ANNUITY INCOME

23 January 2017 By PDSNET

An income which comes in regularly, usually as the result of a contractual obligation and a pre-arranged bank debit order. When analysing a share, it is always good to determine how much of its turnover consists of annuity income and how much derives from new sales. Companies which receive most of their turnover as annuity income are far stronger and less risky than companies that have to "start every month from zero" from a sales point of view. Thus, service companies, especially those in the financial sector like banks and insurance companies tend to have a high percentage of annuity income. This means that their overheads are already covered before the month begins. Manufacturing companies and retailers have to constantly make new sales in every accounting period to stay alive and profitable. Some companies have sufficient annuity income to more than cover their monthly overheads - which basically means that any sales that they make in that month go straight to the bottom line. Such companies are "highly rated" on the JSE. Shares which have a high annuity income tend to trade on much higher price:earnings (PE) multiples than shares which have lower or no annuity income.



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