The credit crunch has caused many investors to seek safe havens for their wealth in recent months, leading to much volatility in the stock market. But cash and commodities are not the only games in town at the moment, as suggested by the yo-yoing of the FTSE 100. It seems that although the share prices of large financial institutions have been suffering badly, investors have been piling into other kinds of large companies.

Of course, one attractive feature of large companies is that they tend to pay large dividends. But these days you do not need to be up among the large-caps to find well-run companies that pay big yields. Just take a look at media distributor Smiths News, which delivers approximately 59 million copies of newspapers and magazines to 22,000 retailers every week.

Previously a part of high street bookseller WHSmith, Smiths News handles the entire distribution process, receiving newspapers and magazines in bulk from publishers before repacking them and delivering them to retailers. This process includes ‘copy allocation’, where the group uses systems it has developed itself to analyse past sales trends and anticipate demand at particular retailers, so that sales are maximised and returns are minimised (the company also handles ‘returns processing’ on behalf of publishers). In addition to its main distribution activity, Smiths News offers complementary services such as NewsWorks, which develops and installs IT systems that improve the supply chains of wholesalers, publishers and distributors. It also runs InStore, a consultancy activity working with major retail chains to improve sales and marketing.

After reporting modest growth in annual profits last October, the group saw its share price slide to a low of 91p. A consequence of this has been a notable rise in Smiths News’s dividend yield, which is now well above six per cent. The total dividend for 2008, estimated at 6.6p per share, is well covered by earnings, since earnings per share are expected to come in at around 14p this year.

And those earnings look fairly secure given a solid trading statement issued by the group in mid-January. Newspaper price inflation helped drive group revenue higher by 0.8 per cent year on year for the first 19 weeks of the current financial year. Smiths News is a high-turnover, low-margin business, so even a small percentage rise in turnover should have a significant effect on the bottom line. Meanwhile, the group secured the News International business in Peterborough and Cambridge, which should add £8 million to annual sales.

One risk for investors to weigh up is the current Office of Fair Trading investigation into the news distribution industry. In the UK, there are three main distributors – Smiths News, Menzies and Dawson Holdings – and there is the possibility that the OFT could take measures to increase competition in the sector.

However, Altium Securities, a broker that follows Smiths News, does not expect significant changes to emerge from the OFT investigation. But even if they do, it believes that the low margins generated in the sector are not attractive enough to encourage a rush of new entrants into the industry.

Fairly flat earnings growth is expected at Smiths News this year and next, although at the current share price the group’s shares trade at a discount to those of its peers. But what should make the shares appealing to investors are the dividend payouts of 6.6p and more that are expected over the next three years.

Smiths News	LSE	£123.47m	67.50p	0.00p
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Smiths News			21/10/2008
Smiths News: Buy for yield appeal			28/04/2008