New Dogs join our portfolio – but will they burn brightly?
The investment column that makes the most of your money
STOCK markets have had a rough ride in recent months and the New Year has brought little relief. Against that backdrop, the Midas Dogs of the Footsie portfolio has proved highly resilient. It has increased in value and outperformed the FTSE 100 index, even as many other stocks have lost ground.
The Dogs comprise the ten highest yielding stocks in the FTSE 100 and we last looked at the portfolio six months ago, in July. Since then, its value, based on a notional investment of £10,000 back in spring 2012, has risen 1.6 per cent from £12,342 to £12,550. A similar investment in the index of Britain’s biggest companies has fallen 2.94 per cent from £11,420 to £11,083.
The market has been spooked on many fronts. Oil prices have more than halved in the past six months. While this should be good for the economy, it has hit energy stocks hard. Commodities have also slid, sending metals and mining shares tumbling.
Concerns remain about economic recovery too, as Europe, Britain’s biggest trading partner, is still struggling and Asia is no longer growing as fast as it was.
The shifts in sentiment are reflected in our portfolio. In July, our Dogs were insurers Admiral and Friends Life, supermarket chain Morrisons, energy firms SSE, Centrica and National Grid, mobile phones operator Vodafone, cigarette maker Imperial Tobacco, banking group HSBC and drugs giant GlaxoSmithKline.
Friends Life is about to be taken over by fellow insurer Aviva, so it has dropped out of the portfolio. Shares in Vodafone, Imperial Tobacco and National Grid have all risen since the summer and, as yields fall when prices rise, these three canines have now left the Dogs.
Their places have been taken by four companies that have been harshly affected by the current market malaise – oil giants BP and Royal Dutch Shell, miner BHP Billiton and bank Standard Chartered.
BP, Shell and BHP are three of the largest firms in the FTSE 100 and they have been badly burned by the rout in the oil and commodities markets. BHP has lost more than 30 per cent of its value since July, BP has fallen by more than 16 per cent and Shell has sunk by almost 13 per cent. Their decline has wiped more than £110 billion off their combined value since the summer and investors have suffered heavy losses. Fears about the direction of oil and metals prices have prompted some brokers to question whether the trio will have to cut their dividends. For the time being, however, most believe the payouts are safe.
All three have embarked on extensive self-help programmes. Only last week, BP announced 300 job cuts in Aberdeen to save costs, having announced last year that hundreds of back-office workers were now surplus to requirements here and in the US.
Shell, meanwhile, shelved plans to build a £4.2 billion petrochemical plant in Qatar with state-owned oil company Qatar Petroleum. Shell’s decision was attributed directly to the falling oil price and follows a multi-billion pound round of disposals last year by new chief executive Ben van Beurden.
For his part, BHP boss Andrew Mackenzie has been taking some serious steps to adapt to the depressed commodities climate. The company is being split in two, with assets such as its aluminium and nickel mines being hived off into a new group, South32, mainly based in the Southern hemisphere. So-called core assets, including iron ore, copper, petroleum and some coal mines, will remain with the original business.
Shareholders will be given stock in both companies and Mackenzie said at an update last November that he remained committed to maintaining or improving the dividend this year.
Because dividend yields rise when share prices fall, the three stocks now have impressive yields, with BP offering 6.3 per cent, BHP 6 per cent and Shell 5.9 per cent.
BP and Shell both have December year-ends, so they will be reporting their 2014 results and updating investors on dividend plans in a couple of weeks’ time. BHP has a June year-end, so Mackenzie will reveal interim figures in February, though the full-year dividend payment will not be unveiled until August.
Standard Chartered, our fourth new Dog, can also attribute some of the blame for its share price performance on external factors. As a bank specialising in emerging markets, the group’s prospects have been called into question, amid persistent concerns about economic growth in Asia.
Standard delivers 2014 results in March and some analysts are worried that it will cut its dividend. For now however, a dividend of 55.7p is forecast and the stock is yielding 6.2 per cent.
Beleaguered food retailer Morrisons is another Dog whose future dividend stream can no longer be taken for granted.
Having fired Dalton Philips as chief executive last week, the company is looking for a replacement and will be reporting annual figures in March. Most followers believe a dividend of about 13.5p will be paid, making Morrisons our highest-yield- ing Dog on almost 7 per cent. Next year however, this company is widely expected to slash the dividend.
There are concerns about the future of GlaxoSmithKline’s dividend too. Brokers believe it is safe at just over 80p this year, giving a yield of 5.6 per cent, but it may well be cut in 2016.
Sadly, questions have also been raised about our second-highest yielder, Admiral Group. The car insurer has been a Dog for years and is renowned for its generous dividends. Sustained competition in the motor insurance market has hit the company, however, and brokers believe the dividend will fall from about 98p for 2014 – producing a yield of 6.8 per cent – to less than 92p for the current year.
At that level, Admiral will almost certainly stay in our portfolio, but the yield may become less resplendent in future.
Utility groups SSE and Centrica are long-standing Dogs as well. Both have fallen since the summer, as Labour leader Ed Miliband has mounted an attack on energy firms, recently calling on them to pass on falling wholesale prices to consumers. Despite pressure on profits and criticism about their attitude to customers, both are expected to deliver small rises in their upcoming dividends, so Centrica is yielding more than 6.6 per cent, while SSE is on almost 6 per cent.
Overall, our Dogs have done well to withstand market turmoil since the summer and the average yield on our portfolio has risen from 5.8 per cent in July to 6.2 per cent today. Our experimental portfolio continues to show its mettle.