In his latest blog post, outperforming fund manager Neil Woodford expresses his view that economics isn’t a science but an art and “irrelevant in the real, irrational world.”
Mr Woodford’s degree in economics hasn’t blinkered him on this point and a career in investment management has reinforced his conviction. Coming up with macroeconomic forecasts and theories hasn’t helped him pick winning shares one bit, yet he has a record of success in investing that must be the envy of his fund managing peers.
Taking a ‘view’
However, he has a ‘view’ on the economic landscape, believing that the world economy will continue to be challenged by low growth and deflation and that interest rate increases are a long way off. He says: “It’s difficult to argue that the equity asset class is cheap anymore, but there are still some tremendously attractive investment opportunities within it and my strategy is focused on pursuing these.”
So what’s he holding? Today, I’m going to focus on two firms in his CF Woodford Equity Income fund — Imperial Brands (LSE: IMB) and BTG (LSE: BTG).
Defensive growth
One theme that seems to be ingrained in the portfolio is that of defensive growth. Businesses operating in defensive sectors tend to experience consistent demand for their goods and services whatever the economic weather and that can lead to the generation of strong, reliable cash flows. We can see this effect with Imperial Brands.
| Year to September | 2011 | 2012 | 2013 | 2014 | 2015 |
| Net cash from operations (£m) | 2,556 | 2,119 | 2,352 | 2,502 | 2,757 |
| Dividend per share (p) | 95.1 | 105.6 | 116.4 | 128.1 | 141 |
Customers often buy consumer products over and over again but when the added ingredient of addiction is thrown into the mix, as with tobacco products, cash generation can be rock solid for firms like Imperial Brands.
The FTSE 100 stalwart is gaining market share both organically and by acquisition and is able to grow its dividend at a fair clip, as we see in the table. We know that Mr Woodford’s total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth, so it’s clear why Imperial Brands earns its place in his portfolio.
A future FTSE 100 company?
Specialist healthcare company BTG also has an impressive record of cash generation as you can see.
| Year to March | 2012 | 2013 | 2014 | 2015 | 2016 |
| Net cash from operations (£m) | 47.2 | 55.5 | 48.5 | 47.7 | 95.6 |
The firm currently resides in the FTSE 250 but my guess is that growing cash generation will end up propelling the fast-growing enterprise into the top index one day. In a recent update, BTG revealed double-digit revenue growth as it continues to make progress with several products.
Right now, BTG doesn’t pay a dividend but the firm’s strong cash flow suggests plenty of potential to do so down the road. In the meantime, investors will likely enjoy share-price growth as long as the company keeps gaining market share.
City analysts following BTG predict an uplift of around 37% in earnings per share for the year to March 2018, so growth potential is on the table. Meanwhile, Imperial Brands thinks its earnings will inflate by 12% during the year to September 2017.
