Broker tips: Income stocks, AB Foods, Reed Elsevier

22nd Feb 2010 13:11

Barclays Capital is advising its clients to buy 'high quality dividend stocks' as dividend yields trade close to historical highs relative to bond yields.Barclays Capital (BarCap) has identified 20 European high quality dividend stocks, a list that includes UK stocks Cable & Wireless, RSA, BP, AstraZeneca, GlaxoSmithKline, Centrica, British American Tobacco, BAE Systems, Pearson, Unilever and British Sky Broadcasting. 'After a short period of underperformance during the low quality cyclical rally in early 2009, we see that our Quality Dividends [stocks] have started consolidating in terms of relative performance. We expect total return to bounce back, given our themes of a style rotation to high quality income generating stocks,' BarCap said.British Sugar and Primark owner Associated British Foods (ABF) is an unusual beast, in Panmure Gordon's opinion, in that it is a defensive stock that also offers strong profits growth.ABF's performance in the first half of its financial year was impressive, the broker reckons, though having lifted its full year earnings forecasts last month by 6% Panmure Gordon will not be revising its full year forecasts yet, though it thinks 'the risks to forecasts remain on the upside.''Although the shares have performed strongly this year, we believe a rating of 14.4x PE [price earnings ratio] and 7.5x EV/EBITDA [enterprise value/earnings before interest, tax, depreciation and amortisation] for calendar 2010E [2010 estimates] remains attractive given the growth potential of the group over the coming years, driven in particular by Primark's transformation into a truly Pan-European retailer,' Panmure Gordon concludes.The broker has reiterated its 'buy' recommendation and 1010p target price. 'Improved strategic visibility' has prompted Charles Stanley to upgrade business publisher Reed Elsevier from 'hold' to 'accumulate'.New chief executive Eric Engstrom has presented a strategic review and the approach appears to be 'evolutionary, rather than revolutionary,' with the increase in the level of capital expenditure from around 4% of revenue to 5% being the most eye-catching announcement, according to Charles Stanley.The broker has nudged up its earnings per share (EPS) forecast for 2010 by 1% to 41.9p on more favourable exchange rate assumptions, but the EPS projection for 2011 is chopped by a similar percentage to 44.5p on more conservative revenue growth assumptions.On those assumptions the stock is trading 'broadly in line with the European professional publisher peer group,' whereas Charles Stanley thinks a premium 'would seem justified, given the high quality of Reed's assets and strong position in a number of structural growth markets.'The shares currently yield 4.2% but the broker is not expecting any dividend growth until 2012.