The Investment Column: Kelda is too conservative to return a big chunk of cash to shareholders

De La Rue; Land of Leather
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The Independent Online

Our view: Switch to rival

Share price: 737p (-16.5p)

Kelda Group, the owner of Yorkshire Water, counts itself lucky not to have taken a bath over its investment in the US. This year the group unveiled plans to sell its Connecticut-based water business, Aquarion, to Macquarie Bank for £491m.

Kevin Whiteman, Kelda's chief executive, said yesterday the company had made a tiny profit overall from the foray. This is pretty good going, given the hundreds of millions UK utilities have lost recently by dabbling in the US market.

Mr Whiteman also unveiled an impressive set to annual results. Profits after tax rose 16 per cent to £174m, but it is worth noting that this figure was flattered by new accounting rules which deflated Kelda's profits last year. There was also news of a 4.6 per cent rise in the dividend to 30.35p a share.

The company has beaten agreed efficiency targets at Yorkshire Water which, with increased charges to consumers, helped offset cost pressure from rising energy prices. Ofwat, the water regulator, has allowed the group to raise customer bills by 18 per cent in total by 2009/10 to pay for infrastructure improvements.

So what now for Britain's third biggest water company? Mr Whiteman promises to continue to improve the efficiency of the business. He will need to if he is going to diminish the effect of high energy costs.

The Kelda boss refuses to say what he plans to do with the proceeds of the Aquarion sale until the deal is completed later this year. It is safe to assume that a part of it will be returned to shareholders, but investors hoping for a big payout will be disappointed. Kelda is one of the most conservatively managed water companies in the UK. Compared with the wider sector, it carries only a tiny debt burden.

Analysts predict, for example, that after it receives the money from Aquarion, the amount of debt on its balance sheet relative to equity will be half that of the rival AWG. If it were to gear up the business it could return a substantial chunk of cash to shareholders. But that is unlikely under the current management.

This conservatism is reflected in Kelda's dividend policy. The group's payout is forecast to rise 32p per share this year. At yesterday's close of 737p, this leaves the stock yielding just 4.3 per cent. Investors looking for a high dividend - and let's be honest, that is the main reason for holding water shares - would do better switching to United Utilities. Its stock yields nearly 7 per cent.

De La Rue

Our view: Hold

Share price: 469.5p (-17.5p)

As the world's biggest commercial printer of bank notes, De La Rue certainly knows how to make money. It supplies 150 central banks around the world with paper money. Over the past year it has also been busy making cash for its shareholders.

De La Rue posted a 17 per cent jump in annual pre-tax profits yesterday and highlighted the return of more than £103m to shareholders during the 12 months to 25 March 2006 through share buy-backs. The company also signalled the buy-back programme will continue this year, which should be of no surprise given its balance sheet boasts £91m of cash.

The sell-off in the stock market has wiped away all the gains achieved by De La Rue shares since the start of the year. Nevertheless, they are still up by 153 per cent since April 2003. Trading at 16 times earnings, with plenty of scope for management to improve profit margins by relocating production to low-cost countries such as China and Russia, the stock is worth holding on to.

Land of Leather

Our view: Buy

Share price: 249.25p (-3.75p)

Despite the difficult conditions on the high street, Land of Leather managed to notch up an 18 per cent rise in profits last year to £14.3m. This figure, unveiled by the retailer yesterday, was slightly better than City expectations and was driven by a 24 per cent rise in sales and improving profit margins. It was accompanied by a final dividend of 4p a share.

The year that has just finished saw Land of Leather open 12 stores, taking its estate to 72. This has meant a 20 per cent increase in the group's floorspace and has been the key factor behind sales growth. The next few months should see the rate of new store openings increase.

In the near term, the World Cup might hold back trading as consumers opt to stay at home to watch the football as opposed to going to a Land of Leather shop to buy a cheap sofa. However, the retailer's expansion and an expected improvement in its margins should keep profits at the group moving higher.

At 249.25p, Land of Leather shares trade at 10 times forward earnings and yield 4.3 per cent. Although readers would do well to avoid the group's sofas on taste grounds, this should not deter them from owning its shares. Buy.