The stock in question is Latchways (LTC), where shareholders owing 38 per cent of the equity have agreed to a £124m bid from MSA Safety (US: MSA). The bid, at 1,100p a share - 48 per cent above the price at which I bought in November - gives my income fund a 3 per cent uplift - useful when the All-Share index fell 6 per in August.
The move for safety-equipment maker Latchways prompts the question: are there similar takeover candidates? The identikit company has a fine long-term record as a leader in a market that's unlikely to face existential threats from, say, technological change or regulation; its financial performance will reflect this and it will be run by bosses who have shown consistent commitment to the company.
There are such companies, though they rarely come with high-yield shares - the market sees to that. One borderline candidate is an old favourite - Walsall-based Castings (CGS), which makes iron castings and machined parts. I got much stick from readers in late 2013 (Bearbull, 22 Nov 2013) when I suggested that Castings' shares were badly overpriced at 427p. For some time that looked a poor call as the price surged through £5. Reality eventually set in, however, and the price fell by over a quarter in the six months to February.
Through the share price gyrations, Castings traded calmly on. Its bosses never have much to say - they let the figures do the talking - but confident words about the outlook for 2015-16 coincided with a share price recovery to the current 430p. At that level, the yield on this year's likely dividend is 3.2 per cent, which is barely enough for an income fund. But do I stretch a point for Castings?
Arguments against revolve around the notion that the shares are not obviously cheap. True, I have not crunched the numbers, but I suspect it's the case. Put simply, Castings' shares trade on just over 11 times forecast earnings for 2015-16. I pay little attention to PE ratios and that's not really a high earnings multiple anyway. Even so, such a multiple is usually borderline consistent with securing the margin of safety I want between modelled values driven by cautious inputs and prices paid in the market.
Arguments in favour suggest that one should not finesse the price paid for shares in a quality operation such as Castings. In the long run they will see you right, so don't quibble for an extra few per cent off the purchase price. Besides - and here we are in 'Latchways' territory - it's plausible that Castings will be taken over not long after its 75-year-old chairman, Brian Cooke, finally calls it a day. Most likely, many Castings' shareholders earnestly hope that will be the case since it's unlikely the company will be improved by the departure of the person who has led it since 1968.
Meanwhile, the drop in equity prices has been focused on big companies, especially those with global reach. For proof, look no further than the difference in performance between the FTSE 100 index and the FTSE SmallCap index. The Footsie is down almost 10 per cent since the end of July, while the SmallCap has dropped less than 3 per cent.
That implies the bargains - where the market has overreacted most - will lie among the blue chips. It's striking that there is an extra percentage point of dividend yield available from shares in HSBC (HSBA) in the four weeks since I did a comprehensive income search (Bearbull, 14 Aug 2015). The bank's share price has fallen 16 per cent in that period and the yield in now 6.6 per cent. Granted, the payout won't grow much, but, with that level of yield, it won't need to; even if it only creeps up, that will sustain the share price.
And the fallout has thrown up two interesting 'left-field' candidates, both investment trusts - JPMorgan Global Emerging Markets Income Trust (JEMI) and JPMorgan Russian Securities (JRS). Generally, I don't want collective funds in my income portfolio. There is no point in picking stocks, then paying a fund manager to do the same. The exception is where the collective fund offers something I can't supply. With these two, that 'something' could be extra 'efficiency' in the portfolio, which would mean less price volatility without sacrificing performance. That could happen because these would make an unusual pair within an equity portfolio of UK-based companies. In effect, they dance to a different tune, so they could supply the portfolio with less volatility without sacrificing performance.
True, I suggest this mostly for discussion. Frankly, I wouldn't touch the Russian securities trust for my income fund. The emerging markets trust, however, might be worth serious consideration. Maybe for a boléro.
