Patience may bring profit at printing.com

slowly, slowly

So far, the Thrifty 30 portfolio’s investment in high street printing franchise, printing.com (PDC), hasn’t disappointed or delighted.

Printing.com differs from other franchises like Kall-Kwik and Prontaprint because production is handled at a central hub in Manchester and most of its outlets are ‘bolt-ons’, run by independent printers that offer in-house printing too.

It provides higher quality (full colour), at low prices (though a comparison chart on Printing.com’s site is over two years old now), and prints the usual range of business cards, stationary and promotional leaflets, mainly for small businesses. Most of its revenue comes from wholesaling printing services to its franchisees, as opposed to licences.

Last year printing.com seemed to be weathering a severe recession in the printing industry, a fact I didn’t think was fully appreciated by investors. I made the company one of the inaugural members of the Thrifty 30 in September. Then the share price was 33.5p, today it’s 37.5p and the portfolio’s received an interim dividend of 1.05p a share or nearly £31 on its £1,000 investment. The final dividend of 2.1p is due in July.

Although its price rose as high as 75p in 2005 and, very briefly it fell below 25p during the credit crunch, investors who bought the flotation in 2004 are no better off now, except for dividend payments.

Then the company was unproven. It had had earned a year of profit and had yet to pay a dividend. Now it’s earned seven years of profit and the shares yield 9%.

But profit growth stalled in 2007, profits have fallen modestly since, and the dividend looks too costly for the company to maintain if profits don’t increase. Net profit for the year to the end of March was £1.3m, and printing.com paid and promised £1.4m in dividends. Obviously it can’t do that forever. If profits don’t go up, the dividend will have to come down.

Despite the uncertainty though, I’m going to stick with printing.com.

Founder and chief executive Tony Rafferty owns nearly 20.5%, of the shares and chairman George Hardie about 3.75%, which makes them committed long-term shareholders who are likely to run the business prudently. Although 55% of the shares are not in public hands, the other six major shareholders look like independent financial institutions.

It’s a profitable company with very little debt and while its failure to grow will have disappointed investors and the possibility of a dividend cut may disappoint again, at just ten times average earnings over the last six years, the shares are good value.

Although profit growth seemed to come to a halt before the recession, the company explained in its 2007 annual report that it had invested in doubling the capacity of its Manchester hub, and in developing international master licenses that would allow printers in New Zealand, Australia, France and the USA to implement its business model. The trouble is that investment, which dented profits in 2007, didn’t pay off between 2008 and 2010 as recession meant reduced interest in new franchises and reduced business in existing ones.

While I fear the Chancellor’s austerity budget may kill off the weak economic recovery we’re experiencing now, I reckon printing.com will reward us when it eventually happens.

This is a portfolio that expects its investments to deliver the goods over 3-5 years, not months, so now is not the time to be impatient with what appears to be a perfectly good company.

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Thrifty 30 updates

The current Thrifty 30 portfolio

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