The Investment Column: S&N dividend brings some cheer

Weapons detection sales keep Smiths on target - Eastern promise makes Laird a good long-term buy
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The Independent Online

With brands such as Foster's, Kronenbourg 1664, Strongbow and John Smith's lined up on the bar, you might think Scottish & Newcastle - the leading brewer in the UK - would be every investor's best drinking buddy.

With brands such as Foster's, Kronenbourg 1664, Strongbow and John Smith's lined up on the bar, you might think Scottish & Newcastle - the leading brewer in the UK - would be every investor's best drinking buddy.

But a cocktail of acquisitions and disposals over the years has left it badly co-ordinated and incoherent. Tony Froggatt, who came in as chief executive in May 2003, only now seems to be sobering up the company.

He introduced much-needed cost cutting in the UK, closing its historic Edinburgh and Newcastle breweries and taking out tiers of management. The results suggest that the hangover is clearing. Profits for the half-year were up 8 per cent, with beer and cider volumes in the UK up 3.5 per cent. The cost savings are now expected to be £60m a year, up from the £45m originally signalled.

The UK - and much of Western Europe - is a mature market for beer, and S&N can only try to flog more of its existing brands to build market share. With Foster's, for example, it has developed a super-chilled version, and it is also launching a wheat version of Kronenbourg to compete with Hoegaarden. Money saved on production and supply is being ploughed into marketing and advertising.

There seems little, though, that S&N can do to stop the pricing wars of UK supermarket chains. Euro 2004 did boost sales but the need to offer heavy discounts to supermarkets wiped out most of the gains. The beer market in France is proving even more fiercely competitive.

Other markets are emerging. Newcastle Brown Ale is a big hit in the US, and S&N is growing in Eastern Europe. BBH, its joint-venture with Carlsberg, is the market leader in Russia, but profitability is being sacrificed to gain market share.

And while sales are predominately in the UK and France, rocket-like growth is difficult. On 2005 forecasts it is trading only at 12 times earnings, but growth still looks stale. With a yield of 5 per cent, it will be attractive to income investors, rather than growth investors.

Weapons detection sales keep Smiths on target

They can be good for business, these terrorist alerts. The latest threats on both sides of the Atlantic have prompted another ratcheting up of security measures to deter an attack - and should mean more investment in the bomb and weapons detection systems sold by Smiths Group's newly created "detection" division.

Smiths is that most unfashionable of creatures, the conglomerate, with operations making and servicing aeroplane parts, selling medical equipment, and also including diverse engineering businesses. Unfashionable maybe, but it ought to provide some highly desirable returns for shareholders now that it is firing on all cylinders again.

The growth in detection sales of 20 per cent in the financial year just ended was impressive after a wobbly start. But most pleasing of all the detail in yesterday's trading update was the prediction that the aerospace division will return to growth next year. It has suffered in the civil aviation downturn of the past four years, when parts have been stripped off grounded aircraft rather than purchased new from Smiths.

An upturn in civil aviation, together with greater spending on the US air forces, will mean turnover and profit growth in aerospace from now, after only flat sales in the year just closed.

So the outlook is bright, with only worries over a declining dollar pushing Smiths shares down 13p to 714.5p yesterday. An Independent tip for 2004, the stock is up 8 per cent since the start of the year and is still very much a buy.

Eastern promise makes Laird a good long-term buy

The combination of relocating major parts of its manufacturing to low-cost Asia and the vigorous pursuit of acquisitions while prices have been bombed out has paid off handsomely for Laird Group, the engineering company whose diverse products include electromagnetic shields for the electronics industry and locks for windows.

It announced a first-half profit up 26 per cent yesterday. As well as the cheaper Far Eastern labour reducing costs, Laird's sales have also benefited from the company being closer to its customers in the growing telecoms and electronics market in the Far East.

The figures were well above forecasts and would have been higher were it not for increases in commodity prices, which the group had to absorb, and the weak dollar. Laird shares jumped 8 per cent to 299.5p in anticipation of the strong trading performance continuing in the coming months.

Laird has pushed in the direction of higher technology, higher margin businesses in recent years and is hopeful that shedding its plastics division will increase long-term profit even further. It is also still on the hunt for acquisitions - and can be trusted to deliver quality ones.

With a likely dividend yield of 3 per cent this year, the shares are not notably cheap but look attractive for the long term.