Could lower business rates send this FTSE 250 stock soaring?

On the face of it, FTSE 250 pub chain JD Wetherspoon (LSE:JDW) got some very good news on Thursday (8 January). The expected rise in business rates for pubs is set to be scrapped.

The stock however, didn’t exactly surge as a result. And I’m not sure the announcement is as much of a benefit as it seems at first sight. 

Relief

Since the Covid-19 pandemic, the UK government has been helping the hospitality sector with business rates relief. This had been coming down each year, before ending in 2026.

The plan had been to replace this with a new – permanent – lower tax rate. But higher rateable values meant that several businesses would have had to pay a lot more as a result.

This however, has been abandoned. Instead, the Chancellor’s reported to be working on a relief package to continue supporting the industry and prevent the sharp increases.

The move marks a U-turn from the government, but I don’t really care about that. I am however, interested in the implications for JD Wetherspoon – a company I own shares in.

Who really benefits?

Wetherspoons’ pubs often have much higher turnover than their independent counterparts. This means their rateable values are typically high and this leads to higher business rates.

Given this, the company would seem to be the obvious beneficiary of a potential reduction in business rates. And while there’s some truth to this, there’s also a catch. 

The firm does typically pay higher business rates than other operators. But it’s also in a better position to deal with this as a result of a cost advantage generated by its size and scale.

As a result, I’m not sure more support for the industry as a whole is a good thing for JD Wetherspoon. It arguably doesn’t need it and it might help the competition.

An analogy

There’s a big difference between running a marathon at sea level and running one at an altitude of 5,000m. The second’s much harder, since it’s more difficult to get oxygen on board.

In either situation, the best runners should win. But the conditions they’re running in can make a big difference to how much competition there is to deal with. 

Specifically, there will be runners at sea level that just can’t complete the race at altitude. And even if you don’t run your best, it’s a lot easier to win when there’s less competition around.

I think that’s how it is for Wetherspoons. It’s one of the few pub companies that can cope with higher taxes, so more support might just help keep the competition in business.

What I’m doing

Lower business rates should help JD Wetherspoon’s financial performance. But there’s a risk they also make the industry more competitive, which isn’t a good thing.

The stock didn’t react particularly strongly to the announcement, but it‘s up 27% in the last 12 months. And it’s reached a level in my portfolio where I’m not sure about adding to it further.

Equally though, I’m not selling a single share. The industry will go through ups and downs, but I think the firm has a big advantage over its competitors and I expect it to do well as a result.

The post Could lower business rates send this FTSE 250 stock soaring? appeared first on The Motley Fool UK.

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Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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