5.9% PLUS: Our top Dogs’ yield beats bank savings
Despite stock market gloom, MoS expert’s portfolio still reaps rewards
HOW much should governments interfere with industry and commerce? When it comes to Jeremy Corbyn and his followers, the answer is fairly clear: as much as possible. However, the Conservatives, allegedly the party of business, are also increasingly minded to meddle with the private sector.
Disasters such as the Carillion collapse do not help, encouraging anticapitalists to believe that business cannot be trusted. But even before the outsourcer fell from grace, the Government’s shadow was hovering across a range of industries.
The consequences of this growing desire to interfere, combined with Brexit-induced economic uncertainty, create a climate where numerous companies find it increasingly hard to thrive.
The Dogs of the Footsie provide graphic testimony of this trend. Our experimental portfolio comprises the ten highest-yielding shares in the FTSE100 index and we last looked at it in July. Back then, the Dogs were riding high, comfortably outperforming the FTSE100 index. In fact, they doubled in value between 2012 and 2017.
Over the past months however, there has been a distinct change in sentiment and performance. Our July Dogs comprised oil majors BP and Royal Dutch Shell, housebuilders Barratt Developments and Taylor Wimpey, utilities Centrica and SSE, insurer Direct Line, Lloyds Banking Group, Royal Mail and moneylender Provident Financial.
Since then, the oil price has risen almost 50 per cent and oil companies have followed in its wake. BP is now around 10 per cent higher at 489p and Shell is almost 14 per cent ahead at 2424p after reporting a surge in fourth quarter profits last week. Both companies leave the Dogs, because dividend yields tend to fall when share prices rise.
The other two leavers – Provident Financial and Royal Mail – have been booted out of the Dogs because they are no longer in the FTSE100 index. Provident Financial was already in trouble in July and its shares had slumped from more than 3200p to 2086p. Since then, the shares have dived to 715p, even after a brief rally at the end of last week.
Royal Mail shares have actually risen since July, moving from 397p to 508p after the company came to an agreement with union bosses last week on pay, pensions and the working week. This gave the stock a boost but in the longer term, Royal Mail still has to deal with the shift from letters to email.
As our portfolio always consists of ten Dogs, we have replaced the four leavers with new pups – insurer
Admiral Group, BT, cigarette maker Imperial Brands and Marks & Spencer. All four enter the Dogs because their share prices have fallen (and yield rise when stocks fall).
Their sorry share price performance reflects individual problems that have been self-inflicted over several years. However, these issues are compounded by regulatory uncertainty, a slowdown in economic growth and structural social shifts.
Take Admiral Group, whose shares have fallen from 2022p to 1854p. Much of the decline occurred late last summer, following disappointing interim figures. These were affected at least in part by a Government-imposed change in the way that personal injury payments are calculated following motor accidents.
Announced a year ago, the new formula was widely criticised for being unnecessarily harsh and likely to result in a rise in NHS costs, as well as higher car insurance premiums.
Following a fierce outcry against the Government’s proposals, a consultation process was launched. New legislation is due but it is unclear when or exactly what it will entail. Some insurers hope the whole idea has been kicked into the long grass but Admiral’s shares have suffered.
BT shares have fallen from 310p to 250p since the summer, a decline of almost 20 per cent.
The company unveiled disappointing third-quarter results on Friday, delivering a 3 per cent fall in revenue to £5.97billion for the three months to December.
The figure was below market expectations and prompted the shares to fall to a near five-year low.
BT is also wrestling with a large pension deficit, concerns about the cost of Premier League broadcasting rights and fierce criticism of its Openreach division, which is responsible for Britain’s national broadband network. Increased regulation is a looming threat too.
Shares in Imperial Brands have dropped from 3429p to 2858p since July. Tobacco consumption is falling across the developed world as governments highlight the health risks and impose legislation that makes it harder to buy cigarettes. M&S shares have also had a bad few months. The company cannot seem to climb out of a multi-year rut, a situation clearly not helped by the broader economic slowdown.
Sadly too, shares in the six remaining Dogs have fallen or moved sideways since July. Centrica delivered a profit warning in November and the shares have tumbled from 201p to 129p over the past six months. Government noise about capping energy prices has not helped and SSE has suffered too, its shares falling from 1395p to 1262p.
House prices are under pressure, particularly in the South East but a lack of homes is shoring up housebuilders’ profits. Both Taylor
Wimpey and Barratt are expected to pay special dividends on top of their ordinary payouts this year. This generosity may be unsustainable over the long term, however.
In July, the Midas Dogs portfolio was valued at £21,292. Today, it is worth £19,482. The FTSE 100 index has risen since the summer, even after the recent sell-off. A nominal £10,000 invested in the index in March 2012 was worth £12,455 in July. Today, that figure has risen to £12,580.
The Dogs are still beating the FTSE 100 but the gap is narrowing, hit by lacklustre performances from many of the pups in our portfolio.
Investors can take a modicum of comfort from the dividend yields. Nine of the ten are now over 6 per cent and four are above 7 per cent, significantly higher than on any Government bond or bank savings rate.
Looking ahead, some of these dividend promises may come under pressure. For now, the Dogs’ disappointing share price performances underline the challenges that British firms face in today’s troubled economic and political environment. This newspaper adheres to the system of regulation overseen by the Independent Press Standards Organisation. IPSO takes complaints about editorial content under the Editors’ Code of Practice, a copy of which can be found at ipso.co.uk.