Rank Is Over The Hill

Stephen Bland announces the first trade in his third high yield portfolio.

Last week when I wrote up the latest addition to this high yield portfolio I referred to the possibility of dumping dividend slasher Rank, which I'm now doing. Readers may recall that this portfolio, the third of my public demo HYPs, is the first in which I am willing to trade shares, the earlier two being for eternity come what may. One of the conditions under which I am willing to consider a trade is where dividends have or will be cut and the price has not fallen in proportion so that the share stands on a much reduced and low yield. This is what has happened to Rank following the disposal of a major part of its business.

With a forecast dividend for the year to 31/12/06 of 6.42p, murdered from the previous year's actual of 15.3p, the yield at 226p is a depressing 2.8%. Note also that the forecast for 07 is for growth to 6.85p, an increase of 6.6%. Better than likely inflation but I can improve upon it and maintain similar sector diversification integrity with its replacement by another gaming share, William Hill. Consequently I have sold Rank, realising about £3,611 after costs for a loss of £1,389 and reinvested this in 563 Hill shares including costs which works out at 641.3p per share.

Note that in the table below I base the cost per share of Hill on the sum of £5,000 invested originally in Rank so as to maintain the total portfolio cost at £55,000 to date, being the money put into it arising from £5,000 in each of eleven holdings. In this way the adjusted the cost per share of Hill comes to a nominal 888.1p though the actual figure is the above 641.3p. Thus a significant loss is shown, arising of course from the loss on the disposal of Rank rather than a true loss on Hill. 888 is a significant number in poker. Keen players will recognise the hand of three fat ladies though it is by no means the best hand in the game.

Hill is forecast to pay a dividend of 20.3p for 31/12/06, giving a yield of 3.17% on my purchase price which beats Rank by a small margin. Additionally the expected rise for 07 is to 22.3p, an increase of 9.9% which also beats Rank's dividend growth. So we gain in both senses of an immediate yield gain plus higher short term yield growth, assuming the forecasts prove reasonably accurate. After that who knows? Strategic ignorance rules.

It will be seen that Hill's yield, though a little better than Rank's, is nothing to get excited about. It's only a little above the market. But I find it attractive to have a gambling share in the portfolio as part of the diversification process. There aren't that many from which to choose. Ladbrokes is another but the yield is lower. Party Gaming and 888 Holdings (888 again!) yield more but I see them as riskier long term holds, being much newer and more concentrated in the online area than the others, thus offering far less diversification within the gaming industry.

Here is the revised current table following the sale of Rank and purchase of Hill.

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Of the shares shown, Stephen owns Alliance & Leicester.