Three resilient British stocks paying income in good times and bad

A professional investor tells us where he’d put his money. This week: Brendan Gulston, co-manager of the LF Gresham House UK Multi Cap Income Fund

With inflation and interest-rate hikes expected to moderate in the UK, many investors now wonder whether Britain is headed for a deep recession after all.

However, the more relevant question is whether the new economic regime of elevated inflation and higher rates will force businesses and consumers to tighten their purse strings over the coming months. As Britons have already cut discretionary spending, it seems prudent to assume this will be the case.

In this environment, only the most resilient companies can deliver consistent income streams. We look at three such businesses available to savvy UK investors at attractive discounts.

Co-bots – not robots

RWS Holdings (Aim: RWS) is a world-leading provider of technology-enabled language translation services for businesses, used by 90 of the world’s top 100 brands. The company has cemented a lead in the business-to-business (B2B ) translation sector, thanks partly to the scale and capability of its business model, which uses in-house translation specialists, freelancers and cuttingedge software.

While automation might be viewed as a headwind for the translation industry, it forms the cornerstone of RWS’s process. The company’s vast pool of translators leverage the group’s proprietary machine-learning platform to conduct machine translation post-editing (MTPE). MTPE boosts efficiency for translators, increasing the workforce’s productivity and enabling RWS to grow margins and take market share.

Rather than posing a threat, automation is fuelling RWS’s growth and resilience over the long term. With a robust balance sheet, well-covered dividend, and potential for margin growth over the coming years, RWS is a resilient income prospect.

Look for loyalty

Premier Foods (LSE: PFD) is a food provider with a portfolio of staple brands, including Mr Kipling, Bisto and Batchelors. While investors might be quick to dismiss this business given its sensitivity to consumers’ spending, Premier Food’s compelling transition story showcases its resilience. Historically, Premier Foods has been overleveraged, exhibiting a debt-to-earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio as high as four, which stifled its growth prospects. But new management has since delivered an ambitious deleveraging strategy, more than halving the debtto-Ebitda ratio and shoring up the balance sheet. The business has seen an uplift in profits since, with consumers signalling loyalty to its market-leading brands despite the squeeze on household incomes. PFD has strong pricing power, demonstrated by its ability to offset inflationary pressures.

Data makes the difference

Sabre Insurance (LSE: SBRE) is a leading motor insurer that sells policies through a network of brokers and brands. Unlike competitors such as Direct Line – which offer a range of products across the mass market – Sabre differentiates within those vehicle categories that are hard to insure. This subsector is difficult to price, as risks are harder to quantify than in other types of standard cover, where more easily accessible data help inform underwriting policies. Sabre has collected two decades of proprietary data, which can be employed to enhance the sophistication of its pricing models.

This competitive advantage has enabled Sabre’s underwriting performance consistently to outperform the competition and should support its resilience over the long term. Furthermore, despite headwinds across the industry in terms of claims inflation, Sabre has been a first-mover in adjusting pricing to the new environment, positioning it for strong medium-term profit growth.

“RWS’s translation services are used by 90 of the world’s top 100 brands”

Bank of America has its origins in the Bank of Italy, founded in San Francisco in 1904. Originally aimed at Italian immigrants to the US, it rapidly expanded across California and was renamed Bank of America in 1930. In 1998 it merged with NationsBank of Charlotte, with the new company becoming one of the largest banks in the US. Under CEO Ken Lewis, who took over in 2001, it would pursue an aggressive policy of expanding through acquisitions.

What was the idea?

Between 1982 and 2007, the mortgage lender Countrywide Financial made a lot of money from providing mortgage financing, at one point being involved with around a fifth of American mortgages. Because many of them were riskier subprime mortgages, it relied on quickly repackaging them as mortgage-backed securities and selling them on. However, by August 2007 the market for such securities had collapsed owing to fears about plummeting house prices and rampant fraud in the market. As a result, Countrywide’s share price started to plunge. In January 2008 Bank of America agreed to buy Countrywide for $4bn, a big discount from its market value of $24bn six months earlier.

What happened next?

At first Bank of America thought that it had picked up Countrywide for a bargain price. However, as the housing and mortgage markets deteriorated further, it became clear that Countrywide’s financial position was even worse than widely perceived. Meanwhile, as evidence began to emerge of large-scale fraud in the market, Countrywide became the subject of various fines and lawsuits from both regulators and disgruntled investors, which Bank of America as its owner was now liable for. Within months Bank of America would itself be seeking state aid; its share price fell by 90% in 2008.

Lessons for investors

Covering Countrywide’s losses, along with settling its lawsuits, would cost Bank of America another $40bn on top of the original purchase price, making its purchase of Countrywide of one of the worst deals in financial history. Ken Lewis would be forced out as CEO in September 2009, with his successor Brian Moynihan admitting that it was a bad idea. Bank of America’s experience shows that seemingly “cheap” investments aren’t always bargains – especially if you don’t do your due diligence (incredibly, lawsuits against Countrywide were already being filed before the deal closed).