High-yield share pays out a huge dividend.
Following the takeover of Robert Wiseman Dairies, £400m market-cap Dairy Crest Group (LSE: DCG) is the last dairy in the UK that you can buy shares in today.
At today's price, Dairy Crest is expected to pay out a 6.7% dividend to shareholders and deliver a level of profitability that puts the company on a price-to-earnings (P/E) ratio of just 6.3.
Cash cow
There's more to Dairy Crest that just milk, however. The company has a substantial dairy foods operation, churning out well-known brands such as Cathedral City, Country Life and FRijj.
The non-milk operation currently provides approximately one third of group sales, with the rest coming from the white stuff.
While cows need milking every day and the British nation remains in love with a refreshing cuppa, the dairy industry is in no danger of disappearing in my lifetime. The only question is the price at which milk will sell such that the farmers, dairies and consumer are all happy.
In the last few years, dairy margins have been declining, to the point where milk production is close to being unprofitable. This has damaged Dairy Crest's earnings -- at the interim stage the company reported just £5.8m of profit on £530m of milk sales, almost half the profit they made last year on the same volumes. Fortunately, the margins on the rest of Dairy Crest's products is far superior to milk; the company sliced £16.5m of profit out of £102m of cheese sales in the first half and a massive £31.7m of profit from spread sales of £160m.
Glass half-full
You might be thinking that with the profit margin Dairy Crest is making on its milk being thinner than the skin on a pint of full-fat pasteurised, then shares in the company should be avoided. But looking more closely at the industry, there are reasons to believe Dairy Crest's cup, while not overflowing, may be half-full at least.
Dairy Crest has recently announced a cut in the price it pays farmers for their milk and is considering the closure of two dairies. This sends a clear signal that the company is taking steps to reverse the margin decline in milk sales.
The company's net debt figure of £365m will no doubt be deterring some investors, but with such attractive vital statistics -- P/E and yield -- as Dairy Crest is demonstrating, the investment case was never going to be all milk and honey.
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> David does not own shares in Dairy Crest.
