Imagine a stock which you have held for 13 years is now trading at the same price you paid for it.
It would feel as though you have lost money on it.
That’s what happened to Dairy Farm (SGX:D01):
The consolation is that Dairy Farm has been giving out dividends over the 13-year period and one would still have made money from it.
However, overall the investment would still disappoint.
Many said to focus on the long term but why are long term investors being punished in this case?
Dairy Farm’s businesses are highly prominent – Cold Storage and Giant supermarkets, 7-Eleven and Wellcome convenience stores, Guardian and GNC drugstores, IKEA furnishing store and Maxim’s eateries and cafes.
These are household brands which are patronized by millions each day. How can the share price be so depressed (down 69% from its peak)?
It beats me too so I am on a quest to find out what’s going on.
It was the growth rate (or a lack thereof)
I didn’t need to look far to find a plausible answer (we can never prove what drove the share price direction but can try to make smart guesses).
The short answer is that Dairy Farm has stopped growing in 2013. Its share price has never seen better days from that point onwards.
Below is the chart of Dairy Farm’s dividend per share (DPS, excluding special dividends) since 2004:
Dividend per share has risen from US7.4c in 2004 to US23c in 2012 – that is a compounded annual growth rate of 15%.
Since 2013, the dividend per share has declined slightly (-1% compounded annual growth rate) but the lack of growth has plummeted the share price as investors are not as optimistic about its future as much as before.
To make the relation clearer for you, I have aligned the price chart with the dividend per share chart below:
The dividend growth was so powerful that the 2008 financial crisis had no impact to Dairy Farm’s ability to raise dividends and the share price hardly drop at all.
This is phenomenal considering that other stocks were hammered down by half or more during the crisis. This showed the resiliency of the business and many investors would have recognized that Dairy Farm was a fundamentally strong stock.
Strong it was… until 2013 when its fortune was reversed.
Supermarkets have been a drag
Dairy Farm has seen sales grown by 8% from 2013 to 2019. Although not a high figure, revenue has in fact grown instead of going down.
But on a closer look at their revenue breakdown, notice that only Dairy Farms’ grocery retail segment has shrunk by 13% (comparatively, Sheng Siong has grown 44% for the same period).
The rest of the segments have grown by 20% and above.
| Segment | Sales 2013 (US$m) | Sales 2019 (US$m) | Change % |
| Grocery retail | 5,974.9 | 5,190.2 | -13% |
| Convenience stores | 1,780.9 | 2,185.4 | +23% |
| Health and beauty | 2,179.9 | 3,051 | +40% |
| Home furnishings | 421.7 | 765.7 | +82% |
| Total | 10,357.4 | 11,192.3 | +8% |
In terms of operating profits, their grocery retail segment saw a 74% decline between 2013 and 2019. Only health and beauty segment did well with a 49% growth in operating profits.
However, grocery retail contributes the most revenue, a decline in operating profits for this segment has dragged down the overall operating profits for the entire Dairy Farm by 14%.
This decline in profitability explains the challenges that Dairy Farm faces which affects their ability to increase dividends.
| Segment | Operating Profits 2013 (US$m) | Operating Profits 2019 (US$m) | Change % |
| Grocery retail | 247.9 | 63.1 | -74% |
| Convenience stores | 70.8 | 82 | +16% |
| Health and beauty | 197.7 | 295.5 | +49% |
| Home furnishings | 43.6 | 42.7 | -2% |
| Total | 560 | 483.3 | -14% |
Lastly, we look at the operating profit margins for each segment.
Not surprising, the operating profit margin for the grocery retail segment has been a mere 1% in 2019 compared to 4%. Dairy Farm has experienced higher costs of operation and margin compression.
In contrast, Sheng Siong reported a 9% operating profit margin in 2019.
| Segment | Operating Profit Margin 2013 (%) | Operating Profit Margin 2019 (%) |
| Grocery retail | 4% | 1% |
| Convenience stores | 4% | 4% |
| Health and beauty | 9% | 10% |
| Home furnishings | 10% | 6% |
| Total | 5% | 4% |
Is Dairy Farm a value buy?
Bad news and results cause depressed prices. Sometimes this may present a value play and an investor can benefit from an improvement in results.
Dairy Farm is trading at a historical P/E ratio of 21. This is not significantly cheaper, considering that its P/E has been around this level in most years.
In terms of dividend yield, Dairy Farm looks cheaper at 5.1% as its average yield has been around 2-3%.
Dairy Farm’s Price/Free Cash Flow ratio of 6 is also at its 5-year low.
Dairy Farm looks cheap overall. But the results must improve to drive the share price higher, else it may remain cheap for a long time to come.
It has been 7 years since their growth has stalled. To make things worse, the margin for its grocery segment has gone lower with little signs of improvement.
It is a mixed bag and I don’t find it a compelling value buy at this point in time.
