I’ve been asked if I would buy more of the shares we now hold in the High Yield Portfolio. The short answer is yes with two caveats.

The first is not necessarily now. And the second, of course, depending if the cash resources are available.

Interestingly, not too long ago we invested more in AVI shares by reinvesting dividend income from our overall portfolio. A significant part of this income came from our holding of Sasol, not a counter in the High Yield portfolio.

We added those shares at a gross share price of R57,31. The shares are now trading around R54 and this means that our return to date on this tranche is negative to date. However, this is probably the effect of Murphy’s Law. You can more or less count that the price falls after we buy.

It would be interesting, I feel, to look at each of the counters in the High Yield portfolio and ask if would buy them now – or defer.

Grindrod was the first counter invested in the portfolio. We bought the shares at a gross share price of R17,48 in November 2009. Not a brilliant buy at all. At the end of July 2012, its shares were traded down to less than R13. The company was not performing and, in particular, it had been affected by its shipping division. Several times we asked ourselves if we should sell.

However, we held because it seemed to us that management was a strong investment fundamental and we should be patient while management sweated the assets, especially the new ones. The market would tell us when the market recognised the company’s performance was on track.
Over 2013, Grindrod’s share price moved up R28. Consequently, as I wrote, in my last blog, the cash-out to cash-in internal annualised rate of return of the portfolio’s Grindrod’s holding at the end of 2013 was 13,6%. This is a bountiful return.

But I’m forced to ask if the market is expected too much for forward earnings growth. After all, the JSE database tells me that at a share price of R28, the historic price-earnings (based on a 12-month period) ratio was 21,46 and the dividend yield was a paltry 1,1%. Not Jean and I would buy share for dividend income.

Yes, I know the dividend was covered by more than four times earnings and the directors expect future earnings growth. Strong growth in return on assets managed seems highly probable.

Okay. So assume that in the financial year ended December 31 2013, earnings are reported at a very challenging 25% higher year-on-year from 141c a share to 176c. Dividends should then be about 41c. The forward price-earnings ratio, on these assumptions, is 16 and the projected dividend yield is 1,5%.

At the invested share price of R17,48, the portfolio’s projected dividend yield is 2,24%, far lower than the portfolio’s yield criterion.

Have to accept, therefore, that the share is a ‘growth’ share. That, I guess is why Remgro holds about 25% of the shares. Grindrod may, therefore, be a poor fit in a high-income portfolio. However, shares are attractive for long-term growth investors. And we’re not selling our holding.

Ben Temkin