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Our pick of the small high-yielders

Created:

2 May 2008

Written by:

Jon Mainwaring

FEATURE: What follows are six shares that not only promise big dividend payments but, we believe, also offer growth over the long term.

Braemar Shipping Services

Braemar Shipping Services, a provider of broking and consultancy services to the global shipping industry, issued an upbeat trading statement in mid-January – six weeks ahead of its financial year-end.

Shipbroking revenues were comfortably ahead of the previous year, while other divisions performed in line with Braemar's own expectations. The company's order book remained at a record level, too. Adjusted pre-tax profits for the 2008 financial year are set to come in at £14.1m – well ahead of 2007's £11m profit. And this profit should translate to earnings per share of around 47p, which means that the expected total dividend for the year of 22p a share is well covered.

Braemar has been confident enough to pay £5.5m (including £4.2m in cash) for Steege Kingston, which provides loss-adjusting services to a range of industries, including the oil and gas sectors. This acquisition, completed in March, is part of a strategy to build a broad-based shipping and energy services group.

Analysts upgraded their earnings forecast for the current year to 28 February 2009 to 51p a share, which points to earnings per share (EPS) growth this year of around 8 per cent.

The shares have been trading for about 450p, or around 8.5 times prospective earnings, so they look fairly priced. However, annual dividends of 22p a share mean that Braemar's yield is about 4.8 per cent. We think the group is a likely candidate for an Isa-based income portfolio.

Centaur Media

Centaur Media is a business publisher and exhibition organiser that has seen its share price halve over the past year.

It markets high-quality weekly publications focused on distinct business communities. These publications include such long-standing titles as The Engineer and The Lawyer. Centaur builds on the established audience for its weekly titles by adding complementary monthly magazines and business directories, and by organising conferences and exhibitions targeted at the readers of its titles.

Recent half-year results, for the six months to the end of December, look solid from a turnover and operating profit point of view. First-half revenues were up by 6 per cent, while adjusted earnings (before interest, tax, depreciation and amortisation) were up 15 per cent to £6.3m.

However, at the EPS level there was no growth. This was due, in part, to one-off costs associated with the closure of Perfect Analysis, an equity research service developed by a Centaur subsidiary.

But the group says that it experienced further growth in most of its markets during the first two months of 2008, and expects final results to be in line with market expectations.

Those expectations are for EPS of 9.1p, which would represent earnings growth of more than 18 per cent over 2007. If these earnings are delivered, then Centaur's estimated total dividend for the year – 3.9p – will be well covered. So the shares, trading at around 75p, are paying out cash at a rate of 5.2 per cent.

We think Centaur looks like a suitable constituent for an income portfolio that promises a little growth, too. Good value.

Creston

Creston is a group of marketing services and communications businesses whose strategy is built around diversification. It has two divisions: insight, which helps clients understand consumer behaviour and attitudes; and communication, which is aimed at helping clients to shape and change consumer behaviour and attitudes.

Creston's two divisions are themselves made up of 12 companies. Insight runs businesses that carry out qualitative and quantitative market research using both traditional methods and online techniques. Communication includes public relations firms, advertising businesses and digital marketing companies.

As well as offering diverse services, Creston also has a diverse range of blue-chip clients. These include retailers Tesco and Morrisons; car manufacturers BMW, Nissan, Vauxhall and Alfa Romeo; banks HBOS and Lloyds TSB; mobile phone operators Vodafone and T-Mobile; and other companies including AstraZeneca, British Airways, Burger King, Ebay and Diageo.

This strategy of diversification should protect the group from just the kind of downturn that investors fear. Meanwhile, Creston's business model enables its companies to generate cross-selling opportunities by referring clients in need of different services to other companies within the group.

In mid-February, Creston provided some evidence that its strategy works when it released an upbeat trading statement. This revealed that trading during the first three quarters of its 2008 financial year was ahead of the same nine months in the previous year, with revenues on a like-for-like basis up 8 per cent. This growth, said the group, was in excess of the industry average and had been achieved in spite of a "volatile economic environment" and the structural shift to online services.

For the year to 31 March 2008, Creston expects revenues to be in line with forecasts and to see like-for-like growth in operating profit.EPS for 2008 is forecast to come in only 3 per cent higher than last year at 17p, although earnings are set to grow by 14 per cent this year. This suggests the group is trading on a price-earnings ratio of just over three times at the current share price of 67p.

Investors are clearly worried that this year's forecast will be cut, but expected dividend payments of 2.9p for last year and 3.2p for this year are well covered, so it seems unlikely that Creston will reduce its dividend payments even if earnings were to decline. Given that the forecast dividend payments yield between 4.3 per cent and 4.8 per cent, Creston's shares offer good value.

Severfield-Rowen

Steel fabrication and construction group Severfield-Rowen has performed strongly over the past few years, driven by such projects as Heathrow Airport's recently completed Terminal 5.

Between 2002 and 2006, turnover increased from £157m to £295m, while pre-tax profits almost quadrupled from £7.7m to £30.5m. The group's management warned in January that it was seeing a softening in some of its key markets, but it still reported adjusted pre-tax profits of £42.9m.

Severfield is involved in steel fabrication, coating and painting; steel erection services; and the management of construction projects. As well as big one-off projects such as the construction of bridges, hospitals, stadia and the Heathrow terminal, the group also supplies a wide range of mid-sized schemes such as commercial offices, schools, hotels and industrial premises.

In January, its order book stood at £440m, compared with £405m the previous month, which gives it good revenue visibility. And this year it is expected to deliver pre-tax profits of around £50m, translating to EPS of between 38p and 39.5p.

Severfield is expected to pay a dividend of around 20p per share this year, which means that its shares are set to yield, at the current share price of 320p, more than 6 per cent.

Before the publication of Severfield's results for 2007, house broker ABN Amro had a price target of 431p per share in mind. Buy.

Smiths News

Smiths News is a media distributor that delivers approximately 59m copies of newspapers and magazines to 22,000 retailers every week. Previously part of high-street bookseller WH Smith, the business broke away from its parent in September 2006.

Smiths News handles the entire distribution process, receiving newspapers and magazines in bulk from publishers before repacking them and delivering them to retailers. This process includes 'copy allocation', where the group uses sophisticated systems to analyse past sales trends and anticipate demand at particular retailers so that sales are maximised and returns minimised (Smiths News also handles 'returns processing' on behalf of publishers).

In addition to its main distribution activity, Smiths News offers complementary services such as NewsWorks, which develops IT systems that improve wholesalers', publishers' and distributors' supply chains, and InStore, a consultancy business that works with major retail chains to improve sales and marketing.

In the first half of its financial year, tight cost controls and new business wins boosted earnings per share by 4 per cent. Newspapers performed well and trading is in line with expectations.

The total dividend for 2008, estimated at 6.7p per share, is well-covered by earnings, since EPS is expected to come in at around 14p this year.

Smiths News is a high-turnover, low-margin business (last year it produced an operating profit of £41.4m on revenues of £1,232m), so even small rises in turnover should have a significant effect on the bottom line. Meanwhile, the group secured the News International business in Peterborough and Cambridge, which should add £8m to its annual sales.

A risk for investors in Smiths News is a falling-off in sales because of slower consumer spending. Another risk is the current Office of Fair Trading (OFT) investigation into the news distribution industry. In the UK, there are three main distributors: Smiths News, Menzies and Dawson Holdings, and there is the possibility that the OFT could take measures to increase competition in the sector.

One broker that follows the company, Altium Securities, believes that the low margins generated in the sector are not attractive enough to encourage a rush of new entrants into the industry. And it does not expect significant changes to emerge from the OFT’s investigation anyway.

Analysts are expecting fairly flat earnings growth at Smiths News for this year and next, although they point out that its shares trade at a discount to those of peers. But what makes Smiths News interesting to us is the dividend payout of 6.7p per share that is expected over the next three years. Smiths News offers good value at under 100p a share.

See Smiths News results.

SThree

Given the current economic uncertainty, it is not surprising that shares in recruitment companies have fallen out of favour.

However, many of these companies are becoming increasingly diversified in terms of the sectors they service and the countries they operate in, which should afford them some protection in a downturn.

One example is SThree. Although exposed to the financial sector, the group's major activity recruiting for the information and communications technology (ICT) sector. A well-established reputation in this area has helped it to drive growth outside the UK, where it has 50 offices in eight countries; last year, the group managed to grow the proportion of revenues that it generated outside the UK from 24.8 per cent to 29.3 per cent.

ICT accounts for roughly one-quarter of the group's revenues; it is reasonably well diversified across a number of other sectors. These include professional and support services (18 per cent of turnover); manufacturing (11 per cent), public sector (8 per cent) and media, entertainment and leisure (5 per cent).

Investment banking, which includes fund management, accounts for about 12 per cent of turnover and so it certainly represents a risk for the group given the current credit crisis. But, as house broker UBS points out, at less than 200p a share, the market appears to be already factoring in a pessimistic outcome in terms of earnings (the shares traded for as much as 520p each last year).

A number of brokers are forecasting that SThree will deliver around 30p a share in terms of earnings this year, which is almost three times expected dividend payments for 2008 of 10.8p a share. The shares are yielding around 6.2 per cent, which makes them worth considering for an income portfolio.

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