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Investment insight: In search of yield

By Craig Pheiffer

A good dividend goes some way to pacify nervous investors in that it provides some investment return when markets are weak and generally indicates that the company is still doing well despite the poor health of the markets. CRAIG PHEIFFER looks for a few of the counters that are offering a more generous dividend yield to help bide us through these troubled times.

With prospects for short-term share price growth muted it becomes extremely important that investors look to those shares that provide some other return either by way of interest distributions or dividends.

In times of low or no growth a good yield becomes all the more imperative but it ‘s not a case of yield at any price. Fortunately, the decline on the JSE has exposed a number of top counters with a significant yield at a fair price spread over the resources, financial and industrial sectors. We have previously espoused the virtues of listed property stocks and while we continue to advocate a 15% portfolio exposure to that sector we will not consider them again here. In hunting for yield it must always be remembered that historic yield is not always the best indicator of future performance.

Financial stocks have not been the flavour of the day given the high interest rate environment, falling equity markets and the greater attraction of the resource counters. This has depressed the sector despite the fact that many of the companies listed in that sector have continued to produce sterling results.

The sector as a whole is cheaply valued on a relative basis but it could take some time before that value is unlocked. Life assurer Old Mutual has taken a beating on the back of the weaker Rand and declining markets but at the current price of 1165c, it is trading on an historic yield of 6,7% and a P/E of 9,3x. Global markets may take some time to recover and the US operations may require further reorganisation but at the current price and yield the share is starting to look a lot more attractive. The same can be said for Nedcor (at 9850c), 53% owned by Old Mutual. The Nedcor share price has been knocked from above 15000c to below 10000c in the space of just a few months on market concerns over the diminishing value of the DiData stake, the BOE merger and the buyout of NIB minorities.

The DiData stake must now be of little significance to Nedcor and the acquisitions will ultimately enhance Nedcor earnings. At a yield of just over 5%
and a P/E of 6,3x the share offers the best turnaround potential in the banking sector. The Liberty Group at a P/E of 10,3x is priced to reflect its status as the blue blood of the life assurance sector but it too offers a handsome yield of around 6% and is worthy of consideration in the yield stakes.

Amongst the resources stocks the platinum miners continue to offer generous dividends. Impala platinum (56700c) offers the best value for money yield at 6,6% on a P/E of 8,3x and would be the first pick of the PGM counters. That compares to the 7,1% yield offered by the relatively more expensive Angloplat (35700c), currently priced at 12 times earnings.

Of the smaller operations Northam (1915c) is trading at an exceptional 12,9% yield on a P/E of 11,2x and would be a great earnings sweetener for any portfolio. While the palladium market is expected to remain in oversupply going into 2003, the platinum market should remain undersupplied, underpinning the platinum price and ensuring that the platinum stocks return similar yields in the year ahead.

Gold stocks have had an incredible run but at current share prices are yielding a lot less than the platinum stocks with Anglogold at 4,3%, Harmony at 3,1% and Gold Fields at 2,4%.

On the industrial boards the “sugar stocks” stand out as having a good yield at a fair price. (5000c) is much more than a sugar stock with its diversified interests in starch and glucose and aluminium and is trading on an historic yield of 5,8% and a P/E of 8,2x. With that company’s greater export drive and myriad growth opportunities in the various divisions the group is well placed to return a similar (sweet) yield to shareholders in the next financial year. Illovo Sugar (790c) is a more focussed sugar play as a low-cost sugar producer and manufacturer of downstream products (e.g. syrup) yielding 6,5% on a P/E of 7,7x. The two companies have been trading at lowly P/Es thanks to the currently depressed global sugar price but any improvement in sugar prices will provide a further kicker to earnings.

There are a number of stocks in the FTSE/JSE All Share index that offer a yield that is higher than that of the stocks highlighted above. Ozz (12,4%), PSG
(10,4%), Sage (10,25%), CorpCapital (9,7%) and Glenrand MIB (8,2%) are some of those stocks but they all have a market capitalisation that is between R450m and R930m. While size is no guarantee of success and some of these latter counters may be considered in a high-yielding portfolio from time to time, current market conditions demand a more cautious investment approach and the stocks highlighted earlier all have a market capitalisation that is greater than R2,5bn. That list is not exhaustive but should provide investors with a start to improving their portfolio yield while market doom and gloom persists.

Craig Pheiffer is Chief Investment Strategist at Sasfin Frankel Pollak Securities. For more information, contact him on (011) 883 2337 or by e-mail on cpheiffer@sasfin.com.

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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