A few weeks ago I purchased shares in Frasers Group (LSE:FRAS), the sports and lifestyle retailer. This is the type of FTSE 100 stock that I wouldn’t normally buy.
I usually only purchase shares in companies that pay a dividend. Frasers last paid one in 2009. Instead, the company prefers to “preserve financial flexibility” and retain cash within the business to fund future growth. The company is coming to the end of an £80m share buyback programme. But it has no plans to return cash directly to shareholders.
Until now, I’ve also steered clear of non-food retailers with a large number of physical stores. Internet shopping is decimating the high street and the government is refusing to reform the outdated rates system. I’m not sure how the shopping landscape will look in a few years’ time. Given the uncertainty, I’m nervous about investing in the retail sector.
The bonus question
So what made me discard these principles and buy shares in a company that has 1,500 stores and hasn’t paid a dividend for 14 years?
The answer to this question lies in the long-term incentive scheme that the company has put in place for its chief executive, Michael Murray.
Murray currently earns £1m a year — an impressive salary by most people’s standards. But if the Frasers share price hits £15 for 30 consecutive days before October 2025, he’ll earn a bonus worth £100m!
To reach this target, the stock will have to rise by nearly 90% from its current level. My interests and those of Murray are therefore closely aligned. In the hope that the company achieves this level of growth, I’m prepared to forgo a dividend over the next three years.
History suggests that getting the share price to £15 will be a difficult one, but not impossible. Over the past five years, it has more than doubled. But it’s currently 15% lower than its all-time high achieved in July 2022.
A big deal
It’s clear to me that the company is going to have to invest heavily in buying more brands. Frasers has built a diverse portfolio of high street names including Sports Direct, House of Fraser, and GAME. Although the company has a significant physical footprint, it’s aware that online shopping is the future.
But to double in size by October 2025, something big has to happen. In recent times, Frasers has grown by buying the remnants of collapsed retailers. But a far larger acquisition is required if Murray is to receive his bonus.
Interestingly, Frasers has built a 5% stake in the struggling online fashion retailer Asos. It’s now the fifth-largest shareholder. But shares in Asos are down 50% over the past year. This makes it vulnerable to a takeover from a well-capitalised retailer like Frasers. Although loss-making, Asos sold 50% more than Frasers in 2022.
It’ll be expensive and Asos will have to be quickly returned to profitability. But in the absence of such a large deal, I cannot see how Murray will earn his bonus and I’ll get the return I’m hoping for.
Whether I’m right to abandon some of my core investment principles remains to be seen. But as Groucho Marx, the American comedian once said: “Those are my principles, and if you don’t like them … well, I have others.”
