The Investment Column: It's still safe to stick with Northern Rock

Severn Trent is clearly one for the low-risk investor; Only the divi makes Dawson worth holding

It is stealing a bigger slice of the mortgage market. The bank's proportion of net mortgage lending is at a record 14.2 per cent. The more business it wins, it says, the more profit it can share with customers in the form of better deals: a virtuous circle. However, while Northern Rock offers some of the best interest rates on the high street, critics note that it charges higher arrangement fees than many of its rivals.

Northern Rock was characteristically upbeat about the outlook for the mortgage market yesterday, stressing that low unemployment and low debt-servicing costs would continue to underpin the market. Significantly, it now sees signs of first-time buyers starting to return to the housing market in the wake of the Bank of England's interest rate cut in August, and with another one expected as soon as next month. Remortgaging is still one of the key drivers of the mortgage market, accounting for about 45 per cent of all gross lending so far this year - and this has underpinned profits at Northern Rock.

Although yesterday's trading update contained no nasties, it disappointed some who had looked for the bank to raise its guidance to investors. It is confident only of meeting existing profit forecasts for the year, with total net lending - mortgages, commercial and personal loans - up 17 per cent in the nine months to 30 September compared with a year ago. Within this, net mortgage lending growth of 23 per cent is down from the running tally of 28 per cent for the first half of the year, suggesting much slower growth in the third quarter.

While other banks have suffered rising bad debts, Northern Rock reassured investors that arrears remain low. But other concerns have not gone away - important financial ratios such as income margin are still falling and profit growth lags asset growth. We have advocated over the past year that long-standing investors lock in some profit as the risks mount, but trading at about 11.7 times 2005 earnings, it is worth hanging on to some.

Severn Trent is clearly one for the low-risk investor

Severn Trent ought to be as calming an investment as a wander round one of its reservoirs. Water companies, being local monopolies, are highly regulated, and highly predictable as a result. The industry has just reached a new five-year settlement with Ofwat which has allowed it raise prices for customers, in Severn Trent's case by 15.2 per cent. This extra income is for infrastructure maintenance and upgrades. Only if Severn Trent can make those improvements and run its business more efficiently, will it have extra profit to pass on to its shareholders.

The company has a strong track record, and a trading update yesterday reflected a good start to the new regulatory regime. It spent £36m on infrastructure maintenance in the six months to 30 September, and will spend twice as much again in the second half of the financial year.

While the regulated business accounts for about three-quarters of Severn Trent's group operations, it does have other interests. Investors might get the whiff of the stagnant pond in some of these businesses, particularly an environmental testing venture in the US, where profits have fallen by 25 per cent. A landfill business in Belgium is also disappointing, although the bigger UK equivalent, Biffa, has been able to raise prices to offset lower rubbish volumes. These businesses have long-term growth potential, and so investors should look through current weakness.

With a 5 per cent dividend yield, it is just the sort of stock low-risk investors should have.

Only the divi makes Dawson worth holding

It could be thanks to Dawson Holdings that you have this newspaper in your hands. The company distributes papers and magazines and, together with John Menzies and WH Smith, it is a member of the trio which account for more than 85 per cent of all UK distribution. It is a tough business, with high overheads and low profit margins, and it doesn't look like it will get any easier soon.

Within days, we will have the Office of Fair Trading's proposals for shaking up the current system, which carves the UK into regions where distributors have exclusive rights to deliver to all retailers. There probably will be no change to that exclusivity on newspapers (local newsagents in hard-to-reach areas fear they might stop getting deliveries if raw competition is introduced), but magazine distribution will become more competitive, with supermarkets demanding ever lower prices, potentially squeezing Dawson.

The big three may win business from remaining independents, but we can't view the new regime positively overall. With fuel costs rising and earnings forecasts being cut, only a 5 per cent dividend yield makes Dawson worth holding.

Arts and Entertainment
TV Review: Sabotage, a meltdown and, of course, plenty of sauce
News
newsVideo for No campaign was meant to get women voting
News
A photo of Charles Belk being detained by police on Friday 22 August
news
News
i100'Geography can be tough'
PROMOTED VIDEO
Sport
Louis van Gaal looks dejected after Manchester United's 4-0 defeat by MK Dons on Tuesday night
sport
News
Actor, model and now record breaker: Jiff the Pomeranian
Video
News
REX/Eye Candy
science
News
i100
News
Down time: an employee of Google uses the slide to get to the canteen
scienceBosses are inventing surprising ways of making us work harder
Sport
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
Extras
indybest
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Google Doodle celebrates the 200th birthday of Irish writer Sheridan Le Fanu
tech
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
News
i100
News
In Eternal Sunshine of the Spotless Mind Jim Carrey and Kate Winslett medically erase each other from their memories
scienceTechnique successfully used to ‘reverse’ bad memories in rodents could be used on trauma victims
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
tv
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

£40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

£45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

£50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

Day In a Page

Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone
Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

What is the appeal of Twitch?

Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

How bosses are making us work harder

As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
Manufacturers are struggling to keep up with the resurgence in vinyl records

Hard pressed: Resurgence in vinyl records

As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

A tale of two writers

Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
Could a later start to the school day be the most useful educational reform of all?

Should pupils get a lie in?

Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
Prepare for Jewish jokes – as Jewish comedians get their own festival

Prepare for Jewish jokes...

... as Jewish comedians get their own festival
SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

A dream come true for SJ Watson

Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
10 best cycling bags for commuters

10 best cycling bags for commuters

Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

Paul Scholes column

Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?