Why I’ve changed my mind about Whitbread shares

Here’s why I believe Whitbread plc (LSE: WTB) could be in the process of taking several strategic missteps.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I reckon it’s a good idea to run your winners when investing. And that can be decent advice when it comes to running businesses too. 

Whitbread (LSE: WTB) had a fast-growing operation in its Costa coffee brand that scored higher profit margins than the rest of the hotel and hospitality set-up in the enterprise. But instead of hanging on to it and building it up, the firm sold Costa to The Coca-Cola Company in January 2019 for £3.9bn, which strikes me as selling that winner rather than running it.

Shareholder benefits?

Whitbread said at the time, combining Costa with Coca-Cola’s “global scale, product and distribution capabilities” would “ensure new product development, continued growth in the UK and more rapid expansion overseas.”  What a pity, then, that Whitbread and its shareholders will no longer benefit from any of that growth!

But Whitbread did say the sale of Costa would provide benefits for “our teams, pensioners, suppliers, shareholders and other stakeholders.” So, it’s interesting to read today’s half-year results report, which describes where some of that one-off payment of £3.9m has gone.

And the company bunged £2.5bn of it at buying back some of its own shares. I reckon it could have spent the money in better ways. Who’s to say, for example, the timing of the share purchases was good?

Whitbread is a highly cyclical business and there’s a fair chance the shares are trading near to the top of their cycle. Profits have been strong in the hotel business for some time, and the thing about cyclical businesses is that earnings and share prices cycle up and down, with downs usually following ups!

One good principle in business is to buy assets when they show good value, such as when the seller is distressed. I fear Whitbread’s share price could be set to extend its current downward trajectory and a much better opportunity for buying back shares could arrive later. Indeed, the outlook statements are getting stronger in their negativity.

An uncertain outlook

Today’s report talks about challenging conditions and uncertainty in the near term. But the company has “confidence in the long-term structural opportunities available in the domestic budget travel markets in the UK and Germany.” However, statements like that make the cynic in me wary about the outlook in the short and medium terms.

Meanwhile, Whitbread is charging ahead with an acquisition and expansion programme in Germany. But is this the right time to be expanding like that? Again, maybe it would be better to wait for better prices later.

And getting back to where the Costa money went, after paying £381m to the Whitbread Group pension fund it now has a surplus of £222m. That’s good.

There’s also net cash of around £804m on the balance sheet, which compares to zero cash a year earlier, before the sale. But on borrowings, the news is lacklustre with the figure at around £882m, compared to £961m a year earlier.

And what if there’s a great turndown in the hotel industry around the corner? I reckon Whitbread could end up wishing it had held onto that £2.5bn it potentially squandered on buying back its own shares. I’ve changed my mind and cooled on Whitbread and will avoid the stock for the time being.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »