Markets continue to be volatile, and ace fund manager Neil Woodford continues to seek out the best opportunities. As such, there was a good deal of trading reported in the latest update from the CF Woodford Equity Income Fund.
A number of moves caught my eye. In particular, Woodford dumped Centrica (LSE: CNA), and pumped more money into GlaxoSmithKline (LSE: GSK), Rolls-Royce (LSE: RR), Legal & General (LSE: LGEN) and AA (LSE: AA).
Out of gas
Woodford’s sale of British Gas owner Centrica follows on from a disposal of SSE in July, and leaves the fund holding just one utility: mid-cap electricity generator Drax.
Woodford had been a keen buyer of Centrica earlier this year, despite the company’s “disappointing dividend cut”; indeed, he had added to the holding as recently as June. However, August saw the fund reduce its position, and the sale of the remainder of the holding in September has come with an explanation:
“[We have] become more concerned about its exposure to the oil price and increasing competition and regulation in downstream energy markets, both here in the UK and in the US. We think the company will now struggle to deliver growth much above low-to-mid single digits, which combined with a reduced cash return, leads to a modest total return expectation. At the prevailing valuation, therefore, the shares can no longer justify their position in the portfolio”.
Centrica trades on a 12-month forward price-to-earnings (P/E) ratio of 12.9, with a prospective yield of 5.3%. The valuation doesn’t look altogether unappealing, and investors may take some comfort from the fact that it’s not so much that Woodford sees Centrica as an awful prospect, but more a case of seeing better value elsewhere. As the fund update puts it: “[Centrica] has become the latest victim of the intense fight for capital between existing positions and new ideas”.
Four tops
GlaxoSmithKline, Rolls-Royce and Legal & General were FTSE 100 underperformers during September. Woodford and his team noted: “As is often the case over shorter time periods, fundamentals have played no part in these moves. When this happens, the logical thing to do is to buy more, which is exactly what we have done”.
Indeed, in addition to these blue-chip heavyweights, the fund “took advantage of share price weakness to add to a wide range of holdings”, including FTSE 250 firm the AA.
GlaxoSmithKline has long been a core income holding for Woodford, and it’s not hard to see why he might want to buy more at this stage. The pharma giant currently offers a prospective 12-month yield on the ordinary dividend of 6.1%, which will be bumped up to 7.6% by an expected one-off special dividend.
Legal & General is Woodford’s only FTSE 100 holding in the financial sector, and he sees it as a strong growth-and-income candidate. L&G currently trades on a forward P/E of 12.1 with a yield of 5.8%.
Rolls-Royce and the AA don’t boast the high yields of Glaxo and L&G. The aerospace group offers a prospective 3.3%, while the roadside recovery firm offers 3.6%. However, the two companies have other attractions. Rolls-Royce is going through a sticky patch, but Woodford looks past a P/E of 15.1 on depressed earnings, and sees long-term value in the stock. Meanwhile, the AA — self-tagged “Britain’s fourth emergency service” — has some utility-like qualities, and, I would note, an appealingly low P/E of 11.6.
