HYP4: I'm Buying BT

By Stephen Bland | 3 January 2007

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It's the first article of the month, so that means it's time to pick the next selection for my fourth High Yield Portfolio (HYP). I'm going for BT (LSE: BT.A) , which brings in a new sector for my fifth choice.

BT is not actually the next share on the FTSE100 arranged by descending yield. That would be Alliance & Leicester (LSE: AL.) , which is currently third on that list based on forecast yields.

However, I already have one bank in the portfolio, Lloyds TSB (LSE: LLOY) , and another financial company, F&C Asset Management (LSE: FCAM) , which is a fund manager. I don't want at this stage to have another bank though I may bring in Alliance at some future point because I do find it an attractive HYP share, and I don't mind having two different types of bank in the portfolio. It depends on what other shares I locate as the months roll on.

The fourth and fifth shares in the yield list are Vodafone (LSE: VOD) and BT with similar forecast yields. Both are in the phone business but I've gone for BT following some recent negative broker comment.

As for the comparative long term futures of these two companies, I haven't the faintest idea which one is better, so I did not allow such perverse thoughts to enter my buying decision. Strategic ignorance rules.

My buying price including costs is about 310p and with a dividend forecast of 13.89p for the current year to 31/03/07 this gives me an expected yield of 4.48%. The historical yield based on the actual 06 dividend of 11.90p is much lower at 3.58% but even that is decently above the market average yield which is around 3%.

Looking at next year, the dividend is forecast to rise to 14.74p, a still useful and probably inflation beating 6% rise over 2007 for a yield of 4.75%.

After going through a very bad patch at the end of the tech boom some years ago when it missed the dividend altogether, BT has put in a powerful recovery as reflected in the rapid growth of payouts since. From just 2p in 2002, the dividend has grown to the figures above.

Although dividend growth cannot continue at that rate, the growth certainly meets that element of my HYP criteria which likes to see growing dividends in place, although that period of dividend cutting is a bit of a black mark. However, BT has to a great extent redeemed itself by the large rises since. Many other large companies that slashed dividends -- and such cuts were widespread then -- resumed their subsequent increases at only a modest pace.

BT is one of those many large companies which have been buying back substantial numbers of shares. I always find this painful because it is throwing away money that could be used to pay out bigger dividends, an especially relevant matter for HYP investors.

I believe that private investors derive no worthwhile benefit from buybacks compared with the straightforward cash of a dividend. Not that there's much one can do about it. There would hardly be any HYP candidates at all if I excluded those that weren't toileting money in buybacks, so common is this insidious practice.

I spoke recently with an investor who agrees with me on this and went to a company AGM to object to their buybacks. He was waved away with vague talk of tax reasons making buybacks preferable to dividends. What rubbish!

Here's the latest table:

Stephen holds shares in all of the companies shown in the table.

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