Ace investor Neil Woodford has a market-trouncing record spanning more than a quarter of a century. The City wizard chooses stocks sparingly; in fact, fewer than one in five FTSE 100 companies are deemed worthy of a place in his funds.
Such selectivity means its always interesting to look at Woodford’s picks. Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US), G4S (LSE: GFS) and British American Tobacco (LSE: BATS) (NYSE: BTI.US) are his blue-chip bets that have underperformed the market by the widest margin over the past 12 months — all well behind the Footsie’s rise of 13%. Are Woodford’s losers now good value?
Imperial Tobacco’s products include iconic French brand Gauloises, and Golden Virginia, the world’s best-selling roll-your-own tobacco. Investors have been concerned about Imperial’s exposure to the economies of the European Union (over 40% of sales) in light of what Imperial’s chief executive referred to as “a deteriorating EU environment” earlier this year. Imperial’s shares have fallen 15% over the past 12 months, making the company Woodford’s biggest blue-chip loser.
However, City analysts still see Imperial growing earnings per share (EPS) and its dividend this year and next. At a share price of 2,141p, the market has the company on a forward price-to-earnings (P/E) ratio of just 10.2 for the current year — firmly in value territory relative to the FTSE 100 average of 15.9. At the same time, a prospective dividend yield of 5.2% is a full two percentage-points higher than the Footsie’s 3.2% average.
The world’s biggest security firm has been through the wringer during the past 18 months. Among other things G4S: messed up its staffing contract for the Olympic Games, lost its longstanding chief executive, and has lately come under investigation for potentially over-billing the government for tagging offenders. The company’s shares are now 11% lower than 12 months ago.
G4S’s troubles haven’t shaken Woodford’s faith in the company, and his Invesco group increased its holding as recently as 29 July. In fact, Invesco now owns over 16% of G4S’s share capital. Analysts are forecasting a 5% decline in EPS this year followed by a double-digit bounceback for 2014 (with the dividend growing both years). A share price of 235p puts G4S on the value side of the market: the forecast P/E for the current year is 11.7 and the prospective yield is 4.1%.
British American Tobacco
As with Woodford’s biggest winners, there’s a bit of a theme among his losers, with British American Tobacco (BAT) joining Imperial as a bottom-three underperformer. BAT, whose global brands include Dunhill and Lucky Strike, has less exposure to Europe than Imperial, and better overall geographic diversity. BAT’s shares are unchanged over the past 12 months, bettering Imperial’s 15% decline, but still conspicuously underperforming the 13% rise of the Footsie.
BAT’s chairman recently said, within the company’s half-year results: “The business is performing well and we are confident of another year of good earnings growth”. Analysts are forecasting 7% growth for both EPS and the dividend. At a share price of 3,465p, BAT’s forward P/E of 15.5 is not only much higher than Imperial’s, but also close to the Footsie average. However, the prospective income is a market-beating 4.1% — albeit not a match for Imperial’s 5.2%.
Finally, I can tell you that two of the companies I’ve featured here are analysed in the Motley Fool’s newly-updated Neil Woodford report. In fact, eight of the maestro’s current favourite blue chips are discussed, as well as his successful approach to investing.
> G A Chester does not own any shares mentioned in this article.