2 Neil Woodford stocks I wouldn’t touch with a bargepole

G A Chester explains why he’s giving a wide berth to two companies in which Neil Woodford is a major shareholder.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There are plenty of loss-making minnow stocks tucked away in Neil Woodford’s Patient Capital Trust and Equity Income Fund. I consider many of these far too speculative for my risk appetite. However, there are also a few stocks among his larger-cap holdings that I’m equally happy to avoid.

Roadside assistance firm AA (LSE: AA) is one. Subprime lender Provident Financial (LSE: PFG) is another. Woodford owns 14% of the former and 25% of the latter. Here’s why these two stocks hold no appeal for me.

Company debts

AA’s private equity owners milked its cash flows, loaded it with debt and then sold it through a stock market flotation in 2014. Woodford participated in the 250p-a-share IPO, and in a further fundraising at 385p the following year. The rationale was that AA could use its “utility-like” cash flows to pay down its debt and, in due course, reward investors with generous dividends.

However, the business has struggled, partly due to past under-investment by its previous owners. Net debt has only come down from £2.99bn at July 2014 to £2.67bn at July 2018. And with the share price having declined to 83p, the debt dwarfs the company’s market capitalisation of £509m. At the same time, the ratio of net debt to EBITDA (earnings before interest, tax, depreciation and amortisation), which was worryingly high to begin with at 6.9, has deteriorated to 7.4.

The board declared a maiden dividend of 9p for the company’s 2016 financial year, but has currently pegged it at 2p for the foreseeable future. This gives a skinny yield of 2.4%. Meanwhile, I view a forward price-to-earnings (P/E) ratio of 5.6 as only deceptively attractive, due to the £2.67bn debt, which equates to around 435p a share.

The company’s last half-year results failed to impress my colleague Paul Summers, or the wider market. A trading update is slated for a week today, but I’m steering clear of the stock for the time being — and for as long as its debt remains at such an elevated level.

Customer debts

Woodford has been a long-term backer of Provident Financial. The company has a market capitalisation of £1.32bn at a current share price of 523p. However, less than two years ago, the shares were comfortably above 2,000p. This was before a disastrous change to its operating model — and other problems — sent it crashing out of the FTSE 100.

One year and a rescue rights issue later, the company is still struggling. It issued another profit warning last month, ahead of 27 February results for its financial ended 31 December. Management said there’s been “some pressure on delinquency and arrears metrics” and that  “underwriting standards have been progressively tightened.”

Neither is good for growing the business, as tightened lending puts pressure on top-line growth and delinquencies hurt profits. With UK consumer debt at unprecedented levels, I think there’s high downside risk to earnings and dividend forecasts. This makes a 2019 P/E of 9.7 and forecast yield of 6.9% unappealing, in my book.

Finally, with the group’s Vanquis bank and Moneybarn car finance arm both under scrutiny by the Financial Conduct Authority, this is another Woodford stock I’m happy to avoid.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

7%+ dividend yields! Here are 2 of the best UK shares to consider buying in June

This Fool has been searching for UK shares with the best dividend yields. Here are two he thinks investors should…

Read more »

Investing Articles

5 FTSE 100 shares to consider buying for passive income right now

The FTSE 100 is having its best start to the year for ages, and that's pushing the top dividend yields…

Read more »

Investing Articles

One overlooked cheap share to tap into the year’s hottest theme?

This Fool describes the key things to think about when investing in copper stocks and analyses one cheap share to…

Read more »

Investing Articles

A cheap FTSE 100 stock that’s ready for a dividend hike in 2024

This banking giant is one of the FTSE 100's greatest dividend stocks. And at current prices, our writer Royston Wild…

Read more »

Growth Shares

Is the BP share price set to soar after Michael Burry invests in the firm?

Jon Smith takes note of a recent purchase from the famous investor behind The Big Short and explains his view…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

I’d focus on Kingfisher now after the Q1 report leaves the share price unmoved

With the share price near 262p, is the FTSE 100’s Kingfisher a decent investment now for dividends and business recovery?

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

£500 buys me 493 shares in this 7.4% yielding dividend stock!

The renewable energy sector remains out of favour. As a result, there are some high-yielders around, including this dividend stock.

Read more »

Road trip. Father and son travelling together by car
Investing Articles

If I’d put £10k into Tesla stock 2 years ago, here’s what I’d have now

Tesla stock has fallen in the past few years. But the valuation looks temptingly low now, as we approach a…

Read more »