Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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Roger Montgomery seeks out extraordinary A1 businesses whose share prices are trading at prices less than they’re worth. Roger also looks for businesses that produce a high rate of return on equity, have little or no debt and whose intrinsic value is forecast to rise over the coming years. Do CSL, Cardno (CDD) and Saracen Minerals (SAR) achieve Roger’s coveted A1 grade? Watch this interview and also discover Roger’s 2012 forecast Value.able intrinsic value for Cardno Limited. Watch the interview
In this appearance on Your Money Your Call with Chris KImber, Roger Montgomery shares his Value.able insights on Vocus Communications and Matrix C&E. Roger also answers a viewer question on stop losses and explains why Lend Lease fails to make his A1 grade. Watch the interview
When stock markets ‘correct’, many investors become fearful. Nervous of further losses, investors sell out, causing share prices to fall even further. Value.able Graduates, like Roger Montgomery, embrace market volatility as an opportunity to acquire shares in extraordinary A1 businesses at prices less than they’re worth. In this appearance on Your Money Your call with Chris Kimber, Roger Montgomery reveals his step-by-step strategy you can follow to navigate turbulent markets. Roger also shares his Value.able insights on Computershare, Fairfax and M2 Telcommunications. Watch this interview and discover which business achieves Roger’s coveted A1 Quality Score. Watch the interview
In this interview with Ross Greenwood on 2GB Money News, Roger Montgomery shares his thoughts on investing in Silver & Gold stocks Troy Resources NL (ASX:TRY) and Silver Lake Resources Limited (ASX:SLR). Listen to the podcast
Roger Montgomery reveals nine companies trading below his estimate of their Value.able intrinsic value. Read Roger’s article.
Roger Montgomery shares his Value.able insights on six new companies that meet one of his strict criteria criteria of extraordinary businesses – recurring revenue. Read Roger’s article at www.eurekareport.com.au.
With school holidays well and truly underway, plenty of my peers are also taking a few days off here and there to take their kids to the football finals, duck up to the beach or entertain. That offers plenty of time to review your portfolio with recurring profits in mind.
Stability and predictability are two key words that many investors are unlikely to have heard in recent times and two important components of the ‘toolkit’ that may have gone astray. But at all junctures of the business cycle, stability and predictability are helpful investment partners.
Irrespective of whether you are building a portfolio from the ground up or are reviewing your current holdings, it is vital that you ensure your portfolio is always pointed in the right direction. Few, if any are able to reliably and predictability predict short-term share prices so there is relevance, if not necessity, in ensuring the very best opportunity is given to your portfolio. When a recovery transpires and investors are willing to accept risk again, the portfolio constructed from businesses with some stability and predictability to their revenues and earnings streams will have an excellent chance of outperformance.
While there are many definitions of what constitutes ‘stable’ and ‘predictable’, in terms of business analysis, recurring revenue would be the one I would use. And if you built a portfolio of such businesses, would it matter if this week a country defaulted on its debt or another had its credit rating downgraded? These issues are both temporary in nature and only likely to impact share prices, not the economics of the business.
Long-term contracts are the best form of recurring revenues and these contracts take many forms; There are of course the obvious long-term contracts, such as a mobile phone plan, internet or TV subscription, a car lease or a property tenancy, but less obvious are the long-term contracts we have with our own bodies to feed them, clean them and take out the waste. We have a long-term contract with our teeth, our cutlery and our toilets and these contracts ensure Coles and Woolworths, Kelloggs, Procter & Gamble and Kimberley Clark have millions of customers buying their consumables frequently and with monotonous regularity. In other words – recurring revenue.
Knowing that a percentage of revenue can be relied upon to come in the door each year allows a business to budget, rewarded staff consistently and plan expansions with fewer surprises.
And if you are buying a small piece of such a business, you can sleep more comfortably at night ‘knowing’ that your share will always have value even if the share price halves or worse.
The following two businesses are examples of companies we hold in The Montgomery [Private] Fund, and that we believe display the characteristic discussed.
M2 Telecommunications is a reseller of telecommunications equipment and services into the $6 billion SMB Telecommunications market. While dominated by Telstra (ASX:TLS) with 80 per cent market share, M2 is the seventh largest Telco in Australia with a 4.5 per cent share.
Two thirds of the business’s revenue is recurring via traditional fixed voice services, mobile (phone and broadband) and wholesaling services. Typically, contracted revenue is on 2-4 year terms giving management a significant amount of predictability.
It is due to this predictability that management have forecast 15 per cent earnings growth for FY12 and have the ability to self-fund a couple of large acquisitions, which Vaughn Bowen has moved aside from day-to-day duties to focus on.
Credit Corp – With new management installed and a demonstrated focus on transparency and sustainable growth, 70 per cent of collections are now on recurring payment arrangements.
This frees up collection staff to focus on those clients that are finding it harder to repay their liabilities and drives efficiencies across the group. Not only this, but the degree of certainty has allowed management to invest in even more self-funded ledger purchases and forecast earnings of $21m-$23m in FY12.
Additionally, the businesses offer the following financial metrics:
High Montgomery Quality Ratings (MQR), high forecast ROE’s, low debt levels, a Safety margin and high, recurring revenues have attracted us. After conducting your own research and seeking and taking personal professional advice, I’d be interested to know whether these companies or any others meet your recurring revenue test.
Go ahead and use this blog post as the beginning of a thread listing companies with solid recurring revenue and earnings.
Given the time to be interested in stocks is when no one else is, now is the time to go through your portfolio and determine those holdings that have a component of revenues that are recurring.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 stock market service, 30 September 2011.
It’s not unusual for stock market investors, including Value.able Graduates, to assume, incorrectly, that I’m against high dividends.
It comes from the position I take: companies that generate high rates of return on equity would make their shareholders a lot more money in the long term if they retained their profits (rather than paid them out as dividends) and continued to earn those high rates.
Not all companies, however, have the ability to sustain high rates of return on incremental equity, and so not all companies have the ability to retain all their profits at high rates of return.
A man with a hammer thinks every problem is a nail, and so given large amounts of cash, a CEO may go and do something silly. Understandably, many Australian investors prefer their Boards of Directors to pay the cash out in the form of a dividend.
There is another method that produces similarly attractive returns as retaining and compounding, but allows for the distribution of accumulated franking credits. For investors on tax rates lower than the corporate tax rate, it makes sense for a company to pay out all of its profits (to the extent that they are fully franked, which rules out a few companies) and replace the capital by way of a renounceable rights issue.
Arguably, a non-renounceable rights issue would be less dilutive on your stake in the business, but may fail to replace all the capital paid out.
As a Value.able Graduate confirmed recently, this only works where the costs associated with the capital raising are less than the tax benefit from paying fully franked dividends out. But that is not the subject of this post.
Don’t get me wrong, I like dividends!
Simply, I prefer to see companies with the ability to generate high rates of return on incremental equity (i.e. strong growth opportunities) retain more capital, borrow less and raise less capital. Borrowing increases risk and capital raisings (acknowledging of the above discussion) dilute ownership.
Dividends are Boring
Stepping aside from the stock market rollercoaster and taking the long-term view, a ‘growing dividends’ route to wealth is hardly an exciting proposition. Indeed, it’s akin to walking around Ikea without a wallet.
Yet many investors who lose money on the stock market, going for the quick buck, keep going back for more (akin to going back to Ikea again) and fail to realise that there is a slow but sure way to riches.
Did you know the stock market is trading about where it was in December 2004? Googling that shocked me – nearly seven years of zero appreciation… it seems zero is indeed the new normal!
Over those same seven years many companies have significantly increased their dividends (I should say that comparison is commonly used by the advisory community and the commentariat but it fails to recognise that there are many companies whose share prices are up three, four and seven fold in the last seven years).
Notwithstanding the weak comparison, it is indeed true that some companies have grown dividends significantly, despite a generally lacklustre market. The Reject Shop grew dividends by 394 per cent between 2005 and 2010 from 17 cents per share to 67 cents; M2 by 800 per cent from 2 cents to 16 cents and JB Hi-Fi by 1100 per cent from 7 cents to 77 cents.
Identifying extraordinary companies – those that generate lots of cash – has the power to make you very happy, just not overnight. In that sense it’s pretty unexciting. Mind you, I am yet to find a book or manual that says investing has to be exciting.
When it comes to investing, what is exciting is the effect of compounding. If you could find a portfolio of companies that paid a 5 per cent dividend yield and was able to grow those dividends by 10 per cent per year, your initial $20,000 portfolio earning $1000 would be generating $6,727 in 20 years – a 34 per cent yield on the initial purchase price. And if The Reject Shop could keep growing dividends at 31 per cent per year (unlikely without hiccoughs), they’d be generating dividends of $53.95 in another 15 years (you see why I said unlikely).
Extraordinary businesses paying attractive dividends
Following you will discover ten extraordinary companies that meet the criteria for high return on equity combined with attractive dividend yields: Imdex (B1), Cabcharge (A3), Retail Food Group (A3), Credit Corp (A2), Seymour Whyte (A1), M2 Telecommunications (A1), Breville Group (A2), Thorn Group (A2), JB HiFi (A3), NRW Holdings (A3).
How did I produce this list?
The goal was to find companies with the potential to significantly increase their dividends in the future. I logged into Skaffold® and refined my search to companies that generate high rates of return on equity (>15 per cent), have little or no debt (interest cover of more than 4 times) and have the strongest expected growth in earnings for at least the next year (EPS growth > 5 per cent).
And because I simply cannot advocate paying more than intrinsic value, I have also selected those that appear to be trading at a rational price (Safety Margin > 15 per cent).
For the record, I only selected A1, A2 A3, B1, B2 and B3 companies. From 1 November, you will be able to conduct searches like this yourself – high ROE, low debt, specified safety margin – the parameters are endless. Your resultant list of companies will quickly help you navigate the 2080 listed companies to find your own income champions.
What other companies make your income champion list?
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 stock market service, 29 September 2011.
Skaffold® is a registered trademark of Skaffold Pty Limited.
Without cash, businesses can die. Understanding cash flow is a simple way to understand the quality of a business, and avoid investing in the next Centro. Read Roger’s article at www.eurekareport.com.au.
Imagine you inherited a portfolio that included Ausdrill (ASL), Boart Longyear (BLY), Monadelphous Group (MND), Bradken (BKN), UGL Limited (UGL), Fortescue (FMG), BlueScope (BSL), Oz Minerals (OZL), Incitec Pivot (IPL), Mirabela Nickel (MBN), Myer (MYR), Fleetwood Corp (FWD), Santos (STO), Oil Search (OSH), Reckon (RKN), Iress (IRE), Roc Oil (ROC), Webjet (WEB), Forge Group (FGE), Mineral Resources (MIN), Clean Seas Tuna (CSS), McMillan Shakespeare (MMS) and Galaxy Resources (GXY). In this appearance on Switzer TV with Peter Switzer, Roger Montgomery reveals is Quality Scores for these companies and shares his thoughts on how to manage the transition of this portfolio. Watch this interview and discover what stocks Roger would sell, and what stocks he would add to the portfolio. Watch the interview.
