These cash cows are strong enough to weather the coming stagflation, writes Douglas Moffitt in The IRS Report.
I have always believed that quantitative easing would set off the mother and father of inflations, and probably a period of stagflation—a toxic combination for real growth in corporate earnings.
So I take great comfort from my two utility shares, and rejoice that I broke my own rules and retained United Utilities (London: UU, OTC: UUGRY)—along with 6.4% yielding Scottish & Southern Energy (London: SSE, OTC: SSEZY)—after they cut their dividend for the current year in response to the latest price controls.
Well-managed UK utilities have built-in inflation proofing, and the effect of the cut will be more than made up in just a few years.
However, until the economic picture is clearer, I am happier topping up my existing, tried-and-tested holdings than searching for new companies for the sake of it.
I think UK Justice Secretary Kenneth Clarke is spot on in saying that the middle classes don't know what is going to hit them as public spending cuts bite, and I think the same may be true for the stock market. But I am happy to make top-up purchases of wireless giant Vodafone (VOD) and transport operator FirstGroup (London: FGP).
Several of the companies I invest in have hiked their dividends. British American Tobacco (London: BATS) posted strong results last month, managing to increase both profits and sales despite a fall in volumes.
This is an impressive trick only partially explained by the inclusion for the first time of earnings from their Indonesian acquisitions. The final dividend goes up by 13%, and the shares still offer a very acceptable yield of 4.9%.
Media conglomerate Pearson (NYSE: PSO, London: PSON) also reported sparkling results, lifting earnings per share nearly 20% and the final dividend by 10%.
The 2010 figures were notable for the impressive growth in digital revenues and the remarkable 54% jump in operating profits from the FT Group. All sectors generated double-digit growth and margins continued to expand. Earnings per share rose 19%.
Pearson is now investing heavily in emerging markets to reduce its dependence on developed economies. If that investment—together with the continuing shift into digital services—pays off, the market may well start to accord a fancier rating to the shares.
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