The Investment Column: Burberry is dear but hold it for now

Keep buying Brambles for dividend growth - Supermarket squeeze weighs on Northern Foods

Burberry may be the butt of every chav-related joke around (that's the gold jewellery-wearing, Burberry baseball-capped fraternity if you've yet to visit chavscum.com). But that hasn't held it back.

Burberry may be the butt of every chav-related joke around (that's the gold jewellery-wearing, Burberry baseball-capped fraternity if you've yet to visit chavscum.co.uk). But that hasn't held it back.

The luxury goods group, spun out of GUS two years ago, unveiled a 22 per cent rise in profits to £78.3m yesterday. It has so much spare cash, in fact, that it has decided to give £250m back to shareholders over the next 15 months and start a policy of expanding the dividend.

Burberry's designs are as coveted as ever, thanks to the commercial nous of its top designer, Christopher Bailey. It pioneered the current penchant for mini-capes and was equally quick off the mark with ponchos.

One of Burberry's big attractions is that when one part of its fashion empire underperforms, another tends to make up for it. So even though current retail sales are "subdued" (it blames the warm autumnal weather in the US, its biggest market), wholesale orders from the likes of Selfridges and Bloomingdale's are flooding in.

The highlight was the unexpected 300 basis-point jump in the gross margin. Storming revenues from its licensing partners helped, as did having less summer sale stock. Although still small proportionately, licensing revenues drop straight down to the group's bottom line. The company says it is still keen to reposition its Japanese licences - getting better royalty rates and awarding lower management fees in the process. But some analysts wished it would move faster.

Burberry only has real problems in the UK, and it won't spell out whether this is due to the chav association that is damaging its brand or a lack of big-spending overseas visitors. Luckily it is finding new markets in Europe and Asia to compensate. Demand in one Hong Kong store (from Chinese tourists) is so strong it has to replenish its shelves every hour.

We have been fans of the stock since it floated, but the shares look high enough on a chunky 18 times price-earnings ratio. Hold.

Keep buying Brambles for dividend growth

Anyone brave enough to follow our advice in February to take a punt on Brambles Industries ought to be pleased. A 24 per cent rise in the shares is a clear indication that the sometimes farcical bad news from the company has been forgotten.

Brambles is the world's largest supplier of pallets (more than 200 million of them) through its Chep subsidiary, used for transporting consumer goods. Clients include practically every well-known retailer, from Wal-Mart to Tesco. Chep is a rental business, charging clients for the amount of time they are using their pallets, which in most cases is all the time.

An overly aggressive expansion plan led to administrative cock-ups and the loss of 14 million pallets. However, Brambles felt confident enough in February that it had overcome the worst to announce a series of "Objectives and Milestones", which, on the evidence of yesterday's trading update, they appear on target to meet. Sales, margins and total returns are growing and the cash flow is excellent, which ought to mean improved dividends in the future.

The only thorn in its side is its Cleanaway rubbish collection business, which has had to agree to price cuts in Germany. In the context of the group, though, the impact is minimal.

With a dividend yield of 3 per cent the shares are no longer at rock bottom prices, and the profit taking yesterday was inevitable. But this is a well managed business with scope to grow the dividend. Keep buying.

Supermarket squeeze weighs on Northern Foods

On the same day that the Government announced a crackdown on obesity levels, Northern Foods, which produces, among other things, 100 million pizzas and 200 million pork pies a year, promised shareholders it would "get fit" as a company.

Pat O'Driscoll, the chief executive, said Northern needed to shape up as she announced a meagre 1.5 per cent rise in underlying half-year profits to £33m yesterday.

Northern is struggling because more than 80 per cent of its turnover comes from supplying ready meals and other goodies to supermarket chains, which are squeezing suppliers harder than ever amid intense competition. Plus, despite soaring demand for ready meals from the new generation of cash-rich, time-poor households, rising raw material costs have been hard to swallow for the group. Marks & Spencer's trading troubles have also not helped the group. It accounts for 30 per cent of Northern's turnover, and its difficulties have knocked sales for Northern.

As part of its get-fit regime, Northern announced two factory closures and has sold off a number of businesses. It does have a tasty 6 per cent dividend yield and the shares are cheap, but trading is still highly competitive. Christmas will be vital, and no one knows how M&S, and hence, Northern, is going to fare. Wait for the new year to see if its health regime has kicked in. Avoid.