Seven high yield, low-risk shares

*Taken over 14 October 2011

Source: Thomson Datastream

The themes of high yield and low risk have been particularly pertinent over recent years. Even as the market has streaked upwards in recent months, the draw of low-risk and high-yield stocks has remained. In fact, since the start of the year the fifth of FTSE All-Share shares with the lowest betas (a measure of share price sensitivity to wider market movements) have risen on average by 9.1 per cent compared with 7.6 per cent from the index itself. Meanwhile, the highest-yielding fifth of the index has gained 8.3 per cent in the year to date.

What's more, the market seems to be once again getting a bout of spring-time jitters with worries about Chinese growth and prospects for the upcoming US earnings season causing share price falls. But current and future zeitgeists aside, the aim of trying to achieve relatively consistent and decent returns has merits beyond the mere objective of beating the market and in itself provides good grounds for rerunning the screen. Our screen looks for the following factors:

■ a one-year beta of 0.75 or less;

■ a dividend yield of 3.5 per cent or more;

■ 10 years of unbroken dividend payments;

■ 10 years of positive underlying earnings;

■ underlying EPS higher than five years ago;

■ underlying dividend higher than five years ago;

■ a return on equity of 12.5 per cent or more;

■ a current ratio of one or more;

■ a market capitalisation of more than £100m;

■ dividend payments covered 1.5 times or more by earnings.

We've had fewer results from the screen this year than in the past. That partly reflects the strong performance in this part of the market, which has pushed down yields. But we still found seven stocks that fit the bill and we take a closer look at them below.

AstraZeneca

Historically, big pharma has been seen as a key defensive sector, but things have changed in recent years as companies have attempted, with varying degrees of success, to avoid plummeting over the so called 'patent cliff', whereby the expiry of key patents opens the way to generic competition. AstraZeneca (AZN) has proved particularly vulnerable. The company is committed to a progressive dividend policy, though, and has indicated to analysts that its dividend cover could be allowed to slip to 1.5 times to keep payments up. Broker JPMorgan Cazenove forecasts that last year's payment will be maintained over the coming two years. But earnings are forecast to fall and the group is finding it hard to develop new drugs to offset declines. In fact, this month the group received a major patent blow in the US while publishing disappointing data on trials for an asthma drug. Costs are being cut, though, and the group is trying to focus the City's attention on its potential long-term organic growth profile.

Source: S&P Capital IQ

Last IC view: Sell, 3,067p, 19 Mar 2013

Provident Financial

Doorstep lender Provident Financial (PFG) looks like it may be in a sweet spot at the moment. Would-be borrowers are finding it increasingly hard to find loans if they have anything other than a top-notch credit history. Meanwhile, the government has recently cracked down on the practices of pay-day lenders which charge high rates for short-term loans. Provident could be vulnerable to a further hardening of the mood towards sub-prime lenders, but it currently looks well-placed to pick and choose what business it does. The group's Vanquis Bank, aimed at people who have been turned down for lending elsewhere, has been growing particularly strongly, achieving a 61 per cent jump in profits last year. Broker Numis Securities expects the progress to continue, with underlying EPS growth of 12 to 13 per cent forecast for the next three years. And after last year's 11.9 per cent dividend boost, Numis predicts an 8.1 per cent rise this year followed by 11.6 per cent in both 2014 and 2015. So, while the price tag on the stocks compared with its assets looks steep, the shares are expected to yield a hearty 5.4 per cent in 2013, rising to 6 per cent the year after and 6.8 per cent in 2015.

Last IC view: Buy, 1,445p, 26 Feb 2013

XP Power

XP Power's (XPP) high yield also got it noticed in our recent screen for 'cheap' small caps. The company has faced tough trading conditions over recent years due to economic weakness. But the long-term strategy XP is pursuing shows a lot of promise. The company has switched its focus from distributing products to design and manufacture. This is higher-margin business and XP has managed to get itself strong positions in a number of niche growth markets. The company also has a large fixed cost base, which means sales improvements should have a big impact on profits. Brokers are forecasting that hearty dividend growth will continue following an 11 per cent boost to the payment last year. Broker Investec Securities forecasts a 55p payment this year followed by 61.5p in 2014, which is equivalent to a yield of 4.5 per cent, rising to 5 per cent.

Last IC view: Buy, 1,080p, 25 Feb 2013

S&U

S&U (SUS) is in a similar position to Provident. It is a non-standard lender operating at a time when loans are incredibly hard to come by for anyone who isn't 'standard'. This enviable position has resulted in the quality of its loan book rising as business booms. Growth is chiefly coming from the group's car finance business where it is picking up 500 new customers a month from a prospective pool of 17,000. Door-step lending is slower, but the business looks stable. Like Provident, an escalation of political attempts to clamp down on lending to vulnerable consumers is a potential risk. But for the time being the business looks very well positioned, which was reflected in a 12 per cent increase in the dividend in 2012.

Last IC view: Buy, 1,030p, 26 Mar 2013

British American Tobacco

Tobacco is a favourite sector for income hunters and defensive investors - at least for those that don't have moral objections to the business. So it's perhaps not too surprising that a tobacco stock has made it into our list. British American Tobacco's (BATS) focus on brands and emerging markets growth has helped offset tough conditions in mature western markets. Regulation is a constant threat to tobacco businesses, but following a lot of headline grabbing action on this front last year, analysts expect a period of relative calm. Panmure Gordon forecasts EPS growth of 10.9 per cent this year followed by 8.1 per cent for the two subsequent years. Dividend growth is likely to keep up with but not exceed this given that cover is only 1.5 times. The group has also been buying back shares. Panmure points out that the shares are actually trading at a discount to global peers and an in-line rating would give a price of 3,900p.

Last IC view: Hold, 3,438p, 28 Feb 2013

Cobham

Defence and aerospace company Cobham (COB) had a tough year in 2012. Cuts in US defence spending held back sales and caused margins to slip. The tough times aren't over but there are reasons to feel more positive about 2013. The group pushed further into the commercial market last year with the acquisitions of Thrane & Thrane and further purchases to strengthen this side of the business are expected in 2013. Cobham also has a growing business in emerging markets and hopes to tap into increased defence spending in countries such as India. Broker Investec thinks organic growth is still at least a year away. But the underlying business looks resilient and is underpinned by contracted work. With acquisitions expected to aid performance, the broker is forecasting only a modest dip in underlying EPS this year from 22.6p to 21.7p before a recovery to 22.5p. What's more, Cobham is expected to continue its historic record of annual 10 per cent dividend increases, which would mean 9.7p this year, rising to 10.6p in 2014 and 11.7p in 2015. That's equivalent to yields of 4.1 per cent, rising to 4.5 per cent and then 5 per cent.

Last IC view: Hold, 235p, 7 Mar 2013

JD Sports

Sentiment towards JD Sports (JD.) has taken a bit of a battering following the group's purchase of Blacks Leisure from the administrators. Losses from the acquisition weighed on JD's first-half results and its trading over Christmas was disappointing, as was the performance of the group's fashion division. But the core JD Sports shops business has been performing strongly and management has a good track record of buying struggling retailers and turning around the performance. So while progress at Blacks may be taking a bit longer than expected to achieve, investors may well be rewarded for betting that the company will get there in the end. Final results, which are due to be published on 17 April - between the time of writing and publication of this article - should provide more clues to how the restructuring is going. In the meantime, the dividend looks tempting and the balance sheet is sound, with broker Seymour Pierce forecasting year-end net cash of £70m.

Last IC view: Buy, 236p, 18 Sep 2013