This overlooked gem offers a fat yield while waiting for long-term growth

Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.

A second, consecutive trading update from Hargreaves Services that provides little incremental good news might not sound like much but there is no bad news, either. And this column is more than happy to take that, given its recent travails with Zytronic, Resolute Mining, S&U and others.

Moreover, this column adheres to its view that financial markets are get-rich-slow mechanisms, when they work at their best. And Durham-headquartered Hargreaves Services still looks more than capable of helping here, given the long-term contract revenues, asset backing and dividend yield it provides.

Hargreaves Services derives the majority of its revenues from its infrastructure arm, where it provides mechanical and electrical services to major water and electricity utilities, as well as earthmoving and raw materials handling, in the UK, South East Asia and South Africa.

The company also has a 9,000-acre bank of brownfield land, which it regenerates and sells to developers for a range of uses, including warehouses, renewable energy projects and residential development. Finally, it owns 49.9pc of the equity in HRMS, a German raw materials and recycling operation where Hargreaves has the right to the vast majority of the profits.

Around 65 framework contracts, including those on the Lower Thames Crossing projects and Suffolk’s Sizewell C nuclear power plant, provide good visibility of earnings, even if the timing of land sales can be unpredictable and revenues lumpy, while a steady improvement in the housing market could boost the land business, too.

The latest update suggests that Hargreaves Services will show an improved performance in the year to May 2025, as will HRMS, while Hargreaves Land will show a decrease relative to the record profit recorded in fiscal 2024. All of these trends support analysts’ forecasts of a modest increase in revenues and faster advances in both underlying pre-tax income and underlying earnings per share.

Those in turn, along with a balance sheet that carries very little by way of net debt, underpin analysts’ expectations of an unchanged dividend of 36p for the full year, enough for a dividend yield of 6.2pc. The 18p final distribution for fiscal 2024 has already been banked, to take our total return from the stock so far into the mid-teens in percentage terms.

That tidy yield means investors are being paid while they wait for Hargreaves Services to deliver on its long-term framework deal and its land portfolio. They should also get some downside protection from the lowly valuation afforded the stock. The fat yield is one facet of that, while another is the multiple of net asset, or book value, per share at which the shares trade, which is just one time.

The full-year accounts to May 2024 showed £192m of net assets on the balance sheet, of which £186m were tangible and that latter figure compares to a stock market valuation of £191m at the time of writing.

Questor says: hold
Ticker: HSP
Share price: 580p

Update: Legal & General

Life insurance giant Legal & General is a long-term holding within the Questor portfolios, not least for its potential as a staple generator of income. And last week’s trading update is a timely reminder of the FTSE 100 index member’s virtues.

Alongside an analyst and investor meeting designed to provide a deeper look into its bulk annuities (or institutional retirement) business segment, Legal & General provided a welcome reaffirmation of both its guidance for earnings growth in 2024 and its longer-term goals.

Management still expects a mid-single-digit percentage advance in operating profit this year and continues to target a compound annual growth rate for earnings of 6pc to 9pc across the four-year period from 2024 to 2027, as well as 20pc-plus returns on equity and the generation of between £5bn and £6bn in capital.

These growth ambitions are underpinned by the company’s strong position in long-term growth markets, such as workplace pensions and bulk annuities – even if investors must be mindful of the competitive nature of the broader insurance business and the challenges faced by the investment management operation.

That capital generation figure is particularly important, as it underpins Legal & General’s ability to invest in its core business and competitive proposition and return any surpluses to shareholders.

Analysts’ consensus forecasts for a dividend of 21.32p a share in 2024 equate to a dividend yield of 8.9pc, which should be enough to satisfy the needs of any income-hungry portfolio builder. There is also scope for further share buybacks, over and above the £200m programme completed this year, to take the total cash yield from the stock above 10pc.

Questor says: hold
Ticker: LGEN
Share price: 236p

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