Is the SEEK Limited (ASX: SEK) share price a buy for dividends and growth?
Investors have sent the SEEK share price almost 33% higher over the course of 2019 to date, so it has been a strong performer.
But it has been a turbulent time for the employment site business over the past five years with the share price up only 34%.
SEEK has an attractive array of digital assets. Seek.com.au is the most popular job portal site in Australia, which is a strong position to be in because it attracts the most job seekers and the most employers, creating a self-fulfilling cycle.
But in terms of growth it has very attractive overseas assets like SEEK Asia and its stake of Zhaopin – a huge Chinese employment site. In FY19 SEEK ANZ grew revenue by 7%, SEEK Asia grew revenue by 16% and Zhaopin grew revenue by 38%.
There's also a lot of potential with its education services and its early stage ventures.
It's clear that SEEK is doing well to expand the business, improve its offering to clients and increase its capabilities.
But that growth seems to be coming at a sizeable cost because underlying net profit isn't growing. In FY19 underlying profit grew by only $0.5 million to $229 million largely because earnings before interest, tax, depreciation and amortisation (EBITDA) is growing much slower than revenue, and depreciation & interest increased by 27% and 71% respectively over the year.
Is all of the investing because SEEK has to invest to maintain its market share and growth rate? Or is the investing because SEEK has a wonderful opportunity to capture? It's hard to say at this stage.
But in terms of dividends SEEK has warned that it's updating its payout ratio to match its growth aspirations. It used to be 50% to 60% of cash net profit, but in FY20 it's going to be 30% to 50% of cash net profit. SEEK said FY20 profit is likely to be similar to FY19 profit, so a dividend cut is quite likely.
Foolish takeaway
SEEK is trading at 39x FY21's estimated earnings with a grossed-up dividend yield of 3%. SEEK is a great business but this valuation does not appeal to me whilst profit remains flat.
