A Marston's masterstroke

A few weeks ago, the Portfolio passed the eighth anniversary of its inception. I can't pretend to be at all satisfied with its performance in the past year. A year ago it was up 85%; two years ago it was over 120%. This time round the Portfolio is up by just 2.7% since inception (7.9% up last time round after dealing charges). That is also after crediting significant income from United Utilities (UU-) and also from the Kent Reliance PIBS (KRB), which together have added some £245 to the Portfolio's cash balances.
 
The FTSE 100 (UKX) index is down 12.2% (down 21.2% last time round) over the same period. While that shows the Portfolio as still being ahead of the game, it is an illusion. We include dividends in the calculation of the Portfolio's performance, so the correct comparison is with the total return index, which is currently nearly 20% up since inception. So the Portfolio's single figure gain is not nearly good enough for a portfolio whose objectives are the dual ones of income generation and capital preservation, not to mention relatively low turnover.
 
In mitigation, of course, I could say that we have experienced one of the nastiest bear markets in many a year since the Portfolio's previous birthday, and it was unfortunate that one of the mainstays of the Portfolio's performance had previously been holdings in bank shares, because of the supposedly reliable income they generated. Enough said, I think, on that score.
 
One other problem we face is the self-imposed discipline of only looking at the Portfolio and making changes to it every quarter. This means that, however much as we might like to do so, we can only react to events some weeks in arrears.
 
The last few months has been fairly active for one major reason. Last time round we added the brewing and pub group Marston's (MARS) to the Portfolio. We managed to do this only a few weeks before Marston's announced a major rights issue and also its intention to 'rebase' the dividend to a more modest level in the coming 12 months, reverting to a payout that is roughly twice covered by earnings on average.
 
These are both major changes that we need to take into consideration. Fortunately, however, the rights issue was reasonably well received and many investors seem to have given Marston's proven management team the benefit of the doubt. To put it in some sort of perspective, David Thompson, Marston's current chairman, was managing director of Wolverhampton & Dudley Breweries (as Marston's was previously called) back in the 1980s when I was still working as a City breweries analyst.
 
Marston's rights issue dished out 11 new shares for every 10 previously held, at a price of 59p. This resulted in the group raising some £165 million after expenses, the lion's share of which will be spent on developing 60 new managed pubs.
 
The result of the right issue on the Portfolio was to increase our holding to 3,675 shares, but to bring down the average book cost of the holding to about 113p. This led to a weighting in the shares that was a little too large for comfort, so I have subsequently sold this holding down to 2,500 at the current price of 103p, leaving us with cash of just over £3,000. In doing this we have taken advantage of being able to acquire the new shares at a bargain price and turned what was previously looking like a hefty loss into a relatively small one.
 
The analyst forecasts for Marston's after the rights issue and a subsequent trading statement suggest that the City expects the company to make just short of £70 million pre-tax in the year to September and a bit more than this in 2009/10. This gives earnings per share in the region 12p and implies a yield of around 6.5% on the sort of dividend forecasts being mooted. That makes it just about acceptable for the Portfolio's criteria.
 
I am still looking for another stock to add to the Portfolio, but I am not in any hurry to do so for the time being. The market may have a spell in the doldrums for a few months after its recent spectacular rise, and I do not feel there is any need for us to rush our fences.
 
It is also worth remarking that Marston's, currently on a single figure price earnings ratio, used to be one of the stocks that in the old days stood at a premium to the sector, such was the perceived quality of the company. I think that this quality is still there, and quality usually tends to come to the fore in the fullness of time.