Never has the hunt for yield and good quality income flow been so great, a situation exacerbated by constant volatility and uncertainty and ultra low interest rates and government bond yields. For the slightly more adventurous conservative investor substantial and relatively safe yields can be found in the stock market, though they do come at a price as quality can be expensive in the current environment.
The first two companies Primary Health Properties (PHP) and HICL Infrastructure (formerly HSBC Infrastructure) are considered by some analysts to be like quasi-government bond securities as their revenues are largely guaranteed by the state. Though these two companies are very safe bets by equity standards, they do nonetheless carry operational risk, which is not the case for Gilts. Also, there is always regulatory risk, but the UK government tends to be careful about tinkering too heavily with existing contracts for fear of damaging future investment in the public sector. However, these risks are more than compensated for by their inflation-busting yields.
Just what the doctor ordered
Primary Health Properties (LON:PHP) is a healthcare real estate investment trust – a property company, which lets out modern purpose built medical centres mainly to doctors and dentists across the UK. There's certainly no speculative development for PHP or glamorous trophy buildings to adorn the annual report, but therein lies its 'nice' qualities. Nothing is built until it is pre-let and the lets can be for over a decade with rents linked to inflation. Most of its properties are worth less than £10 million making them relatively straight forward to build and manage in contrast to say a skyscraper. Another positive factor is that it's properties tend to be 99% let. For a property investors it doesn't come much better than that.
PHP really showed its mettle during the financial crisis where revenues remained stable and their were no cash flow crises. This stands in sharp contrast to say British Land, which struggled during the height of the financial crisis. In 2009 PHP did conduct a cautionary rights issue to beef up its equity buffer in case it breached its loan covenants with banks as all commercial property values were under pressure. But as it turned out, this was very profitable for shareholders who took up their rights. All in all this is probably one of the safest, albeit most boring, property companies on the UK stock market. Probably the most exciting bit is that the company believes changes to the current regulatory regime giving doctors more responsibility over procurement will actually benefit the group's growth strategy. The market capitalisation is around £250 million and the yield 5.4% and it trades at a premium to net asset value of 43% with gearing of 263%, according to the Financial Times market data and it listed in 1996.
Boring, but safe
If PHP sends you to sleep, HICL Infrastructure (LON:HICL) risks putting you into a coma, though the income stream is very reliable and mainly UK focussed. Of all the infrastructure funds listed in the UK it's probably the safest. It prefers to invest in projects linked to the public sector, which are operational, so avoids build risk. Many of the projects are social in nature, such as law courts, libraries, schools, police stations and hospitals where commercial risk is minimal and revenues tend to be government guaranteed and in many cases inflation adjusted. This would contrast with investing in an airport where returns are very likely to be linked to passenger volumes and airline usage, which can be a source of worry for investors during a recession.
HICL's share price tends to reflect the dull nature of this company, but on the plus side it is relatively stable. It has a market cap of £1.1 billion with a yield of 5.4% and trades at 10% premium to net assets and is 100% geared. It floated in 2006.
Transmitting regular dividends
The next one, National Grid (LON:NG.) , a FTSE-100 company and a utility, is maybe marginally more exciting and emerged from the great privatisation wave of the 1980s. It operates electricity and gas transmission networks in the UK and owns a utility business in the US. Unlike other utilities such as Centrica and Scottish & Southern Energy its UK business is a monopoly and profits are therefore more regulated. That means it agrees with the regulator how much money it is allowed to make, a nice contrast to other businesses, which have to compete and innovate for their profits. The renewal and partial greening of the UK's power generation capacity offers the prospect for National Grid to renew and build infrastructure such as linking offshore wind farms to the UK's electricity grid. There's also the advent of smart grids in the UK to manage energy more efficiently. More investment is an opportunity to grow profits. It supports a P/E ratio of 12, a yield of 5.6% and a market cap of £25 billion.
Coining it in on royalties
By the standards of these three stalwarts, the next one Anglo Pacific Group is somewhat more racy, though relatively dull by the standards of its industry – mining. It actually doesn't do any mining and exploration itself, but helps finance mines in exchange for a royalty on the output, which has proved to be very profitable. It's not a concept that's well understood in the UK by contrast to North America where so called royalty trusts are a familiar part of the investment landscape.
Anglo Pacific (LON:APF) largely avoids many of the operational risks involved with mining, such as cost inflation a problem for the resources sector, though if a mine is shut, say for maintenance or due to an accident, then the royalty flows stop as happened recently on one of its investments. However, this was not a disaster for APF as it was one of four producing projects, has cash in the bank and no debt along with very low operating costs of its own.
The other three companies mentioned do carry high levels of debt – though given the solidity of their income streams and the defensive nature of their businesses this shouldn't be a major issue. APF holds net cash, which helps offset to a certain extent the riskier more cyclical nature of its business.
The exciting bit is that APF is involved with 11 projects under development and 6 in pre-development. That means future sources of royalties and greater income diversification. So although APF is safer than most mining companies of a similar market capitalisation it is still exposed to prices of commodities and sentiment towards the sector. APF is involved in coking coal and iron ore (for the steel industry), gold, chromite and uranium. So its share price tends to be quite volatile. APF has a market cap of £280 million, trades on a PE of 17 and sports a dividend yield of 3.8%.
Worth a look after the next sell-off
What these four companies have in common is their stellar record on delivering dividends and dividend increases in particular even though they mostly operate in fairly dull sectors. But in an environment of constant volatility and uncertainty, boring is quite possibly the new exciting as seeking excitement through the stock market seems increasingly akin to very high risk. Also, all four are well run and enjoy growth prospects and the first three at least are well suited to conservatively managed portfolios with the last one maybe adding a bit of spice in terms of potential out-performance on the share price. All four are worth a look when the stock market hits one of its regular pockets of turbulence and sentiment turns 'risk on' and a big sell-off occurs.