Finance & Funds or Water & Waste?

A couple of results announcements today from decent income stocks today in the shape of Intermediate Capital Group (ICP) The mezzanine finance and fund provider and Pennon Group (PNN) the water utility and waste group. Click the highlighted names if you want to read the full announcements. Longer term readers may recall that ICP is one I recommended and bought almost exactly a year ago when it was around 400p with a target of 500p. I reviewed it again in January this year when it hit my target and debated whether I should stay or go and take the money and run.

In the end I top sliced my holding and continued with it and based on today's figures I'm glad that I did. They seem to be firing on all cylinders at the moment reporting record assets and new funds being raised at record rates, credit standards being maintained and impairments down on last year and below their target 2.5%. Added to which Europe seems to be recovering (although they are more global and diversified these days) and investors are still hungry for yield products and markets remain buoyant for exits. So I guess you could say it doesn't get much better than this?

On the back of this they are planning to return £300m (about 13 to 14% of the market cap) via a special dividend which is on top of the £100m share buy back which they did in the last year. In addition to this they are raising the final dividend and as a result, the full year dividend, by just under 5%. This is all designed to re-gear their balance sheet to 0.8-1.2x from 0.5 currently and raise their return on equity to over 13% from the current 11%, although I hope they are not gearing up at the wrong time.

The shares have responded with a further 5%+ rise to around 590p at pixel time and this leaves them on a yield of about 3.9% based on 2016's forecast dividend of 23.2p (+5%) which would still leave it towards the bottom end of its yield range in recent years, suggesting it may be up with events up here. In addition banking / financials are often valued on a price to book based on their ROE with 10% often roughly suggesting a 1x price to book. In this case if we take their suggested 13% ROE and factor in perhaps a prospective 10% rise in today's book value of 402p to give say 442p this would also leave them on a fairish looking 1.33x book value. So a strong hold for me up here on that basis, but worth watching markets, bond yields, credit spreads and defaults for signs of continued good times or trouble which might hit this one quite hard.

Meanwhile in the more mundane world of water and waste Pennon Group have also reported a near 5% increase in their dividend and they are committed to growing this by RPI +4% until 2020. So by way of comparison with ICP based on their 2016 forecast dividend of 34p (+5.76%) this also leaves them on a prospective yield of around 3.9% at the flat pixel time price of 877p.

So there you go a couple of stocks yielding 3.9% on the basis of forecast dividend growth of around 5% albeit that they have differing levels of operational and financial risk. So as ever you can pay your money and take your choice or not as the case may be, but they both seem reasonable to me and certainly more likely to protect against the ravages of inflation (which I discussed yesterday) than a cash deposit. If you are bullish of markets I guess you might prefer ICP or if you are more cautious you would probably go for Pennon but if you wanted to hedge your bets and get a bit of diversification you could buy both, just a suggestion not a recommendation.