Thanks for your reply @Slideup. You make some good points. Smartgroup’s NPAT was flat for about 5 years between 2018 and 2023, and during that time almost all its earnings were paid out as dividends. Two years ago, I posted a straw here titled “Cash cow struggling to grow.” I thought this summed up Smartgroup’s outlook during this period.

You are also correct in saying that if all earnings are paid out as dividends, your returns are limited to the fully franked dividend, and do not reflect the strong ROE.

My thesis at this point in time is based on a more optimistic future for Smartgroup. I am expecting 12-13% earnings growth for FY24 and a further 10% earnings growth in FY25. Statutory NPAT for 1H24 was $34.3 million (up 18% on pcp) which makes analyst forecasts of $70.4 million (53.5cps) for FY24 achievable, especially when you consider the addition of the South Australian government contract which did not contribute to earnings in the first half. This contract, a win from McMillan Shakespeare, added 36,500 salary packaging customers to the June total of 402,000. That’s a significant 9% increase. Just recently Smartgroup also picked up the Monash contract which should start contributing to earnings in 2H25. So I think double digit earnings growth over the next few years is feasible.

Providing Smartgroup doesn’t lose any major contracts I expect financial performance, including NPAT, ROE and dividends to improve. This should result in a 10% total yield on the current share price and some share price appreciation. Of course my whole thesis hinges on double digit earnings growth. Only time will tell!

Good posts guys, do you think maybe there's a pre-election cloud over the business? Salary sacrifice has been a political football in the past and fear of a radical policy change, whether rational or not, might be keeping a few away, just a thought. Not a business I've looked into before but inspired enough to take a look now.

Thanks @Longpar5. I think salary sacrifice policy is the dark cloud that hangs over businesses like Smartgroup all the time, and yes upcoming elections seem to have a dampening affect on the share price. I think these companies are always on a slight discount because of that risk. If you choose to take them on, I think position size is important. I think I’ve nearly reached the limit on the position size I’m comfortable with at around 6.4%.