Neil Woodford’s investment performance in 2017 so far has been mixed, but here are three shares that have done well and which I think tell us something about his style.
Long-term vision
Earnings per share plummeted to a low in 2014 for security firm G4S (LSE: GFS), and the shares are down 11% over five years at 259p. But fortunes are reversing, and the price is up 10% so far in 2017 — and up nearly 60% since last June’s lows.
With 2016 results due on 8 March, expectations suggest a P/E of 17, but a dividend yield of 3.6% doesn’t really justify a premium rating over the FTSE 100 average to me. Forecasts for this year and next look better, with EPS growth, that would bring the P/E down to 14.5 this year and 13.5 next, while the dividend yield would grow to 3.8% and then 4%.
G4S is ramping up its dividend while at the same time saying that reducing net debt is one of its key priorities. Net debt amounted to 3.2 times EBITDA at the halfway stage — that makes me a bit twitchy and I’d prefer to see all available cash used to repay some of it. But Neil Woodford can see through these short-term issues and appears satisfied there’s long-term value.
Risky recovery?
Stobart Group (LSE: STOB) shares have put on 6% this year, to 189p. This is another recovery stock, and these days the firm is showing an unusual combination of growth and income characteristics.
Forecasts for the next two years suggest sharply rising earnings and give us forward PEG ratios of 0.5 and 0.4 (where anything below 0.7 is often seen as a strong growth indicator).
At the same time, the firm has said it intends to double its dividend from this year, and that would yield 6.4%. The trouble is, it would be nowhere near covered by earnings, and it’s going to be paid out of cash from disposals.
Again, I’d rather see debt being paid down first, even if it’s a lot less here (at the interim stage it stood at £47.7m), and dividends only paid from surplus cash and sustainable earnings. For me the overall package looks a bit too risky, but good investment managers don’t shy from a bit of risk.
Still big business
British American Tobacco (LSE: BATS) is the fourth biggest holding in Neil Woodford’s Equity Income Fund. After Thursday’s full-year results, the shares picked up a fraction to 5,010p, putting them on a 9% gain so far in 2017.
With revenue up 6.9% at constant exchange rates (12.6% at actual rates, boosted by the falling pound), adjusted operating profit grew by 9.8% with adjusted EPS up 18.8%. That all-important dividend was again lifted, by 10% this time to 169.4p per share (ahead of forecasts, for a yield of 3.4%).
Although cigarette volume remained constant (against an estimated 3% fall for the industry), profits rose as increasing wealth is still driving customers to higher-margin products. The company’s agreed acquisition of the remaining 57.8% of Reynolds American that it doesn’t already own is also a strong indicator of future progress.
Many would keep away from tobacco firms, for ethical reasons and because consumers are trending away from the stuff. But there’s still a good long-term future for the business, and that’s Mr Woodford’s approach.
Purely on investment performance, this would be my pick, as I see it as a low-risk cash cow that should keep on rewarding shareholders for decades.
