QUALIPORT
Bargains, Bargains, Bargains

By Maynard Paton (TMFMayn)
September 27, 2001

Carburton Street, London -- Further to Monday's announcement, Tuesday morning saw the Qualiport (notionally) purchase the following:

* 128 shares of Lloyds TSB (LSE: LLOY) at 607p. Including stamp duty of £3.88 and dealing costs of £15.00, the total transaction came to £795.84.

* 161 shares of Carpetright (LSE: CPR) at 483.75p. Including stamp duty of £3.89 and dealing costs of £15.00, the total transaction came to £797.73.

So why buy Lloyds TSB and Carpetright? Simply, they're both great businesses selling at very attractive valuations.

Lloyds TSB

In terms of steady and solid long-term investments, I've always liked Lloyds TSB. As one of the UK's four leading banks, it's got one of the best business franchises around. So much so, the government has officially confirmed the lack of effective competition within the industry. It's all good news for the bank's shareholders.

But what of the company's valuation? When covering Lloyds TSB in the past, I've diverted from valuations based on projected earnings or free cash flow. Rather than delve into a set of very complex accounts, I've always considered the dependable dividend as an acceptable valuation tool for a bank. Indeed, Lloyds TSB is very much a passive investment for the Qualiport, similar to the shares bought for a high yield portfolio.

Revisiting this article, I declared:

"An investment "bargain" is a company that:

• is large and well-established;
• has the prospect of producing a significant rise in dividend payments in years to come, and;
• has a prospective dividend yield equal to the return from Government bonds (gilts)."

Lloyds TSB now fits the bargain bill. At the moment, brokers are pencilling in a full-year dividend of 33.9p. At the Qualiport's 607p purchase price, Lloyds TSB shares offer a prospective dividend yield of 5.6%, notably higher than the 4.9% yield offered by 10-year gilts at present.

It's also worth contrasting the current Lloyds TSB valuation with that seen in March 2000. Back then, at the height of the TMT boom and the "old economy" sell-off, Lloyds TSB shares fell all the way to 517p. At the nadir, the 517p share price would have offered a prospective dividend yield of 6.1%, well above the then 5.2% yield on 10-year gilts. 

Following eighteen months of widespread stock market heartache, anybody buying Lloyds TSB shares back in March 2000 will now be smiling. Such is the power of a decent, sustainable dividend providing a backstop to a blue-chip share price! If you ask me, at 607p, Lloyds TSB shares are pretty much a bargain for any long-term collector of robust blue-chips.

Carpetright

Unlike Lloyds TSB, Carpetright isn't a company you can forget about for a decade. For instance, while Lloyds TSB can maintain a decent competitive position no matter which directors come and go, there's no such luxury at Carpetright. If Lord Harris and his team depart from Carpetright, shareholders could be in trouble.

Anyway, nothing has fundamentally changed at the carpet retailer since the Qualiport's August share purchase. Nor has anything really changed since the company's initial portfolio review in December.

Assuming my forecast for 10% free cash flow growth remains intact for the current year (for the record, brokers are expecting 18% earnings growth), at 483.75p, Carpetright shares offer a prospective free cash flow yield of 8.8%. Assuming the dividend payment grows at 10% too, the shares also offer a forward dividend yield of 6.1%. In my opinion, the shares are now in bargain territory for shareholders with a long-term investment horizon.

Where next?

In the current stock market depression, there are a fair few other companies that also warrant serious investment consideration.

From the Qualiport's own watch list, Allied Domecq (LSE: ALLD), Halma (LSE: HLMA), Ultraframe (LSE: UTF), Ulster Television (LSE: UTV), Metal Bulletin (LSE: MTLB) and Games Workshop (LSE: GAW) are all hovering around the Qualiport's "buy" prices. And with many of the portfolio's existing shares very attractive too, there's a bit of a dilemma. What to buy?

The recent purchases have left around £2,400 in the Qualiport's wallet. So the portfolio's choice is essentially this:

* Choose a sixth portfolio member, or;
* Use the money to top-up the existing holdings.

It's a big decision, given the Qualiport will become fully invested if it goes for the new member option. Going for the top-up option, there is some added flexibility.

And after some thought, here's the decision...

Dealing

Within the next five trading days, the Qualiport will purchase the following:

* £800 of Emap (LSE: EMA) shares, and;
* £800 of Johnston Press (LSE: JPR) shares.

For now, I'd simply say Emap and Johnston Press shares are two more investment bargains. Monday's Qualiport will specifically cover Emap, its latest trading statement and the group's valuation. 

Disclosure: The author owns shares in Carpetright, Johnston Press and Games Workshop.