BP will reinstate dividends early next year and pay a 7% yield in 2012, allowing further upward share price progress, according to Dalton’s Glen Pratt.
Pratt, who manages the Melchior UK Opportunities fund, says the oil giant has made good progress in selling non-core assets to help finance the cost of clean-up and its balance sheet is still showing gearing of less than 20%.
Elsewhere, he remains cautious on companies dependant on the British consumer, with tax rises, government cuts and higher food prices reducing discretionary income.
“We are more relaxed about overseas-generated earnings as we see resilience in economic growth in emerging markets and China in particular,” adds Pratt. (article continues below)
“One area on which we are positive is any industry or stock with defensive earnings and stable cashflows paying out large dividends. With cash deposit rates below 1% and bond yields heading towards 3% in the UK, there will be a continual search for higher yet safe yield.”
He notes the likes of Vodafone yielding 5.4%, National Grid 7% and BT 5% and between them, these three comprise more than 10% of the UK Opportunities portfolio.
“They are not especially exciting in terms of earnings growth but offer scope for yield compression alongside dividend so give potential total returns of over 25% over a two-year period,” he adds.
Looking at the background, he says company cashflows are back close to cyclical highs and equities look remarkably cheap, allowing the group to maintain a broadly bullish stance.
“The forward PE ratio remains around the 10 times level while prospective dividend yields remain close to 4%,” he adds.
“It is worth repeating that compared with 10-year bond yields of just 3.4%, on anything more than a 12-month view, this remains a compelling entry point for equities compared with other asset classes.
“Our feeling has been that allied with the weakness of sterling, the attractive valuations of some UK companies make them prime candidates to be bought by larger overseas players. This provides a firm underpinning to UK equities – notwithstanding concern about economic recovery – and we are looking to identify the next potential corporate targets.”