Loyalty is a wonderful thing, and Neil Woodford has bags of it. He has just announced the top 10 holdings in his new CF Woodford Equity Income fund, and the only surprise is how few surprises there are. Eight of the holdings also featured in his former fund Invesco Perpetual High Income’s top 10.
His loyalty to the pharmaceutical sector is particularly striking. AstraZeneca (LSE: AZN) (NYSE: AZN.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) remain his two largest holdings, making up 8.3% and 7.11% respectively of his new vehicle (if slightly down from 8.81% and 8.72% at Invesco). Woodford still loves those pharmos.
Marriage Material
He first displayed his ardour for AZN five years ago, buying it cheaply when nobody else wanted to know, because he saw its long-term potential. It has grown 65% since then, against 63% for the FTSE 100. That isn’t dazzling, but remains a credible turnaround, given the state the company was in when Woodford bought it, with its pipeline of drugs threatening to run dry and a patent cliff looming.
Today, AstraZeneca boasts a healthy late-stage pipeline, with non-risk-adjusted peak year sales potential of around $63 billion. Yet it remains a long-term conviction play, with management predicting that revenues in 2017 will be the same as in 2013, around $25.71 billion. Things should really kick off after that, it claims, with revenues topping $45 billion by 2023. Not many fund managers (or private investors) look that far ahead.
Woodford may have bought AZN cheap five years ago, but at 15.1 times earnings and 3.7% yield, he won’t have secured such a bargain today. As recently as last October, you could buy AZN at 7.8 times earnings and a 5.6% yield.
Glaxo’s China Crisis
Woodford’s other pharmaceutical favourite, Glaxo, has been a labour of love lately. Its attempts to crack China, the world’s second-largest drugs market, have backfired amid a welter of bribery allegations. Chief executive Sir Andrew Witty initially played them down, but the case has descended into a murky tale of sex, lies, videotape and closed trials of British suspects. In May, the Serious Fraud Office launched a criminal investigation into the bribery allegations.
Woodford remains loyal, despite a disappointing return of 45% over the last five years. In fact, he probably sees current issues as a buying opportunity. This storm will pass, and China only makes up 5% of the company’s sales. It isn’t that cheap. Glaxo currently trades at 14.1 times earnings, and yields 4.9%.
The recent 6% drop in overall group sales in the first quarter are another concern, but I suspect this will only strengthen Woodford’s conviction. And it takes a brave investor to bet against that unwavering force.
