Neil Woodford's Latest Buys

Published in Investing on 19 March 2012

Here's what the dividend expert has been purchasing.

It's always useful to see which shares the experts are buying, especially in times as uncertain as these.

Neil Woodford, as I've mentioned before, is as expert as they come. Through his Invesco Perpetual Income and High Income Funds, he looks after an enormous £20 billion of client money and has generated a superb 327% return during the last 15 years. The wider market, with dividends reinvested, has returned about 44% during the same time.

Clearly, Mr Woodford knows a thing or two about what shares to buy and when, which is why the Fool has published this exclusive report on his market-thumping track record and the holdings he thinks can power his returns to further gains.

So what has Mr Woodford been buying of late? Well, the latest annual report for his £11 billion High Income Fund has just been published and the document reveals the investments he made throughout 2011 -- a year when the market returned -3.5% following the eurozone troubles. In contrast, Mr Woodford's trades helped his High Income Fund register a 9%% gain during the slump.

High Income fund purchases

I highlighted some of Mr Woodford's recent trades back in November. In particular, Mr Woodford liked the look of BAE Systems (LSE: BA) at 302p, Reckitt Benckiser (LSE: RB) at about £33 and Centrica (LSE: CNA) at 320p during the market's summer slump. True to form, Mr Woodford's latest report highlights further buying of this trio.

For BAE, I reckon he bought more at 267p during the second half of last year, which looks a decent trade with the price now at 315p. My sums also suggest Mr Woodford acquired more Centrica shares at 299p, which have since rallied to 317p. I've also deduced he purchased a few more Reckitt shares at about £33, which have since climbed beyond £35. All told, BAE, Reckitt and Centrica were Mr Woodford's three largest share purchases of 2011.

But perhaps more of interest to you is Mr Woodford's latest buying ideas -- the new shares he's introduced to his portfolios, or those shares where he's increased his stake significantly. So I've delved into the 2011 Invesco Perpetual High Income report and pinpointed these three ideas:

1. Mr Woodford established a new position in Smith & Nephew (LSE: SN) during the second half of 2011. I calculate he paid an average 564p a share, which compares favourably to the current price of 629p. Looking back, it seems Mr Woodford took advantage of the market's disliking to S&N's third-quarter results, when the medical-devices group owned up to rising costs within its orthopaedics division.

I must admit S&N is not a typical dividend stock, with a trailing income of about 11p per share and sub-2% yield. I can only presume Mr Woodford expects S&N to capitalise on an ageing population and the firm reinvesting its profits for further growth, which should then translate into greater dividends in the years to come.

2. Another of Mr Woodford's new holdings is Sanofi (NYSE: SNY.US), the French pharmaceutical group with a speciality for diabetes and oncology products. I suppose this purchase was not a surprise, given Mr Woodford's liking for the healthcare sector -- his funds are already loaded with AstraZeneca (LSE: AZN), GlaxoSmithKline (LSE: GSK) and Roche.

I estimate Mr Woodford paid about €54 a share for Sanofi, which equates to a price-to-earnings ratio of 8 and yield of 4.9% based on the group's subsequent annual results. These ratings appear in line with his traditional investments, and provide scope for growth if Sanofi's profits regain their momentum.

3. Among Mr Woodford's top-ups, his purchase of Serco (LSE: SRP) was among the most prominent. Similar to S&N I suppose, this trade emphasises Mr Woodford's liking for growth companies and the possibility of receiving a superior future income from rapidly increasing profits. Despite the recession, the outsourcer's earnings have more than doubled in the last five years, and advanced by 12% during 2011.

At present, Serco offers a trailing yield of 1.6% at 537p. My sums say Mr Woodford paid 508p during the second half of last year, following a very small purchase at 577p during the first half. (Interestingly, Mr Woodford was also a buyer of fellow outsourcer Capita (LSE: CPI) during 2011.)

The expert's outlook

I must admit none of these buys is going to have a substantial influence on Mr Woodford's High Income fund in the near term. Of the shares I've mentioned, BAE Systems had the largest weighting at 3.6% and Serco had the lowest at 0.4% as at the portfolio's December year-end. However, Mr Woodford is not known for speculating on random punts and I hope keeping tabs on his purchases has thrown up some beneficial ideas for you to research further.

Something to bear in mind, however, is Mr Woodford has mixed views on the market right now. Here's an extract from his latest investment report:

"The increasingly tough economic outlook is not a surprise to us. In our opinion, the eurozone is on the verge of a renewed recession and there are downside risks to forecasts for UK economic growth... As the economic environment remains challenging, we expect this to be manifested in lower earnings and profit warnings from some companies.

However, there are also certain types of companies that can thrive in this environment, delivering sustainable dividends and earnings growth, and the fund is invested accordingly. It is encouraging that our view of a year ago, that the valuation of these companies was too low, has started to be recognised, but we believe that the fundamentals have yet to fully assert themselves."

Just to remind you, the major shares Mr Woodford is currently backing -- and that have started to "reassert themselves" -- are documented fully in this exclusive Motley Fool report. If the market does suffer another setback, knowing which companies this investment expert favours strongly could prove vital!

More on the markets, shares and Neil Woodford:

> The Motley Fool owns shares in AstraZeneca, GlaxoSmithKline, Reckitt Benckiser and Smith & Nephew.

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Comments

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mcturra2000 19 Mar 2012 , 12:03pm

Very nice article.

One thing I was wondering - does Neil make most of his money from the "short tail" or the "long tail" - i.e. do his top 10 positions make the most money, or is it the smaller positions that tend to do best?

MaynardPaton 19 Mar 2012 , 1:19pm

Hello mcturra2000

One thing I was wondering - does Neil make most of his money from the "short tail" or the "long tail" - i.e. do his top 10 positions make the most money, or is it the smaller positions that tend to do best?

With some quite large positions, I'd have thought the movements among his top 10 positions outweigh what goes on further down the portfolio. But I have not checked for sure. I suspect the best individual performers are to be found outside his top 10 -- he does own a few shares that can be described as 'not obvious high-yield stalwarts'.

Mayn

MaynardPaton 19 Mar 2012 , 1:21pm

Hello everyone,

Just for clarification and to provide some extra info, Neil Woodford runs two funds -- Invesco Perpetual High Income and Invesco Perpetual Income.

The two funds have performed almost identically down the years and are pretty much made up of the same shares, albeit with slightly different weightings. The article above relates to dealings within the High Income fund.

Invesco does not make it easy to find what NW has purchased, but the funds' reports are available online.
http://investor.invescoperpetual.co.uk/UK/onshoreliterature/UK_Series_MRA_long.pdf (High Income FY 2011 Dec11)
http://investor.invescoperpetual.co.uk/UK/onshoreliterature/UK_series_interim_long.pdf (High Income HY 2011 Jun11)
http://investor.invescoperpetual.co.uk/UK/onshoreliterature/uk_2_investment_series_mra_long_annual.pdf (Income FY 2011 Mar11)
http://investor.invescoperpetual.co.uk/UK/onshoreliterature/UK_series_interim_long.pdf (Income HY 2011 Sep11)

The High Income fund has a June interim and December year-end, while the Income fund has a September interim March year-end. As such, there's a new NW report published every quarter -- and I will do my best to keep an eye what Britain's most prominent City investor is doing on your behalf!

Mayn

Crawfish123 19 Mar 2012 , 11:34pm

I turned my minor holding in S&N into one of my larger ones in the autumn.
Although dividends are nice, its preferable for companies to keep hold of the cash if they can deploy it at a decent rate of return. S&N have a long history of this, along with being highly profitable and cash generative.

They make an acquisition with borrowed money, then pay back the borrowing over 3-4 years. We're at the end of this cycle now as they are about to pay off all their debt.

wokingblade 20 Mar 2012 , 1:16pm

Keep it up Mayn !

WB

Levant1 20 Mar 2012 , 1:25pm

Ploughs money into arms manufacturers and drug companies, well I suppose thats an example of a sybiotic relationship if ever there was one.

eccyman 20 Mar 2012 , 6:23pm

I hold both the income & high income funds from IP and have been very pleased. If you're reading this - thanks Neil!

One question - why not merge the income & high income funds?

rouge14 20 Mar 2012 , 9:25pm

Does Mr. Woodford not also manage the Edinburgh Investment trust?

eccyman 20 Mar 2012 , 9:26pm
Possak 21 Mar 2012 , 1:27pm

I'm a little surprised at the comment that Serco has grown its revenues despite the recession. It has been able to grow them because of the recession - companies and governments are more likely to see a benefit in outsourcing during busts than during booms.

ADrunkenMarcus 22 Mar 2012 , 1:16pm

eccyman,

I always wondered why there are two funds in the first place, since they seem virtually identical. One benefit is that they pay bi-annually, so if you held both you'd get quarterly payments, but I just hold the Income one (divis May and Nov). For me, I am keen on the Edinburgh Investment Trust, except I think it was on a premium when I last looked.

Best wishes,

Mark.

motivefinder 24 Mar 2012 , 3:44pm

looks like market is ready to be crushed,
future is dark here,
Ireland back to square one--so what ever was done since 2008 , failed
UK on life support, greece, porugal, spain italy --- any time can go in to coma
china on its way to be admitted into hospial
after 2012 olympic, UK will be in major shock,
market is waiting to be crushed, run run run with your money from the market---
banks are warned o raise money , if they want to survive-- nationalisation of RBS and LLOY on the card in next down ward trend

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