In this article I set out how I have used Stockopedia's screening facilties to identify some potential high-yielding investment candidates for my portolio.
My Objective
At present, I have a target weight of 18% in my SIPP portfolio for high yielding equity investments (distinct from fixed interest investments). As time passes, my objective is to covert an increasing proportion of my portfolio to income-generating assets, so that I can spend less time on investing/trading and rely on the income to live on, whilst devoting my time to more productive things.
Given the low interest rate environment (with no end yet in sight), high yielding equities are one of the few ways of generating a decent return on capital (without being reliant on the vagaries of the market or M&A to realise returns). For that return to be reliable, I am seeking "relatively safe" investments, where the yield now is attractive and the chances of a dividend cut are reasonably low.
A number of my earlier higher yielding investments have risen significantly in share price, making their yield less attractive (e.g J Sainsbury (LON:SBRY) , GlaxoSmithKline (LON:GSK) , Keller (LON:KLR) ). Hence I have been trimming those (as those who follow my tweets @marben100 will have seen!). This has led to me now being underweight at below 14% of my portfolio and hence in need of some new investments... so time to try out Stockopedia's screening facilities. Must admit that I wasn't satisfied with the criteria of the built in high-yield screens, so decided to "brew my own".
Current Holdings
Just for reference, the companies that are currently within my HY subportfolio are:
- Interserve (LON:IRV)
- Halfords (LON:HFD)
- Braemar Shipping Services (LON:BMS)
- Vodafone (LON:VOD)
- J Sainsbury (LON:SBRY)
- Smiths News (LON:NWS)
My Screen
So, my screening criteria are as follows:
Yield > 4.9% [obvious!]
"Div Grwth Streak" > 3 [has been growing dividends for more than the last 3 years]
Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »
Net Debt/Price < 1 [not overgeared/overindebted]
Mkt Cap > £50m [For this subportfolio, avoid illiquid tiddlers]
Div cover > 1.5 [Margin of safety, dividend decently covered by earnings]
Results
Well, I was pleasantly surprised to find that only 5 stocks in Stockopedia's entire universe passed that filter! Those five are:
| Name | Yield % | Div Gwth Streak | Net Debt / Price | Mkt Cap £m | Div Cover |
|---|---|---|---|---|---|
| Chesnara | 8.55 | 7.00 | -68.0 | 228.3 | 1.51 |
| AstraZeneca | 6.10 | 9.00 | 0.21 | 36,565 | 2.19 |
| Tullett Prebon | 5.36 | 9.00 | -5.30 | 684.6 | 1.97 |
| IG Holdings | 5.17 | 6.00 | -14.4 | 1,582 | 1.67 |
| Novae | 5.01 | 4.00 | -207.4 | 237.7 | 2.24 |
Going through that list, I have to drop Chesnara & Novae - both are insurers and I am not comfortable holding insurers whose results are dependent on investment returns and hence likely to be volatile in the current climate (and, potentially high risk).
Until fairly recently I have held GlaxoSmithKline (LON:GSK) in preference to Astra - but GSK became less attractive as the SP rose and I have now sold out. I hadn't spotted that Astra's yield had risen to such a high level. I do appreciate that investors are concerned about Astra's pipeline and patent expiries (which is why I preferred GSK previously, as their business appeared better diversified). However, for the next 2 years, these factors are already reflected in analyst forecasts - which still leave the divvy very comfortably covered and divvy growth still forecast. I note that the company has also recently taken on a new CEO, has divested some businesses and bought others. Let's see whether he has the nous to improve the company's pipeline. For the meantime, there seems little prospect of a divvy cut.
Finally, on Astra, I checked their annual report for pension liabilities. These can be a "hidden danger" not revealed in the data that Stockopedia is able to publish. I was pleased to see that Astra's GROSS liability was little more than their annual profits (and a small fraction of the market cap.)! So nothing really to worry about there (unlike, say £BT , where their pension liabilities vastly exceed the company's market cap.).
So, I concluded that Astra definitely belonged in my HY subportfolio and I have bought an initial tranche of shares today. I will be looking to add on weakness.
That leaves Tullet and IG. Funnily enough I had already added IG to my watchlist for a potential HY purchase recently, having identified it as a candidate from general reading and being a client of theirs. I am hoping for a dip in the market/SP to enter. Looking at Tullet, under Terry Smith's leadership that definitely also appears to be a candidate for the watchlist and again, I'll be looking for a good opportunity to enter that one.
All in all, I am well pleased with the results of this exercise and well done to the Stockopedia team for developing some institutional-grade screening tools.
Mark
Filed Under: Income Investing,
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AstraZeneca PLC (AstraZeneca) is a global biopharmaceutical company. AstraZeneca discovers, develops and commercializes prescription medicines for six areas of healthcare: Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology, and Respiratory and Inflammation. It has a range of medicines that includes treatments for illnesses, such as its antibiotic, Merrem/Meronem and Losec/Prilosec for acid related diseases. AstraZeneca’s products include Crestor, Atacand,Seloken/Toprol-XL, Plendil, Onglyza, Zestril, Symbicort and Zoladex. The Company owns and operates a range of research and development (R&D), production and marketing facilities worldwide. AstraZeneca operates in over 100 countries, including China, Mexico, Brazil and Russia. In August 2012, Alliance Pharma plc’s subsidiary, Alliance Pharmaceuticals Limited, acquired the antimalarial brands. In August 2012, the Company announced the acquisition of Amylin Pharmaceuticals, Inc. by Bristol-Myers Squibb Company. more »
IG Group Holdings plc is a United Kingdom-based company. The Company is engaged in derivative trading services, providing financial contracts for difference, spread betting and exchange-traded derivatives to retail investors worldwide. The Company provides contracts for difference (CFDs) and spread betting on over 14,000 financial markets, including forex, stock indices, shares, commodities, binaries, options and interest rates. The Company operates in five segments: United Kingdom, Australia, Europe, Japan and Rest of World. The United Kingdom segment includes financial spread bets, contracts for difference (CFDs), margined forex and binary options. The Australian, Japanese and European segments includes CFDs, margined forex and binary options. The Rest of World derive revenue from the operation of a regulated futures and options exchange, as well as CFDs, margined forex and binary options. more »
Tullett Prebon plc (Tullett) is an inter-dealer brokers, and acts as an intermediary in the wholesale financial markets, facilitating the trading activities of its clients, in particular commercial and investment banks. The business covers the product groups, including fixed income securities and their derivatives, interest rate derivatives, treasury products, equities and energy. Tullett Prebon’s business is conducted through voice broking, where brokers, supported by screens displaying historical data, analytics and real-time prices, discover price and liquidity for their clients, and through hybrid electronic platforms, which cover asset classes that include United States, European, Australian and Scandi Repo, United States Fixed Income, global FX Options, Cash Credit and CDS, and the United States and European Energy markets. On March 4, 2010, the Company acquired 100% of OTC Valuations Ltd. more »
15 Comments on this Article show/hide all
Thanks for the compliment Mark and glad to see you using the screening tools! If you have any ideas for how we can improve the screener w.r.t. Dividend investing then let me know your thoughts.
PS - We are soon to be publishing a pretty extensive book on Dividend investing. If anybody wants to sign up for the list - it's going to be free for all Stockopedia members just like the Value Stocks book. Check it out here http://j.mp/LyTYm5
Interesting comments Mark. Like yourself i went for Glaxo because it's patent expiry pipeline is in far better shape than Astra Zeneca's - for that reason I'd still avoid AZN, despite the more attractive yield. Am personally waiting for Glaxo to cheapen before nibbling some more - so a market panic inspired risk off day will be highly appreciated if it results in selling across the board...
As to Tulletts, despite being a fan of Terry Smith, I'd personally prefer ICAP over Tulletts - the former has a better EBS platform,from what I can recall and, I have to say from personal experience, far better voice broking across their product range than Tullet Prebon..But perhaps things have changed since my day.
Hello Mark,
"A number of my earlier higher yielding investments have risen significantly in share price, making their yield less attractive (e.g J Sainsbury (LON:SBRY) , GlaxoSmithKline (LON:GSK) , Keller (LON:KLR) ). Hence I have been trimming those"
Would you mind to explain the rationale behind this statement? The share price has risen, but the yield you receive is relative to the price you paid, so assuming no increase in yield, the current share price is not relevant. The price you paid is.
I'm not trying to challenge this, I'm genuinely interested as a relatively novice investor.
Kind regards,
Jonniegul
Hey Jonniegul,
I am a novice as well but from what I understand it is to do with reinvestment rates, you want the yield to stay high for when you use those dividends to buy more shares! Which you would do because it mimics the compounding effect you see when you leave interest untouched in you deposit account i.e. interest is being earned on the interest and the principal.
hope that helped...
In reply to Jonniegul, post #3
Hi Jonniegut,
No, IMO that's a total fallacy. Yield is what you get on the money you've currently got invested. What you paid originally is irrelevant. The key point being, if I can earn more for the same invested amount elsewhere (without taking undue risks), I clearly generate more income, which is what I'm after. The weighted average yield on my 7 current high yielding investments is 6.8%. When current/prospective yields fall to close to 5%, they're no longer particularly attractive to me (as high yielding investments). Hence my search for reasonably safe homes to reinvest my money when yields fall. Of course, I could simply reinvest by buying more of my highest yielding stocks (Halfords (LON:HFD) , Braemar Shipping Services (LON:BMS) and Smiths News (LON:NWS) ) but I don't want to take excessive risk by being too concentrated. Hence adding AstraZeneca (LON:AZN) in now and other investments when their yields rise* keeps my average yield up. Another way to look at this is like switching your savings account to one offering higher interest.
As it happens, I've also found this to be a successful trading strategy, as it causes me to automatically bank profits as value is "outed" through rising capital values and reinvest in companies offering better value. I will also trim or dispose of high yield holdings if their outlook worsens without the SP falling disproportionately. As part of my general portfolio management policy, I will also trim an individual holding if its capital value becomes too large and hence poses too big a risk, in the event of it being hit by some form of bad news. "Too large" is generally more than about 5% of my total SIPP portfolio (not just the high-yield part), but dependent on how risky I perceive the partcicular investment to be. Since I started my high yield sub-portfolio in November 2009, it has generated an IRR of over 24% p.a (based on the current market value of the portfolio). Some of that return has come from dividends, some from trading as described, and two of my high yield investments (Lincat and Robert Wiseman Dairies) were taken over at big cash premia to their market prices.
*I am very suspicious of current market conditions. Following recent ECB announcements "Mr Market" seems to be behaving as though everything has been resolved and all is sweetness and light. IMO it has not been resolved and big risks remain. We'll see how effective the solution is when the bond market starts to force Spanish bond yields up again and discover whether Spanish politicians (and their electorate) are willing to accept the conditions that the ECB will impose in order to activate the OMT. [That is just one of several potential problems remaining in the Eurozone.] Besides that, once the US election is over we have the problem there of the looming "fiscal cliff" (and an unsustainable deficit)... and then we have uncertainty in China also threatening global growth. So, several factors that could cause a sharp downturn in the market in the near term and present (judicious) buying opportunities.
Cheers,
Mark
In reply to Fangorn, post #2
fangorn,
Thanks, I'll take a close look at ICAP cf TLPR before purchasing. ICAP didn't pass my filter because short-term dividend cover wasn't good enough. However, ICAP offers a higher yield and current outlook (and forecast divvy cover) looks OK. I'll have to examine their results statements/annual reports more closely to decide which I prefer.
TLPR is more of a "niche" operator, specialising in dealing fixed interest investments, whereas ICAP is the 800lb gorilla generalist. Though TLPR is smaller, it's balance sheet may be more "bombproof". I'll need to look carefully at both businesses.
Cheers,
Mark
In reply to marben100, post #5
Hi Mark,
Many thanks for that, a very detailed and informative reply. It certainly given me some food for thought and an idea of where I shall be spending some of my time this weekend - portfolio review!
I too was a holder of Lincat, sad to see it taken over, but no complaints at the return!
Cheers,
JG
In reply to sasan, post #4
Hi Sasan,
Thank you also for your thoughts. I see where you're coming from. I don't automatically reinvest my dividends, but the theory holds - when I do invest them, I want the best return!
Regards,
JG
Hi Mark,
Do you know why Cineworld (LON:CINE) failed the screen? Fwd yield 5.03% easily covered and increased every year since listing, net debt 100m on a 355m market cap, dividend should be able to be increased more now they've finished the capex of rolling out digital projection and start getting the associated reduced costs.
Price has been a bit perky of late but still looks good value. It doesn't usually fall much with the general market (beta 0.62) but one for the 'price weakness watchlist' if it's not already on it?
Danger
Hi, I suspect that, in this case, it will be because of the dividend growth streak requirement (as the dividend was flat from 2007 - 2008), plus the historic yield is below the threshold (4.62%), although the forecast yield is above it (you can screen on either). We've unlocked a copy of the Cineworld stock report for anyone that wants to have a look at it today.
This raises a very interesting point about stocks that are just near the edge of a set of screen criteria. As part of the checklist functionality, you can compare a stock (e.g. Cineworld) against a screen to see where it's failing - this can be helpful. See this link for more details.
Thanks Murakami, I'd missed that it was historic dividend and >3 years not >=3 years.
Nice feature on the screen checklist btw.
Mark,
Another idea for further research would be Harvey Nash (LON:HVN) - I think it only fails on the market cap being £37m - however it has a £550m turnover so on this it's a much larger company than say BMS on this measure. Low margin recruitment companies might not be your idea of safe though - however any economic improvement or margin improvement towards the level of the larger industry firms could easily see it meet your market cap criteria :-)
In reply to dangersimpson, post #11
Thanks for those ideas, Danger. I'll consider them.
Mark
Hi Mark,
You might also want to add a sales growth criteria (i.e. 3 year avg >0%) to your screen to help you steer clear of companies in decline.
Best,
Todd
Having had a quick look at ICAP (LON:IAP) 's annual report (& today's trading update), decided to take the opportunity of today's selloff to dip a toe in the water there.
2012 reported profit figures were distorted by goodwill writedowns. Looking at the cashflow, the dividend appears decently covered by free cashflow (£255m FCF, vs £135m divvy). This looks to me like both a yield and a recovery play. Clearly going through a bad period, with fear stalking the markets. But looks like I get well paid to wait for a recovery...
Cheers,
Mark
Tempus commentary fr you on Icap M...
"The problems of Icap and the other inter-dealer brokers are those of the City as a whole. The markets — whether equities, interest rate derivatives, foreign exchange or whatever — are quiescent, claims Martin Waller, writing in the Tempus column in The Times. Icap has been the subject of a series of profits downgrades and, given the lack of forward visibility for future trading levels, pessimism is probably the best stance, if not merely to head off any more, and it has been cutting costs accordingly. The shares, off 11½p at 332½p on Wednesday, sell on 9.6 times earnings and have the support, at this level, of a 6.9 per cent yield, but there are no immediate grounds for optimism, Tempus believes. "
Concur with your "This looks to me like both a yield and a recovery play. Clearly going through a bad period, with fear stalking the markets. But looks like I get well paid to wait for a recovery..." comments.