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...which were updated again yesterday. These are accessed via a google sheet which will automatically update in your google drive if you have one. If you don't you can read more about it and get 15gb of free storage here. Don't forget you can read more about the Scores and sign up by using the headings at the top of the page and clicking Scores. By way of encouragement I thought I would try uploading a video explaining them in more detail, how you can use them and how to sign up for them. First up I should apologize for the quality of the video now it has been uploaded, the original looked fine on my screen but seems pretty fuzzy on line, especially if you maximize it. So if you watch it in the window you might just about be able to see what is going on but hopefully my dulcet tones explaining it will help, or should that be dull sick tones? Hmm.. perhaps I should trade mark that like Taylor Swift did with "this sick beat". Talking of Taylor, if my video is too dull and boring for you then I offer you one of her videos to shake things up a bit.
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..which is designed to be a more complete picture of how a Company uses its cash flow and allocates it capital. This can encompasses dividends, capital expenditure, share buy backs and debt pay down if applicable. Some such as Meb Faber in his book Shareholder Yield suggested that in the US this is a better way of identifying stocks than just focussing on yield, given the extent of buy backs undertaken in the US. You can also read an interview with him and a research paper by Wes Gray and Jack Vogel, the authors of Quantitative value, tilted Enhancing the Investment Performance of Yield-Based Strategies. I have mentioned in the past that I had not found a way to screen for this in the UK, but I'm not too concerned by that as I use cash flow as part of my analysis any way and share buy backs are not so prevalent in the UK. However, I have been trying out a newish investment screener called Quant Investing which is good at introducing newish concepts such as this to its screening menus. Thus I got around recently to trying this and did a screen for the top 20% UK stocks on their Shareholder yield measure. I must admit I found the resulting list of names to be a bit of mixed bag and a bit strange to be honest so I'm remain a bit sceptical about the value of this measure in the UK. If it of interest I attach the list of names below. 
 As I mentioned in yesterday's post about Reckitt Benckiser which I feel is expensive, I have had a few questions about low medium & high PE valuations and my sell discipline which is based on 20x PE and 2% dividend yield. I have written about this before and you can see my original post here. So I thought I would expand on the thinking behind those metrics and why they were chosen as they were not simply plucked out of the air. They are based on years of experience and knowledge of financial market history. This suggests that it is usually not a good idea to buy markets / equities when ratings go over 20x, think back to the dot com peak in 1999. While this seemed like an exciting time to invest, the overall index in the UK which was on well over 20x at the time and has gone sideways since then, only offering the dividend yield by way of return in the subsequent 15 years as the overvaluation has been worked off. That's not to say you couldn't have made decent returns over that period as I did by focussing on value stocks in the early 2000's when the highly rated technology stocks were collapsing. But it did mean that if you bought an index fund your returns have been disappointing and probably well below the long term expected real (after inflation) return of 5 to 6% from equities. Which just goes to show the importance of the starting valuation when you are buying stocks / the market. At the other end of the scale it is usually a good idea to get more exposure to equity markets when valuations reach single figures as they did back in the UK in 2009 after the financial crisis. Any one who was brave / wise enough to have bought shares in that period will have in all probability done very well and earned above average returns versus the long term average, as the market has recovered its poise and ratings have increased again. As a result the FTSE 100 for example has nearly doubled as it has recovered from around 3500 back towards its 1999 peak close to 7000. Thus when the market is priced around the mid teens in between these two extremes you could say that the market is fairly valued and should provide average real returns although in the long term this will depend on whether the market re-rates upwards or downwards from there. So lets look at some evidence of what these types of rating mean for returns. I'm going to cheat a bit here and stand on the shoulders of a giant John Mauldin, who I have mentioned before. Below are four key graphics from a post he featured back in 2010 looking at this which you can read here via the Market Oracle site. These show the forward 10 year real returns based on different PE & Yield ranges.    These show that as you would expect as you go up the valuation scale in terms of PE and down in terms of yield the average real returns tend to decline with the >20x and <2% returns falling below the average long term 5 to 6% real returns.
Now while this is US data a similar pattern would be seen in the UK. Indeed it used to be that whenever the yield on the UK market went below 3% in seemed to signal a reversal in the market, although in recent years the market has on occasions been prepared to run with lower yields. The other reason that markets have perhaps been prepared to entertain lower yields on some occasions is not only the falls we have seen in interest rates and inflation but also the increasing use of share buy backs (SBB). Indeed some suggest that Total Shareholder Yield which includes not only dividends but SBB's and in some cases debt repayments, but I'll have more on that for you soon. The markets propensity to accept lower yields can be more prevalent for individual stocks but nevertheless I tend to try and use a 3% minimum yield for new purchases. This is why I then use a lower 2% threshold as selling trigger to allow for re-ratings and the benefit of the Company trading well and growing its dividend strongly. However once it goes below a 2% yield I tend to look to exit, although I will judge each stock on its merits and some may warrant a sale before they reach that level if, the fundamentals of the business or the facts change as not every stock will be able to justify a 2% yield. I therefore think in general if the 2% & 20x ratings signal poor returns for an index it seems sensible to apply the same thinking to individual stocks, although obviously some can go onto much higher PE's and have little or no yield, but as a value investor I'm not interested in playing those types of stocks myself and would rather rotate into better value stocks. Of course some businesses may never be successful or robust enough to justify such lofty valuations in the first place. Meanwhile in the piece I referenced earlier John Mauldin mentioned secular bull and bear markets and the roughly 17 year cycle, there is some great research on this and the importance of avoiding the downside if you can in secular bear markets. This come from Crestmont Research website. In the UK we have been going sideways since 1999 on the back of the extended valuations back then and the start of secular bear market. Since then I have had pencilled in my calendar 2016 as the year to look out for the start of a new 17 year secular bull market. But I guess you can never be that precise about these long term cycles but here's to hoping 2016 might be the year that FTSE finally breaks above 7,000 if it doesn't manage it this year. However it does seem as though we might still need one more big sell off at some point to take valuations back down again before the next secular bull market can begin - I guess time will tell. Finally if you want to read more about the long term real returns you might expect from equities see the Global Returns Year Book from Credit Suisse.  ...because I consider it to be an expensive defensive. The stock concerned in Reckitt Benckiser who announced full year results today. Yes it is a good quality company with brands and high margins and return on capital as a result. Their revenues were down in actual currencies to £8836m versus forecasts of £9200m to £9500m so a miss although the company did flag a 4% growth in constant currencies and they expect a similar rate of growth this year. This appears to be a slow down from the historic 8% trend. In addition the adjusted eps figure of around 230 pence seems to be a big miss against the forecasts of anywhere between 245 pence and 260 pence, although I acknowledge that the picture was confused by the demerger of RBP. Tends to suggest that either their guidance wasn't very good or the analysts couldn't work out the effects of the demerger or it was a genuine disappointment, not sure which. The fact that analysts had on average forecast a dividend cut but they gave a 1% increase suggest perhaps the first two reasons? Even before this thought the estimate revisions were very negative. So I am surprised to see the shares spiking up first thing above 5800 pence (+4% or so) on the back of these numbers, but maybe I'm missing something in all their polished presentation of the figures. I note also that they are still doing share buybacks and broadly neutralizes incentive plan share issuance (c. £300m p.a.) and intend to top this up with an additional up to £500m share buyback programme in 2015. The balance sheet is fine with just £1.5 billion of debt versus the £40bn market cap. so I guess they could have fire power to do another deal, which is just as well as they seem to be running out of steam on their own having struggled to grow earnings since 2010 according to figures presented by Stockopedia. Thus with this background I can't get excited about this one on 22x and a 2.5% yield with an earnings yield of around 5 to 6% so it is not one that wows me up here and if I had it I'd say sell it bang - given the rating and the disappointing growth, but I can see others might want to hold it as a quality play. Talking of ratings, check back tomorrow as I'm planning a post in response to some readers questions about rating ranges and sell disciplines so see you then.  as we have had reasonably positive trading updates from Bellway (BWY) the house builder and Mondi (MNDI) the packaging group which amongst other things produces cardboard boxes. I note that both of these are top decile stocks on the Stockopedia ranking system. Bellway are talking about 15%+ volume growth and margins approaching 20% although they do talk about volumes being first half weighted. I guess this is understandable given the election coming up and given the rise in house prices we have seen in some areas. So something to watch out for there in the second half. However the shares, which have come back a little since the year end still look good value with a PE of 8.5x and a yield of 3.5% and they still appear near the top of the Compound Income Scores. So it seems there is nothing in the statement to suggest any action is required unless you are worried about a second half slow down. Meanwhile Mondi seem to have come in slightly ahead of consensus which is for 101c as the basic underlying earnings per share (euro cents) is forecast to be 106-109 (2013 95.0), increasing between 12% and 15%. These shares have done quite well being up by around 20% since I wrote them up last April. This leaves them looking more fairly valued now on around 14.5x with a 3% or so yield and a 6% earnings yield. This leaves it just outside the top quartile of the Compound Income scores so OK, but may be not worth chasing up here given a strong rally recently has left them looking overbought in the short term. However I note there has been some corporate activity in the sector recently so maybe investors are anticipating some action here too?  |
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