Tumultuous markets since the start of 2016 have created bargain purchases aplenty. But for investors seeking safety from red ink in their brokerage accounts, the safety and stability of relatively boring shares with high dividends can be very appealing.
Business plans don’t come much more boring than the shipping of letters and parcels that Royal Mail (LSE: RMG) does. While the long-term decline of posting letters continues, the rise of online shopping has created a rapidly expanding market for the shipping of parcels. However, Royal Mail isn’t the only player in this field and margins have been squeezed as international competitors and the likes of Amazon move to gain market share. Although Royal Mail increased UK parcel volumes by 4% over the past nine months, revenues only bumped up 1%.
Margins remain roughly 2% to 3% lower for Royal Mail than at major international competitors, and price competition will require any margin improvement to come from internal cuts. Operating costs are forecast to be brought down by 1% for the full year, but ‘transformation costs’ will continue as staff are made redundant and infrastructure upgraded. The long-term outlook for the parcel delivery business remains competitive and with the declining letters segment still accounting for 60% of revenue, I don’t foresee any huge growth for Royal Mail’s shares coming soon. But despite limited growth prospects, dividend yields will reach 4.6% this year and the business should remain steadily profitable.
Emerging markets star
Consumer goods giant Unilever (LSE: ULVR) provides much more growth opportunity due to high emerging markets exposure. A full 58% of revenue comes from these countries and despite gloomy economic news, emerging market sales grew by 7.1% on higher volumes and price increases in 2015. Revenue growth has been hard to come by for the company, but management has been attacking internal costs to bring operating margins up to 14.8%. Costs should continue to fall as the controversial private equity favourite ‘zero based budgeting’ is rolled out across the company. The combination of predictable earnings growth and a 3.3% yield has sent share prices up to trade at 21 times forecast 2016 earnings. Although the shares are certainly pricey, investors seeking the safe returns Unilever provides will have to pay for quality.
Safe haven
The ultimate safe haven of utility shares is also a possibility, and an attractive one at that, with a 4.5% yield on offer at National Grid (LSE: NG). The highly-regulated energy transmission business in National Grid’s two markets, the UK and Northeastern US, provides the promise of steady returns year-after-year. Plans to divest the majority of its UK gas distribution business could net up to £11bn to be reinvested in order to hit management’s target of 5% asset growth per year. With share prices up 77% over the past five years, current valuations are quite pricey and the company trades at nearly 16 times this year’s earnings. But with a great dividend and solid returns on offer, I believe shareholders should continue to enjoy National Grid for years to come.
