I can't help but imagine that the 1300 Smiles Limited (ASX: ONT) AGM today was a fairly enjoyable occasion for shareholders. After all, the company has safely endured a difficult period for dentists, after the outgoing Gillard government cut the Chronic Dental Disease scheme, reducing revenue to the dental industry by some 20%. But even more so than that, long-term shareholders in this company are laughing. Not only have they made back their original investment in dividends alone, but the share price appreciation is impressive too:
Source: Google Finance.
Of course, for shareholders like me who only caught on in the last few years, the returns haven't been spectacular. Nonetheless, the 2.3% dividend yield is sufficient incentive to hold on as management continues — steadily — to improve the underlying business.
There can be little doubt that Mr Market's generous valuation of 1300 Smiles goes some way to explaining why competitor Pacific Smiles Group Ltd (ASX: PSQ) saw its share price rise over 40% in the few days since listing.
At present, 1300 Smiles trades on about 25 times 2014's earnings, whereas Pacific Smiles currently trades on an eye-watering 39 times 2014's earnings, or 32 times the pro forma forecast for 2015. Of course, it's not always safe to compare two companies, even if they are in the same business. After all, they may have different strategies and strengths.
That brings me to the second reason 1300 Smiles' shareholders are smiling. It is best demonstrated in the graph below, which shows the ascendance of the company's Care Plans and Treatment Plans. The Care Plans entitle members to 2 dental examinations, 2 x-rays, 2 hygiene treatments and 2 fluoride treatments every year, plus 10% off any more complicated procedures that may be required. The Treatment Plans are interest-free payment plans that allow patients to get timely treatment, even if they don't have the cash upfront.
According to today's address, the Dental Care plans alone are bringing in revenue at an annualised rate of $3.5 million, up from a big fat zero, two years ago. This is excellent, because Dental Care members are likely to be relatively loyal to 1300 Smiles dentists – though it is too early to say that for certain.
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The third reason that 1300 Smiles shareholders are smiling is that the company they own part of continues to be a net contributor to society. In particular, the company's philosophy of pursuing, "Affordability, Accessibility, and Availability," means that they are making dental healthcare available to those who might otherwise neglect it. Long-term neglect of dental health typically results in more serious — and expensive — health issues. The cost of rectifying these more serious issues invariably falls on the tax payer. Aside from helping individuals who are in need, this company's business model also makes this country stronger. If only we could say the same about all listed entities.
It was also good to read that the founder – and current Managing Director — intends to continue to lead the company into the foreseeable future. Shareholder friendly founder CEOs are often the best kind, because they know the business really well, and they are highly motivated to think long term.
