Taking Aim

Sure, arrange a spreadsheet of the components of the All-Share by descending stock market value and you will see a bias towards familiar names that offer high dividend yields accompanied by just-about acceptable levels of dividend cover. In truth, many of these equities are not as contemptible as the previous paragraph suggests. An income portfolio comprising the likes of HSBC (HSBA), BP (BP.), BHP Billiton (BLT), Imperial Brands (IMB) and National Grid (NG.) – plus a few others of similar market value and dividend yield – would generate almost as much income as a fixed-rate annuity with the promise of repaying most of its capital – and quite possibly more. For those whom we might euphemistically call ‘final-stage investors’, a portfolio offering this combination of acceptable dividend yield, rising income and capital to pass on to beneficiaries is a serious proposition and one that I discussed at length last summer (see Bearbull, 14 July and 21 July 2017).

However, the Bearbull portfolio isn’t at that stage yet. So, invigorated by the prospect of a new year, I churned both the FTSE All-Share and its equivalent for the Alternative Investment Market (Aim) with the aim of providing some names that don’t usually qualify as conventional high-yield candidates (see table).

It is important that I get my caveats in first. The presence of any of the 10 in the table is by no stretch an investment recommendation. It’s little exaggeration to say the 10 are thrown in there and – were I to do the same exercise tomorrow – 10 other names might materialise. From the 1,450 or so components of the two indices, I got a quick feel for what might justify a little investigation by using criteria such as dividend yield, dividend cover and PE ratio (fairly obvious, really) plus ratios for price to sales, price to tangible assets and price to 52-week low.

Still, readers don’t have to take my word for it. The most interesting inclusions in the table – chiefly because they present a contrast to much of the current Bearbull income portfolio – are the four Aim-traded stocks. And even those four bring their own idiosyncrasies – from the raciness of Plus500 (PLUS), which provides a platform for punters to trade contracts for difference, to the recovery prospects of Maintel (MAI), which is entrenched in a painful process of turning itself from a telecoms provider to an IT services supplier while promising 10-per-cent-a-year growth in dividends. Randall & Quilter (RQIH) provides the comparative solidity of being a highly experienced insurance-industry player, which chiefly runs off closed non-life insurance books.

Meanwhile, the value play – and perhaps the most interesting – is Elegant Hotels (EHG), which owns and runs hotels in Barbados. Coincidentally, Elegant, in which leisure industry entrepreneur Luke Johnson is the largest shareholder with 12.5 per cent of the equity, announced results for 2016-17 this week. They made uninspiring reading, chiefly because they came with a 25 per cent cut in the dividend – never good for a putative income stock – and the intention to cut another 24 per cent in the current year. That would leave a payout of 4.0p, which would produce a 4.6 per cent yield – acceptable for the income portfolio – with the share price at 88p.

The question is whether the price will dip lower. It had been buoyed by takeover speculation, which turned out to be an aborted approach from the Spanish resort hotels operator Meliá Hotels International (BMAD:MEL). Meliá cannot now return for six months, but the price may be supported by its discount to underlying net asset value, which management puts at 163p a share. True, that discount looks so wide – 46 per cent – as to strain credibility, especially as occupancy rates for Elegant’s seven hotels look low (64 per cent). It doesn’t help that Elegant primarily relies on increasingly hard-pressed Brits for custom (almost 80 per cent of its revenue) and prices in US dollars. Still, maybe because I like bricks and mortar – or the Caribbean equivalent – to underpin my investments, Elegant is the one to which I’ll give first attention. More on all of these next week.