It looks like the FTSE 100 could end 2023 little changed from the start of the year, barring a big Santa rally or Grinch crash.
Reflecting on the year, I can see I’ve devoted only a few of my fortnightly columns to single companies.
Today, I’m going to revisit Aviva (March), Tesco (June), and Wetherspoons (October).
By pulling the three together, I’m hoping to give you a flavour of our Motley Fool investing philosophy, the different kinds of opportunity available in the stock market, and some of the measures for valuing companies.
Down to business
Front and centre of our investing philosophy is that when we buy shares, we become part-owners of a real business managed by real people.
Our shares aren’t a bet that a dot on a stock chart will end the day a bit higher than it started.
We want the superior returns that are available from successful long-term business ownership.
Insurer Aviva caught my attention in 2020 when it appointed Amanda Blanc as its new CEO.
She had an excellent CV, but what really grabbed me was her first presentation to City analysts. It was the most impressive I’d seen from an incoming CEO since Dave Lewis debuted as the new Tesco boss in 2014.
Blanc’s strategy to simplify Aviva — and do it at pace — was crystal clear. She also immediately aligned herself with investors by wading into the market to buy £1m shares.
If we’re business owners, then vision, energy and integrity are great qualities to have in our managers. Blanc demonstrated all three.
When I wrote about Aviva in March, the share price was 423p and the running dividend yield was 7.3%. The shares happen to be exactly the same price today.
However, investors have received dividends totalling 31.8p per share in the meantime. And the running yield has ticked up to 7.6%, because the board increased the latest interim payout.
I think Aviva remains a good stock for investors seeking a high passive income to consider.
There are two very attractive reasons for owning a share of Tesco’s business.
First, it’s far and away the dominant force in UK grocery retail. This gives it competitive advantages over its rivals.
And second, everyone has to eat. This means its business is less impacted by the ups and downs of the economy than firms in more economically sensitive sectors.
Back on track
Tesco went through a spell some years ago when management took its eye off the ball. However, the aforementioned Dave Lewis came in, and sorted it out with a back-to-basics, retail-is-detail strategy.
Lewis’s successor and current CEO, Ken Murphy, is continuing in the same vein. Despite the growth of discounters Aldi and Lidl, Tesco has maintained its market share of 27%-28% for many years.
When I wrote about Tesco in June, the shares were 260p. The business was priced at 11.8 times its earnings with a running dividend yield of 4.2%.
This looked good value against the FTSE 100’s 14.5 times earnings rating and 3.8% yield. If the market were to re-rate Tesco to the same earnings multiple as the Footsie, its share price would begin with a ‘3’ rather than a ‘2’.
The price has risen to 280p, but it still trades at 11.8 times earnings. This is because its earnings have increased since June.
To my eye, Tesco continues to offer prospects of an above-average total return from a combination of growth and income. In the shorthand of our Share Advisor analysts, it’s an ‘Ice‘ stock.
Our analysts have had many successes by recommending investors align themselves with strong, entrepreneurial, founder-led companies. Yes, it’s that philosophy of real businesses managed by real people again.
One firm I looked at recently is renowned value pub chain Wetherspoons. It’s headed by its founder, chairman and major shareholder, Tim Martin.
When I wrote about the company in October, it had just reported a year of record sales. However, profit was well down from its pre-pandemic level. This was because margins were depressed by very high cost inflation over the year.
I noted that if margins were to normalise in coming years and the market maintain its rating of 19 times pre-tax profit, the share price would more than double.
The price was 650p at the time. It’s since risen to 720p, but not much else has changed. The company currently pays no dividend, and the big attraction I see remains that potential for a substantial re-rating and rise in the value of the shares.