A&L: the stock to buy for income

Convenient time to take profits at Uniq; Renold succumbs to engine failure
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The Independent Online

It was back in March that investors unbattened the hatches and began to feel confident enough about the economic outlook to take on shares in riskier companies. Since then, jam-today companies that do safe, boring things like pay dividends have underperformed.

As optimists have pushed the market higher, the forecast annual dividend yield on the FTSE 100 has fallen from well above 4 per cent to 3.5 per cent, while interest rates on savings and bonds have started to rise.

Yet that does not mean the income investor need abandon the stock market entirely, as an interesting new bulletin from Barclays Private Clients, the stockbroking arm of the high street bank, shows. Barclays has assembled a top 10 of FTSE 100 income stocks yielding, on average, 5.5 per cent.

Barclays points out tantalisingly high dividends at two of its rivals. Alliance & Leicester has stuck to its knitting, is well run and has a safe dividend yielding 4.9 per cent. More controversially, Lloyds TSB is included. Although there have been suggestions that weakness at its Scottish Widows life insurance business will force a dividend cut, the consensus view now is that, following overseas disposals, the divi can be maintained unless an (unlikely) acquisition opportunity comes along. The 8.3 per cent yield is too good to miss.

Another unfashionable stock in the portfolio is the beleaguered supermarket J Sainsbury. The Sainsbury family's presence on the share register should safeguard the dividend and this column has argued before that a back-to-basics approach can rescue the grocer from its malaise. The depressed share price gives it a 5.5 per cent yield.

Scottish and Southern Energy, which generates and distributes electricity in the UK, is one of two utility picks. Even after falling prices for electricity distribution, the dividend is well covered, yielding 6.1 per cent. Shares in the water company Severn Trent are still where they started the year, and its dividend yield of 6.6 per cent is very attractive.

Insurance groups also provide rich pickings for income investors, now the stock market rebound has alleviated solvency fears. Aviva, the owner of Norwich Union, and the low-cost products specialist Legal & General are the top picks. Another recovery play, Hilton, has been able to maintain its dividend through the hotel industry downturn thanks to its Ladbrokes betting business. If hotel bookings pick up, there is scope to increase the pay-out.

And no income portfolio would be complete without a tobacco stock or two. Gallaher, market leader in the UK and a growing presence in Eastern Europe, is in the process of reducing debt, while British American Tobacco's recent deal to distance itself from its troubled American division has reduced the financial risks from cancer litigation.

Convenient time to take profits at Uniq

Medical bulletin from the poultry farm: the avian flu that wiped out a generation of Dutch chickens has been contained. The birds stopped going cheap as a result of the flu, which meant a European shortage, but prices are coming back down.

Which is good news for Uniq. It makes readymeals for supermarkets, and its poultry products business was one weak spot (the other was readymeal sales in France during the heatwave) in interim results yesterday.

Uniq has sorted itself out after years of restructuring that saw it abandoning the old Unigate dairy business. The easy gains have been made now, and future efficiencies require upfront investment in the robots that make Marks & Spencer sarnies and, increasingly, its dressed salads.

Sales growth will be key to the company's share price performance from here. Its French spreads brands, including Ilo, are growing strongly in a health-conscious market. In the UK, M&S, which accounts for about 17 per cent of Uniq's total turnover, is expanding its Simply Food chain of food-only stores, taking just the sort of convenience range that Uniq supplies.

We were negative on the shares at 174p a year ago and they have been as low as 122p, but the company's return to health has since prompted a mini rally. While suppliers to the mighty supermarkets face a continual squeeze on profit margins, the current price-earnings ratio of 12 looks enough. Take profits if you have them.

Renold succumbs to engine failure

Faced with a choice between letting a customer down and letting shareholders down, the little engineer Renold chose the only sensible course.

Its investors had to endure a profit warning when a car maker last year unexpectedly demanded more of Renold's engine parts than the company could profitably produce. It is fulfilling the orders, but the overtime and delivery costs have turned the contract loss-making. The company's fans say Renold's determination won it respect, new engine design projects and a strong future order book. But more expensive factory upgrades will be needed over the next six months to turn matters round fully, and the incident highlights how volatile business with car giants can be.

Renold is also suffering the effects of a downturn in the sale of chains and machine tools to other, economically sensitive industries. Its exposure to the US contributed to the fall in profits in the first half but renewed optimism on growth there suggests Renold will improve its performance in the coming months.

A trend in car manufacture away from using belts in engines to using the kind of durable chains produced by Renold - plus a dividend yield of 5.1 per cent - gives some support to the shares. But, up 3.5p to 87.5p yesterday, they still trade on 14 times reduced earnings forecasts for the year. That is not compelling value.