I’ve written a lot lately about big cap, solid growth companies like Vodafone, BHP Billiton and MITIE, and I guess that some people who read this might think, “What sort of value investing is that? Where are the obscure, the unloved and the unfashionable?”. I’m not sure I can stretch that far, but the next company under review is UK Mail (LON:UKM). It’s no world leader or mega-growth story; in fact they’ve barely grown earnings per share in a decade. They operate in a commodity market (where nobody has any pricing power) with barriers to entry that are relatively low and customers that don’t give a damn who they deal with. They are however, the leading independent, integrated postal group in the UK. In plain-speak that means they deliver things like mail, parcels, packets and palletised goods either inside the UK or internationally, for next day or not.
So what’s so good about a zero growth company in a market so competitive it looks like a war zone?
The irresistible lure of a high dividend yield
The yield. It’s all about the yield. With a share price of around 200p and a dividend of 18p, the yield currently sits at almost 9%. Usually when a dividend yield is that high it means the odds of the dividend actually being paid are low. That’s why it can be so dangerous to invest just on the basis of yield. The dividend often gets cut or suspended and all you’ll have to show for your investment is some shares in a crummy business on the road to nowhere. On the flip-side, the benefits of a high dividend yield (if it actually gets paid) are obvious: You get a whacking great dollop of cash just for holding the shares.
This is really useful, especially in the longer term as you are realising returns all through the holding period. This means you’re not as dependent on the share price (and therefore capital gains) to actually make you any money. The problem with being dependent on capital gains for all of your returns is that Mr Market is a fickle fellow; there’s no way of knowing how he’s going to value your holdings, regardless of how well the company actually does. For example:
Scenario 1 – Company doubles in size, retains ‘no dividend’ policy and share price…
