For the financial year ending in August, brokers expect Smiths News to pay a dividend of 9p a share (see table below). At the current share price, that equates to a stonking 11.7 per cent yield - heady stuff in these zero-interest times. Obviously there is a reason such a yield is on offer - buying and reading newspapers and magazines is in long-term decline, so a company that makes its living by distributing them has problems. That said, we reckon that Smiths' ability to generate the cash that can fund its dividend is good enough to make its shares worth buying.
- Fat dividend yield
- Assurance of long-term contracts
- High barriers to entry
- Ability to cut costs
- Serves a declining industry
- Revenues likely to fall
Smiths News was formed in 2006 when it split from high-street retailer WH Smith, since when it has delivered consistent and stable cash profits. Five-year average free cash flow before some exceptional costs has been £23m, comfortably more than the average dividend cost of £12m. Not just that, but free cash flow has been on the rise, shifting from £20m to £23m between 2009-10 and 2010-11, and broker Liberum Capital reckons it will climb to £33m by 2013-14. So on a cash basis the dividend looks decently covered, and Smiths prospects look sufficiently bright for that to remain the case.