UK-Slim Pickings for stocks in FTSE 100

The market has rallied strongly since spring and equities in general "once again look attractive", says The Investors Chronicle. But not all boats will float on the tide: even with the FTSE 100 shares, investors should pick carefully. The following may be worth considering.

The utility sector throws up some good opportunities. Scottish and Southern Energy's decision to withdraw its £1.1bn offer for Midlands Electricity scuppers its expansion plans, "but shows it won't overpay for growth". The group has about £1.5bn that it could return to shareholders, on top of a 5.7% dividend yield and a forward p/e of just 11. Gas supplier Centrica is also worth a look. It expects its new £350m customer relationship management system at British Gas to generate £100m-£135m in cost savings in 2005. This, plus plans to increase the dividend payout to 40% of earnings, should lift the shares from their "unjustly" low rating.

In the health sector, pharmaceutical giant GlaxoSmithKline has again been hit by generic drug copying, this time of its anti-depressant Paxil. However, the impact of this has already been priced into the shares, and in the past the company has demonstrated resilience in similar circumstances. Trading on a hefty discount to peers, the shares are a buy. Alliance Chemical is also of interest, as new regulations in the UK should allow the chemist chain to expand the number of pharmacies it has, while margins in its wholesale business are improving.The group offers solid growth prospects and, trading on 12 times 2003's forecast earnings, the shares are a buy.

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Otherwise, take a look at the tobacco sector. Whatever the direction of the FTSE in the coming months, there is still "every reason" for investors to own tobacco shares; they produce steady profits, have "gushing" cash flows and offer high dividend yields. Imperial Tobacco is slightly more expensive than Gallaher and British American Tobacco, its two UK peers, but it is still "a very attractive proposition". Thanks largely to last year's acquisition of Germany's Reemtsma, the group is set to deliver strong earnings per share growth of 29% by 2005. The integration is going well and cost savings could amount to more than £200m by the end of 2004. Litigation is a continuing threat to tobacco companies, but Imperial has no exposure to the US, where tobacco firms are facing punitive damages.

Meanwhile, it continues to enjoy around 44% market share in the UK and trades on an undemanding ten times CSFB's forecasts of adjusted earnings of 97.7p in 2004. A yield of 4.5% on 2004's forecast dividend is also attractive.