BLT dilemma

[kempiejon]

I'm sure TJH will be along to confirm but if I remember right he's also made some judgement calls holding onto or even topping other shares whose yield disappoints perhaps S32, Lloyds no doubt some others.

[Arborbridge]

he's also made some judgement calls holding onto or even topping other shares whose yield disappoints

I think this comes under his rider "if the share has a chance of restoring its dividend in a reasonable timescale".
I'm guessing he will say that this applies not only to complete suspension of dividends, but also dividend cuts.

The falling yield might apply principally were it has done so by dint of rising price, not cutting.

That's my interpretation, anyhow.

[tjh290633]

Having been invited to comment, I would say that when a share falls, but continues to pay dividends, albeit reduced, I am inclined to hang on and see what develops. If it stops paying dividends, rather than sell immediately, I prefer to wait a while until the initial knee-jerk reaction has subsided, and the price may have risen considerably from its lowest point. This might be called timing the market, but it is just my observation of what happens in such situations.

I have detailed such occurrences in the past, and will not bore you by giving examples here, but the other situation is where an ostensibly large and robust company falls out of favour, as Tesco has done, for example, yet is almost certain to return to its former prosperity once the new broom has swept out the augean stables. Taylor Wimpey was another where I could not see that the demand for houses was going to fall, and the sell-off was overdone. Likewise Lloyds Bank, arguably the most robust of the UK banks, is likely to become a "dividend paying machine", as someone in the press recently described it.

Commodities are funny things, and go from feast to famine, so the likes of the miners and the oil companies can have variable fortunes. In general it seems best to relax and watch how things develop over the course of a year or three.

TJH

[pendas]

I'm sure that patience pays dividends as Terry says.

The dilemma is that once in retirement both time and money can be in short supply and the recovery time for some companies that hit hard times can be extremely long in relation to the likely time you have left. If you do decide to sell, you can end up ratcheting down the capital which ultimately buys less income.

My records show there has been a 81% total return this year on BLT, so I can say with some confidence that the time to sell certainly wasn't at the start of the year, though it would have been a good buying opportunity for capital gains.

I first purchased in 2011 at £23.91 and made subsequent purchases at lower prices producing an average cost of £16.29. I show an annualised return of -1.5%. It represents a little over 3% of the portfolio at it's present value, so the income reduction hasn't had a great impact and I will continue to hold in the hope of better times. South 32 was sold in October this year at a profit due to the small size of the holding.

[idpickering]

OK folks, it's pickering time again.

BLT has reached a point where according to TJH's ideas (which I'm "shadowing") I ought to be selling. The yield is below 2% - I believe it's around 1.5% historic. So I should bite the bullet, take the capital loss on the nose and go for something of higher yield. Would that be the right decision?

OR

The worst it seems may be past, the price has rallied dramatically, the forecast eps is increasing, the forecast to next June shows the yield could be 3.1% - which would not qualify as a sell.
I'm torn here between being a wannaby dorisian and a what I really am - a slow tinkerer!

So, help me with my pickering on this one. Having gone through a large amount of pain, should I wait for the slow return of gain? - or cut now. What would you do, and what are holders of BLT doing?

Arb.

PS I do have "mining" interests represented by BRCI, the IT.

I'm a bit late coming to this thread, but my inclination would be to leave it in the hyp. That would be the SI thing to do imho. Ok you dont have to have every sector covered but mining is one to holhd, if you got a good yield on purchase.

Ian

[Dod1010]

I replied to Arb several posts back but it disappeared into the ether I think with BLT back at around £14, you might as well hang on and see what happens on the dividend front. It is after all back to where it was about two years ago. The trouble is it may be some time before its dividends get back to an attractive level.

To that extent I agree with Terry. Where I disagree with him is his advocating hanging on to the likes of Tesco and Lloyds afterthey cut their dividends. They are big companies and can be expected to recover? As pendas says, that may take some time and if like me you are living off the dividends, you need (or at least I do) every share to be productive. it is all very well saying, (after eight years) that Lloyds is on the verge of becoming a dividend machine. Maybe.It though is the best example by far of why it is often best just to sell a share that cuts its dividend (I will not argue about when is the best time to sell. I simply sell; no argument.

Dod

[daveh]

I own BLT, first purchase made in 2008 at £9 last purchase made at the end of 2013 at £18 most expensive purchase made at £25. Sitting on a 5% loss including dividends. I'm going to keep as I think the dividend will increase and the share price already has in expectation of an improvement in the commodities cycle.

I was tempted by a purchase when the share price was well down, but didn't have the guts to take the risk. I was similarly tempted to purchase Persimmon at the height of the financial crisis. I already owned and was well down in capital, but looked at the accounts (can't recall if it was a final or half year) which showed that they were making a small profit and more importantly were now debt free, but were still not paying a dividend. They weren't going bust, and I thought the demand for new houses (if not the ability to afford them) still remained, so I thought the price was a bargain (in the £2-£3 region if my memory serves), but didn't buy as there was no dividend and that would be against the HYP principles. If you have a "system" which seems to work then you should stick to it. I have bought Lloyds recently, which is a similar situation, but they had started paying a small dividend which was predicted to ramp up very quickly, so I will bend the system a bit, but couldn't go so far as to buy a share with no yield and at the time no prediction when a dividend would appear.

I would have done well with Persimmon* (both on capital and income fronts), Lloyds still remains questionable, as the price is down from my latest purchase, but the dividend is acceptable and looking like it will ramp up quite quickly. However I don't know if sticking to the HYP system has saved me from other purchases in recovery situations which haven't recovered. My HYP is doing well anyway showing an annual return of 8.5% since inception.

* PSN has done well for me from the original purchase at £6.50 with it almost tripling in price and having paid back 2/3 of its purchase price in dividends

[MDW1954]

I doubled my holding of BLT by two big purchases in December 2015 and January 2016, getting in at 716p and 596p. I bought Weir and IMI at about the same time.

It was a gamble, and one that could well have gone wrong, and to some extent it did -- despite saying that they wouldn't, BLT did cut the dividend.

Overall, I'm 54% up, but obviously down on the income. I know that I ought to sell and allocate the capital elsewhere, as there is no capital loss (and indeed, a capital gain) but I'm minded to hang on and see what happens -- which is my usual boring approach to such situations, being still in the HYP-building phase.

MDW1954

[Gengulphus]

... and if like me you are living off the dividends, you need (or at least I do) every share to be productive. ...

In that case, you're probably doomed, because it's a fact of life that every share in a HYP being productive is probably going to cease to be the case within a few years. Basically, the odds are against you: just a 2% chance per year of any given share running into trouble and having to cut its dividend results in a ~70% chance that some share in a 20-share portfolio will do so within 3 years. And selling when it happens and reinvesting the proceeds almost certainly won't save you, because the capital is well down: if you originally invested say £5k in a shareholding at a 5% yield, expecting £250 annual income from it, and it cuts and the market halves its capital value, you need to reinvest the £2.5k sales proceeds in a 10%-yielder to restore the income.

Basically, to have a good chance of making a success of a HYP, you must have some safety margin - i.e. an excess of the income it generates over the income you need from it - so that you can take a dividend cut or two in your stride. Whether you take it in your stride by not selling and hoping for recovery (which when it happens can be spectacular), or by selling and making do with the income you can get on the reduced capital (which probably won't grow spectacularly), is up to you. But if you have no safety margin, neither of those courses of action is likely to save you, and if you do have a reasonable safety margin, either of them might do so and you need to exercise your judgement which of them is more likely to work.

... it is all very well saying, (after eight years) that Lloyds is on the verge of becoming a dividend machine. Maybe.It though is the best example by far of why it is often best just to sell a share that cuts its dividend (I will not argue about when is the best time to sell. I simply sell; no argument.

It is all very well indulging in sour cherry picking (though why you pick Lloyds as the sour cherry when RBS is an even better example escapes me!), but you can prove just about any investment technique to be a bad one by being selective about which examples you look at. And likewise, one can prove just about any investment technique to be a good one by sweet cherry picking - e.g. I can point to the example of Persimmon as an example of where selling immediately when it cut in 2009 would have been a very bad move indeed to show that instead hanging on for recovery is a good idea.

To get a balanced picture, one needs to choose a criterion for selling and then look at all the examples where it would have applied, or at the very least an unbiased sample (*). For the criterion of selling immediately when the dividend is cut completely, for instance, one needs to look at the example of Persimmon as well as the example of Lloyds - and all the other examples inbetween and beyond them in both directions.

(*) And any technique for selecting a sample that pays any attention to which examples spring to mind is not unbiased - the human brain is much better at remembering things that went wrong than things that went well!

Gengulphus

[Dod1010]

Gengulphus

I get tired of your long posts picking me up on most of my carefully thought out comments.

I have no idea where you get your percentages in your first paragraph but they do not apply to me. Anyway, we are all doomed, so said the man in Dad's Army some years ago. I am not concerned.

As for my reference to Lloyds, Terry mentioned it in his recent post as a large company which would most likely recover (like Tesco - holders are still waiting)

I am happy with my results and have a very conservative if unconventional approach to investing.

Dod

Moderator Message:
Civility please. Gengulphus writes long replies to everyone.

[miner1000]

The commodity super cycle is still going to show an upward swing hopefully

The commodity super-cycle is over. You have the normal commodity cycle (in my experience roughly every 7 years), and once in a very long time (I don't have this experience but I would suggest something like once per lifetime) you get a super-cycle like the one that ran from 2003 to 2014 when everything is perfectly aligned (in this case the emergence of China was the real difference) when prices break the mold and increase dramatically (much larger increase than normal) and stay higher for longer.

we have just had that super-cycle and the next one will be for our grand-children or great grandchildren to enjoy. In fact, I suspect this downturn in commodity prices (metals and minerals not oil) has much longer to run before we see a significant and sustained change of direction.

That said, I don't tinker, so if I held BHP Billiton, I would not sell it. I don't hold it or any other miner.

Miner

[Arborbridge]

Miner, thanks for commenting: I wondered if you would.

To others, I'd like to say my "vision" about BLT might be slightly biassed since I have reasonably significant holdings in ITs covering this area. I did that as a policy change thinking that I would reduce the risk compared with holding just one share in the sector.
If I did decide to sell BLT, therefore, I am not stepping out of the sector.
However, for now, since the winds seem fair set for BLT at present, I shall hold on for now.


Arb.

[tjh290633]

As for my reference to Lloyds, Terry mentioned it in his recent post as a large company which would most likely recover (like Tesco - holders are still waiting)

We are certainly waiting for Tesco to re-enter the lists, but Lloyds Bank has resumed dividends and with an historic yield of 4.6% is looking attractive again. As it happens, with the open offer and the rights issue, it was possible to augment one's holding at very low prices, if one was confident that it would come good. I think that this was a better option than selling at a very low price and incurring a hefty loss.

Tesco's price has been on the mend for some time. Hopefully dividends are just around the corner.

TJH

[minerjoe]

BLT profits derive of mainly two things

1. Iron Ore - up from where it was last year (around $80p/t)
2. Oil - up from where it was last year

copper and other metals are loose change compared the above two.

I got them a few months ago at 950p so I am sitting pretty, however its a cyclical industry. I would expect the dividend to rise as cash flow will be much improved, especially in iron ore from the Pilbra.

Just thoughts from someone in the industry, so I will always have slightly rose tinted glasses. As the classic mining quote goes "on top of every hole in the ground, is a liar"

[Arborbridge]

Just thoughts from someone in the industry, so I will always have slightly rose tinted glasses.

Not necessarily! Miner1000 is also in the industry and takes quite a different view.

Arb.

[Breelander]

We are certainly waiting for Tesco to re-enter the lists, but Lloyds Bank has resumed dividends and with an historic yield of 4.6% is looking attractive again. As it happens, with the open offer and the rights issue, it was possible to augment one's holding at very low prices, if one was confident that it would come good. I think that this was a better option than selling at a very low price and incurring a hefty loss.

Like TJH (and Gengulphus, if I remember correctly) I took up the open offer. For the right issue I let some go to finance the rest (tail swallowing). In the way of these things, it's taken far longer to come good than I'd anticipated - but at a (now) 3% of my HYP, both in income and capital, it's probably worked out better than selling at the low.

[Arborbridge]

In the way of these things, it's taken far longer to come good than I'd anticipated

There in lies the rub. Most of us thought it would be far quicker, and with the benefit of hindsight, we would have been better to sell - I would expect.

However, what no one can easily tell us is whether it is generally better to sell in such cases, or to hang on. Least of all Dod, who believes selling is the thing, but only "knows" by gut feeling since he keeps no numbers. Between Gen and Dod we have almost the epitome of "two cultures", taking two quite different approaches to the problem.

[Breelander]

...what no one can easily tell us is whether it is generally better to sell in such cases, or to hang on...

I don't think it's possible to say 'generally'. Each case has its own unique factors and has to be looked at on its own merits. For myself the decisions for Lloyds and Firstgroup went in opposite directions. Last Christmas I indulged in some 'navel-gazing' spreadsheet work to see if I could say if my FGP choice was a 'good' one.

There's been a lot of talk here (on both sides of the argument) as to the desirability of tinkering. ... Just for fun (Ha! I must have been mad) I thought I'd pick over the ashes of this particular 'tinker' to see if I could have done it better. I'm afraid it doesn't shed any light on the debate, mostly it confirmed that 'you never can tell'. )

...

On the evidence so far, was I right or wrong to tinker? There's no clear answer to that. It's true that I could have timed it better, but who could possibly have foreseen that waiting six months while the market fell would have produced a more profitable result? Or can guess if seven (eight? nine?) months may be even better? Certainly not I. It seems counter-intuitive that selling a share at a peak was a marginally worse decision than waiting for it to fall some 16% or so... On that basis, who can say for certain that 'hold on for recovery' is any worse than the other options?

Don't get me wrong, I'm happy I did what I did when I did. I just don't plan to make a habit of it - there are far too many 'What If's to consider. )

https://web.archive.org/web/20161104222 ... 09137.aspx

Looking again today, the jury is still out on that one.

[Arborbridge]

the jury is still out on that one

That's one of the problems: how long does one give the jury?

And the other problem is, as you mentioned, that each case is different. The best solution is also unknownable until too late.

And since there are two halves to the question, the second half (to redeployment of capital) success or failure, adds a further dimension.

The only thing I know for certain about those tinkering decisions is that I win some and lose some!

[Breelander]

The only thing I know for certain about those tinkering decisions is that I win some and lose some!

A little knowledge is a dangerous thing. The risk for a tinkerer is that some (but not enough) knowledge/experience can bias them towards systematically making the 'loosing' choice - pyad's 'strategic ignorance' protects against this by saying that on average inaction is better than a well-intentioned but misguided one.