Financial services group Alexander Forbes reported its annual results earlier this week. Alexander Forbes' share price is currently at about the same level it was six years ago: 1 175 cents. It reached an all-time high of 1 875 cents in 2000 and 2001. The share has lagged the rest of the market for the past six years.
Many growth shares - particularly in the financial, media and information technology sectors - have followed a similar path.
Their share prices exploded in the 1990s and the early part of this millennium, followed by some corporate headwinds and mediocre performance. Very often those headwinds coincided with acquisitions and rapid expansion.
It's not all gloom and doom for Alexander Forbes' shareholders, though. Over the past six years, its dividend has grown by an average of 15 percent a year.
It is worth looking at the type of investment Forbes used to be, what it has become, and the pros and cons of having it in your portfolio now.
Forbes' earnings increased by more than 30 percent a year between 1996 and 2002.
However, management felt compelled to - you guessed it - expand offshore. This in itself was not a bad thing, but some of its offshore operations have failed to live up to expectations (for example, National Britannia, which was subsequently sold), while others operate in an industry that faces increasing regulation and costs (for example, International Risk Services).
Furthermore, insurance rates have been weak internationally, hurting the offshore company's income growth. The weaker United States dollar further damaged offshore profits. The internal restructuring of some operations exacerbated the cocktail of privation.
While all of this was happening, Alexander Forbes' overall cash flow situation deteriorated.
Management addressed these problems by issuing more shares and using the proceeds to repay debt and strengthen the company's financial situation. These measures greatly improved the cash flow and the
balance sheet.
The comfort of issuing the extra shares in order to reduce debt and provide some certainty about the group's financial strength came at a price: there are now 20 percent more shares into which each rand of profit must be divided. This is a factor to bear in mind if you want to invest in this share. On the other hand, had the financial situation not been improved, Forbes' ability to generate profits might have been impaired at some point due to its debt burden and weakening cash-flow situation.
What is interesting, though, is that despite the headwinds that the company faces, and a 16 percent drop in earnings per share, the group has elected to pay out the same dividend of 67c as last year.
What management's policy will be going forward remains to be seen, but paying dividends clearly remain-ed a priority this year.
My guess is that, with management holding a healthy portion of the company's shares, Forbes is likely to maintain a good payout ratio.
As a potential shareholder, you need to make the call whether you think Forbes can sustain the necessary increase in profits to continue showing growth in dividends.
The shorter-term pressures on the company have been alleviated, and the share currently has a dividend yield of 5.9 percent and a price:earnings ratio of 10. This compares to the All Share index's dividend yield of 2.7 percent and p:e of 14.
In other words, the market is already demanding a cheaper rating because of the risks in the company, such as the continued weakness of the US dollar and the potential for its offshore business to continue consuming cash without due reward.
Currently, Alexander Forbes can best be described as a turnaround share with the potential to pay attractive dividends.
You have to answer two questions before you buy Forbes' shares:
- Will the shares continue to pay dividends?
- Is a dividend yield twice that of the market and a p:e ratio of just over 10 enough compensation for the risk of investing in this business?
If your answer to both questions is "yes", this is a share for you.
If you cannot answer those questions to your satisfaction, rather leave it out of your portfolio for now.