Five safe-yield plays

The five stocks selected by last year's screen produced a 24.4 per cent total return compared with 21.8 per cent from the index (see table).

When we re-ran the screen in 2012 we were more sceptical about prospects than perhaps, with hindsight, we should have been. Indeed, we worried that our requirement for stocks to have a low beta (a measure of a share price's sensitivity to wider market movements) could prove an impediment to outperformance should the market make big gains. But in the event low-beta stocks generally outperformed over the last year despite the market's strong run.

As well as looking for low beta, our screen looks for a number of other measures of a company's business quality and reliability. Also, very importantly, it looks for a decent yield of 3 per cent or more as well as solid dividend cover of two times or more. The specifics are as follows:

■ Dividend yield of at least 3 per cent;

■ Dividend cover of at least two times;

■ Interest cover of at least five times;

■ Dividend growth in each of the last three years;

■ Forecast earnings growth in each of the next two financial years;

■ An average return on equity over the last three years of at least 12.5 per cent;

■ Cash conversion (measured as cash from operations as a percentage of operating profit) of over 100 per cent;

■ A market capitalisation of at least £250m;

■ Beta of 0.75 or less.

There are once again reasons to worry about the potential performance of the screen over the next 12 months as any strategy focused on yield runs the risk of facing a headwind from tapering of quantitative easing (QE). This is because tapering is likely to push up the 'risk-free' yield from government bonds thereby making the yield from 'income' stocks look less attractive. That said, we set a fairly low bar for our 'safe yield' stocks, which means they may be less sensitive to the impact of tapering than classic 'high-yield' plays. And over the long term the steady flow of reinvested dividends can be a powerful influence on overall performance.

The five stocks which passed our screen this time round are: 

WH Smith

Stationery, books and magazines retailer WH Smith (SMWH) is a seemingly perennial favourite for screens that look for reliable stocks offering value, yield and earnings growth. The preference so many screens seem to show for the stock is based on the company's reliable strategy that has consistently delivered strong returns over several years. Smith's end markets are hardly to die for. In fact its performance on the high street is often stagnant at best, and in the 14 weeks to 8 June group sales fell 5 per cent. But it makes maximum use of management's cost-cutting savvy and the operation's enviable ability to generate cash. While the group's travel business and international stores are a focus for growth, it is ongoing share buy-backs and margin improvement that really underpin analysts' expectations of steady ongoing growth.

WH Smith's penchant for returning cash through buy-backs does not impinge on its dividend, with the group boasting the second-best five-year compound annual dividend growth rate - of 16 per cent - out of the five stocks coming through our screen. The market has been showing some caution towards the shares recently due to a period of worse than usual performance, especially from the company's travel business, as a Fifty-Shades-of-Grey sales bulge dropped out of its figures. Investors are also still getting used to the company's new chief executive, Steve Clarke, and there are lingering uncertainties about whether his highly-regarded predecessor, Kate Swann, showed similar canniness with the timing of her exit as she did in running the business.

*Bloomberg consensus forecasts for the next 12 months

Source: S&P Capital IQ & Bloomberg

Last IC view: Hold, 777p, 11 Apr 2013

Hilton Food

Following a tough 2012, when meat packer Hilton's (HFG) performance was hit by weak European markets and currency headwinds, there are hopes that the group can start to show its growth credentials in 2013. While the benefits of recent investments in Denmark should aid progress, it is a recent deal in Australia that provides the real excitement. While this will probably not be too significant to this year's performance, the deal to supply 84 stores of the country's largest retailer, Woolworths, marks a major step forward for the company as it is Hilton's first foray outside Europe. If things go well, there is the potential for it to pick up much more business in Australia and Asia too.

What's more, the structure of the Woolworths deal means it will not be a drain on capital. So, coupled with its sound balance sheet and strong cash generation, Hilton has plenty of firepower to invest in further growth opportunities. Indeed, broker Investec Securities forecasts that the group will have net cash of £6m by the end of the year if it doesn't find anything to spend its money on. Dividend growth of about 7 per cent a year is also expected by the broker out to 2015.

*Bloomberg consensus forecasts for the next 12 months

Last IC view: Buy, 340p, 2 Apr 2013

Hill & Smith

The performance of galvanising and infrastructure specialist Hill & Smith (HILS) is expected to be weighted towards the final six months of this year. Putting added reliance on the second half makes the company and its shares look a riskier prospect. This has contributed to a rather lacklustre share price performance in 2013 so far. What's more, the group's most recent trading update reported some softening in the US, which made up over half of Hill & Smith's profits last year, and trading conditions more generally are tough too.

But a smattering of short-term uncertainty should not overshadow a long-term track record that has earned Hill & Smith a reputation as a reliable play. Indeed, the kind of infrastructure products it provides are real essentials, such as motorway crash barriers and street-lighting poles. So demand is only ever likely to weaken so far. Prospects should also benefit in the longer term from the group's investment in new products and new markets. Hill & Smith has expanded significantly into international markets over recent years, too, and about three-quarters of its business now comes from outside the UK.

*Bloomberg consensus forecasts for the next 12 months

Last IC view: Hold, 446p, 12 May 2013

Micro Focus

IT-systems improvement specialist Micro Focus (MCRO) is a company very geared towards generating the best possible returns from its business. From a shareholder perspective, the dividend is an important component of the return seen from the group's shares and Micro Focus's management seem very aware of this. The dividend was hiked by 27 per cent in the year to the end of April to 40¢. That dividend increase came despite a rather dull performance during the year, which saw revenues fall back 3 per cent. Nevertheless, lower costs and a lower tax bill helped push earnings forwards.

Micro Focus, and the City, now expects modest growth from the business underpinned by a steady increased in investment in the type of mainframe projects Mirco Focus works on, despite growing interest in cloud computing. Broker Numis believes there is "excellent visibility" of 10 per cent returns from Mirco Focus, with the possibility of this being boosted by any increase in organic growth or acquisitions. The company conducts a lot of business in the US - 46 per cent of sales last year - and was one of the stocks selected by our 'resurgent US' stock screen in March, and as such it could benefit from currency strength and economic growth in the region.

*Bloomberg consensus forecasts for the next 12 months

Last IC view: Buy, 673p, 9 Jun 2013

British Sky Broadcasting

There has been some nervousness about British Sky Broadcasting's (BSY) prospects since the shares peaked at over 900p in March. The company itself warned investors to be ready for a "noisy" summer, with most of that anticipated kerfuffle coming from BT's launch of its new sports channels. BT has invested heavily in programming in order to try to wrestle customers off Sky. While the content on offer is generally regarded as thinner than Sky's, the pricing is lower, which could be a particular draw for Sky's lucrative commercial customers. Ahead of the BT launch, Sky reported relatively weak TV-package customer wins. But Sky has been doing well at selling bundles of phone, internet and TV products.

While recent share price strength suggests some confidence is returning, and the share price does not look challenging, there is good foundation for such nervousness with broker Investec commenting following the BT launch in May that it believed there was a between a -5 per cent and -15 per cent risk to its earnings forecasts for 2014-15. That said, the broker stuck with predictions of 14 per cent EPS growth for the year recently completed at the end of June, followed by 4 per cent in the current financial year and nearly 7 per cent the year after. What's more, Sky's strong cash generation should continue to support the dividend and means there could be the potential for a return of cash to shareholders.

*Bloomberg consensus forecasts for the next 12 months

Last IC view: Buy, 821p, 31 Jan 2013