Derek Pain: Mild wind stirs the breweries

Prices will bounce back and I would not be at all surprised if the Footsie ends the year comfortably above 5,000 points

The turmoil in the stock market is clearly hurting some shares more than others. In such treacherous days with investors under intense pressure, so-called recession- proof stocks are accorded a special, often wholly unjustified, status.

The turmoil in the stock market is clearly hurting some shares more than others. In such treacherous days with investors under intense pressure, so-called recession- proof stocks are accorded a special, often wholly unjustified, status.

Some shares, of course, enjoy better defensive qualities than others do. But in real terms a truly recession-proof share does not exist. All that is on offer is an often-suspect ability not to fall as steeply as shares that are brutally exposed to the chill winds whistling around the country at times of doom and gloom.

In days gone by brewers undoubtedly offered comfort for the harassed investor. Yet although the shares of the few remaining quoted brewers should perform more strongly than many others they will still feel the pinch.

The no pain, no gain share portfolio contains a comforting collection of what I would describe as old-fashioned defensive investments. Allied Domecq, Burtonwood Brewery, Safeway, Scottish & Newcastle and S&U are fine examples of the safety first policy I have adopted to cushion the speculative impact of more adventurous selections.

Last week S&U, a finance group, produced splendid interim results which in happier days would have drawn a highly positive stock market response. Indeed for a time the shares were up 10p at 410p; they closed on Friday at 397.5p with only a tiny number of shares going through. They were 292.5p when I recruited them to the portfolio in June 1999 and have since been as high as 425p and as low as 216p. With a door-to-door credit business S&U has obvious defensive qualities. Yet it is far from being recession-proof.

Half-year profits were 30 per cent higher at £4.2m with the dividend increased 16.7 per cent to 7p a share. For the full year profits of £8.3m are expected with £9.2m next year.

Most constituents offer reasonable dividend yields. S&U returns more than 6 per cent which looks attractive in these low interest rate days. Scottish & Newcastle, still the nation's biggest brewer, is another portfolio stock with a high historic yield of approaching 6 per cent.

S&U's ability to continue to pay a reasonable dividend rate is underpinned by the very nature of its operations. Besides its door-to-door credit business, it also embraces a car finance division operating in what is euphemistically called "the sub-prime market".

The group, which remains on a lower rating than its main rivals, is on the look-out for acquisitions. It is holding talks with at least one possible candidate. I understand S&U would not be averse to financing takeovers by handing out shares. Currently the Coombs family, with around 50 per cent of the capital, controls the group. The publicity-shy, property-owning Berger family is thought to account for a further 20 per cent. Any move to weaken the Coombs/Berger control should be bullish for the shares, which are now an exceedingly narrow market with little institutional involvement.

Of course, high dividend yields often – but not always – indicate trading problems. Global Foods, the portfolio's basket case, is, say most share tables, offering a remarkable 8.6 per cent. It is an illusion; merely demonstrating the group's difficulties. Global last week said it would not pay an interim dividend; there is every chance the final payment will also be dropped. The 8.6 per cent relates to last year.

The group, known for its beefburgers, has been hit by the BSE and foot-and-mouth disasters. It lost £600,000 in the first half year and although burger sales are showing signs of recovery, it continues to suffer. Last year it achieved profits of £5.8m.

The shares, bumping along at a dismal 9.5p, have the dubious distinction of being the portfolio's most depressed constituent. I have agonised about whether to chop them since the group's difficulties first became apparent earlier this year. With Global facing a long, hard battle to recover its former glory I feel the portfolio should cut and run, accepting a 10.5p a share loss with the price at 9.5 pence.

Settling for such a sharp deficit is a depressing experience. But Global is a casualty of poor trading; not the stock market slide. And although I am usually inclined to stick with a share, which should in time stage a comeback, I feel in today's exceptional climate it is best to swallow hard – and get out.

However Global is a special case. I am not advocating investors rush to sell in the present climate. Hold remains my advice. And do not be afraid of the occasional buy, if you feel it is worth taking a chance. On all historic measurements shares are cheap. Prices will bounce back and I would not be at all surprised if Footsie ends the year comfortably above 5,000 points.