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By Nigel Somerville | Sunday 9 September 2018
Disclosure: I own shares in one or more of the stocks mentioned. 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.
It is a while since I updated on my small portfolio of high-yielders from the FTSE100. The idea of the portfolio – perhaps somewhat contrary to expectations – is that I am bearish, but am struggling to find somewhere to park my cash. Bond yields are low and prices high, but interest rates are rising so my simple mind sees capital losses there. You still can’t get any meaningful interest at the bank and property prices look set to (at best) stall. And to cap it all, I am nervous that the market might sell off. So I am investing here as a bear.
So far I have four stocks in my mini-portfolio: Centrica (CNA), BT (BT.A), ITV (ITV) and Vodafone (VOD). All are paying very attractive yields – fine, so long as that continues – but for various reasons appear to be out of favour. In addition, we have new management at the helm in some form or other. My play, then, is that the market has sold them off on fears of what lies around the corner but those fears will not play out; if the market sells off these stocks will be less affected and, of course, that those stonking dividends continue. That’s the theory, at any rate.
With BT, when I bought the yield was almost 7% so in a way I don’t really care what the share price does so long as the dividends continue. After all, long term returns from shares lie at around 7% a year anyway. We have new management at the top: the new chairman arrived with a decent track record from his days at Rio Tinto and already the CEO the is half out of the door.
With a new chairman there are plenty of reasons to wonder whether sell-offs will come on to the agenda – perhaps a sale of Open Reach? But in the meantime although the dividend was frozen for a couple of years (currently now at 6.91%) it seems safe enough. BT has been out of favour, with regulatory pressures, concerns that its customers will seek cheaper deals elsewhere, a pension deficit (which has been going on for years) and the odd fine. My hope is that these pressures are now receding and I sense that if the company keeps its nose clean the shares will head north from the current 223p.
Having bought at 225p I’ve already bagged 10.55p a share in dividends so although a couple of pence down from a capital point of view I’m nicely up by around 8p per share – around 3.5% - in just under six months.
The next news I am waiting for is who the new CEO will be, and in around 7 weeks we should get the interims: much to look forward to, then.
Centrica (CNA) – aka British Gas – was causing me some concern when last I wrote about it. The regulator was looking at imposing price caps, Jeremy Corbyn seemed more of a threat, a profit warning from the new management is still in my memory and the interims were round the corner. Having sold a chunk already (at 162.8p, having bought in at a shade under 143p) the temptation, if the interims were well received in the market, was to sell the rest of my shares and look elsewhere.
So far this one has worked out very well: bought at 143p, dividends received of 8.4p, sold a chunk at 163p and in a month I qualify for another 3.6p per share.
The interims offered little to get excited about (see Chris Bailey HERE) and the shares dipped a little. The best bit, for me, was the reaffirmation of the c. 8% full year dividend – and no profit warning. Now we have heard from the regulator and the draconian measures (apparently) seem rather tame from Centrica’s point of view so the shares are up again, closing last week at 148p. Meanwhile, Jeremy Corbyn is making even more of a Horlicks of things so despite the government shambles over Brexit I fancy JC is a very long way away from No 10.
For me, then, this is one to stick with at least for now. Two big threats seem to have receded and we can hope for the new management to improve things. In the meantime I’ll carry on collecting the dividends, hoping that the dividend payout is a fair reflection and that the share price is the thing which will have to move (upwards).
On the price cap, I cannot help but remember the endless concerns over the likes of United Utilities as it battled with regulators. Each time the market worried that profits (and therefore dividends) would be hit, but each time it seemed to me that United Utilities and the like once again pulled the wool over the referee’s eyes and the dividends continued unabated. Are we going to see the same thing happen here? And if so, quite apart from the government interfering in the market, the whole exercise looks like a terrible waste of everybody’s time.
ITV has been pretty quiet since its half-year report in July. Having played this very well so far (perhaps more by luck than by judgement), buying in at 143.7p and selling a chunk at 182.5p, I now have an ex-dividend date look forward to next month when I become entitled to the 2.6p per share interim dividend (although it is not paid out until December) and and the company has committed to paying out at least 8p per share this year and next. At the current 158p that means the dividend will be more than 5%.
What will be of interest is how the world cup played out: only the first few days of it fell during H1 so we might be in for a pleasant surprise when the company offers its Q3 update in November.
Of course, Chris Bailey has been conducting a one-sided love-in with (now not-so-new) CEO Carolyn McCall and hopes for great things. And as Lucian Miers points out, major investor Liberty (which is sitting on around 10% of the stock) could potentially launch a bid – there are those who would see it as a natural fit. That suggests to me that if the shares tank Liberty could take it out at a bargain price and I suspect that I wouldn’t be in line to make a huge loss. If Carolyn McCall does a great job then the shares will go sharply higher, and if things don’t change much then we either all stand still or Liberty makes a move anyway. I fancy the odds.
As I look at ITV, there isn’t much debt, profit to cash conversion is high at 94% at the last count and EPS of 5.3p from H1 (7.1p adjusted) easily covers the interim dividend. Everyone seems to ignore the cashflow and think that ITV is dead in the water. But I fancy that it is still very much in the game – if not the license to print money of yester-year attributed to Lew Grade.
So it is all good? Er, well, yes - apart from Vodafone (VOD). Two big deals announced over the past week (India merger with Idea and Aussie merger with TPG) perhaps haven’t gone down well despite promises of synergies, but at 165p (ouch: I bought at 191p!) I still fancy the company is good for its dividend. It would, after all, be a bit of egg-on-face time if the new CEO (the current finance man) had to chop the payout, and I don’t suppose the outgoing boss want a cut on his record either.
On the last numbers, the dividend is 15.07 Euro cent per share – about 13.5p, which comes in at 8.2%. At the last update (end of July) the company reiterated full year forecasts so like BT this is one to buy and forget….so long the dividend is paid.
I originally rejected Vodafone because it just looked too expensive, but the shares have come off from around 240p to 165p. If, according to Chris Bailey, it was overpriced at 240 (he was looking for £2) then perhaps it has overshot by almost the same amount. So £2 again, perhaps next year? That – with 13.5p of dividends would make an attractive return.
So three up and – again perhaps by good luck rather than being clever – one down, but I only bought half the amount of Vodafone as I did with the other three. I fancy topping up the other half now, and a bit more ITV ahead of the Q3 trading update.
So far, so good. Taking account of Vodafone as a half unit and the other three as a whole, and taking the profit-taking (just slicing the top) in Centrica and ITV (thus adding to the cash-pile, along with two dividends so far) the portfolio is ahead by around 5% including stamp duty (but not including dealing costs). The real test, of course, will be how it fares if/when the FTSE dives but 5% after just under six months will do me just fine for now. It may not be a get rich quick scheme but it is a lot better than I’d get in the bank.
With a stack of cash banked from dividends and two top-slices, I really must find stock number five.
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