LuniHYP100: Year 12 review

[Luniversal]

LuniHYP100 was twelve on Tuesday(1). It was launched on vintage-2000 pyadic principles: fifteen FTSE 100 stocks, invested in equal amounts, sound payout records, above-average yields, sectorally varied, all bought together, no unforced tinkering.

The portfolio should furnish above-market purchasing power, optionally safeguarded against constituents' defaults by 'derisking' (see below). Capital preservation or enhancement are de trop.

Its first 15 holdings cost £17,890 gross, about £1,200 a share. No capital has been added or withdrawn.

Original purchases:
BAe Systems (BA.)
British American Tobacco (BATS)
Centrica (CNA)
Glaxo SmithKline (GSK), renamed GSK in 2022
ICAP (IAP), renamed NEX (NXG) in 2016; partly replaced by CME (see below)
Pennon (PNN)
Reckitt Benckiser (RB.)
Reed Elsevier (REL), renamed RELX in 2015
Royal Dutch Shell (RDSB), renamed Shell (SHEL) in 2022
SSE (SSE)
Standard Life (SL.), renamed Standard Life Aberdeen (SLA) in 2017 and abrdn (ABDN) in Jul. 2021
Tesco (TSCO)
TUI Travel (TT.), exchanged for its parent TUI (TUI) in 2015
Unilever (ULVR)
Vodafone (VOD)

Direct Line (DLG) was added in Nov. 2018, financed by liquid funds thrown up by 'market trading'. Three minor additions were spawned by divestments:

Indivior (INDV), spun off by GSK in Dec. 2014.

CME, an American company, acquired in part-exchange for NEX in Nov. 2018.

Haleon (HLN), the consumer brands division of GSK, was majority-sold and floated a year ago.

Vodafone and Standard Life distributed cash in 2014-15 and Standard Life again in Jul. 2018, reducing their weights in the portfolio. Stakes in Pennon and TUI were shrunk by a trade sale and a government bailout respectively. Compass and Tesco shrunk their capital in a small way when returning cash. Such receipts were treated like special dividends.

Choosing Direct Line has been the only decision required hitherto: a quiet life for an apathetic shareholder.


INCOME
Historic yields on purchase averaged 4.6% against a benchmark (Footsie) yield of 3.1%: fairly High as in 'H'YP.

Dividends paid in each financial year; percentage changes in regular payouts only, nominal and deflated:

2011-12: £808, missing £92 due to 'dividend drag'. (2010-11 equivalent: £809.)
2012-13: £988, +17.6% nominal (+5.1% underlying), +14.3% real or +2.2% underlying
2013-14: £960, +5.4%, +2.8%
2014-15: £2,184, -2.4%, -3.4%
2015-16: £901, -5.7%, -7.3%
2016-17: £969, +9.7%, +6.2%
2017-18: £1,023, +5.5%, +2.1%
2018-19: £1,286, +7.8%, +4.9%
2019-20: £1,048, -5.7%, -6.7%
2020-21: £1,637, -16.0%, -19.9%
2021-22: £879, -1.0%, -12.8%
2022-23: £859, -2.9%, -13.6%
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For the third year running, regular dividends suffered a setback. Taking the first year as 100, income deflated by the Retail Prices Index (RPI) regressed thus:

2011-12: 100
2012-13: 114
2013-14: 118
2014-15: 114
2015-16: 105
2016-17: 112
2017-18: 114
2018-19: 120
2019-20: 112
2020-21: 90
2021-22: 78
2022-23: 67
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Routine dividends in Years 1-12 compounded, jerkily, at a paltry 0.7% pa versus inflation of 4.0%. Real income last year was two-thirds of Year One's-- far from the orderly progression intended when 'sturdy' blue chips were assembled.


Income growth evaporated the moment the pandemic began; it is out of court as long as companies respond to inflation-- somewhat abated but still in double figures-- by offering dividend hikes of 5% or less. Meanwhile they allot improvements in free cash flow more to share buybacks or acquisitions.


The haul since inception is £13,544, including £2,362 in one-offs. Of that £1,034 came in special dividends, not quasi-capital disgorgements. In Years 11 and 12 the sole specials were New Year bonuses from CME, up from £14 to £19 in 2022. abrdn and SSE did not made good on suggestions that they might supply extras.


The weak trend in income threatens the income reserve. See 'Derisking' below.


LuniHYP250, the midcaps HYP reviewed last week, obtained twice as much as LuniHYP100 from specials relative to regular payouts; the extras market trading can dispense were lucrative. A Footsie-based portfolio is more stolid but less rewarding. No original constituent has fallen to a takeover, for example.


Forty regular dividends landed, two more than in 2021-22. In general companies posted rises below inflation. That was true of the four most reliable, historically speaking, of the first 15 picks: BAe, BATS, Relx and Unilever. Reckitt is on the fringe of this elite, moving forward anew after a brief freeze in 2021-22.


Other once-stalwart progressive payers sit in the sin bin. GSK. after years of freezing, 'rebased' downward upon its disposal of Haleon. (In retrospect I should have picked the other big British pharma, AstraZeneca, but it yielded less in Jul. 2011.) Shell rebounded quite smartly after its shocker of a slashed payout in 2020, yet it is far from full restoration. Ditto Tesco.


SSE is heading into the brave new world of renewable energy, which implies lumpy income jam tomorrow in place of the smooth inflation-sheltered stream on which it once prided itself. Like other water companies, Pennon is under political pressure for distributing too much when it ought to be investing in purity and security.


Direct Line was the most unpleasant surprise in Year 12. The motor insurer passed the final altogether after getting its lockdown-market sums wrong, though this is should be a temporary lacuna. On a brighter note, Centrica returned to the list, modestly. In capital terms it is the dunce of the portfolio. Vodafone is another grisly tale of missed buses and mismanagement, though its peculiar accounting permits it to declare a flat dividend in euros. TUI's share price rallied remarkably, but not because it has any short-term hope of paying out.


The yield on each year's brought-forward market value has averaged 4%, disregarding one-off receipts. It was 3.5% for 2022-23, down from 3.8% the year before. Such running returns no longer look as tasty stood against other ways of paying one's bills; cash and bond yields have widened sharply to c.5%.


CAPITAL
Though never intending to sell, I follow values. Were they to lag revenue growth, it might portend trouble for the revenue stream: prices pushed down for fear of impairments.


Anniversary valuations, annual changes and performance against the FTSE 100 index were:

Jul. 2011: £17,890 (purchase)
Jul. 2012: £18,088, +1.0% year on year/+2.2 points above the FTSE100
Jul. 2013: £23,039, +27.4%/+10.7
Jul. 2014: £22,683, -1.5%/-3.3
Jul. 2015: £23,283, +2.6%/+2.3
Jul. 2016: £24,364, +4.6%/+6.2
Jul. 2017: £26,562, +9.0%/-1.6
Jul. 2018: £27,476, +3.4%/+0.6
Jul. 2019: £24,860, -9.5%/-7.1
Jul. 2020: £22,829, -8.2%/+7.9
Jul. 2021: £22,802, -0.1%/-11.5
Jul. 2022: £24,305, +6.6%/+3.6
Jul. 2023: £25,437, +4.7%/+0.3
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In money terms, the portfolio is still below its peak year-end value five years ago. With the launch date as 100, the RPI-deflated real worth of the principal changed thus:

Jul. 2011: 100
Jul. 2012: 98
Jul. 2013: 122
Jul. 2014: 117
Jul. 2015: 119
Jul. 2016: 122
Jul. 2017: 129
Jul. 2018: 129
Jul. 2019: 113
Jul. 2020: 103
Jul. 2021: 99
Jul. 2022: 93
Jul. 2023: 88
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Unable to withstand the inflationary onslaught since early 2021 it may have been, but capital values stood up better tn revenues. The picture was mixed.


Seven of 17 share prices rose in 2022-23. Gains of more than a quarter occurred at TUI (a 341% rise from the near-dead) and Centrica, up 41%. Vodafone's price almost halved; next worst was a 42% decline at Indivior and falls of more than a quarter at Pennon, Direct Line and BATS.

At (2) I rank the average monthly return for each constituent, combining capital gains on paper or realised proceeds with all income received.


LuniHYP100 beat its Footsie benchmark in seven of twelve years. The only serious undershoots were 2018-19, by 7.1 percentage points, and 2020-21, by 11.5. Of course the Footsie is a pretty punk indicator nowadays.


BALANCE
Ignoring Direct Line, Haleon, Indivior and CME-- too small and/or new-- a perfectly equilibrial portfolio would furnish +7% (one-fourteenth) of income per shareholding. After a dozen years the LuniHYP houses three which account for more than one-tenth of revenue: REL, 14%, BAe, 13% and BATS, 11%. These have been the three on the podium for the past four years; they also produced by far the largest combined returns since 2011(2). That said, the current big three together represent 36.9% (2022: 33.8%) of the portfolio's survivors' payout since 2011, against a lifetime average of 32.0% including years when several others claimed medals. Such stats do not disclose relentless drift towards dangerous concentration.


For three consecutive years the least munificent sources of dividend have been Centrica, Tesco and TUI. Together they ponied up a mere 4.1% of LuniHYP's collections (2022: 3.7%). Yet none is in a death spiral, and only TUI is a persistent non-payer.


Likewise capital. Excluding the tiddlers, the top three for realisable worth on Jul. 18 were Relx (21.6%), BAe (14.5%) and Unilever (9.4%). In total they represent 45.6% of the portfolio, but only Relx was valued at more than half as much again as the mathematical norm. Halfway through the first 12 years, at Jul. 2017, the three most valuable holdings were Relx, 13.1%, TUI, 11.2% and Unilever, 9.5%, together representing one-third of total value. Relx is the runaway 'bagger'; otherwise, no huge skew to the few has happened.



DERISKING
This is a way to convert erratic income delivery into a peaceable stream; purchasing power is preserved by setting cash aside for dipping into if dividends dwindle. There should be scope for occasional increases in the inflation-shielded spendable sum. The opposite is sadly true in these difficult times.


Before the covid debacle, derisking allowed an initial payout of 4.0%, plus uplifts for inflation. It rose to 5.6% after three years. In Year 9, 2019-20, the rate was prudentially trimmed to 4.8%+RPI. Deterioration of payouts' real worth was so alarming that two years later the rate needed further shaving, to 4.3%+RPI. For the present it will remain there.


To date the portfolio has generated £13,544 of income, £12,250 or nine-tenths of it spendable: i.e. a safety margin of 10%. The reserve is worth 13 months of current withdrawn income, the same as its lifetime average. Sounds comfortable? Not if one projects without excessive pessimism.


Suppose revenue intake can rise by 6% pa, whereas inflation is 7% pa in the year to Jul. 2024 and settles at 5% pa thereafter. The reserve stands at £1,334. It would be drained by £300+ each year and would be exhausted by Jul. 2027. This despite a small real annual increase in income, instead of the brutal shrinkage suffered lately.


If the withdrawal rate were chopped a third time from 2023-24, to 4%+RPI-- back to the original rate-- the reserve would empty by mid-2028. Only one year's stay of execution.


What escape from this impasse? Will Britain's Big Board businesses galvanise their returns on capital and convert them more vigorously into cash? The cost of borrowing is on the climb. The 'stakeholder' cant de nos jours deprecates shareholders' entitlement to first dibs on profits. A dearth of entrepreneurship and new-economy prospects besets the FTSE 100's tired oldsters, now under 4% of global market cap. A rally in dividends is implausible.
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(1)
Year 7 review (2017-18):

viewtopic.php?f=15&t=12738&p=180246#p180246

Year 8 (2018-19):

viewtopic.php?f=15&t=18603

Year 9 (2019-20):

viewtopic.php?f=15&t=24428&p=331513#p331513

Year 10 (2020-21):

viewtopic.php?f=15&t=30353&p=428169#p428169

Year 11 (2021-22):

viewtopic.php?f=15&t=35207&p=515433#p515433


(2) Combined returns: income received plus paper profits or cashed-in values since acquisition:

1 RELX £36 a month
2 BA. 24
3 ULVR 14
4 GSK 11*
5 ABDN 10
5 CME 10
7 RB. 9
7 TUI 9
9 SSE 8
10 PNN 7
11 BATS 5
11 SHEL 5
13 VOD 3
14 CNA -2
14 TSCO -2
16 DLG -5
* Including Indivior and Haleon
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[Itsallaguess]

Routine dividends in Years 1-12 compounded, jerkily, at a paltry 0.7% pa versus inflation of 4.0%.

Real income last year was two-thirds of Year One's-- far from the orderly progression intended when 'sturdy' blue chips were assembled.

Table below showing portfolio yield figures from year-start capital -



Source - my own spreadsheet

In your 'Balance' section, you mention that BAE, RELX, and BATS now account for nearly 37% of the overall portfolio income, following what's to be expected (see HYP1...) regarding the 'natural drift' of a hands-off, long term buy-and-hold income-portfolio.

With that level of income-concentration, accompanied with BAE now yielding 2.91% and RELX yielding just 2.09%, that natural drift into portfolio 'lumpiness' can then perhaps tend to hold back the overall portfolio yield being achieved, as can be seen in the above table.

Cheers,

Itsallaguess

[NotSure]

Many thanks for this. A really good investment related read. Great to see these long term studies.

I can't help noticing this gets less attention than HYP1?