Central bankers the world over – with the possible exception of Japan – are of the view that a global slowdown, even a recession, would be a price worth paying to get inflation down.
Higher interest rates and “quantitative tightening” (QT) are the tools of the policymakers’ trade and they are designed to increase borrowing costs and interest bills and drain liquidity from the economy. At some stage the central banks will pause, or even change direction, but that moment does not feel imminent.
The trigger for greater activity, if history is any guide, will be a peak in the yields on two‑year American Treasury bonds and two-year gilts in Britain, as they seem to lead headline interest rates by around six months. Admittedly, the past is no guarantee for the future, but investors may be best served by carefully calibrating risk and, frankly, taking a cautious, defensive posture until that zenith in the yield on two‑year government paper has passed.
Such a strategy takes this column back to PZ Cussons, the gels, soaps and tanning products specialist. Our initial analysis of a year ago is so far generating a paper loss of 48p, although our 6.4p in dividend payments covers a little of that. Better still, last week’s full‑year results suggest that the FTSE 250 constituent is capable of generating share price gains and income for the patient investor and providing a haven until the interest rate storm blows itself out.
Sales and profits dipped a little on a stated basis for the 12-month period to the end of May but that does not tell the whole story. The base for comparison was tough, thanks to strong sales of Carex soap in the Covid-wracked preceding year, while revenues grew on a like-for-like basis by 2.9pc over the year and by 7.1pc in the final quarter.
That momentum continued in the first quarter of the new fiscal year, to the end of July, when sales grew by 6.7pc year on year, buoyed by the sales mix but also by pricing.
PZ Cussons can charge more thanks to the strength of its brands and that pricing power helps to protect margins and cash flow. Cash flow in turn funds the dividend, which grew last year, and also pays interest on any debt, although PZ Cussons has net cash on its balance sheet once liquid assets and borrowings are adjusted for leases and a pension surplus.
That financial solidity is particularly welcome at a time when rising interest rates will start to drive up interest bills, weigh on earnings and possibly strain balance sheets.
If one desirable facet in a stock is pricing power and another is a solid balance sheet, a final one is an attractive valuation – the lower the price we pay, the greater our protection against falls (and the scope for gains). A mid-teens earnings multiple, combined with a forecast yield north of 3pc, is not knock‑down, bargain basement territory but it is appealing enough for a business with a double-digit operating margin, double-digit return on capital and strong cash flow.
Questor will stick with PZ Cussons.
Questor says: hold
Share price at close: 197p
Update: Ladbrokes 5.125pc 2022 bond
Its betting shops are still ubiquitous on the high street but the company left the stock market after Entain acquired Ladbrokes Coral in 2018 and now the Ladbrokes Group Finance 5.125pc 2022 bond, issued in 2014, has matured.
That means it is job done as far as we are concerned, with £30.75 in coupons (interest) safely clipped for every £100 bond owned and the initial investment (or principal) returned on maturity on Sept 16.
Granted, we paid £103.20 to buy the bond in January 2017, but the overall return is still 27pc after we have adjusted for the return of the principal at £100.
That means we have still beaten inflation, as the consumer prices index has risen by 21pc over the same time span; in fact the timing of the bonds’ maturity could hardly be better as inflation runs rampant and the Government prepares its review of the 2005 Gambling Act.
Russ Mould is investment director at AJ Bell, the stockbroker
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