Gallaher Joins High Yield Portfolio

Stephen Bland picks Gallaher for the next share in his third high yield portfolio.

Slightly later than usual due to the intervention of the break plus my HYP2 third year review, I'm now publishing the next selection for my third high yield portfolio, which continues monthly until I feel it is complete.

My eleventh choice is tobacco company Gallaher (LSE: GLH) . Here is the list of all the shares to date in HYP3. £5,000 was invested in each and all expenses are included in the cost price.

Gallaher, a FTSE100 share, takes the portfolio into the new sector of tobacco. In fact there are only three tobacco companies listed and they are all large enough to be in the index. Just to illustrate how big these companies are, Gallaher has the smallest cap of the three by a long way yet still manages to be 55th in the FTSE100. The company is the highest yielder by a worthwhile margin over the other two tobaccos, and with the index yielding under 3%, it is definitely well above that average as well.

Gallaher has been paying annually increasing dividends for a number of years. The payout for the year ended 31/12/05 was 33.5p with forecasts for 06 of 35.4p and 07, for what it's worth, of 37.4p. That gives a forecast yield of 4% for 06 and for 07, 4.3%. The company has exhibited a similar eps trend over the last few years, so cover has remained within the comfortable range of about 1.7 1.9. In other words it's an attractive HYP share.

Tobacco shares have in the past suffered seriously, but temporarily, from periodic scare stories regarding damage claims from sufferers of smoking or legislation to restrict the activity. The shares have always recovered but more than that they have proven to be outstanding investments over the years. If ever this happens again, it will, as in the past, present a great buying opportunity for an HYP or indeed a short term crisis play.

Note that my monthly selections for HYP3 are valid only around the time I make them and it must not be assumed that I would pick the same shares now. Also, unlike HYPs 1 and 2 which are eternity portfolios, I am keeping open the possibility of trading the shares in HYP3.

This possibility leads me to my one divi cutter and consequent poor performer so far in HYP3, Rank. Is Rank rank? Will Rank rank for the chop? Does repeating a word in a desperate attempt to be alliteratively punny render it meaningless? I'll give the matter some thought but its forecast yield is now very low by HYP standards and lower than the market too. Therefore I expect the portfolio yield would be improved by a higher yielding replacement without compromising the integrity of the sector diversification, Rank being in the businesses of gambling and restaurants.

For further information on HYPs in general, the performance of my older portfolios, and the advantageous tax treatment of dividends compared with other forms of income, readers may wish to refer to my earlier HYP articles.

Of the shares featured here I own Alliance & Leicester, BT, Lloyds, United Utilities.