With the benefit of hindsight, we know that March 2020 represented the bottom of the Covid stock market crash. Any UK investor fishing for stocks back then would have encountered a FTSE 100 teeming with bargains. And as it turns out, one would have been the shares of B&M European Value Retail (LSE:BME).
But how much of a bargain exactly? Would a £5,000 investment have doubled by now? Let’s find out.
A giveaway stock in hindsight
If I’d invested £5k in B&M stock in the middle of March 2020, I’d have paid approximately 270p per share. Today, just three-and-a-half years later, the share price is 573p.
That means I’d have generated a handsome 112% return so far. My investment would have grown to around £10,600 today.
Better still, I’d have received over £2,000 in dividends too. That’s because the company has regularly dished out special dividends on top of its regular shareholder payments.
Why has the share price doubled?
As its name suggests, the bargain variety retailer is known for its focus on value. And as household budgets have come under pressure from rampant inflation, B&M has benefited.
Unfortunately, I’ve been quite bearish on the discounter’s prospects for the past couple of years. Granted, it’s perfectly positioned to do well when the economy is struggling. But because of high inflation, I thought margins could come under severe pressure as it struggled to pass on its own rising costs to price-sensitive customers.
However, it turns out I was wrong. Its operating margin did slip in FY23 (ending 25 March), dropping to 10.8% from 13% the year before. But that’s hardly severe pressure.
Likewise, profits fell last year, but not as much as I feared. The group still recorded a resilient £348m post-tax profit.
So I’m actually kicking myself that I didn’t work this out sooner and invest. I mean, even buying the stock one year ago would have delivered me a 50%+ return so far.
Will I right my wrong?
Over the coming months, I wouldn’t be surprised to see B&M (and, to a lesser extent, its low-priced supermarket Heron Foods) filling some of the void left by rival Wilko, which even if it hasn’t gone forever, is likely to be much smaller.
That said, it faces competition here, as Home Bargains and Poundland will also be battling for those extra shoppers. And inflation, which has helped the company, finally appears to be easing.
Nevertheless, many household budgets are likely to stay under pressure even as inflation cools. After all, according to The Money Charity, people in the UK owed £1.84bn at the end of June, an increase of £42.1bn from the year before. That’s an extra £791 per UK adult.
Therefore, I think B&M’s relentless focus on price and value will keep paying dividends. Speaking of which, the forward dividend yield stands at 3.7%, with the payout having grown at an annual rate of 15% since 2017.
Moreover, the forward-looking price-to-earnings (P/E) ratio is just 15.3 times. Like its stores, this seems to offer decent value, I feel.
So, on balance, I’m inclined to see the stock as a buy. And if I didn’t already have sufficient exposure to commerce and retail across my portfolio, I’d snap up some shares today.
