With the WH Smith share price down 4% in annual results, is it still worth considering?

I WH Smith (LSE: SMWH) share price fell 4% in morning trading on Thursday (14 November) after its full-year 2024 results failed to impress. The high street segment dragged down the results of the popular UK stock, which was good in its travel category.

It marked a 16% rise in annual profits with pre-tax profits of £166m in the year to 31 August. This is up from £143m in 2023. Total group income increased by 7% to £1.9m.

Transport hub areas saw a 15% increase in trading profit but earnings were lower in high street stores. It has already closed 14 such stores and is in talks to renew the leases of another 100. It plans to open 40 new transport-related stores this financial year.

“As we increase mobility, the division of highways will be a small part of the whole group”, said in today’s results.

The key announcement was a 16% increase in net profit. The new final dividend of 22.6p will bring the total to 33.6p for the year. The dividend yield now stands at 2.4% and with a payout ratio of 64%, dividends appear to be adequately covered by earnings.

Strong expansion

Since one of the first newsstands opened on the platform at Euston station in 1848, WH Smith has been synonymous with railway shops. It has been selling newspapers, magazines and snacks to passengers for 176 years. During that time it was expanded to include high-end shops, airports, hospitals and motorways.

However, the basic business model of selling educational materials and confectionary in transit areas remains unchanged. Now with more than 1,700 stores worldwide, it has grown to £1.7bn FTSE 250 company.

Over the years, the business has tried several avenues of expansion, including a tour division, a DIY chain and a record store. Many of these failed or were eventually sold, but holdouts include Marshall Retail Group, curi.o.city gift shops, and airport electronics chains InMotion and Tech Express.

This has helped it gain a foothold overseas in the US, Canada, Australia and South East Asia.

Risks and potential for growth

The main risk with WH Smith is both the cyclical nature and unpredictability of travel. Naturally, the pandemic hit the company hard, shaving 65% off the share price. But similar hikes and dips occur with events such as the Paris Olympics, the soccer Euros and general changes in consumer travel habits. A continued decline in the revenue of high street stores may affect the price.

Earnings are forecast to grow 87%, giving it a forward price-to-earnings (P/E) ratio of 14, below the industry average of 17.2. The average 12-month price target from 13 analysts is £15.82, an increase of 21.6% from the current level.

Debt remains high, at £481m, giving the company a debt-to-equity ratio of 144.9%. This is high but manageable. Operating income is 3.6 times interest, so that’s pretty much covered.

All things considered, it appears to be in good shape. Sadly, my investment budget for this year has grown significantly but with a decent value and moderate growth potential, I think the stock is worth considering.