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Neil Woodford drops biotech, buys BT, IMB, IAG – is he right?

Neil Woodford was once considered the UK’s answer to Warren Buffett. The one-time golden boy of fund managers saw his star crash and burn after his flagship £3.7bn Woodford Equity Income Fund was suspended in June 2019.

In details published by Woodford Investment Management, the fallen idol revealed he has sold off risky AI and biotech stocks, using 84% of the proceeds to pile money into proven FTSE 100 dividend payers BT (LSE:BT.A), tobacco giant Imperial Brands (LSE:IMB) and International Consolidated Airlines (LSE:IAG).

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It seems Woodford has gone back to the drawing board to follow advice that Buffett and Terry Smith have been plugging for years: buy good, long-term companies at attractive valuations.

While the celebrated stock-picker’s reputation may never recover, is he actually right this time?

Give me a call

BT looks undervalued to me. The telecoms giant has been on my watchlist for a while and now it could be at a decent price to jump in, with shares down 14% last month and a cheap trailing price-to-earnings (P/E) ratio of 6.7.

The market tends to expect a lot, and when an August trading update showed a 1% revenue drop, the market started pouting and had a bit of a tantrum.

But City analysts think earnings will grow 7.6% next year. I’d also back the EE owner to make significant gains off the back of the first 5G mobile network in the UK.

A headline dividend yield of 8.7% is also pretty stellar. I wouldn’t be surprised if BT trimmed this high dividend back to free up more cash for its full fibre broadband rollout but CEO Philip Jansen has this one in hand, I reckon.

Flight to safety

A couple of months back, when the now sadly departed Thomas Cook share price was on the wane, I backed IAG as a much better alternative for investors.

There’s no doubt the British Airways owner will benefit from the highly publicised collapse of its rival.

Dividends are hitting 5.7% right now and past payouts have been covered almost four times by earnings. The shares are a little more expensive than in the summer but still really very cheap at a trailing P/E of 4. Net profit margins of 11.8% across the group are reasonable, although free cash flow is underwater for the year.

Still, the IAG share price is ticking back to levels not seen since early July, so I’d say Woodford has this one right.

Up in smoke

Imperial Brands might seem like an odd pick. In June 2019 CEO Alison Cooper tore up a key company pledge on dividend growth. Before that, IMB had one of the most stellar records on the Footsie, pushing payouts higher by double digits for 18 of the last 20 years. But a headline dividend yield of 8% or more this year is still very good.

IMB isn’t expensive, either. It has a trailing P/E ratio of 7.9 and with earnings expected to grow by 10p a share next year, a forward P/E ratio of 7.5.

Watch out for vaping problems to hit the business hard, though. With declining numbers of smokers worldwide, tobacco firms have invested heavily in e-cigarettes. India just banned the smokeless cartridges and several US states have banned vaping too. This kind of public health outcry could spread, which would hurt sales badly.

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Tom Rodgers owns no shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.