Investment Column: Tobacco is unlikely to run out of puff
Wednesday 22 October 2008
As the economy heads towards recession, investors need to look not only for those companies that will best maintain their share price, but also for those that will continue to offer an attractive dividend yield.
That rules out most of the banks. Despite falling over themselves to pay bumper staff bonuses, as part of the public rescue dividends are to be prohibited for the time being.
UK investors have enjoyed growing dividend yields in recent years: according to Merrill Lynch European Strategy, the average reached a 26-year high of 5.8 per cent last week, and while this is certain to fall as the recession bites, the experts point out that there are sectors that traditionally offer dividend yield protection during a recession. In the last three recessions, food retailers, healthcare groups and utilities cut dividends by less than 10 per cent, while on average car-related business slashed returns by more than 50 per cent.
Ethical investing is often a bull market nicety that is shunned in a recession for reasons of self-preservation. With that in mind, buyers might wish to consider the FTSE 100's two tobacco groups, British American Tobacco (BAT) and Imperial Tobacco, which are doing well selling cigarettes in the emerging markets, particularly the Middle East, despite a falling number of smokers in the West. According to research from Evolution, BAT and Imperial are likely to increase payments by 51 and 53 per cent respectively over the next three years. BAT's share price in particular has barely moved in the past 12 months as others in different sectors have plummeted. The tobacco stocks are nailed-on buys in the face of the expected recession.
Our view: Sell
Share price: 167.25p (+21p)
There is evidence that the sell-off of some stocks has been overdone a tad in recent weeks and that investors that abandoned everything in the wake of the banking crisis may have jumped a little quickly in some cases.
Laird's shares jumped 14.4 per cent yesterday after the group issued a trading statement saying that full-year targets would be hit, even though demand for its electronic and technology products has slowed. News that the group is "taking actions to reduce costs" will no doubt be welcomed by investors, if not employees.
The stock's stellar performance yesterday should not cloud the fact, however, that owning Laird shares over the last month has been like listening to a record of nails scratching a blackboard, on repeat. Before the update, the shares had fallen by more than 50 per cent in the last month alone, with the group losing more than three-quarters of its value in the last year. Last week Goldman Sachs' watchers cut the company's target price from 406.5p to 220p.
Cutting (and running) is exactly what investors should do. The share price went through 220p earlier this month on the way down, implying that those at Goldman think there is little room for improvement.
The fact is that the group's customers, such as Nokia, are facing slowing demand as the global economy heads into recession, and even though Royal Bank of Scotland, the house broker, thinks that the stock, trading on price earnings ratio of 4.2 times for 2008 and 4.6 times for 2009, already prices in what is likely to be a tough 12 months next year, there are better options for investors, at least for the time being. Sell.
Our view: Sell
Share price: 64p (-4p)
The currency investment manager Record said yesterday that the quarter to the end of September had been "exceptionally challenging," due to clients being risk-adverse and the group struggling to find counterparties – the banks Record trades its with – that are suitably solvent and liquid.
The group offers traditional currency hedging services to its institutional clients, as well as sexier absolute return strategies, which the chairman and chief executive, Neil Record, says is the bit that has been hit by the credit crunch.
The candid Mr Record says that his company (he owns 32.2 per cent of the stock) is a medium-term bet and that a punt on the group is in effect an option on the return of the effectiveness of the carry trade, which while struggling now, has a record of effectiveness over 30 years.
It is true that the group is not a short-term bet. Mr Record blames the crunch for the fact that the stock is trading at its lowest level since listing at 160p last November. Another shock can only send the shares south again, he concedes.
The house broker, Cazenove, says that the shares are trading at 7.1 times current year estimates to March 2009, but it is sentiment that is really behind the share price. Investors should avoid, at least until there is a tangible return to economic health. Sell.
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