Right now, the views of shrewd fund manager Neil Woodford on the banking and oil sectors suggest investors should think twice about buying into popular shares Lloyds (LSE: LLOY) and Royal Dutch Shell (LSE: RDSB), while his take on company-specific issues at Rolls-Royce (LSE: RR) makes the aerospace giant another stock to avoid.
Lloyds
Back in the summer of 2013, the Daily Mail reported that long-standing banks bear Woodford was eyeing up an investment in Lloyds. The Mail said it had heard from ‘City sources’ that Woodford was in talks to take a stake of up to 10% of the bank.
Woodford quickly scotched the rumour:
“Reports of my imminent return to the banks sector through a purchase of some of the Government’s stake in Lloyds are not correct. I have absolutely no intention of buying a stake in Lloyds or any other UK-focused high street bank at the present time and don’t expect to do so for some time.”
Three years on, Lloyds has resumed dividends, and Woodford has acknowledged — in a recent Q&A session — that the bank is “arguably more investable than at any stage since the crisis”.
But, he explained:
“it is still not sufficiently attractive to warrant a place in the funds. One thing that continues to concern me is the exposure to the UK housing market. Any correction here would shatter the consensual view that its balance sheet is rock solid.”
Lloyds’ shares are trading at 70.5p compared with a tangible net asset value of 55.6p. A housing market correction would hit the balance sheet hard and probably the share price even harder. And it would appear to be implicit in Woodford’s remark that he sees a correction to the housing market as a very real risk.
Shell
Shell has been more popular than ever of late with investors seeking a high income. A depressed share price has pushed the yield up, and with management having pledged to maintain the dividend, there’s currently a 7.5% income on offer.
Woodford isn’t tempted, saying in the Q&A session this week:
“I remain cautious about the investment attractions of this sector. Whilst oil prices remain below $60-70 per barrel, the global integrated majors fail to generate sufficient cash flow to fund growth in the business and dividends. Currently dividends are being paid from asset disposals or by increasing borrowings. In other words, they are unsustainable unless oil prices rise significantly.”
As for the recent bounce in the oil price, he added: “In my view, oil market fundamentals do not support this sort of rally in the price of oil.”
Implicitly, then, Woodford sees a risk of the oil price remaining low enough and long enough to threaten the dividends of the big oil companies and/or their ability to invest for the future growth of the business.
Rolls-Royce
Woodford maintained his faith in Rolls-Royce as its shares sank during 2015, talking about its superb technology, very high barriers to entry and substantial long-term order book.
However, his view changed before the year was out:
“The problems, which initially had affected the military aerospace and marine businesses, now appear to have spread to the core civil aerospace business … This has shaken my confidence in the investment case and so the position has been sold across all mandates”.
Rolls-Royce’s shares have rallied strongly since the company’s results in early February, but in the Q&A session this week Woodford defended his decision to sell, saying it was made on a 3-5 year investment view: “We will have to wait and see whether our analysis and judgement proves accurate.”
