Six safe high-yielding shares

STOCK SCREEN: We find six stocks that offer high well-covered yields

July 18, 2011

It's been a turbulent year and on at least two occasions we've screened for defensive shares that look well set to prevail against economic headwinds - be it natural disaster, political turmoil or sovereign debt fears. It is debt concerns in Europe and the US that have got us searching for defensives once again, and this time we're on the look out for companies that can offer a secure and high dividend yield.

It's worth noting that our two other defensives screens have done very well in this year's rocky markets. The 13 cheap defensive shares that we highlighted on have delivered an average total return of 18.2 per cent compared with 1.3 per cent from the FTSE All-Share. What's more, on the day of writing, not a single one of those shares is down on the basis of its mid-price, although some are flat. Meanwhile, the nine big reliable shares we identified on have produced an average total return of 6.1 per cent compared with 1.5 per cent from the All-Share.

For this screen we've focused on dividend cover as a key measure of how defensively positioned a stock is. We've required that last year's payout was at least two times covered by underlying earnings per share. It's easy to achieve high cover on a meagre dividend, so we have also looked for stocks that pay a dividend yield of at least 3 per cent.

To sort the wheat from the chaff, we've also required that all the stocks appearing in the table below satisfy six of the following seven criteria (only Cranswick managed to satisfy all seven):

■ A beta of less than 0.5: if a share has a low beta (less than 1) it indicates that movements in a wider market have little influence on the price;

■ Cash profits equivalent to at least five times interest expenses: we've used this ratio to provide some peace of mind about a company's debts. While cash profits ignore a company's capital expenditure needs, if they cover interest by more than five times, debt should be serviced quite comfortably;

■ A three-year record of dividend growth;

■ Forecast underlying EPS growth;

■ Average return on equity of 12.5 per cent or more over the last three years - this should provide an indication that the company's business is of decent quality;

■ Operating cash flow exceeds operating profit - this represents a very minimal check on a company's ability to generate cash;

■ Market capitalisation of £250m or more - generally, larger companies make safer investments.

Company	TIDM	Market cap	Price	Beta	Dividend yield	Dividend cover	12m-month forecast PE
John Menzies	MNZS	£324m	540p	-0.1	3.5%	2.2	8
Clarkson	CKN	£239m	1,270p	0.2	3.7%	2.3	11
Cranswick	CWK	£347m	728p	0.0	3.8%	2.3	10
Hiscox	HSX	£1.6bn	407p	0.3	4.1%	2.1	27
AstraZeneca	AZN	£42.2bn	3,093p	0.3	5.3%	2.3	7
Beazley	BEZ	£628m	124p	0.4	6.0%	2.6	11

Source: Capital IQ

Despite its strong track record, shares in pig-products group Cranswick have been on the skids recently. The recent weakness is based on fears that a combination of rising input costs and weakening consumer demand will lead to disappointments. However, the group has made positive progress in 2011 on some important fronts. For example, the US authorities have granted it the right to start exporting into that market. What's more, it is completing a period of heavy investment into factories which should underpin future growth in the medium term, and the well-covered near 4 per cent yield holds attractions of its own.

Beazley is a solid bet in the non-life insurance sector but falling premiums have cast a shadow over the shares, and it is proving tough for the group to impress the market very much in such an environment. However, it looks like there is value on offer. Last year the group was able to put in a strong underwriting performance and also pay a special dividend on top of its full year dividend. The shares are priced at about estimated net tangible assets, which is not challenging. Plus there is the potential for upside if large claims start to send premiums north.

AstraZeneca has been beset by problems related to patent expiries and the rise of generic-drug producers. The problems have been made worse by a number of high-profile drug development failures in recent years. The outcome of an FDA review of its Brilinta anti-clotting drug is due imminently, although broker Charles Stanley believes a negative outcome is already priced in. While all this is pretty grim, the company continues to generate cash which is supporting the dividend payout and funding an EPS enhancing share buy-back policy.

John Menzies has its roots in the newspaper and magazine distribution business, which is now a declining market as the circulation of print-based publications fall. Cost-cutting has helped prop up this side of the business but management has also targeted growth in the aviation market, providing services such as baggage handling. Trading has been strong recently with a number of noteworthy contract wins and the prospects for increased outsourcing by the aviation industry looks good. Based on broker Singer's recently upgraded forecasts the shares are valued at just seven times expected earnings, which is at the very bottom end of the historic valuation range.

Insurers live in a somewhat counter-intuitive world where the market views large losses from big claims as good news. That's because after an insurer makes a big pay out, it tends to push up the cost of insuring against that event in the future. So the large catastrophe-claims bill that Hiscox has faced following the Japanese earthquake, tsunami and ensuing nuclear disaster has actually caused the share price to rise. The group is considered to be a class operation with a strong balance sheet. Valued at about 1.3 times broker Espirito Santo's forecast net tangible asset value, Hiscox's shares look dear compared with peers but prospects look good.

Shipping broker Clarkson has been buoyed recently by growing global trade, thanks largely to the health of emerging economies and China's demand for raw materials. The oil market is also experiencing high levels of activity as oil companies try to sell off stocks while the price is high. The high volatility of freight rates is a major risk for investors in the shares, but the valuation is a lowly four times forecast earnings once the share price is adjusted for the company's cash pile.