A Share That's Just Too Cheap

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By

Stephen Bland

Published in Investing on 12 August 2010

Stephen Bland is feeling the urge to splash out more on Aviva.

I'll update the value portfolio this week but first a couple of company results. 

Interserve

Interserve released half year figures to 30 June with reduced eps, a marginally increased dividend and reduced debt. The company states that trading was in line with expectations and that the second half will show a significant uplift on the first.

Interserve has almost no tangible assets, but my key to it as a value play was the very low P/E and high yield. With the shares at 203p and a 2010 eps forecast of 37.4p, the P/E forecast is still only 5.4. And with a dividend expected to be 17.9p for this year, the forward yield is a seriously high 8.8%. 

The shares are hardly changed since purchase but the original value case remains and I'm encouraged further by the sharp reduction in debt from £85m to £53m since June last year plus the upbeat outlook comments. 

It stays in.

MS International

MS International issued a brief trading report for its first quarter. There were no figures but the comment was positive. 

Overall the level of activity across the group is improving and orders are 10% higher than the comparative. Importantly for this value share, they state that the balance sheet remains strong with net cash. 

The shares are showing a small profit and stay in.

What's moving?

Looking at movements in the portfolio, Aviva, after an initial boost to the share price on what I considered its excellent half-year results, has fallen back again to below cost. 

During that short period it appeared that the market was starting to come round to my opinion on Aviva and re-rate it but it got cold feet. The market continues to be wrong. It could be me that's wrong but I'm far too arrogant to admit that, not yet anyway. 

Anyway, the post-results fallback in the price to 364p has driven the forecast 2010 yield up to 7.2% and higher still for 2011. Amongst the highest forward yields in the FTSE100. Make sense? Not to me.

If it goes much lower I may well unbalance the portfolio even more towards Aviva. As this is a fixed sum portfolio, the money can come only from the cash and sale of another share and there are some here that I am close to selling.

Cable on probation

Regarding the cash element, this has increased by £228 from dividends paid on the two Cable & Wireless holdings.

With a complete disdain for logic, Worldwide seems more UK-oriented than Communications, so there is clearly a plot here to confuse people or me at least, because I can hardly tell them apart. 

Fortunes have become very mixed following recent trading updates so that the Comms holding is showing a small profit whilst W/W has developed a sizeable loss in percentage terms. Taken together they are down about 12% on cost. 

These shares haven't done the business I'd hoped and may consequently be candidates for a dump at some stage if nothing changes. They could both be good bid possibilities but I don't hold a share with that as the main ground.

Dart is showing a good profit and Mucklow a small one. Both have more to come I think.

Moneysupermarket is down. This is another one that hasn't fulfilled my hopes for it so far. Nothing has actually gone wrong with the business and the recent results were okay, it's just that the value I saw in it as an unreasonably low rated cash generator hasn't yet outed. A bit like Aviva.

BP continues to languish. Even though it is well up from the crisis low, it still shows a weighty loss on cost.

So no changes at present. However some are coming up I feel on certain shares where the reasons I went in are no longer so valid, a likelihood aided by my desire to increase the Aviva holding to an insane level if it gets much cheaper.

At £67,599 the portfolio is up £1,130, about two clicks, from the last review about a month ago when it stood at £66,469.

 Cost
£		Value
£
Aviva (LSE: AV)26,20225,177
BAE Systems (LSE: BA)5,0004,709
BP (LSE: BP)7,5215,892
Cable & Wireless Comm (LSE: CWC)1,8892,172
Cable & Wireless W/W (LSE: CW)3,1112,249
Dart Group (LSE: DTG)5,0006,367
Interserve (LSE: IRV)5,0004,949
Mucklow (LSE: MKLW)5,0005,243
Moneysupermarket (LSE: MONY)5,0004,640
MS International (LSE: MSI)5,0005,376
Sub-total 66,774
Cash 825
Current value 67,599
Originally invested 60,000
Gain/(Loss) since May 2009 7,599

 

More from Stephen Bland:

Of the shares mentioned, Stephen holds Aviva, BAE Systems and BP.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

bouleversee 12 Aug 2010 , 3:44pm

What about BAE Systems, Stephen?

F958B 12 Aug 2010 , 4:11pm

The portfolio has too much money allocated to one company.
The lack of diversification will eventually be the undoing of the portfolio - if not with Aviva, it will suffer a catastrophe with an oversized holding in some other company in the future.
Your unbalanced portfolio will either go from rags to riches, or from riches to rags. It may well go from rags to riches and then back to rags.

Like the financial industry, I put an arbitrary cap on my individual portfolio holdings of approximately 10%, with a sector cap of approximately 25%. Those are purchase prices; iIf a share moves dramatically, then the weighting can move a little higher.

Gold bullion in your posession would be an exception to the allocation rule, since it doesn't have potential for company bosses to massage the books, declare bankruptcy, nor to be decimated by one adverse financial event - such as a chain reaction from bad derivatives spreading through the financial system.

I agree that Aviva seem very cheap, but maybe someone "in the know" knows something nasty that we don't.
I don't own Aviva shares and have no plans to acquire some shares in the near future. There are other, less risky, high-yield shares available.

theRealGrinch 12 Aug 2010 , 6:17pm

Am I alone in thinking Aviva has a pension deficit the size of the GDP of a not so small nation? Maybe this is the reason for the shares dragging down. Buying more and more of the same stock to average down costs isnt the best idea here. Standard Life would be a better buy.

Luniversal 12 Aug 2010 , 8:04pm

Or RSA Insurance. But Mr Bland considers RSA 'far more risky' than his beloved Aviva.

It would be helpful if the table included a comparator such as the FT All Share Index, so we could see how good a gain £7,600 on £60,000 (12.7%%) is.

On the last dealing day in May 2009 the All Share closed at 2252.6, and today at 2713.0: a gain of 20.4%.

pyad 13 Aug 2010 , 9:16am

"What about BAE Systems, Stephen?"

Yes, I omitted to mention this one. Recent results were reasonable but I think I said at the time that it is now a possible candidate for a sell as to some extent my view has changed on the share. The yield is good though so it's paying for its keep meanwhile and that high yield is a bit of a value indicator.

"...Buying more and more of the same stock to average down costs isnt the best idea here. Standard Life would be a better buy."

If I increase Aviva it would not be merely to average down. It would be because I see the share as continuing to be an outstanding value play, worth taking the excessive risk from overweighting to an insane level as I say in the article.

To say Standard Life would be a better buy implies that I need a share from the life insurance sector. That is to misunderstand my approach but the fact is that there is no diversification requirement. When looking for value shares, I filter across the market and have little regard for the nature of the business. Thus Aviva isn't there because it's an insurer, it's there because it is simply a very attractive value share in my view. What it does is close to irrelevant to me and the same goes for all the others.

In the same way if I sold Aviva I would not look amongst insurers to replace it, I would look at the whole market. Whatever fell out of the net would be my choice. I have no interest or love for any particular business and in fact have written many times in the past against falling in love with shares. What I love is value, not individual shares.

draiochtanois 13 Aug 2010 , 10:16am

Isn't Aviva just like those dividend honeys of yesteryear?

Lloyds TSB down from a 7% yield to 0
RBS down 0
Kingfisher slashed 50%
BT slashed 50%
BP eliminated essentially because money was spent on safety and operations when it should have been

Some nasty derivatives lurking somewhere maybe? Or the aforementioned pension deficit? Or government bonds in Greece,Portugal& Spain?


Fulvio100 13 Aug 2010 , 11:09am

The above comment about Aviva's pension deficit hasn't been addressed.

timthegambler 13 Aug 2010 , 11:40am

Deficits in the staff pension schemes 1,657m, 1,988 at HY09
Other obligations to staff pension schemes 1,382m, 1,351m at HY09

Total Provisions 4,003m, 3,980m at HY09

abrahamisaacs 13 Aug 2010 , 3:55pm

A pension scheme deficit esp on that scale needs addressing. Management need to close down the scheme/s and make exceptional contributions to reduce the deficit. They cannot ignore it and hope it will disappear through good investment management. The trustees have probably switched into bonds anyhow and will thereby increase the deficit still further as the bond returns will not cover the pension liabilities.

pyad 13 Aug 2010 , 4:01pm

"The above comment about Aviva's pension deficit hasn't been addressed."

Alright I'll address it. The pension fund deficit is of no consequence here.


"Isn't Aviva just like those dividend honeys of yesteryear?"

Not in my view though of course there can never be any guarantees with shares, HY or otherwise. But your implication that HY shares are poor just because they are HY is actually quite wrong. In general HY is a value indicator.

ThirdWay 13 Aug 2010 , 7:25pm

Why is there no benchmark shown, e.g. the FTSE, that this portfolio can be judged against?

draiochtanois 16 Aug 2010 , 1:38pm

>> In general HY is a value indicator.

I think this statement lacks intellectual rigour, high yield on it's own is not an indicator of anything except a high yield.

Unless it is backed by adequate dividend cover then it's pointless.

Didn't your previous HYPs contain some of these same shares? And how are they doing now?

The Fool is becoming more foolish by the day...

Back2Value 20 Aug 2010 , 5:32am

I am a holder of Aviva from buying at 345p and I plan to continue holding, because I think it has a lot further upwards to go. For me, having done my own research, the logic is compelling and to some extent the risk is lower because it is such a large and well-researched company. That doesn't remove all the risk of something nasty coming out, but it's a risk I'm prepared to take.

Pyad has always made it clear that this is a value trading portfolio and he has never set any rules on diversification - in theory he could put the lot on Aviva. He is not encouraging anyone else to follow him without making up their own mind. The lack of such limitations makes it more interesting.

B2V

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