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Yield munchers look away now - three FTSE-100 behemoths that are not cheap

By Chris Bailey | Thursday 1 February 2018


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


If I mention the names Vodafone (VOD), Royal Dutch Shell (RDSB) and Unilever (ULVR) to you, what is your first reaction? Stalwarts of the FTSE-100? Dividend-heavy behemoths that will never let you down? Holdings in my company pension fund? You could also add three names that reported earlier today and collectively add up to a very decent chunk of the UK's leading index.

Investing either as a pro or an enthusiastic amateur is a tough old business. You have to battle through psychological pressures that inhibit you being (to quote Buffett) 'greedy when others are fearful', interpret and size up management teams and business plans and even muse about the macroeconomic backdrop out there. At a certain level you can see why investors retreat into tracker funds or look to find 'long-term growth stories' that thematically have a perceived good chance of paying off over the next few years or so. For me, these latter thoughts can easily become sloppy especially deep into a bull market (which is where we are) as such 'sleep well at night' stalwarts actually are far less exciting for your total portfolio value and progress than you think.

Take the three names above. Your corporate pension fund manager is taking the fees you pay for carrying on holding these names and feels smart and worthy because all have made decent total returns - like the overall FTSE-100 - over the last year. But whisper it quietly: none of the three are currently cheap - and recent share price declines have wiped out 2 years worth of those feted dividends.

Take Vodafone. Yes, you get that 5%+ yield and it will generate enough cash (pre-spectrum spending though!) to pay this and chivvy debt down a bit. The overall business continues to struggle to generate proper growth as telecommunications markets are highly competitive and essentially utility-esque with much of the recent progress being centered on cost cutting. Try running an earnings-based valuation of Vodafone and you will see what I mean. I am not surprised that the share has pulled back 10% from recent highs (2 years worth of dividends!) in recent weeks. Unless you are an aggressive yield muncher, then wake me up at 200p...

And talking about 10% falls from recent highs, we move next to Royal Dutch Shell. I liked this stock when the fear factor around the BG Group deal was high but that proved up a while ago. Today's numbers show higher profits and lower gearing ratios thanks to a big squeeze on capex spending but that game is now changing...and Shell has to start spending again to ensure, even with the BG assets in its portfolio, it is achieving production growth in the early part of the 2020s. Yes, you have a nice 6%+ yield, but note (again) this was not raised. For capital growth prospects in 2018 in the energy space I would highlight one of my tips of the year on this website: the oil services company Wood Group. Shell is not the only one which needs to hike spending...

Finally, let's move onto the final member of our 10% fade from recent highs FTSE-100 stalwart club: Unilever. It bravely turned down a bid from US consumer staple giant Kraft (in association with some partners) and went on its own reorganisation initiative focusing on higher margin businesses often with an emerging market focus. There is nothing wrong with this but again the sheer enthusiasm for 'worthy global div players' has blinded investors. A x20+ earnings multiple and an (admittedly covered) 3%+ yield hardly smells like value to me. It even irked me a bit in its presentation by highlighting more of a volume growth than a price increase focus.

So what am I trying to say? First, it is a proper active market out there. Most stocks are not cheap and don't think hiding in all dividend heavy, FTSE-100 stalwarts is a way to make money. If you are a yield muncher and don't care so much about capital growth then be my guest but otherwise do not be afraid to rip up the normal playbook and go rogue in some actively selected stocks you do believe are cheap. And that probably means holding a bit of cash too currently. After all the second part of that Buffett quote above is to be 'fearful when others are greedy'.


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