Returns on saving accounts are paltry. So it’s no wonder many cash-starved income-seekers are being enticed by the juicy dividend yields on offer from many companies. However, before jumping in, be aware of the dividend trap – the risk of being suckered into buying a share solely because of its payout. Over the past year, there has been a deluge of FTSE 100 companies (including Xstrata, RBS, Enterprise Inns, and Persimmon) that have either slashed, or entirely cancelled, their dividends in order to conserve cash and pay-down debt. And this deleveraging is not about to end anytime soon. So how can we find income?
Business Post (LSE: BPG), tipped as a BUY by Seymour Pierce
One approach is to plump for stocks that are cash generative, have sound balance sheets and offer everyday services. Take Business Post. It is a leading UK parcel, mail, courier and pallet delivery group. It competes profitably against rivals such as CityLink and TNT, and has been steadily expanding its customer base. That’s in part because companies such as HSBC and O2 have turned their back on the Royal Mail following the liberalisation of the UK postal industry. Business Post’s mail division has a 15% share of the market, and will soon become the firm’s biggest contributor to bottom-line profits. Reassuringly, 70% of its business is based on recurring deliveries of documents, such as bank statements, reducing its exposure to economic fluctuations.
The smaller pallets unit is also performing nicely despite the recession. The only fly in the ointment is the more cyclical parcels division, which saw revenues fall in the third quarter. This reduced the group’s overall growth to 3% from 16% at the half-year. Clearly this sharp pullback has spooked the City, but the sell-off appears too harsh. For example, declining revenue in parcels has been partly offset by lower fuel costs, headcount cuts and reductions in the vehicle fleet.
As for the firm’s courier business, it has increasingly moved from ad hoc deals to long-term agreements. It now has a big contract with Orange to deliver broken mobile phones for repair, for example. Finally, the firm is almost debt-free, has minimal capital expenditure requirements and so should have sufficient fire-power to maintain, or even increase, its 6% yield even if things turn nasty. There is an outside chance that it could also become the target for a foreign buyer.
The City is forecasting sales and underlying earnings per share of £395m and 21.7p respectively for the 12 months ending March 2009, rising to £425m and 23.4p a year later. Consequently, with the stock trading on undemanding price earnings multiples of 13.2 and 12.3 respectively, the shares are good value. Things could still go wrong of course. A long, brutal recession would hit top-line growth and the windfall of poor management at rivals such as the Royal Mail and CityLink may be coming to an end following their recent appointment of new top brass. That said, Business Post looks well placed to continue gaining market share in the medium term, and should benefit from the growing trend for people to buy goods online and have them delivered.
Recommendation: BUY at 288p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.