Low returns are endemic. Interest rates have been at historic lows for almost a decade and central banks’ money-printing operations have pushed up bond and equity prices, squeezing yields to minute and often negative levels.
So the existence of a group of high-yield stocks are ripe for closer inspection. Analysts at Liberum, the investment bank, have put together a compelling analysis of the best shares to hold for a good-value dividend yield. They note that the FTSE All Share yield is an unexciting 3 per cent, but add that a significant proportion of companies are paying out twice that.
Needless to say, some of those dividend yields will prove illusory. The shares, in other words, will be priced on the expectation of a dividend cut. But the Liberum list offers a sensible starting point for looking for best-value, reasonably safe dividend investments.
Glaxosmithkline: yield 6 per cent
Back in late October Glaxo took a tumble when Emma Walmsley, its new chief executive, promised to give Pfizer’s consumer health products portfolio a look over. The market duly wondered where a spare $15 billion might come from and sold the shares just in case the divi was at risk. The risk seems overstated. After all, the huge asset swap with Novartis that forged Glaxo’s consumer health division was completed only a couple of years ago and not all investors are keen. The dividend, otherwise, is comfortably covered by next year’s forecast earnings.
The market is also downbeat on Advair, Glaxo’s blockbuster lung disease treatment, which is coming to the end of its patent protection. But this impact ought to have been long reflected in the guidance.
Yet since their Pfizer-inspired blip, the shares have not recovered any of the ground lost against either the FTSE 100 or Astrazeneca and ended yesterday at £12.79, off 18 per cent this year. Pfizer’s consumer healthcare business, which includes Advil and Chapstick, has other suitors and a resolution of that situation will boost Glaxo stock and instantly cut the dividend yield. Lock it down while you can.
Marston’s: yield 6.6 per cent
Like its fellow brewer Greene King, Marston’s offers the promise of a wet-smacking dividend for yield-thirsty investors. Unlike Greene King, it is on firm ground in a more promising part of the market. This year it bought Charles Wells brewery (not including its pubs), which brings brands such as Bombardier, Courage and McEwan’s under Marston’s stewardship. Two years earlier it bought Daniel Thwaites’ beer division. Those deals bolstered the group’s position at the premium end of the market, adding to a stable that already included Hobgoblin and Wainwright, without over-extending its property footprint.
The shares popped 10 per cent last week after strong results, but they remain good value and are still nearly 20 per cent below the levels reached in March, closing at 118¼p.
Dixons Carphone: yield 6.3 per cent
Contradictory sounds have emerged from the owner of Currys of late. Before the summer, the company appeared to vindicate the merger of Dixons Retail and Carphone Warehouse by announcing record results. Fast-forward to August and its shares dived by nearly a quarter after it warned about profits, with a sluggish domestic mobile phone market and changes to EU roaming charges hitting earnings.
The shares peaked at more than 500p two years ago, compared with 161p yesterday, down 4p. The over-arching logic of the tie-up still makes sense. Consumers increasingly read the news and watch video on their mobile phones and will listen to music through a wifi-connected speaker. A retailer that can offer you smartphones and internet-connected appliances along with the internet and mobile package to fit ought to be in a strong position.
Yet, on its price-to-earnings ratio, it is cheap as chips (and not microchips). Its dividend is covered handsomely by its forecast earnings. Lots can go wrong with Dixons, but a lot will have to go wrong for this valuation to make sense.
Northgate
Time was when Northgate was regarded as a bellwether of the British economy, its number of vans on hire an indication of how the world of tradesmen and corner shops was doing.
The commercial drivers of business for Northgate, which has about 40,000 vans out on rent in Britain and another 41,000 in Spain, have not been straightforward, however. There has been a structural shift in the game. White van man has gone from owning his vehicle to more likely renting it, even more so in times of economic uncertainty.
Northgate itself has become an unreliable gauge for underlying demand. Kevin Bradshaw, chief executive for less than a year, argues that it has underperformed, especially as six months in he was forced to deliver a profit warning.
In a market growing at about 6 per cent a year because of that structural ownership shift, Northgate’s number of vans on rental, a proxy for revenues and profits, has fallen 4 per cent in Britain year-on-year.
Uncompetitive, pedestrian execution, putting up barriers to completing sales, are merely some of the things that Mr Bradshaw says he is having to correct, though he claims cracking progress is being made. That is not immediately obvious from yesterday’s half-year results to the end of October. Revenues were up 10 per cent at £349 million, but much of this came on the back of the strongly recovering Spanish economy, where Northgate now has 11 per cent more vans on hire. Underlying pre-tax profits slumped by 16 per cent to £33 million. The company blames the affect of depreciation on the vans it sells on. These mostly are run on diesel, the vehicle fuel being demonised by the government.
To underpin its claims of a recovery, Northgate is raising the interim dividend 7 per cent to 6.1p. With at least an 18p total payout expected this year and the shares at 412¾p, the stock is yielding more than 4 per cent and trading at less than ten times this year’s forecast earnings. Though more than one investor thinks that the stock is fair value at 600p, the market’s current undervaluation comes down to wondering whether Mr Bradshaw can deliver.
ADVICE Buy
WHY Shares seem undervalued but way forward is not clear
