The new economy stocks have had a rough ride and last week's legal ruling
against Microsoft sent the Nasdaq tumbling by 15 per cent in just one
morning session. The Techmark index has seen a 30 per cent fall from its
high this year while European technology stocks have also suffered from
In spite of tumbling prices, yields on new economy stocks remain at paltry
levels because many companies have no earnings so falling prices are
irrelevant when trying to calculate a dividend yield.
New economy stocks present a serious problem for income-oriented
investors. With no earnings and many years of strong earnings' growth
already priced in, many technology stocks are unlikely ever to provide more
than a meagre income.
This contrasts sharply with old economy stocks which have also been on an
uncomfortable ride for the year so far, but for different reasons.
The obsession with anything internet or dotcom-related seems to have run
out of steam over the past week but many high-quality UK com-panies still
trade at substantial discounts when measured against the dotcoms.
This offers some attractive opportunities for income-seeking investors.
Take Boots, for example. In the retail sector, it used to be the classic
defensive play – strong brand name, solid management and a good product
range. Moreover, unlike many retailers, Boots can rely upon steady sales
as, even in the new economy, people still need chemists. However, it does
not possess any obvious internet or dotcom characteristics and over the
past 12 months its shares have fallen by nearly 40 per cent. Due to the
slide in valuation, Boots currently offers a prospective yield for 2001 of
5.1 per cent.
Brewing has suffered a similar fate. Bass, the country's leading brewer
for some years, has become so disenchanted with the stockmarket's obsession
with dotcom mania that it looks as if it will offload all its UK brewing
operations to a European competitor. Whitbread, Bass's old rival, is under
pressure to do the same.
Like Boots, Whitbread also offers an attractive forecast yield of 5.3 per
cent for 2001 and, as with many high-yielding blue-chips, there is also
plenty of scope for capital gains.
The problem for companies such as Boots and Whitbread has been that
investors have assumed that the old economy and new economy are mutually
exclusive. This, of course, is not, and never has been, the case.
Boots has already established an online shopping capability and, like all
companies, it can benefit from the B2B revolution which will produce huge
cost savings in purchasing and logistics.
It is the same with Whitbread. Brewing is a mature market and is never
going to produce the huge capital gains that some tech stocks have offered
but there is no reason why it could not turn itself into a fully fledged
new economy player. It already owns Marriott, one of the most successful
hotel brands in the world, which provides an online booking and
There is also David Lloyd Leisure and TGI Fridays, which should benefit
from the rising consumer spending power created by the new economy. As for
brewing itself, a well-run Whitbread pub comfortably outstrips the turnover
of lastminute.com and probably stands a better chance of still being around
in 100 years time.
In the US, the new economy has brought real advantages – higher
productivity, lower inflation, more choice and transparent prices to name
but a few. It is interesting, however, to note that many of the most
successful US new economy are, in fact, old economy companies which have
reinvented themselves. Enron, an oil company, is a case in point, as is
Once investors realise that companies such as Whitbread can get in on the
new economy act, valuations will close and yields will return to more
sensible levels. In the meantime, high-yielding blue-chips such as these
offer compelling value so it is a case of catch the high-yielding
blue-chips while you still can.