We live in a crazy world where base rates are stuck at 0.75% while plenty of top UK companies yield more than 7%, almost 10 times as much. If you are looking for decent income you have to accept a bit of risk, but the rewards are high.
Centamin glisters
This morning gold miner Centamin (LSE: CEY) reported a 13% drop in gold production in 2018, in what was an “operationally challenging” year, although management alerted investors to the problem in December, and the stock crept up 0.77% this morning.
Centamin reported a 17% increase in production in the final quarter to 137,600 ounces, due to higher grades from open pit and underground operations. Full-year 2018 production from its Egyptian Sukari mine was 472,418 ounces, in line with December’s lowered guidance.
Shine on
Three months ago, Peter Stephens urged investors to load up on the stock after its summertime share price crash and that was good advice, as it is up around 30% since then. Now could be a good time to add a bit of gold mining capability to your portfolio, to help balance risks elsewhere. Chief executive Andrew Pardey is looking forward to 2019, promising “tight cost control across all areas of the organisation and returns for our shareholders”.
Centamin trades at a forecast 17.1 times earnings, slightly above the FTSE 100 average of 15.78. The current yield is a massive 8.4% although that is forecast to drop to 4.7% next year, with cover of 1.2. City analysts are bullish about earnings, predicting 24% growth in 2019, and another 17% in 2020. By then the yield should be around 5.1%.
Brand power
FTSE 100-listed tobacco manufacturer Imperial Brands (LSE: IMB) has also had a rough ride, its share price down 25% in the last 12 months. The sector has been hit by tough talk from the US Food and Drug Administration, which is looking to crack down on youth vaping, and that could threaten the group’s Fontem Ventures arm, whose brands include blu and Reon.
The hope was that vaping growth would help offset the long-term downward trend in smoking rates across the developed world, but now investors fear they will come under the same health and regulatory pressures as old-fashioned cancer sticks.
A fit of the vapours
Imperial nonetheless sold 255.5bn cigarettes last year, as Kevin Godbold reminds us, and even if that was a drop of 3.6% it should still keep the cash flowing in, while cost savings helped to lift operating profit by 5.7% to £2.4bn.
Investors must accept that this is a declining market, though, and while Imperial has been good at cost-cutting, it is struggling with market share, particularly in the US. Even vaping could backfire, by cutting traditional tobacco volumes.
Cash cow
This £23bn blue-chip will nonetheless generate swathes of cash for years and the entry valuation is a tempting 8.6 times earnings, almost identical to British American Tobacco (which crashed 50% last year).
Imperial’s forecast yield is now a grandstanding 8.8%, with cover of 1.4. Earnings are expected to grow 3% this year and 5% in 2020, by which time the yield is on course to be a smashing 9.1%. Put that in your pipe and smoke it.
