Although events such as the Royal Wedding and the assassination of Osama bin Laden have captured the front pages, the real story from an economic standpoint is what the central banks are cooking up. And it’s not looking good for savers. Both the Federal Reserve and the Bank of England are signalling interest rates will stay lower for longer, thanks to disappointing GDP data. Worse, China and many other emerging markets are also tightening monetary policy in an attempt to prick inflation.
So real returns on cash are set to stay negative – and squirrelling money away in deposit accounts or government bonds is likely to be a losing trade. To me, it seems the best bets for inflation protection are equities. The very best bets of all are the beaten-up consumer staples, such as Robert Wiseman Dairies, Britain’s largest fresh-milk distributor.
The industry has historically been characterised by high volumes, slim margins and predictable, albeit not spectacular, returns. That was, of course,until Asda and Tesco unleased some harsh measures on their milk suppliers last September. That kicked off a savage price war that slashed the cost of four pints of milk to 125p and sent Wiseman’s stock into freefall.
However, I suspect this hammering will only be temporary. The milk market is beginning to resemble the early days of the organic, fair trade and free-range movements. Then, ethical consumers decided to switch brands because they wanted to pay a decent wage to farmers for quality produce, such as chicken, coffee and other perishables. In March the Co-op chose Wiseman to help it offer sustainable milk products. The scheme involves paying 350 dedicated dairy farmers premium prices, in return for ensuring strict standards on animal welfare, quality and the environment.
Robert Wiseman Dairies (RWD), rated a BUY by Investec
This could be the start of another sea-change in consumer perception – a move from supermarkets selling milk as a loss-leader to promoting milk on the basis of healthy lifestyles and sound ethics. Indeed, this already appears to be happening in convenience stores, where Wiseman’s Black and White range of fresh milk has jumped ten places to become Britain’s 36th-biggest brand.
That doesn’t mean the board can put their feet up, though. They’re squeezing the last pip out of overheads and have recently closed two less-efficient sites in Devon and Fife. Consequently, the City is predicting 2011/2012 turnover and underlying earnings per share of £940m and 27.6p respectively, while the firm churns out a tasty 5.3% dividend yield. On this basis, I would rate the group on a through-cycle EBITA multiple of eight,assuming sustainable margins of 4%. After deducting net debt of £21.5m, this delivers an intrinsic worth of about 390p per share.
So what could go wrong? Well, another war at the tills certainly wouldn’t help, albeit this seems unlikely as it’s not in the long-term interest of either its rivals (Arla and Dairy Crest) or the giant grocers. Another factor to watch is rising input costs, particularly for diesel/plastics, along with the inherent volatility of by-products (eg, bulk cream). That said, in the broader context of food inflation, prices look more likely to harden than drop. Investec has a target price of 383p. Preliminary results are due out on 17 May.
Recommendation: BUY at 324.5p