What’s the ideal share for an ISA? For me, it’s a company with an easy-to-understand business and good margins, selling products or services that will be in demand for as far ahead as the eye can see; a company that can simply continue to do what it’s always done, and deliver more of the same for shareholders. In my ISA you go!
I’m sorry to say that Lloyds (LSE: LLOY) (NYSE: LYG.US), Vodafone (LSE: VOD) (NASDAQ: VOD.US) and Blinkx (LSE: BLNX) don’t fit the bill. All three are in the midst of major change. The outcomes are, as yet, uncertain, and the future levels of sustainable returns for shareholders unclear.
There are some smaller companies that have my ideal characteristics. Unfortunately, Blinkx — an AIM-listed £125m software firm — isn’t one of them.
Blinkx is an internet media platform: “We link viewers with content publishers and distributors, and monetize those interactions through advertising”. The company made an $18m pre-tax profit last year (at an uninspiring 7% margin), but is forecast to swing to a $4m loss this year, as it attempts to adapt to “significant industry changes … in a dynamic marketplace”.
Still, Blinkx says digital advertising spend is expected to surge from $50bn in 2014 to over $74bn by 2017. How much profit will the company — which claims to have “the world’s most advanced video engine” — reap from this rising ocean of cash? … Nowt or very little, according to analyst forecasts.
Mobile giant Vodafone elected to sell its stake in US firm Verizon Wireless last year in a deal worth $130bn. The move gives the company the firepower to respond to a rapidly changing landscape in which bundled packages of mobile, landline, broadband and pay-tv look like being the future. At the same time, the company acknowledges an “increasingly competitive environment” and the risk of “lower future revenues and profitability”.
Even as things are, Vodafone has its work cut out to replace lost earnings. The company delivered 17.5p earnings per share for the year to 31 March 2014, but is forecast to post just 6.4p this year and next, before an uptick to 7.6p for fiscal 2017. Earnings fall well short of covering the current year’s forecast dividend of 11.5p — let alone increases under the Board’s “progressive” dividend policy.
Vodafone knows where it wants to go, but there is, as my old grandma was fond of saying, “many a slip twixt cup and lip”. The company has to cross a wide and turbulent gulf without any slips, and that doesn’t seem to me to be adequately reflected in a share price that equates to 30 times forecast 2017 earnings.
Banking may be as old as the hills, but considerable uncertainty surrounds future profitability and long-term shareholder returns from the industry, as a result of the Great Financial Crisis of 2008/9.
Lloyds has certainly made great strides in its recovery, but costs related to past misconduct, such as redress for the mis-selling of payment protection insurance, still cloud the immediate future. And let’s not forget that these “exceptional” costs aren’t merely a novel feature of the post-financial crisis years. Go back to 2005 and you’ll find Lloyds making provisions for past sales of mortgage endowment policies; back to 2000 and its redress to past purchasers of pension policies.
Of more concern to me, though, is the extent to which longer-term regulatory costs and government skimming may hamstring profitability. The trend isn’t particularly encouraging. In this week’s Budget, George Osborne again hiked the levy charged on banks’ balance sheets — this time by a third. The message seems to be: the more your profitability recovers, the bigger the contribution we’ll ask you to make to the Exchequer.
Banks may become safer, but in doing so they may also struggle to deliver the rate of growth I would be looking for from a long-term holding in my ISA. Lloyds already trades on a relatively high price-to-tangible book value of 1.5, and a decent dividend income, rising with inflation, may become the Black Horse’s’ main attraction in the new climate for banking.
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