Investment Column: Don't rush to stub out Gallaher

Ailing mail order group N Brown is best avoided; Dimension Data looks programmed for growth

It is pretty simple to make money when your customers are addicted to your product. As a result, tobacco stocks are never likely to run out of puff. Stock market fashions may ebb and flow but the cash keeps rolling in, dividends keep rolling out to shareholders, and groups such as Gallaher have plenty of firepower with which to go adventuring in the new markets which are opening up out east.

Gallaher, the company behind the Benson & Hedges and Silk Cut brands, said yesterday that it had sold 18.2 per cent more cigarettes in the first three months of this year than it did in 2003, thanks to a big marketing push in Russia and other former Soviet Union countries. In Kazakhstan, it has captured more than a third of the market.

The entry of 10 new member states to the European Union will mean more of the cheaper cigarettes coming back west, which could prove another threat to Gallaher's entrenched positions in countries including Germany, Ireland and the UK. Sales in these markets are already eroding as a result of punitive duties on cigarettes, stringent advertising rules and, increasingly, bans on smoking in public buildings. No wonder Peter Wilson, Gallaher's new chairman, was moved to tell shareholders at the company's annual meeting that "smokers shouldn't be discriminated against" and that Gallaher is "committed to bringing balance and a sense of proportion to the public debate on smoking".

The important thing for investors is that Gallaher is pushing into emerging markets more quickly than it is suffering declines in the West, and so it is. Russia is its single biggest market by volume, and it is having some success in persuading smokers to trade up to its more expensive brands. It is also ahead of the pack in China, where it has a joint venture to distribute its Memphis brand in this most populous market.

Worries over the economy have pushed investors into defensive sectors in recent weeks, making Gallaher shares look toppy again but, with a dividend yield of just under 5 per cent, it is a solid hold in any climate.

Ailing mail order group N Brown is best avoided

Who would be a traditional mail order retailer? Recent months have seen the former pioneer GUS exit this old-fashioned market, which shrunk 7 per cent last year.

Companies such as Next, which has a thriving catalogue business, rely on a high street estate to persuade customers to order from its directory. The shops provide a useful dumping ground for all those outfits that looked better on the page than on the body. N Brown doesn't have the luxury of a store network. Alan White, the chief executive, thinks that by marketing to the older, plumper woman the company could thrive. But scores of high street retailers cater for just that market.

N Brown's vulnerabilities were highlighted by last year's postal strike. Rising bad debts - many of its customers rely on its credit options - also hit its bottom line. Mr White hopes his attempts to tap the e-commerce and TV shopping market, the latter via a joint venture with Richard Desmond's Northern & Shell group, will make up for flagging mail order sales. But this is a real stab in the dark.

Although sales of clothing and footwear have risen 2 per cent in the past 10 weeks, N Brown's crackdown on riskier credit means home and leisure sales are down 5 per cent. It plans to sell its TV rental business and will take a £9m charge to cover the anticipated losses.

The shares, down 4.75p at 115.25p, have had a rough time since this column recommended avoiding them 18 months ago at 157p. Any investors still hanging on to the stock should sell.

Dimension Data looks programmed for growth

It has been downhill all the way for the technology group Dimension Data since its float in 2000 - when it briefly enjoyed FTSE 100 status before the crash that brought it, and its peers, back to earth.

However, yesterday it was celebrating a return to profit in the six months to 31 March. Although the cheers were somewhat muted, an 8 per cent increase in sales to $1.2bn and operating profit of $9.9m versus a loss of $4.5m on the second half of last year is real progress.

Anyway, this might be the stock for investors still looking for some exposure to the recovery in technology spending. But what does Dimension Data do exactly?

Part of its attraction is that its interests are spread both internationally and operationally. Its core business is basically hand-holding. It will build for corporate clients their IT networks, putting together all the servers and other bits of kit sourced from a host of different suppliers. It then looks after the network, upgrading it when necessary and integrating new technology as and when.

Growth areas for Dimension Data include offering the same clients data storage and back up facilities. Over the past 12 months the shares have risen from 17p to 33p, but don't be spooked by an earnings ratio for next year of 26 times. This should be a long-term winner.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Ramsay Bolton in Game of Thrones
tvSeries 5, Episode 3 review
News
peoplePair enliven the Emirates bore-draw
Arts and Entertainment
tv
News
Britain's opposition Labour Party leader Ed Miliband (R) and Boris Johnson, mayor of London, talk on the Andrew Marr show in London April 26
General electionAndrew Marr forced to intervene as Boris and Miliband clash on TV
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence