...about my purchase of IG Group in September this year which I mentioned in my other post today? If so good news as I am hoping to introduce a portfolio service in the New Year in which I will open up my portfolio and give updates on trades as they happen.
If that is something that might be of interest then head over to my Portfolio page for some background on how I do it and how I have done in the last few years. There you can also sign up to get yourself on the update list for when this service goes live and to receive details of any launch offers.
I mentioned in my post earlier this week about the possible advantages of focussing on stocks which have shown a consistent track record of increasing their dividends. S&P also provide an index for this in the UK and other regions around the world. The UK version is also offered as an ETF under the ticker UKDV which has been available since 28th February 2012.
You can get a copy of a recent fact sheet by clicking the highlighted ticker above or see it on line if that is of interest to you? If you want to get a spreadsheet with a list of the 30 holdings making up the fund you can download that here because I like to be helpful.
One interesting things is that I see Tesco (whoops) is in the top ten with a 4% weight - guess after their dividend cut it will drop out on the next index re-balance. I also note that Glaxo is also in the top ten and as I mentioned recently I have some concerns about the sustainability of their dividend distributions in the longer term, so you probably need to do your own research on stocks in this list and make sure you are comfortable with them if you were thinking of investing, this is why I prefer to do it myself.
However, I think the concept behind this index / ETF overall is a good one and if you wanted to follow it blindly then this offers a relatively cheap 0.3% (total expense ratio - TER) way of doing it with a current yield of around 4%. It looks like it has outperformed the FTSE by around 12% in capital terms since inception and obviously a bit more in total return terms given the extra yield. However as you'll see in the chart below is has underperformed over the last year after a poor run since June this year, probably primarily on the back of weakness in Glaxo & Tesco more recently.
This is the second in an occasional series looking back at some of my greatest hits over the years and some of the lessons that can be learnt from them. Today we have had a trading update from PZ Cussons (PZC) the personal and home care business which is mostly known for it soap brands like Imperial Leather which seems OK on the face of it. They reported that they expect profit reported in Sterling to be up 6%, although this would have been +17% without the drag from currencies. I won't go into more detail on the results as I no longer hold it, but you can read the full announcement here.
Meanwhile the rating, while still expensive at nearly 19x and around 2% yield still puts me off somewhat. It was a full rating which exceeded my 2% & 20x selling trigger and a slowdown in growth prospects and dividend growth which led me to sell this one back in 2011 and switch into Reckitt Benckiser (RB.) which was arguably similar but cheaper at the time. This worked out well as since then PZC has gone sideways and Reckitt's is up nicely, although as it is no longer cheaper than PZC and showing signs of struggling to grow so I switched that into something else recently.
So what was the story on PZC and why was it such a big winner for me? On the face of it as such a dull business on a high rating today it seems incredible that it could have produced such a huge return. However, when I bought it back in the late 1990's it was very much an out of favour neglected stock, although it had some of the quality characteristics is has today like good margin and ROCE plus a dividend that rose steadily. It was however languishing in the back waters of what then was called Overseas Traders and was then known as Paterson Zochonis and was seen as something of a colonial throwback with its operations in the Far East and Africa. It also had an antiquated share structure with restricted voting A shares which helped the directors to keep control and ruled out a take over by and large. At the time it also had a substantial investment portfolio and as a result the shares also I seem to remember traded at a discount to NAV or book too.
Over time they continued to invest in and modernise the business utilizing the largely liquid investments they had and they also revamped the share structure. They also made some acquisitions to expand their product range and go more up market in some cases. Eventually as Emerging markets became more popular and this one with its oversea exposure and re named to PZ Cussons started to attract a wider audience. Thus as they continued to deliver good earnings and dividend growth the stock got re-rated from a single digit P/E and big yield to in excess of 20x and a sub 2% yield by the time I sold it as a multiple of my original purchase price having enjoyed a steady flow of sizeable dividends along the way.
Summary & Conclusion
So what are the lessons from this one? Well it shows that going into good value, obscure or unloved / neglected stocks and sectors can pay off well if you can find a good quality Company which can grow and you are prepared to wait for it to be discovered by the market and other investors. It takes quite a lot of discipline to stick with these types of stocks especially when you see people making quick gains in .com rubbish or whatever the latest hot sector turns out to be - I guess it is a bit like the fable of the tortoise and the hare in investment terms. It is also another example of one of those family businesses which Lord John Lee the MP investor has written about and held for years too and still does I believe.
Any way if you enjoyed this post and you didn't see the first part you can check it out here. Otherwise check back tomorrow when I'll have a note on some research which when combined with a value screen might help to identify out of favour / neglected stocks.
brilliant!? Three brief updates today from seemingly boring stocks:
1) Berendsen (BRSN)- which with its subsidiaries is engaged in the laundering and maintenance of textiles. The Company provides service solutions to source, clean and maintain the textiles that the customers need to keep their businesses running.
2) Computacenter (CCC)- The IT service provider which I wrote up after its results last month.
3) Unilever - (ULVR) well everyone knows what they do, don't they?
Please note also that the chart above is a price chart and does not include the fairly decent dividends / yields paid by these Companies over the last five years.
Taking Berendsen first as this has been a longer term holding for me and one I have traded successfully over the years. It used to be called Davis Service Group and has generally stuck to what it knows which is textile rental, dust mats, wash rooms and work wear (uniforms) etc. It supplies these services to hotels, hospitals and other businesses so it tends to be a fairly steady business but with some economic sensitivity from the hotel, catering and industrial uniform side of things.
Any way their update today saw trading in the first three months of the year in line with management's expectations. Underlying revenue for the Group, at constant exchange rates, was up 3% compared to the equivalent period last year and in their Core Growth businesses, revenue increased 4%. Reported revenue for the Group, including the impact of currency translation, was similar to last year. Their margins increased again in their core business and this meant their operating profits were also up here. While in their ex growth bits or what they describe as manage for value businesses (cash cows),
as expected revenue was similar to last year here, but profits were lower as a result of the contract re-pricing in the second half of last year and start-up costs on a number of significant new contracts.
Cash flow remained strong and the group expects to deliver further growth this year. Given the rise in the shares over the last few years (see chart above) they are not such good value as they were, but in the context of the current market and with their strong forecast eps growth and dividend growth trending at around 7%, 2x covered by earnings they seem OK if not outstanding value on around 16.7x earnings with a yield of 2.9% forecast for this year with the shares at 1044p.
Next I'll briefly pick up on Unilever which I mentioned in my post earlier this week when I returned from my Easter break. This was because Diageo had flagged the effects of weak emerging market currencies and some weakness in consumer demand in some of those markets. Well Unilever talked about underlying sales growth of 3.6% overall and 6.6% in Emerging markets and pricing being up by 1.6% but overall turnover fell by 6.3% after an 8.9% currency hit - so the same effect there. However they talked about positive results in Home Care and Personal Care and a strong start to the year in Refreshment. Their food business declined which they blamed on the timing of Easter. The market does not seem to like the results as the stock is off 1.3% this morning in a market that is up 0.5%. Given it is on around 19x and struggling to grow I guess the price reaction is not that surprising for an expensive defensive stock. However as far as I'm concerned the most interesting bit in the announcement was that the quarterly dividend was up by 6% to 28.5 cents or 23.3 pence. This is around about the 7% growth that is forecast by analysts which puts it on a 3.5% yield for the current year at the current 2600 share pence price. So as a result I'll probably retain my small holding for the yield as part of a broader diversified income portfolio.
Finally - briefly, you'll be pleased to hear Computacenter can be summarised as UK business strong, Germany stable and France still struggling and providing a drag on performance with an exceptional restructuring charge of between £7 million and £9 million. They still have cash on the balance sheet and cash generation remains strong. If you want a more detailed review of the business then please click though (at the link above) to my write up from last month - it still seems OK having drifted back after the results as I expected to leave it on around 13x with a 3% yield @ around 650 pence. I'll leave it there and well done if you got this far - but as I said at the beginning boring can be brilliant!
Yesterday I wrote about Essentra and promised a note on why I had exited my investment and sell disciplines. So that is the reason for today's title, which refers to yields and PE's on stocks. As you know i like to achieve a decent yield on my investments and this tends to be a key part of my approach. Since I want at least some income I tend to put a lower limit of 2% on stocks that I consider for my portfolio to just about cover inflation, with growth hopefully to provide some real returns. Therefore to be consistent, if I am reluctant to invest in stocks that yield less than that, then it follows that I should be wary of holding stocks when their yields fall below that level.
Thus I use that as one of the potential valuation triggers for a sale of a stock from my portfolio. However, I will also look at the growth rates and the potential going forward, so sometimes the yield will be below 2% on a historic basis but a bit above prospectively depending on the expected growth. However in the case of Essentra the yield was still sub 2% even with 2014's 15% forecast dividend growth. Thus for me that was the first potential trigger for a sale, although the prospects still looked good.
The second one related to the 20 aspect of the title and in this case I'm referring to the Price earnings ratio or PE. Again here I would not tend to buy a stock on more than 20x earnings so again I get twitchy if one of my stocks re-rates onto more than 20x, although as we saw yesterday it is a nice ride when it happens as a result of earnings growth and a re-rating. Then again I'll look at the growth, quality and prospects etc. and weigh these against the rating. Simplistically P/E can be viewed as being in cheap territory if they are less than 10x about average around 15x and over 20x is expensive in my book. However, all of those need to be considered against the quality and prospects of the business you are assessing.
As markets move up and down through bull and bear cycles stocks can bounce around within this range and when investors get really excited about something it can go onto a much higher rating like ASOS (ASC) which is now on 75x.
I obviously don't tend to play in this space as my value and yield instincts are too strong, but if people want to play that game - good luck to them. The problem with highly rated stocks is that they give you little protection on the downside if they disappoint. With ASOS for example recently having coming back from £70 to around £45 in just over a month on a recent disappointment. Thus I tend to look to rotate out of expensive stocks and recycle into cheaper stocks with better yields to try and repeat the process and limit the downside should things not turn out as expected.
Value and yield stocks conversely have less extravagant expectations built into their share prices so any disappointments there are not so harshly treated as expectations are already low. But if they surprise on the upside then that is where you get good things happening as the stock can then benefit from a re-rating, although sometimes you have to be patient and just enjoy the yield. Filtrona / Essentra was a classic case of this and I'm not saying it won't go higher than the 900p+ I sold at as the prospects still look good, its just I'm looking to reinvest the cash into a better value stock with good prospects. This sell discipline is easier to implement when a stock gets to this type of rating and then starts to show signs of slowing down or plateauing in terms of its performance then it is a much easier call. So there you go don't forget 2% and 20x and I don't think you'll go too far wrong, or buy low, sell high as the old saying goes, but as I found with Essentra it is easy to say but not so easy to do.
In addition on the subject of 2 and 20 I referred once before to a great article by Terry Smith which highlighted how badly investors would have done if Warren Buffet had set up as a Hedge Fund. In fact if they had invested $1000 in 1965 with Buffet on Hedge fund terms 2% and 20%, Buffet would have ended up with $4m and the investor just $300,000. This is the second reason for the title of this piece in so far as buying Hedge Funds on 2% & 20% terms is generally bad for your portfolio, but good for the hedge fund managers. If you are not familiar with the 2% & 20% terms they basically mean that they charge 2% on the funds in total and take 20% of any of the profits, although sometimes there will be a minimum hurdle rate (quite often low) and a high water mark. The problem with this is they make out like bandits in the good times, but then if they blow up and have little prospect of being paid because investors are underwater, they then shut up shop and leave the investors drowning in losses.