a total outlay of £523.50. The prospective forward yield is a very juicy 6.76% [23.6p (estimated 2012 dividend) / 349p (share price)]. Compare that to money in a bank account.
All said, this company ticks pretty much all of the boxes for the Child Millionaire portfolio – high yield, track record of rising dividend, market dominance – not to mention that I regularly shell out money to use the company’s train and bus services and even if I wanted to use an alternative (and I often do), there just isn’t any, meaning that millions of people like me have to buy their products.
I rate FirstGroup a buy.