Three blue chips worth bagging Good catches among blue chips

THE INVESTMENT COLUMN

Investors dazzled by the new heights reached by the FT-SE 100 index during the last week can be excused for thinking that there are few areas of value still lurking on the stock market. But a bit of fishing among leading companies still throws up three shares yielding more than 7 per cent.

On the face of it, a return like that looks highly attractive, given its comparability with what is available on medium-term gilts. Risks should be limited by the fact that there can hardly be three bluer chips than British Gas, now yielding 7.2 per cent, Hanson at 7.6 per cent and P&O on a hefty 8.2 per cent.

But a high yield should set alarm bells ringing among investors. Normally it heralds bad news ahead and each of the Footsie high-yielders has been weighed down by problems over the past year, giving them the dubious honour of taking three of the bottom seven places among the worst-performing shares in the Footsie for 1995.

Arguably the company in worst shape is P&O, squeezed between a cut-throat construction market and a price war with rivals on its cross-Channel ferries. At the same time, soaring capital expenditure is doing nothing for a balance sheet already groaning under more than 80 per cent gearing.

There is obviously a clear worry that the 30.5p dividend, held for the past three years, may be cut in 1995. That said, P&O has substantial asset backing from its property assets and the turn in the shares cannot be far away.

Less risky are British Gas and Hanson. The former has been hit by a warning that large provisions could result from onerous North Sea gas contracts. More serious are fears that the regulator, Ofgas, could take a significantly harsher view when it announces a new price formula for the transportation and storage business next June.

Even so, although growth is likely to be sluggish, it is hard to see British Gas cutting its dividend.

Similar considerations apply to Hanson, which has borne the brunt of the current disfavour with conglomerates and has not excited the market with its recent purchase of Eastern Electricity. None the less, given the current high ratings among engineering companies, Hanson could provide a cheap way into the sector.

The turn in sentiment may be a bit off yet, but with recent management changes the time to buy the shares is fast approaching.

Dobson price

not right yet

Shares in Dobson Park Industries have remained comfortably clear of the 110p offer from its US mining equipment rival Harnischfeger since the bid was launched last month. The stock market's conviction that the offer is too low to succeed was only reinforced by yesterday's defence document from Dobson Park, which prompted a 1p rise in the share price to 125p.

Dobson said it estimated that taxable profits had risen 41 per cent to pounds 14.8m in the year to last September, and is forecasting a 20 per cent uplift in the total dividend to 4.5p.

That looks a healthy enough rate of growth and Harnischfeger has still not fully addressed Dobson's strong and growing order book for its more advanced longwall mining equipment. Dobson has established a competitive edge against producers - including Harnischfeger - that are still dependent on making equipment for use in the declining room and pillar method of mining.

There is little question that the Americans need Dobson, particularly in their home market, where the percentage share of mining output from the longwall technique has grown from less than 20 per cent to around 30 per cent in 10 years.

Harnischfeger argues it could develop its own sites to make longwall equipment. Analysts, however, say it would be at least 10 years before it could compete head-to-head with Dobson. None the less, there remains significant industrial logic behind a merger of the two groups.

For the current year, analysts reckon profits will at least top pounds 20m and could even be as high as pounds 22m. At the upper end, Harnischfeger's terms would represent an exit p/e ratio of only 12.2.

With Dobson forecasting a further 16 per cent dividend increase to 5.2p for this year, shareholders should hold out for a better price.

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