Ace City investor Neil Woodford has thrashed the FTSE 100 over the last five, 10 and 15 years. Hence, I always keep an eye on his holdings for promising investment ideas.
Woodford is very selective in picking shares for his £20 billion funds. Fewer than one in five of the UK’s top 100 companies earn a place in his market-beating portfolios.
The following three firms all offer prospective dividend yields of over 4.5%:
|Company||Share price||Dividend yield|
|GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US)||1,673p||4.6%|
|AstraZeneca (LSE: AZN) (NYSE: AZN.US)||3,208p||5.6%|
|Imperial Tobacco (LSE: IMT)||2,142p||5.4%|
Woodford has backed pharmaceuticals companies in a huge way: in fact, the healthcare sector — mainly big pharma in Woodford’s case — constitutes over a third of his funds’ portfolios. His biggest bets are GlaxoSmithKline and AstraZeneca, each at a whopping 8.5%.
GlaxoSmithKline has an excellent dividend record of above-inflation growth, and the company has already upped its first two quarterly dividends by 5.9% this year. Analysts see growth ahead of inflation continuing, but the consensus forecast of an overall 4.3% rise for the full-year payout looks a bit stingy to me, given the level of uplift in the first two quarters.
Nevertheless, even on that analyst consensus, GlaxoSmithKline — currently trading at 1,673p — offers a dividend yield of 4.6%, comfortably above the FTSE 100 average of 3.2%.
Woodford’s other big pharma bet, AstraZeneca, has suffered more than GlaxoSmithKline from expiring patents on some of its blockbuster products. AstraZeneca held its dividend for 2012 at the same level as 2011; and also failed to raise this year’s half-year dividend when releasing its interim results at the start of this month. Analysts are forecasting no dividend growth for this year or next.
The compensation for AstraZeneca’s currently static dividend is a 5.6% yield at a share price of 3,208p. To put some perspective on that, it would take GlaxoSmithKline perhaps five years of dividend growth from its lower 4.6% yield to overtake AstraZeneca’s 5.6% if the latter’s dividend remained flat over the period. Of course, by five years’ time AstraZeneca may be increasing its own dividend again … but, then again, may have cut it. Still, we know which outcome Woodford is backing.
Tobacco is another sector on which Woodford has bet big. Three cigarettes firms figure within the top 10 holdings of his funds. The current highest yielder of the three is Imperial Tobacco. At a share price of 2,142p, Imperial Tobacco yields 5.4% based on analyst dividend forecasts for the company’s financial year ending this September.
Imperial Tobacco has already lifted its interim dividend by 11% and analysts are expecting the full-year payout to be at broadly the same level — well, 10% actually. They’ve also penciled in a 10% increase for the year to September 2014. It’s not hard to believe that Woodford would view a 5.4% yield with the prospect of double-digit income growth as an attractive proposition.
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> G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.