Rats Deliver A High Yield

Stephen Bland adds Rentokil to his fourth high yield portfolio.

My title is a little bit unfair perhaps as a reference to my sixteenth and final addition to this high yield portfolio (HYP) of Rentokil Initial (LSE: RTO) . That's because Rentokil is far more than a pest control operation though that continues to be one division of the company. Other divisions include parcel delivery, washroom and other facilities and services. Thus it is an business-2-business business rather than one that sells to the public.

A lot of the income is from regular contracts, always good for the cash flow and helping to offset the servicing of its substantial debt burden. This is a somewhat similar situation to utilities which often have high debt but strong cash flow because customers are on contracts.

A few weeks ago when I added my fifteenth share to HYP4 I said that I would keep it open for a while to see if any other share caught my attention. Rentokil has done so, adding welcome diversification to the portfolio together with a good yield.

The current forecast dividend for the year to 31/12/07 is 7.78p which at my buying price including costs of about 149p gives a forecast yield of 5.2%. For 08 the consensus forecast is for 7.69p which, oddly, is lower than 07 despite a forecast rise in earnings per share. Doesn't sound right to me but anyway, that figure gives a marginally lower yield for 08 though still pretty good compared with that on the FTSE 100 of 3.2% or so.

The historical dividend picture over recent years ain't perfect either. In 02 Rentokil paid out 5.53p which rose every year to 7.38p for 05. So far, so good, but in 06 the dividend was held at that figure. Normally, I like to see unbroken dividend growth with HYP shares over the last few years and therefore it is a little negative to see no growth between 05 and 06. Growth is forecast to resume with the aforementioned 7.78p for 07 and then fall slightly for 08. As I say, that forecast fall seems odd and consequently somewhat unlikely perhaps, but even if it happens, the yield remains very attractive.

The reason I'm picking Rentokil despite the lack of unbroken dividend growth is that I see the company as something of a turnround story. I don't do deep analysis for HYP selections but even a superficial glance at its numbers history reveals that it has gone through a poor period. Once a very highly rated share because of a long history of eps increases, the company fell from grace some years ago but new management is now changing things. Whether that will work out well long term I cannot know and moreover, my attitude of strategic ignorance prevents me from even hazarding a guess. I just look at the current omens and like what I see from an HYP point of view.

And that completes HYP4. Here is the current valuation. Each share cost £5,000 including all expenses.

Doesn't look good right now, being down 12.6%. Recent months have not been kind to High Yield big- cap shares so that all portfolios will be showing a fall over this period. That's the way it goes sometimes. The income though has not suffered and that, principally, is what this is all about.

Anyone entering the strategy expecting always to show good gains, even over short periods of a few months or a year or two, is certain to be disappointed. However it is long term income performance that counts here, short term capital movements should be of little concern.

It is absolutely inevitable that over various short terms all HYPs will fall in value, as will any long term equity strategy. With HYP4 one of those times just happens to be now, in its early days. If you do worry excessively about short term capital falls, and lack faith regarding the effect of long term income growth and associated capital gain, then perhaps you are in the wrong strategy. Not that you'll find one that doesn't show falls on occasion.

Of the shares shown I hold BATS, BP., BT.A, DSGI, GSK, LAND, LLOY, PSON, RBS, RTO, UU., WMH