5 high yielding consumer stocks to buy

The UK stock market has marked down significantly a number of UK consumer stocks as concerns over the current levels of consumer spending in the UK economy have intensified. These matters were made worse as a result of the ‘credit crunch’ and subsequent worries over the potential for falling house prices to impact further on consumer confidence.

The current valuations of some retail stocks indicate a market consensus that British consumers are going to have to pull in their spending and the good time for these retailers is over for now.

The Income Monkey suggests that the current falls are over done. Investors and savers that are focused on maximising their investment income might want to take a punt on these income stocks and the fact that their sales are sufficiently sustained to allow these household names to maintain their high dividends even during the coming leaner times. What the market may have missed in several cases is that what are perceived as largely UK focused businesses are increasingly deriving their revenue from abroad and therefore are as much as a play on globalisation as they are on the health of the UK economy. Read on for some domestic income & savings opportunities.

DSG International
This company owns the brands Dixons, Currys and PC World. The market is concerned that its core markets of electricals and PCs will be hit hard by any slowdown in consumer spending. The share price has fallen from a high this year of 220p to just above its year low of 117p. The result is a healthy projected yield of just under 8%. The downside is that the dividend is only just covered by income and therefore if trading worsens more than expected there is always a danger that it could be cut.

High 220.25p Low 116.6p CURRENT 117p
Projected yield 7.7%

Debenhams
Since floating at 200p in 2006 Debenhams the UK’s second biggest department store has disappointed the market and had slumped to a low of just under 90p earlier this year. It has now bounced a little after an up beat trading statement in recent days which showed that despite like for like sales decline overall profits rose because of new store openings. The yield is not as healthy as some with a projection of 6.4% for the year ending august 08. However, the dividend income should be relatively safe giving it is covered just under twice by projected earnings.

High 203.75p Low 89.5p CURRENT 112.25P
Projected yield 6.4%

Pendragon
Pendragon is the UK’s biggest car dealer. The company used to specialise in luxury brands such as Porsche and Ferrari but has recently moved into selling main stream models by Ford and Vauxhall. The share price has slumped from a high of 125p earlier this year to trade at a little over half this level although it now stands above its low. Valued at a little over £400m with sales of £5 billion the yield for the financial year ending December 07 its’ yield is 6.2% rising to a projected 7.2% for 08.

High 125.25p Low 55p CURRENT 63p
Projected Yield 6.2%

HMV Group
HMV is a music, video and book seller through its’ two retail concessions HMV & Waterstones. Its share price has been hit over the last few years by competition from internet rivals both for the sale of music and books as well as concerns over the state of UK consumer spending. The share price is down from a high this year of 171p. At the current price the stock is on a 6% yield with the dividend not fully covered by revenue. Analysts however expect revenues to recover during the next financial year ending April 09.

High 171p Low 104p CURRENT 121.5p
Projected Yield 6%

Kingfisher
Kingfisher is potentially one of the most interesting and heavily hit retail shares with its strong exposure to the UK housing market. Kingfisher owner of B & Q is synonymous with UK DIY. However what is not known by many investors is that half of it’s’ revenue are now generated internationally in France, Poland and China amongst other countries. Whilst the UK is turning down sales in many of its foreign markets are booming away. With its property portfolio having a valuation of over £3billion compared to its current market cap of just over £4 billion its share price is pretty well backed by tangible assets. As recently as June this year broker SG Cross Asset Research had a target price of 354p. Billionaire Warren Buffets Berkshire Hathaway has a stake in the business and to top it all; the current yield is a more than respectable 6.5% and is just covered by the projected earning to the end of January 08.

High 284p Low 164.8p CURRENT 173.1p
Projected yield 6.5%


THE INCOME MONKEY VERDICT

The Market is clearly pricing in a big slump in consumer spending over the next couple of years. There could be an opportunity for savers and investors seeking income to buy into high yielding stocks on the basis that expenditure does not slump by the degree expected and that these companies continue to pay a high and rising dividend income through to the next up turn in the consumer spending cycle.

I love irrational investment markets

I love irrational markets. Markets are generally irrational. They are founded on FEAR and GREED. Both very human emotional concepts and therefore arguably irrational.

Before i sail of into a voyage of Freudian analysis I think it is worth examining these concepts in respect to the state of the current stockmarkets approach to income producing property shares.

For the last few years markets have been getting carried away on a tidal wave of property investing euphoria. A lot of property investors have been making lots of money. Other investors have seen this and investors being GREEDY have dived in in the hope that they too will make lots of money. This forces the price of property making it less likely that investors will make money.

The realisation by investors and the markets that too many investors were investing in property and at too high a price has prompted by the so called 'credit crunch' has forced investors to dramatically reappraise their investment decisions. Many investors are thinking 'oh god i've paid too much for these property investment companies - lets get out.' Then the FEAR cuts in. They panic and sell. This forces down the price, more panic and sell forcing down the price even further. Its a property investment meltdown.

This is a great opportunity for all income monkeys.

Falling share prices of these property investment stocks have slashed their price. In the case of Mapeley which the Income Monkey is particularly keen on, by over 100% in less than 6 months.
Have the value of the assets of these property investment companies property fallen by that much, have their rents shrunk by that much, have their costs gone up by that much. NO off course they haven't.

YES - property investments were overvalued. The IPD index showed that UK commercial property returns in August were the worst in 15 years and that forecast show that 08 & 09 are going to be tough.

However this is the great thing for income seeking investors and savers.

• whilst property prices may come down rents a property companies main source of income doesn't. Lower property prices actually benefit income investors as they mean that rental yields go up allowing property investment companies to pay out even more in dividends.
• the values of investment property may go down, however, rents very rarely do. In fact GVA Grimley the property consultants research has predicted rental growth averaging 3% for 2008 & 2009. This means that rental income from which dividends are paid is generally secure.
• A falling property market is likely to knock consumer confidence reducing economic activity and prompting a cut in interest rates. This will reduce property investment companies biggest overheads meaning that their net income should increase giving them greater scope to pay larger dividends

All this seems to indicate that the equity markets are acting with exuberant irrationality. Investors should release that markets cant afford to act irrationally for long as the equilibrium between investor FEAR & investor GREED falls once again into an uneasy equilibrium.

Income investors and savers should ignore short term FEAR and look to the long-term income stream

Theres income in foreign property investment

Investors over the last few years have associated the word property as a bye-word for fast investment profits, extraordinary investment returns and stories of individual investors going from rags to riches over night. With house prices booming in the UK; up by 300% in 10 years, more and more UK investors looked to replicate this experience in undiscovered parts of the world. Combined with the potential financial investment rewards may like the cache of telling their friends at their next dinner party that they are not actually a financial control clerk in an SME but that they are actually a budding international property investor.

Wearing my multiple hats of town planner, surveyor, property investor and equity investor I travelled around Eastern Europe and the Baltic States of Latvia, Lithuania, Estonia in the early part of the Millenium and I was convinced that these beautiful countries with grand and neglected cities were going to experience an economic boom and off the back of that a thriving property market. However, I resisted the temptation to invest for very practical reasons.

• Language barrier
• Not understanding the legal & planning system
• The practicalities of not understanding the areas of a city or town, which are the good areas to buy a potential investment property and the places to avoid
• The difficulties in managing a property. If a boiler goes in this country it is difficult enough to sort out but at least you can always pop round and check that the plumber really has installed a new boiler and not billed you as such but then just replaced a part. If this happened in Poland or Estonia it could be many years if ever before you realise you’ve been paying for work that was never done
  

All these factors meant that I never did get around to investing in eastern European property although I was convinced of its’ potential.


New buy-to-let industry for international property investors
In recent years there has been an explosion in a whole new industry catering for westerners to invest in international buy-to-let. English speaking agents, letting agent, even companies building purpose built buy-to-let accommodation ready to be bought and let out. At this point an investor should know that the real investment opportunity has gone. I would have willingly bought a beautiful but shabby apartment house in the old part of town because that was going to be the Kensington or Chelsea of the revived country. I’m not interested in buying a non descript box in the equivalent of the Isle of Dogs. To invest I would only want a trophy asset, however these investment properties would now come along with a trophy price tag.

Wall of money
The result of the wall of foreign investment money flooding the residential investment market of these emerging countries is that often their property markets now have values that are on a par and in some cases like Estonia are more expensive than their western neighbours. This has occurred at the same time that their real economies whilst growing fast still only afford their people a fraction of the wealth of neighbouring western economies. According to the Economist Intelligence Unit in late 2006: Croatia GDP per head was $11,050, Estonia $14,120, Slovenia $21,260 & Bulgaria $4,820 compared to the UK’s $42,430.

This all begs the question if the westerner stop buying because they can’t get the money from their banks, or decide that international property investment is a bad idea, then in purely local valuations these properties particularly the non descript boxes are only worth a fraction of the price at which they were sold. This is exactly why in the end I decided not to invest directly in foreign residential property.

There is however a much better way of investing in the undoubted growth prospects of the emerging economies and property markets of Eastern Europe and the Baltic states.

How to become an international property investor from the comfort of your armchair
Having been a property investor in the UK residential investment market for over two decades and despite the availability of property management websites such as www.propertyhawk.co.uk; which enable me to manage my buy-to-let investment properties online. There are still practical difficulties in direct investment in residential property. These are:

• Managing tenants and tenancies
• Maintenance
• Finance & accounting
• Complying with legal and safety requirements
• Short term nature of tenancy and potential voids period

An investor who buys shares in companies that own commercial property avoids all these practical difficulties and the potential residential investment property bubble that may be developing whilst obtaining exposure to the high growth potential of these emerging economies.

The Stock Exchange has in the last couple of years seen a barrage of property investment companies listing which invest in a range of commercial properties in Eastern Europe and the rest of the world. Investors who pick wisely can buy shares producing a hassle free dividend income as well as potentially benefit from the capital appreciation of the underlying property portfolio through an appreciating share price.

The credit crunch throws up some property income investment gems
The impact of the global credit crunch on property companies share price has been severe. Markets have responded to the anticipated lower growth in capital values by knocking 40 50 60% of the value of these companies in only a few months. The result is some income investment gems where it is now possible to buy shares in property companies investing in growing eastern European economies at big discounts to their underlying asset value and also yielding 8%+ on existing and planned dividend payouts.

Which companies should you buy?
The Income Monkey particularly likes the following investment property shares
as an income play:

Dawnay Day Carpathian
Company admitted to AIM in July 2005 with the intention to invest in a diversified portfolio across 6 countries in Central and Eastern Europe. The intention is to pay a dividend of 10p for the financial year ending December 2007.

High 135p low 98.25p CURRENT 100.50p market cap
Projected dividend 10p Yield 10%

Raven Russia
This company is a great play on the fast expanding Russian economy. One thing that any expanding economy needs is warehousing with which to serve the shops and businesses. The Russian economy has a massive shortage of this space. Raven Russia aims to provide A grade warehousing facilities by funding the developments with a local development partner. It than buys the completed development at a pre-agreed price. It is currently forecasting an ungeared yield of 12.4% which means that it can afford to pay out big dividends. It is expected to yield just over 5% paying a dividend of 5.5p for this year. This dividend the company expects to rise to 9p when the development portfolio is fully let giving rise to a yield of just over 8% at the current share price of 107.75p.

High 126p low 88.5p CURRENT 107.75 market cap £460m
Projected yield 8%

Equest Balkan Properties plc
Equest Balkan Properties plc is a commercial property investment company focused on South Eastern Europe but primarily Bulgaria and Romania. Its’ objective is to invest principally in a range of income-producing; commercial, retail and industrial property opportunities in or around the major cities of Bulgaria, Romania, Albania, Bosnia & Herzegovina, Croatia, FYR, Macedonia, Serbia & Montenegro and Turkey, where it considers investments have potential for capital appreciation. The Company may also invest in development projects where it expects high rental yields. It may also invest selectively in land acquisitions.

High 132.5p Low 85.5p CURRENT 85.75 market cap £120m
Projected yield 8.75%

Prospect Epicure J-REIT Value Fund
For those investors that are looking for high yielding investment opportunities outside the EU then they should look at Prospect Epicure J-REIT value. This company is an Isle of Man registered company which was set up to invest in the exciting opportunities represented by the Japanese real estate market. It intends to do this by investing in Japanese property REITs. The Japanese property market has been in a massive slump since the 90’s but with the general recovery in the Japanese economy is showing signs of recovery. It is targeting a 7% yield on its offer price of 100p which at its current price of 85.25p equates to a yield of just over 8%.

High 135.25p Low 74.5p CURRENT 85.25p market cap £86.10m
Projected yield 8%

Mapeley
Investors that still have faith in the UK property market want to have a look at Mapeley. This share has slumped from a high of just over £40 early this year to currently trading at a little over £18. This puts them on a massive yield of 9.6% forecast to rise to 10.4% next year. With a rock solid set of tenants including the Government and Abbey National and several large outsourcing contracts their income seems assured. The market seems to be marking them down savagely because of concerns over the future of the UK commercial property market. With the shares being valued at a discount to the net asset value of £745million at a discount of 27% the value of UK commercial property would have to fall off a cliff for investors to be holding a share with less value than that of the property it owns. With interest rates set now to fall in the foreseeable future income investors may not see yields like this on a property investment for a very long time. It’s clear that investors should fill their boots before sanity in the investment market returns.

High £40.30 Low £18.30 CURRENT £18.41 market cap £542 million
Yield 9.6% Prospective Yield (08) 10.4%

The Income Monkey verdict
Income junkies want to hold onto their nerve with the current uncertainties in the investment property market caused by the credit crunch. Property prices across the globe are fully valued and are likely to fall. However, those wise investors who can see past the short term investment market worries and who buy these property stocks can afford to ride out any dip in the capital values of these shares with the sound knowledge that they are receiving a strong dividend income backed by a secure and rising rental stream. In time growing economies and a stabilising property investment market means that capital values will rise and investors will also benefit from appreciating asset values and rising share prices.

Northern Rock - investment income gem?

For most investors these two words fill them with dread. There are those investors who spent time worrying about the safety of their deposits or sometime lifetime investment savings. Those poor investors who have witnessed the value of their investment drop from a high of a little over £12 earlier this year to just over £2 at the present time.

Like all investment ‘car crashes’ there is always a contrarian investment play. With shares in the Rock falling like a stone could there by an income investment gem sitting there waiting to be discovered?

PIBS – investment income opportunity
Northern Rock like many other former building societies issued what were called PIBS. PIBS or Permanent Interest Bearing Securities or Permanent Subordinated loans as they are known where they relate to demutualised building societies such as the Northern Rock. These securities are fixed income investment stocks or loans. They were issued by building societies to raise additional capital. They offer investors a set investment income - the gross coupon price - paid twice yearly, net of basic rate tax. PIBS are traded on the London Stock Exchange, the capital value of Permanent Interest Bearing Shares moves in response to interest rates, as do gilts. If rates rise, the capital value reflected in the buying price falls and vice versa. This in turn determines the gross investment yield PIBS earn. Unlike other loan stock such as gilts there is no redemption date on which the capital is repaid. They are open ended in the respect that these investments can be redeemed by the borrower at any stage or never.

For example
A Coventry Building Society PIBS was issued with a coupon rate of just over 6%, the price of that stock issued at a 100p is trading at 96p meaning that the effective gross yield stands at 6.35%

PIBS risk vs reward
Most PIBS will generate a yield of about 1% above the best deposit rates available at between 6.3 and 7.3%. This reflects that they have to be bought through a stockbroker so that the investor incurs a cost of acquisition and sale and also the fact that there is a small amount of risk associated with them. The risk of these investments is that as a secondary debt, holders of the stock would not benefit from the deposit insurance schemes operated by the Government and also as secondary debt the holders would be the last in line for payout should the former building society ever go bust. The fact that the interest rates are only marginally above the current highest investment deposit rates shows that the investment markets perceives these stocks as very very low risk investments.

The Northern Rock PIBS paradox
This brings me back to the Rock as an investment income play. Northern Rock PIBS at the time of writing stand at 87.5p. The coupon interest rate stands at 12.626% meaning that the gross yield is an eye watering 14.4% before acquisition costs. What are the risks to an investor?
The main risk to a holder of Northern Rock PIBS is that the building society will go bust and there are insufficient funds to pay the holders of the stock and investors end up with nothing. The fact is that the Government, the Bank of England, the UK banking system simply can’t afford this to happen.
The fall out of a major UK bank going bust particularly now the Government has put its ‘neck on the line’ to protect savers deposits would cause a complete political and financial melt down and a crisis of confidence in the UK financial system that would rock the UK’s economy to its foundations. In short – it ‘ain’t’ going to happen. The overwhelming most likely scenario is that Northern Rock will be taken over. In this case there are two likely scenarios

• either the PIBS will be retained in which case investors will continue to receive their bumper investment income payout in perpetuity or until the new owners decide to redeem the loan. At which point the investor would receive the issue price of 100p making a tidy investment profit
  
• the new owners will redeem the stock at the issue price of 100p meaning the investors receive their investment profit early but don’t benefit from the advantages of the ongoing investment income

Less risky investment income PIBS
For those investors with less of an appetite for investment risk then there are PIBS for many of the Building Societies that are not in such ‘financially challenging’ positions as the Northern Rock is. Examples of some investment rates as of 10.12.07 are:

Source: Collins Stewart
Bradford & Bingley coupon 11.625 158p Yield 7.36%
Bank of Ireland coupon 13.375 182 Yield 7.35%
Kent Reliance coupon 7.875 112 Yield 7.03%

A PROPERTY INCOME GEM

If I were to tell you about a share that has:

• Almost halved in value
• Is run by one of the UK’s most respected names in property
• Has a list of blue chip clients
• Who’s price is fully backed with it’s UK property assets in fact it is trading at a discount to net asset value of 17% according to its trading statement ending June 07

And best of all Yields just over 9%

Would you be interested?

Credit crunch
Like any financial crisis the recent credit crunch has caused investors to re-evaluate their risk and investment priorities. One sector that has suffered particularly badly is property as the market prices in higher borrowing costs and slowing or potentially falling asset values. This in my view has thrown up some very interesting investment opportunities for the Income Monkey which I will investigate in the coming months.

One such opportunity is a company called Mapeley.

http://www.mapeley.com/


Property outsourcing
You probably have never heard of them but if you have ever visited an Abbey National premises or been inside a tax office then the chances are you will have been inside one of their properties. This is because one of the key aspects about Mapeley is that they are what is called an outsourcing company. This means that they look after every aspect of their clients property requirements which means that the Abbey National or HMRC don’t have to worry about getting their buildings fixed or dealing with planning departments or buying new properties or disposing of surplus space. All of it is taken care of by Mapeley. The benefit for Mapeley is that they receive a regular income from these blue chip organisations as well as any rent from the properties they own. They currently own over £2 billion in property and own or manage over 1650 properties. The contracts are not short term either spanning a 25 year period.

Why the city has fallen out of love with Mapeley
The share price of Mapeley peaked back in April at just over £40, since then it has been pretty much a down hill run with the shares falling as low as £19.64 in September in the wake of the ‘credit crunch’.

The city has fallen out of love with property shares generally but Mapeley has been particularly hard hit for several reasons:

• It’s A typical business model of outsourcing which makes it hard to value as a property share. Most property companies are either predominantly investment companies or development companies. The former being valued in relation to their asset values (typically at a small discount) or as development companies where profits are the key factor in analysts valuations. Mapeley whilst having an increasing exposure to investment still derives most of its income from outsourcing.
• The market is worried that the company that has only recently been actively investing directly in property may have bought at the peak of the market. In Mapeley’s defence they would argue that their unique position of having a close relationship with clients and a strong regional presence means that they have been able to secure investments at a good price allowing them to retain a strong yield on their portfolio. For instance in their most recent set of interim results they reported that the acquisitions of £75.7 million during the period had a net initial yield of 7.1% which easily covers the cost of any borrowing.
• The big worry for any investor in Mapeley is that they loose one of their outsourcing contract undermining their income and ability to pay a dividend. This is unlikely any time soon as the contracts were for 25 years and any attempt by the companies to get out of them will cost them dearly.
• Outsourcing contracts which were the flavour of the month back at the start of the millennium have fallen out of flavour in recent years as companies have realised they can make potentially more money out of property then they can out of selling widgets. Therefore, few have been signed in the last couple of years. The last one won by Mapeley was back in 2006 with the passport agency to manage 69 offices. This may change soon when companies realise that property prices fall as well as rise and looking after their accommodation requirements is a big cost and hastle to their business.
  
  
  Mapeley a must for the Income Monkey
  The reasons to be attracted by Mapeley are obvious. Look at that great fat income of 190p for the financial year ending December 2007. This equates to a yield of just over 9% covered just over once. The other good thing for income junkies is that the dividend is paid quarterly meaning that you get your hands on your money four times a year. The current forecast from digitalook www.digitalook.com is for a dividend of 208p equating to a mouth watering dividend yield of 9.7% for the year ending December 2008.
  
  The attractive thing for an income investor is that rents rise and the outsourcing contracts are for fixed fees meaning that even if the expected downturn in commercial property prices occur, the rising income should allow the company to continue to pay a large and rising dividend payment.