Still, the brutal fact is that, following the takeover of pubs operator Greene King, the Bearbull Income Fund has almost £30,000 of spare cash gathering income at the rate of about 1 per cent when all around there are decent-quality equities throwing off dividends offering over four times that rate.
So do I watch from the sidelines until the market decides that the world isn’t going to end? Could do. There is some sense to it. Reason it as follows – by keeping the £30,000 in a savings account yielding about 1 per cent rather than in high-yield equities generating 4 per cent-plus, the income fund loses about £1,000 a year. Meanwhile, if that sum were put into an equity, its value would only need to fall 3 per cent for the losses to be the same as the lost income. Yet because capital values will always be more volatile than dividends then, in a falling market, there is a high chance that capital losses would exceed income foregone. A 10 per cent drop in value would leave the fund £2,000 worse off than if it had kept the £30,000 in cash.
It was ever thus – we invest against a backdrop of uncertainties and Bearbull is obliged to maximise the fund’s income without taking unjustifiable risks. That usually means staying fully invested, especially when nothing has happened to expect the market’s long-term returns to fall.
Readers will also know I am keen on shares in bowling-alley operator Hollywood Bowl (BOWL) – see Bearbull, 20 December 2019. That’s because, in addition to the company’s merits, at 282p its shares yield 3.4 per cent on just the recently declared final and special dividends, which are available to buyers until 30 January.
Hollywood should be a good replacement for Greene King since both companies aim to capture revenue from discretionary spending by UK consumers. Quite likely, that won’t be a great place for the foreseeable future. Even so, Hollywood seems to have defensive merits and those of a growth stock.
These are best illustrated in a comparison with its nearest rival, Ten Entertainment (TEG), salient figures for which are in the table. First, some background – these two dominate the UK’s £320m a year market for 10-pin bowling, capturing approaching two-thirds of it. On average, their sites are bigger than those of smaller rivals. Despite that, of the 170 or so sites run by small operators, the bosses of Ten Entertainment reckon that about 60 would be worth buying.
| Bowling them over | |||||
| Hollywood Bowl | Ten Ent'ainment | Hollywood Bowl | Ten Ent'ainment | ||
| Share price (p) | 282 | 304 | Five-year growth rates (% pa) | ||
| Mkt cap (£m) | 410 | 198 | Revenue | 10.5 | 10.8 |
| PE ratio | 18.5 | 20.3 | Op profit | 35.3 | 29.8 |
| Div yield (%) | 4.3 | 3.8 | EPS† | 42.9 | na |
| No. of centres | 60 | 45 | Five-year average | ||
| Year end | Sept | Dec | Profit margin (%) | 19.3 | 15.6 |
| Sales (£m) | 130 | 76 | Cash conversion (%) | 97 | 89 |
| L-for-L growth* | 5.5 | 7.4 | Cap-ex/Revenue (%) | 10.3 | 5.3 |
| Op profit (£m) | 29.2 | 13.1 | Dep'n & Am'n/Rev (%) | 8.7 | 7.4 |
| Source: S&P Capital IQ, company accounts; * latest figures; †Four-year rate | |||||
So there is some – though limited – room to expand by acquisition, although Hollywood’s preferred route is new build, usually in out-of-town retail and leisure centres. Hence the markedly higher proportion of revenue devoted to capital spending by Hollywood over the past five years (see table). That said, Ten Entertainment’s cap-ex shot up to 11.4 per cent of revenue in its most recent full year (although still behind Hollywood’s 12.6 per cent).
However, despite rising levels of capital spending both companies are great cash-generating machines, which fact draws attention to the three stand-out rows in the table – those for cash conversion, profit margins and like-for-like sales growth. Each company’s cash conversion has been helped by lowish cap-ex and management of working capital. These factors may not be so helpful in the future. Even so, there is no reason to think that lower rates of cash conversion will undermine Hollywood’s balance sheet even if they constrain the special dividend.
Meanwhile, both companies are sheltered against dull consumer demand by really fat profit margins – especially in Hollywood’s case where the22.5 per cent margin for 2018-19 was the best it has recorded. In large part, those margins come from getting more out of the group’s existing centres. In that context, the 5.5 per cent revenue growth from like-for-like space in 2018-19 looks impressive. True, that makes for a demanding comparison in 2019-20, but if revenue intensity is at least maintained, that points towards profitability staying strong.
In a nutshell, I would be happy to have shares in either company in the Bearbull fund but Hollywood shaves it, probably because its greater size gives it extra economies of scale. And then – let’s not deny it even though it’s not wholly defensible – there is that dividend coming through next month.
