3 Very Quick Share Ideas From Neil Woodford

Published in Investing on 14 November 2012

The high-yield ace is bullish on British American Tobacco (LSE: BATS), BAE Systems (LSE: BA.) and Capita (LSE: CPI).

Ace dividend investor Neil Woodford revealed a trio of share tips this morning after reviewing the performance of one of his portfolios.

The high-yield expert, who has delivered gains of 300%-plus during the 15 years to 2011 and currently manages some £20 billion on behalf of retail and institutional investors, provided the three ideas within today's half-year results for Edinburgh Investment Trust (LSE: EDIN).

Tobacco

Mr Woodford said today that "news that the Australian Government had been successful in defending a challenge from the tobacco industry against the introduction of plain packaging had largely been expected, but appeared to act as a catalyst for profit taking in a sector which has performed very strongly over the past few years."

Mr Woodford has been a long-time fan of British American Tobacco (LSE: BATS) (NYSE: BTI.US) and claimed this morning that tobacco shares in general "represent exactly the sort of quality stocks that can deliver attractive profit and dividend growth through a low economic growth environment."

Importantly, Mr Woodford said he did not believe tobacco shares were "valued appropriately" at present. BAT, for instance, offers a potential income of 4.2% at £32 a share, with the dividend forecast to advance a further 10% during 2013.

At the last count, BAT represented 7% of Mr Woodford's Edinburgh trust portfolio.

Defence

Mr Woodford had a few words to say about BAE Systems (LSE: BA) this morning. In particular, he reckoned the group's proposed merger with EADS "did not look particularly beneficial to shareholders" and he was no doubt pleased when the deal was called off.

Indeed, Mr Woodford claimed this morning that a standalone BAE "will be a valuable future contributor to the portfolio", which is presumably why the defence contractor's shares still represent 4% of the Edinburgh trust.

Anyone buying BAE shares today at about 300p could be paying just 7 times possible 2012 earnings and be in line for a 6%-plus income. City brokers reckon the dividend could be raised a fraction during 2013 as well.

Outsourcing

Finally, Mr Woodford confirmed today that his Edinburgh trust "took advantage of a placing of shares" to increase its investment in Capita (LSE: CPI) during recent months.

He said Capita had issued the additional share capital to allow the company to make further bolt-on acquisitions, and at the time the firm itself said "the current acquisitions environment continues to offer a rare opportunity to broaden the business."

Capita is perhaps not a traditional FTSE 100 (UKX) income share, with a possible yield at a market-average 3.4% available at the 685p Mr Woodford paid in the placing.

However, the outsourcer has a tremendous record of dividend growth -- indeed, the firm's payout has expanded at a 19% average compound rate between 2006 and 2011. So perhaps Mr Woodford is hoping a faster-growing payment can complement some of the other higher-but-slower-growing yields in his portfolio.

Capita currently represents nearly 4% of Mr Woodford's Edinburgh trust.

Other Woodford favourites

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To receive all these Neil Woodford large-cap ideas right now -- and to learn the investing logic behind them -- just click here. The report is free and comes with no further obligation.

> Maynard does not own any share mentioned in this article.

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Comments

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ProfessorMarcus 14 Nov 2012 , 11:53am

Hi, do you have a link to the report please as I can't find anything obvious.

Thanks.

ANuvver 14 Nov 2012 , 12:31pm

What report?
Neil who?

goodlifer 14 Nov 2012 , 12:39pm

"The high-yield expert.. has delivered gains of 300%-plus (OK, let's say about 350%) during the 15 years to 2011."

If your figures are correct, that's about 8.5% compound growth.

Warren Buffett averaged 28% over 40 years.
Mr Bland's Doris managed around 11% over about the same period by doing absolutely nothing.

Even I - a wet-behind-the-ears amateur part timer, with less than four years at the game - seem to be getting nearly 7%, and that's on dividends alone.

Or have I miscalculated?

ANuvver 14 Nov 2012 , 12:41pm

Yeah, let's have a special report about Doris.

F958B 14 Nov 2012 , 1:02pm

goodlifer

Buffet's returns are flattered by the use of gearing, and his departure from "overvalued" markets in the early-1970's, followed by his re-entry after the mid-70's crash.
Higher inflation also flattered the nominal value of many assets in the 1970's; inflation was so high that a secondhand car could often be purchased, used for a year, then sold for more than the purchase price!
A quick look at house prices also shows considerable inflation causing a pricing illusion; £2k for a house in 1960, £4.5k in 1970, £10k by 1975, £22k by 1980. Nowadays we don't (yet) have that kind of inflationary support.

I also think that your portfolio is significantly skewed because you entered markets at the beginning of a strong bull run.
The 1999-2009 investing environment was cruel - with markets being cut in half, or a loss of about a quarter if dividend were reinvested, but which slips back to a real loss of around half if dividends and inflation's erosion are considered.

goodlifer 14 Nov 2012 , 2:53pm

Thanks F958B
"Your portfolio is significantly skewed because you entered markets at the beginning of a strong bull run."

How does a bull run help a dividend reinvestor like me?
It would obviously suit my book for the market to tank as low as possible short of the whole economy going into meltdown.

More to the point, it's certainly been a buyers' market for me so far, and I don't yet know how on earth I'd ever cope with a sellers.'

You're absolutely right to raise the question of inflation, but your examples are a bit selective - I don't know the numbers for 1996-2012, but all experience suggests that for the last eighty years or so, and for just about every decade therein, it's averaged about 5%.

goodlifer 14 Nov 2012 , 6:39pm

F958B
"Buffet's returns are flattered by ..his departure from "overvalued" markets in the early-1970's, followed by his re-entry after the mid-70's crash."

You almost make it sound as if Buffet was cheating.

goodlifer 14 Nov 2012 , 7:01pm

ANuvver

You and I were having a learned discussion - under Harvey's "Market, Please Crash" - about timers and pricers etc until we were so rudely interrupted.

You: MK's success was very much as a pricer and a long-term holder. He would doggedly stick to underwater positions he believed in, rather than trading out of them.

Me:Thanks for that - it'was news to me, and apparently quite true.
Very odd though.

The Crest fund was launched in about 1929, while his General Theory Cap XII, reputedly the locus classicus - I know you like your Latin tags - of MK's views on investment was published long after he apparently became a pricer.

You wouldn't think so if you read it, as I've just done.
Really weird.
What 's even weirder is that WB endorses it whole-heartedly.

Anyway, let's look on the bright side.

It gladdens the heart of a pricer like me to learn that a one-time timer, whom I'd always thought to be the greatest speculator in the history of investiment, was actually a dismal failure who had to be bailed out by his rich Daddy; yet he eventually saw the light, remustered as a pricer and made himself and his beloved Kings College, Cambridge a very satisfactory killing.

Or have I got it all wrong?

F958B 14 Nov 2012 , 7:27pm

Hi goodlifer

If you bought at a major low, the shares will have been offering higher-than-usual yields and with some economic-recovery potential with which the dividends may have been boosted or reinstated.
Then there's capital gains on shares which recovered in price.

As for Buffett, gearing and "cheating": it is a bit unfair to compare Buffet's geared portfolio in an uptrend against Woodford's ungeared investment funds which also have limits on the amount which can be invested on one company.

But, having said that: you probably are aware that I "cheat" by attempting to use market timing and gearing when I see fit, which intermingles with my core high-yield, blue-chip, long-term-hold portfolio.

ANuvver 15 Nov 2012 , 9:29am

Goodlifer:

Wouldn't have called it all that learned (at least from my side)! JMK did indeed go through the seven ages of man, as do we all. He was also quotably known for changing his mind when necessary (much like Uncle Warrant). It is possible to be a prescient macro analyst but a lousy investor and vice versa.

He also, IIRC, came up against stiff opposition from the dons over leveraging college property for investment purposes.

In common with F, I don't see pricing and timing, to reintroduce your division, as exclusive philosophies. Our approaches seem to be similar. I agree with him also that anyone starting three or four years ago has been spoilt, and should maybe guard against overconfidence.

My holdings are split (often arbitrarily) into income, growth, fixed income, commodities, property and cash. The income section is far and away the largest allocation (I'm extremely conservative at heart), but I also regard trading cash as an asset class.

Its value is in opportunity, which can't be spreadsheeted. Well, I'm sure there's some clever way of quantifying optionality or some other pertinent metric, but I don't go into that (although I do keep an eye on the VIX).

This is the part of my portfolio where I exercise my opinion, my attitude about macro concerns. By regarding cash as an asset class in its own right I can play my gut feeling as a percentage game against the rest.

Heigh-ho, back to watching GDP Eurovision... Espana - minus trois points...

Nil carborundum!

goodlifer 15 Nov 2012 , 12:54pm

Thanks again F958B
"Woodford's ungeared investment funds which also have limits on the amount which can be invested on one company."

I'm afraid I hadn't realised he operated under such handicaps.
I'm not saying he's not a competent professional, I just don't buy Mr Paton's apparent notion he's the greatest thing since sliced bread.

F958B 15 Nov 2012 , 1:38pm

Bear in mind that Woody runs funds which invest in stodgy blue chips, mostly based in the UK. He is obliged to keep most of that money invested at all times. He can't easily move to other asset classes such as bonds or precous metals.

Woody's a "safe pair of hands" who generally knows what he's doing with his slow-and-steady approach to his whole portfolio (we all buy and few duds and sell a few winners, but it's the whole portfolio that counts).
His periodic underperformance is inevitable due to constant shifts in market fashions - notice how some big blue chips are among the FTSE's worst performers in recent months due to a change in fashion. It is interesting, however, that a slow-and-steady equity income fund should manage to outperform so many of the equity growth funds. The reason: growth is usually overpriced while slow-and-steady is often underpriced.

Of all the money managers in the UK, I think Woody is the one I'd feel most comfortable with - and probably for you too, from what your comments have implied about your investing style.

Buffy does as he pleases - buying shares anywhere in the world, sometimes wth borrowed money, and sometimes buying entire companies. Sometimes Buffy hoards cash. At times he has been known to dabble in precious metals despite his and his sidekick's recent anti-gold propaganda.

Neither of them are perfect but I have a lot of respect for both Woody and Buffy. I have more of a soft spot for Woody.

goodlifer 15 Nov 2012 , 7:42pm

F958B
I don't disagree with anything you say.

goodlifer 16 Nov 2012 , 1:17am

Further thoughts.

I'm now inclined to think Mr Woodford's a competent professional who probably does a pretty good good job for his clients.
I'm also inclined to think that people who keep plugging him as God's gift to British investment are in grave danger of making themselves - and perhaps also Mr Woodford - look ridiculous.

One of the reasons why, these days, I don't normally bother to read our Foolish experts' articles,
I just go straight for the comments

pawansonic 16 Nov 2012 , 7:19am

BAT has a primary listing on the London Stock Exchange and is a constituent of the FTSE 100 Index. As of 6 July 2012 it had a market capitalisation of £65.6 billion, the sixth-largest of any company listed on the London Stock Exchange.
http://www.sonictrades.com/mcx-gold-tips/

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