Five safe-yield buys

So this week's screen may provide a timely pause for breath for any readers that have been perturbed by this column's recent mini risk-athon. We're revisiting a screen from last year that we designed to target safe stocks based on dividend cover.

The six stocks the screen selected in 2011 have had an excellent year, as our table below shows. Since the article was published (19 July 2011) every single one has outperformed the FTSE All-Share on a total return basis (share price performance plus dividends secured). What's more, the combined performance of the portfolio blew the index away, posting a total return of 13.2 per cent compared with just 1 per cent from the benchmark index.

Source: Datastream

It is worth noting that this screen selects only low-beta shares, which is a measure of share price sensitivity to the wider market, so the five stocks highlighted by this year's screen are unlikely to keep up with the market if it does shoot higher. What they do offer is a relatively high and safe dividend; the basis for our screen is that shares must be yielding more than 3 per cent on a historic basis and that the yield must be two or more times covered. While last year we only required stocks to pass six of the seven other screen criteria, this year we required them to pass all seven, albeit with a less stringent beta requirement of below 0.75 rather than below 0.5. Here are the screen tests:

FIVE HIGH AND SAFE YIELDERS

WM Morrison

Supermarket group Morrison has found itself out of favour with investors recently. Weak first-quarter results, which reported a 1 per cent fall in like-for-like sales, reflected the pressures cash-strapped consumers are facing, as well as tough competition from rivals and the added problem of food price inflation. Meanwhile, the plight of Tesco and fear that its attempts to revive trading will hurt peers has further soured sentiment. However, Morrison looks in a far better position to mitigate the headwinds than the rest of the sector. The group has an under-developed convenience store, online and non-food offering and has the opportunity to improve profits by investing in these areas. The company is also cutting costs, with £100m of savings expected this year. And the valuation is far from challenging based on both dividend yield and earnings multiples. Last IC view: Buy, 278p, 4 May 2012

Source: CapitalIQ

Mitie

The progress made at property services outsourcing group Mitie has been impressive recently, driven by higher activity in its end markets. Indeed, at the full-year stage the group's order book was 26 per cent ahead at £8.6bn and 83 per cent of budgeted revenue for the year had been booked while the bid pipeline stood at £11.2bn, suggesting there is plenty of work still out there. The business has also been winning more higher-margin work - despite fears that the harsh economic environment would lead to tougher negotiations with clients - which is helping profitability. In fact, tough conditions arguably play to the strength of outsourcers, which look to generate cost savings for clients. Mitie has also announced some big contract wins recently. True, while the valuation does not look high based on the strong fundamentals, it does look fairly full compared with the battered peer group. Nevertheless, there are clear attractions. Last IC view: Buy, 273p, 21 May 2012

Cranswick

Memories of last year's profits warning from pork processor Cranswick, which was caused by rising pig prices, may be weighing on the market's mind now as prices once again rise. However, the company, which has a strong long-term track record, is likely to be readier for the challenges this time. What's more, in the second half of last year Cranswick proved its ability to bounce back and, following the sale of its stake in a joint venture with Morrison, the business has money to invest in growth opportunities. The most promising area of growth recently has been the export market, especially the sale of prime rib to the US and the so-called fifth quarter (ears, trotters etc) to Asia. The shares are the only ones in the current list that were also featured last year. Last IC view: Buy 833p, 21 May

Cobham

Defence company Cobham featured in another one of our recent dividend focused screens, which looked for stocks with long track records (10 years plus) of dividend growth. The main negative affecting sentiment towards the group at the moment is the fear that defence spending is set to fall. However, Cobham put in particularly strong results last year. What’s more, a recent acquisition of a Dutch rival, Thrane & Thrane, has reduced its reliance on the North American market where the defence spending squeeze could be particularly felt. There is also the potential for further acquisitions given the company’s strong balance sheet. Last IC view: Buy, 223p, 4 May 2012

Compass

Catering giant Compass has built a reputation as a core growth stock based on the long-term trend towards food-services outsourcing by large organisations. That story is playing out very nicely in North America and emerging markets at the moment. However, the group's European and Japanese businesses are proving more of a challenge. It's also yet to be seen what implications slowing Chinese growth may have. Nevertheless, Compass has been able to offset weakness in the business with efficiency improvements and new contract wins, while growth elsewhere continues to be enhanced with bolt-on acquisitions. All in all, Compass continues to look like a solid bet and the share price should be helped by an ongoing £500m share buy-back programme. Last IC view: Buy, 623p, 16 May 2012