MARKET COMMENT
Add Vim To Your Portfolio

By David Kuo (TMFDragon)
August 13, 2003

Just when you thought all the low-hanging fruit had been plucked, a bit of gentle probing under the foliage reveals yet another peach of a share ready for harvesting. Unfortunately, low-hanging fruit, with its sweet aroma of high yield and succulent pulp of modest P/E, is unlikely to stay clinging to the branches for long.

That was the case with Nichols (LSE: NICL), the maker of Vimto and Sunkist drinks. The company -- and please note the past tense here -- had a prospective dividend yield of 7.1%. That yield was dependent on Nichols maintaining its full-year dividend payout of 8.8p per share.

Nichols' shares, up until the end of last week, were changing hands at 124.5p, valuing the soft drinks-cum-food producer at £46m. Bottom-line profit for the current year is expected to remain low, as the company undergoes a major rationalisation of its manufacturing facilities. Eventually, the bottling of its soft drinks will be outsourced to a third party.

The full benefits of these improvements are not expected until 2004, when earnings could rise to 14.2p per share from 4.4p this year. On that basis, the company stood on a prospective valuation of 8.7 times 2004 earnings.

However, shares in Nichols jumped almost 14% this week as keen-eyed investors harvested the shares. The shares have, nevertheless, fallen back a little today, losing 6p or 4% to 136.5p, after the company delivered in-line interim results.

Nichols said pre-tax profits before exceptional items rose 10% to £1.8m, though turnover was broadly unchanged at £48m. The company has also maintained its interim dividend at 3p and reassured that some of the benefits of its restructuring could be in evidence as early as the second half of this year.

At today's share price of 136.5p, Nichols is still attractively valued at 9.6 times forecast 2004 earnings. The 6.5% prospective yield is also quite tempting, though the dividend payout is only just covered. That could keep a lid on the share price, at least until the financial benefits of the rationalisation become a bit more tangible. Until then, the dividends should add some vim and vigour to a long-term investor's portfolio.