Very undervalued. Dividends increasing. Two screaming buys.
Brian Dennehy
In recent months we have highlighted that the mega caps, with sensible business models, little or no debt, big and safe yields, have underperformed. Surely a “safe” yield of 6% has huge attractions in a low inflation world?
As Bill Mott (of Psigma Income) recently pointed out, can there be much more to go for in miners and the like once the Chinese have re-stocked? And the banking system has been saved by a tidal wave of Government money, but how can you possibly put a value on UK banks?
In contrast there are a range of high quality blue chips with high and well covered yields, plus limited business and financial risk e.g. pharmaceuticals, oil, tobacco, utilities, telecom. In a world where most acknowledge there will be an anaemic recovery, shouldn’t these sectors be prioritised in your portfolio?
Analysis by Rob Arnott reached the conclusion that value stocks (which typically includes these high yielders) have been punished by the market, and appear cheaper than at any time other than in 2000, just before the tech bubble burst - and from that point the high yielders outperformed for a number of years and went on a 7 year bull run.
As highlighted last month, funds that have over-weighted these mega-companies have tended to underperform since the market turn in March. The most stark fund in this category is Newton Higher Income - one of the outstandingly good funds as markets collapsed post-Lehman, but lagging since the market turned in March (though still up 20% since then).
Long term research highlighting how high yielders outperform strongly suggests you should buy such an equity income fund on relative weakness, as does Arnott's analysis on the value/growth anomaly. Add to that the knowledge that economic growth is likely to be anaemic, and that interest rates could stay low for a considerable time, and the case is compelling.
Neil Woodfords Invesco Perpetual funds (no longer in the equity income sector) have similarly underperformed and he has said how it feels like 1999 - just ahead of years of outstanding relative performance, as others over-looked the value in front of their noses.
Last but not least both funds have recently increased their payouts - by a whopping 15% in the case of the Newton fund.
Both funds are screaming buys.
Date: 11.09.2009