Income replacement job

If that cash were invested in an average high-yield share then its annual income would chase £1,200, while it would produce less than £300 if it stayed in a deposit account. The gap of about £900 would mean a shortfall of 5 per cent or so in the amount that the fund is likely to distribute in 2020. Avoiding such a loss is hardly a reason to rush into any old high-yield stock; even so, it would be nice to secure the extra income – and soon.

One way to do so would be via a holding in spirits distributor Stock Spirits (STCK) since the company’s final dividend for 2018-19 is in the share price until the end of January and that alone yields 2.7 per cent. True, that return will also depend on the sterling/euro exchange rate as Stock pays its dividends in euros, which is also its reporting currency.

In the coming years that currency factor might provide a useful hedging mechanism. But that would depend not only on how Brexit develops but also on how the euro copes with – or solves – its fundamental flaw, the absence of a satisfactory way in which the eurozone mutualises national debt. Additionally, it’s not necessarily helpful that Stock Spirits reports in euros but generates most of its revenue and costs in Polish zloty and Czech koruna, which, in the long term, are probably weaker currencies.

Not that too many weaknesses were in evidence in the results for 2018-19, which were announced last week. Stock reported perfectly acceptable figures, with sales volumes up 8 per cent, feeding through to 10 per cent revenue growth and a 12 per cent rise in underlying operating profits. Helped by lower exceptional costs – most of which were goodwill write-downs – earnings more than doubled to 14.3¢ (about 12.2p).

Arguably most encouraging from an investor’s viewpoint, however, is that Stock continues to be a fine generator of cash. Granted, two acquisitions – one in Italy, the smaller one in the Czech Republic – cost €32m (£27m) and meant that net debt ended the year a third higher at €43m, yet – as the table shows – still just 0.7 times ‘ebitda’ (cash operating profits). But the point is that free cash flow, calculated before the effect of acquisitions, once more dwarfed the cost of dividends – €44m against €17m; and 2014 was the last time that Stock’s free cash flow failed to cover dividend payments.

So a holding in Stock Spirits, whose shares I have been loosely monitoring for over a year now, is a possibility. But, arguably, so are the others in the table. What they have in common is that they are relatively easy to understand – important, if you are considering sinking capital into a company’s shares – and have strong positions in their respective markets.

Ironically, two with the strongest positions – Devro (DVO) and PZ Cussons (PZC) – are having to cope with the toughest trading. Just six weeks ago this forced sausage-skins maker Devro to announce the closure of a plant in the UK, which will mean £15m of exceptional costs (£10m in cash), and the write-down of others in China and the US.

True, Devro has been going nowhere in particular for some years now, and having to incur heavy capital spending for the privilege. Yet capital expenditure has moderated in the past three years, so the conversion of accounting profit into cash has improved. Meanwhile, it is possible to put a value on the shares clear of £2 – against 167p in the market – although that still relies more on capitalising accounting profits than on cash generated.

PZ Cussons is probably in worse shape. No longer does it look like a mini-Unilever, with the right to a share rating to match. Yet broadly it is the same business as it was some years ago, with decent brands and an exceptional one (Imperial Leather), plus a way into sub-Saharan Africa’s emergence via its exposure to Nigeria, which magnifies the continent’s merits and flaws and which generated £197m of the group’s £689m revenue in 2018-19. Granted, net debt has risen substantially in recent years, but the dividend, which more often than not is covered by free cash flow, should survive.

Meanwhile, the hope – for Devro as well as for Cussons – is that in the coming years performance will revert to mean, thanks chiefly to management trying a bit harder. That would be an improvement and buying the shares now means investors would capture the benefits that brings.