Investor attention has recently been focused on the Woodford Patient Capital Trust — the master investor’s quirky new growth venture — the full portfolio of which was revealed last week.
However, Woodford’s mainstream Equity Income fund has also been busy, having just reported a good deal of trading activity during July.
Of particular note, Woodford dumped utility SSE (LSE: SSE), and pumped more money into favoured stocks, including BT (LSE: BT-A), Drax (LSE: DRX), Rolls-Royce (LSE: RR) and Legal & General (LSE: LGEN).
Cash flow concerns
Woodford has viewed the broad utilities sector as problematic for some time. He sold National Grid a few years ago, unhappy with the prospective reward for equity risk, and he has also shunned the water sector.
However, SSE was one of the few utilities he had maintained faith in, buying more shares as recently as April on weakness in the run-up to the General Election. Historically, Woodford and his team had viewed SSE positively “due to its unwavering focus on shareholder returns and, in particular, the dividend”.
So, what led to the change of heart and the sale of this stock, which currently yields a prospective 5.9%? Woodford believes SSE may struggle to continue its strong track record; in particular, he and his team have developed “increasing concerns about the company’s ability to grow its cash earnings”. Cash earnings, of course, are vital to delivering sustainable dividend growth.
Value in a strategically important asset
While Woodford sees below-the-surface issues at SSE, the problems currently facing fellow electricity company Drax are in plain sight. Drax had committed significant capital to convert part of its power station from coal to biomass, but the government’s recent decision to abolish the Climate Change Levy exemption for renewable energy has thrown a spanner in the works.
City analysts’ earnings and dividend forecasts for the next couple of years don’t make for pretty reading. However, Woodford and his team continue to see value in the company, on a view that Drax is “a strategically important asset in the UK electricity generation sector”. Indeed, during July, “we added modestly to the holding at a very depressed share price level”.
High-conviction blue chips
Rolls-Royce and Legal & General are two of just four FTSE 100 companies that feature not only in Woodford’s Equity Income fund, but also in his Patient Capital Trust.
Rolls-Royce’s string of profit warnings has led many investors to spurn the company. City analysts have the stock on a fairly high 2016 P/E of 18, but Woodford and his team remain resoundingly bullish: “Over the long term, the company continues to offer substantial scope for capital growth as it executes its strong forward order book and improves profitability. We added to the holding progressively throughout the month”.
In contrast to Rolls, there is strong momentum in Legal & General’s business. Annual earnings have been rising at 10%+ and are forecast to continue doing so. There’s a prospective 5% dividend yield, too. A P/E of 14 doesn’t seem particularly demanding, and this is another stock Woodford was happy to buy more of during July.
Woodford and his team thought long and hard about the changed investment case for BT earlier this year when the company announced its intention to acquire EE in a £12.5bn deal. They ultimately decided that the deal would be good for shareholders in the long term, and Woodford has put his money where his mouth is by buying more shares during July. A current-year forecast dip in earnings puts BT on a P/E of 14.8, but that would represent decent value if Woodford is right about the company’s prospects.
