WH Smith ( 727p and 2% of JIC Portfolio)I have introduced a new holding in WH Smith today. The shares have fallen back some 10% since interim results on 11th April which were good but the shares had been strong in the run-up to the announcement. The highlights from the results were earnings per share up 11% and the interim dividend up 13%. It is strongly cash generative and in the first half of the current year generated free cash flow of £58m and at the half year stage had net cash of £41m. It returns excess cash through a mixture of strong dividend growth and share buybacks; as at the 11th April it has spent £28m buying back 4.2m shares. From a trading point of view the High Street continues to be under pressure from a sales point of view but margins have improved as the sales mix evolves. Travel (airport, stations, motorway services etc) saw profits increase by 7% and now accounts for 38%of Group trading profits. Its share of profits should continue to grow with further openings in international markets, especially China.

Conclusion; maybe not the most exciting investment idea but I think 726p should prove a worthwhile entry point. It is highly cash generative and at 726p the shares are on a prospective yield of 4.2% and a PE ratio of 10.4x. In the year to August 2014 the PE ratio falls to 9.5x for 9% earnings growth. I suspect however, that these forecasts will turn out to be too conservative as I think analysts tend to underestimate the effect of share buybacks when crunching their numbers. (See transaction history at www.JohnsInvestmentChronicle.com)

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