Stars pick smashed-up dividend stocks to buy today

There are plenty of people out there volunteering good reasons to buy more mega-cap defensive yield stocks.

The Neil Woodford’s of this world are just so delighted their bets on big pharma have finally come off that it is no wonder they have created a wave of enthusiasm around these companies which have weathered the volatility well.

But, Clive Beagles, manager of the JOHCM UK Income fund and a key pick in Citywire Selection points out that the case to buy more GlaxoSmithKline or AstraZeneca today is a mite thin.

‘It may be easy to think of tobacco, pharma and telecoms because they have all done so well. But I would rather be looking outside of those areas.  They may be the safest dividends but there could be better buys.’

In the hunt for alternatives Beagles has been looking for bargains among smashed-up yield stocks. This inevitably of course leads him towards consumer-facing stocks and most particularly those with businesses reliant on the discretionary spending of the embattled British public.

It has been almost investment heresy to buy UK-facing consumer stocks of late. But everything has a price and for Beagles the trick is simply to buy things that can demonstrate excellent valuations on criteria other than their P/E ratio. ‘You have got to anticipate earnings downgrades and it is easy to see some stocks that on their P/E ratios looks cheap, but nobody believes the 'E'. If we can find real life examples that don’t rely on that its worth buying.’

Beagles’ picks

Looking at the current economic environment it is hard to imagine there are a wealth of people deciding to take their first cruise aboard one of Carnival’s P&O or Cunard liners.

But Beagles’ points out that the current share price of £17.72 means that the value of the company’s shares are now less than the value of the fixed assets owned by the company. ‘Carnival has only traded below the value of its fleet twice before, after 11 September 2001 and at the bottom in 2009. It has 50% market share, it is the dominate supplier and it is trading below the cruise fleet’s value and is yielding 4.5%. To me that is more interesting than arguments about whether National Grid is good at a yield of 6%.

The current P/E ratio of Carnival stands at some 11.6 times with analyst forecasting that to fall to 9.6 times by 2012 were there no downgrades.

The stock has fallen 16.9% over the past year and some 36.59% over the past six months. It hit a share price high of £32.34 in January of 2011.