With the Christmas retail results in full swing, now seems like a good time to answer this question.
Marks and Spencer is of course a mainstay of many investors’ portfolios, both professional and private alike. It is of course one of the kings of the high street with a long history going back to Michael Marks opening a stall at Leeds Kirkgate Market. Since then it has come a very long way, but is it still a good investment given the current difficulties in the retail sector?
In some ways that’s a trick question because the difficult environment that retainers face is exactly the sort of environment that often creates the best long term investments. A happy economy rarely creates compelling buying opportunities.
Choosing a valuation system
Marks and Spencer is of course not a ‘cigar butt’, but is instead a market leading company with a long history of dividend payments, so I’ll be valuing it using the ‘defensive value’ strategy. This involves looking at long term earnings growth, the current price relative to those long term earnings and the current dividend yield and its sustainability. Together these make up the drivers of long term equity returns.
So let’s start with the share price chart as that’s where many investors begin. That’s generally a huge mistake as the historic share price has little bearing on the long term future share price which is instead driven by the future fundamental value of the company.
You can see from the chart that even with a stable, boring old company like Marks and Spencer the shareholders can still have a very exciting time of it. However, in effect, by ignoring the massive spike and crash in the share price between 2005 and 2009, it seems that the shares have gone precisely nowhere in 10 years or so. For many investors this is enough to put them off as they immediately think that the next 10 years are likely to look the same with zero capital gains.
Moving on to the fundamentals of the company, those same 10 years or so have produced the…
