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.