No Pain No Gain: Former brewery star serves short measure to a hungover portfolio

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The Independent Online

With the stock market so weak, it is not surprising the no pain, no gain portfolio is displaying much pain and not enough gain. Clearly, it is not possible to nullify completely the impact of such a savage three-year share slide.

With the stock market so weak, it is not surprising the no pain, no gain portfolio is displaying much pain and not enough gain. Clearly, it is not possible to nullify completely the impact of such a savage three-year share slide.

But it is a wounding experience when a former star is exposed as a bungler. I must admit this week's "cold draught" from Scottish & Newcastle caught me on the hop. I had not expected such a defensive group to roll out a profit alert, even though it was followed only hours later by Allied Domecq.

S&N's is not a brutal warning. Perhaps a £15m or £20m shortfall. Even so, the nation's biggest brewer, with such brands as Courage, Fosters and Kronenbourg, had seemed set for a strong performance in the year ending April. Problems with a new distribution network have done much of the damage. In the group's interim statement in December it referred, in a low-key way, to difficulties and warned delays were having an "adverse affect on profits". Now, it transpires, things have got much worse and the group is forced to run its new network alongside its old one, with a telling impact on costs. To pile on the agony, festive trading felt the slowdown experienced by trendy high street bars

So for the first time since I recruited them in April 2000, S&N shares are below my buying price of 394p. Despite the company's less than scintillating display I have no intention of ditching the shares, although with a staggering yield of around 8 per cent there are clearly stock market worries that the dividend will be cut.

In time, S&N will recover from its distribution difficulties. But it is disturbing that it should suffer such a setback. It could not expect to be immune from a slowdown in festive trading. But the domestic distribution reverse represents a failure of management, hardly encouraging for a group developing an international network.

It is still heavily borrowed and there will be a huge temptation to end its progressive dividend policy when it tots up its final figures. Yet its pubs side, which it wants to sell to reduce its debt burden, continues to do well and it says its international operations are performing in line with expectations. Year's profits, therefore, could emerge at £520m, down from earlier hopes of around £545m.

I think it is highly unusual for a blue-chip Footsie constituent to offer such a rich yield. It was only in December, when S&N felt compelled to mention the distribution problems, that it apparently underlined its intention to pursue a progressive dividend policy.

The yield was then 6.3 per cent. With last year's dividend only just covered, a cut must be a possibility. Yet any reduction would be foolhardy. It would further damage the group's reputation, which has not been helped by this week's shenanigans. At the very least, the payment should be held at last year's level. The "progressive" policy has presumably been chucked out of the saloon bar.

Last year, S&N shares approached 700p. A steady decline from such a heady level then became much steeper with the price dropping sharply this year. It is difficult to ascertain just how much of the recent fall was due to the general stock market retreat and how much to any lurking worries about the distribution network and festive trading. I was prepared to accept the interim statement, which seemed to be rather bullish, at face value. But such a downbeat bulletin just two months later shows how wrong I was to be so complacent, and underlines the need for shareholders to remain cautious when assessing information.

Another no pain, no gain constituent which has failed to cover itself in glory is the little City of London Group, with public relations and investment interests. Like so many, it got its corporate fingers burnt in the internet fall-out. It, too, offers a rich dividend yield, but it is strictly a notional calculation. The group failed to pay an interim dividend and has to decide what to do about a final. So forget the published 14.3 per cent yield: that will not happen.

At the interim stage, CoL suffered a £2.3m loss, largely the result of write-downs against two abandoned internet ventures. But its remaining internet play is showing signs of coming up trumps.

Rchive-it offers tamper-proof e-mail archiving. It has already attracted the attention of London Underground and has a dozen other organisations displaying more than passing interest, including, I believe, the Ministry of Defence. CoL is so enamoured by Rchive-it's prospects that it has pumped more cash into the fledgling business, lifting its stake from an effective 49.9 per cent to an effective 72.5 per cent.

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