EssDeeAitch wrote:I am considering building an HYP and would like to ask if there are any hints, tips and advice experienced investors can/will share with me.
I have read a number of articles on the matter but would like to flesh this out with some real world experiences.
Any help will be much appreciated.
Possibly the most helpful post I have encountered on the practical process of building an HYP was a "worked example" of how Gengulphus (aka 'Big G'
) selected shares for a model portfolio. I cannot post a link here as it was on the predecessor board in Dec 2015. So obviously all of the data is out of date, but the thought process is explained from a screener to individual share selection
most of post reproduced:
[i]This post does the next stage of the UHYP15 selection process, namely choosing the best share of those found in each sector by the filtering and "black-marking" stages I did earlier in the thread.
In the cases below where I take a look at debt measures, the ones I use below are based on the most recent annual report or full-year results of the company, as follows:
Net debt: As reported by the company, if the company supplies such a figure. Otherwise I attempt to calculate it from balance sheet items.
Gearing: Net debt divided by (net assets attributable to shareholders minus goodwill). If a separate goodwill figure is not available, instead subtract all intangible assets.
Debt multiple: Net debt divided by the earnings figure used to calculate adjusted (or underlying) earnings per share. If such an earnings figure is not available, instead divide by the earnings figure used to calculate basic earnings per share.
Interest cover: Earnings before net financing costs (and taxation), divided by net financing costs. Calculated on a pre-exceptionals basis where relevant - the point is to see how well the company can pay its net interest bills going forward, not to look at unusual past interest bills.
Where subsequent results give an updated net debt, I will say what it has changed to give an idea which direction it's heading, but not normally try to recalculate the other figures (too tricky a job for some of them). Where they don't, I will say what the change in net debt is from the previous year, again to give an idea which direction it's heading.
On to the individual sectors, in each of which I indicate my eventual choice om table by emboldening its row:
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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HSBC HSBA Banks 540.50p £105,264m 6.14% 6.13% 1.38 1.57 Good *
Investec INVP Banks 567.50p £3,501m 3.52% 4.03% 1.97 1.91 OK **
HSBC's much better yield, hugely greater market cap and better dividend growth record wins this sector. Its cover is worse but forecast to move in the right direction and so not a huge concern to me. But it is very irritating that they're still trying to decide whether to move abroad and there's still no clear timescale for the decision to be made - the recent statement about it in their third-quarter results seems to be back-pedalling on the original deadline of the end of this year:
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Domicile
In April 2015, the HSBC Holdings plc Board of Directors asked management to commence a review to assess the best place for the HSBC Group's headquarters to be located to maximise long-term shareholder value and the Group's future strategic opportunities. Although management is undertaking the review on behalf the Board, it is the Board that will make the final decision regarding the location of the Group's headquarters. The review will focus on long term perspectives, as opposed to short-term factors.
Whilst there is a considerable amount of work still to do, a significant amount of work has been carried out, supported by a number of external advisers. In addition, as the review has progressed, further information has been requested by the Board.
Whilst the target for completion of the review was initially set as by the end of 2015, this is a self-imposed deadline that can be moved should the Board require further work to be performed. An announcement will be made when the Board makes its final decision and, if necessary, a further update will be provided at the time of the full year results announcement.
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I think I'm just going to have to let HSBC proceed to the shortlist of 'sector champions' and (I suspect) get into the final selection for UHYP15, taking the risk that it will stay in the portfolio for quite a short time before being tinkered away as a foreign share. If it does happen, at least UHYP15 will be in good company: HSBC is already in my main HYP (in ISA, SIPP and dealing accounts!),
GDHYP, UHYP13 and UHYP14...
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Carillion CLLN Construction 312.90p £1,349m 5.67% 5.77% 1.90 1.87 Poor **
Galliford Try GFRD Construction 1472.00p £1,180m 4.62% 5.43% 1.71 1.61 Good *
Kier KIE Construction 1352.00p £1,268m 4.08% 4.72% 1.74 1.64 Poor **
Carillion beats the other two on market cap, yield and cover, but has a much less good forecast dividend increase (as evidenced by the difference between the forecast and historical yields). So I'm inclined to give the top spot to Carillion, but want to check the debt situations:
Carillion: Net debt £177.3m (up to £199.6m in interims), gearing negative equity situation, debt multiple 1.2 times, interest cover 4.0 times.
Galliford Try: Net debt £17.3m (up from £5.1m the previous year), gearing 4%, debt multiple 0.2 times, interest cover 12.4 times. Should be added that average net debt over the year was £168m, which would be equivalent to gearing of 39% and a debt multiple of 1.8 times, so those year end figures are flattering!
Kier: Net debt £141m (up from £123m the previous year), gearing 190%, debt multiple 5.0 times, interest cover 5.8 times. Average net debt is indicated as £82.9m, which would be equivalent to gearing of 112% and a debt multiple of 2.9 times, so clearly a different pattern to Galliford Try.
After looking at those debt figures, Galliford Try's better dividend record, forecast dividend increase and debt figures outweigh Carillion's somewhat better market cap and forecast yield and cover figures for me. Quite a close call, though!
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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BAE Systems BA. Defence 513.50p £16,443m 3.99% 4.06% 1.85 1.80 OK *
Meggitt MGGT Defence 375.00p £2,996m 3.67% 3.83% 2.36 2.05 Good **
Cobham COB Defence 302.30p £3,405m 3.52% 3.74% 1.74 1.78 Good **
Rolls-Royce RR. Defence 601.00p £11,152m 3.84% 3.04% 2.83 2.96 Good ****
All the cover figures and dividend records are OK as far as I am concerned, and BAE Systems has the best yield and (much less important) market cap, so it takes this sector.
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Morgan Adv'd Materials MGAM Electronic & Electrical 247.20p £711m 4.41% 4.56% 2.03 1.92 Good **
Only candidate in sector.
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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SSE SSE Energy Utilities 1462.00p £14,686m 6.05% 6.17% 1.40 1.26 OK **
Centrica CNA Energy Utilities 219.10p £11,194m 6.16% 5.49% 1.42 1.48 Cut ****
National Grid NG. Energy Utilities 925.70p £34,913m 4.63% 4.72% 1.36 1.38 OK **
My immediate inclination is to go for SSE with its high yield. But I have to remember that my very positive experience of being a shareholder in the company goes back to flotation (as Scottish Hydro-Electric) getting on for 25 years ago, so much of it may not be all that relevant today!
So trying to move beyond that immediate inclination, I can see things I like in all three: SSE has the highest yield, Centrica has got its cut out of the way and the medicine seems to be working on its debt ( as I recently posted in
http://boards.fool.co.uk/-i-was-quite-s ... he-drop-... ), National Grid feels like the most solid of the three. I think I'll have a look at their debt figures to try to resolve the issue:
SSE: Net debt £7,568m (increased to £7,937m in subsequent interims), gearing 358%, debt multiple 6.2 times, interest cover 5.3 times. I should say that I have used the company's "adjusted net debt and hybrid capital" figure here, which is considerably larger than its plain net debt figure, and I've used the company's interest cover calculation because it takes the interest-like payments on the "hybrid capital" into account. That's partly to be conservative, partly because the "hybrid capital" (which makes up the bulk of the difference) does seem to have a lot of the characteristics of debt.
Centrica: Net debt £5,196m (reduced to £4,905m in subsequent interims), gearing 4124%, debt multiple 5.4 times, interest cover 5.9 times.
National Grid: Net debt £23,915m (increased to £24,592m in subsequent interims), gearing 351%, debt multiple 10.9 times, interest cover 3.8 times.
Cannot say I like any of those sets of debt figures! But high debt is more acceptable for utilities than most types of company, due to their relatively reliable revenues, so that dislike probably shouldn't count for much. More important are the comparisons between the companies: on those, National Grid stands out for its significantly higher debt multiple and lower interest cover than either of the other two, so with the lowest yield as well, I'm going to rule it out.
Between SSE and Centrica, I see little to choose on the debt multiple and interest cover. Centrica's gearing is considerably higher, but gearing is basically a measure of how well a company could repay its debt if it suddenly had to do so, making it relatively unimportant for utilities IMHO. So it boils down to SSE having the higher yield vs Centrica having its dividend cover and debt moving in the right directions... I think I'll go for Centrica, despite its cut: I regard cuts mainly as a warning that more cuts are likely to be on the way, but as I say above, in this case the medicine seems to be working and so I'll discount that danger significantly.
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Vesuvius VSVS Engineering 336.20p £927m 4.83% 4.86% 2.06 1.77 OK **
IMI IMI Engineering 920.50p £2,558m 4.08% 4.15% 2.07 1.61 Good *
Weir Group WEIR Engineering 1129.00p £2,512m 3.90% 4.02% 3.21 1.77 Good **
Smiths Group SMIN Engineering 1023.00p £4,069m 4.01% 3.97% 2.10 1.89 Poor **
Vesuvius looks like the obvious candidate, with a yield quite a bit ahead of the others and nothing major wrong with it - just its small size. But I think I'll check up on its debt as well:
Vesuvius: Net debt £268.3m (rising to £296.0m in sbsequent interims), gearing 81%, debt multiple 3.0 times, interest cover 8.8 times
Nothing very worrying there, and I think I'll save myself the trouble of working out the debt situations for the other three companies - they're unlike to be sufficiently better than Vesuvius's to end up beating it.
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Tate & Lyle TATE Food Producers 602.50p £2,759m 4.65% 4.67% 1.36 1.24 OK **
Only candidate in sector, Unilever having too low a historical yield compared with the FTSE 100 yield.
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Persimmon PSN Housebuilder 1942.00p £5,740m 4.89% 5.18% 1.31 1.57 OK *
Taylor Wimpey TW. Housebuilder 198.00p £6,139m 4.67% 4.91% 1.21 1.52 Short ***
Berkeley BKG Housebuilder 3602.00p £4,922m 5.00% 4.25% 1.46 1.61 Short ***
Bovis Homes BVS Housebuilder 982.50p £1,241m 3.56% 4.07% 2.25 2.44 Good ***
Note: In view of today's news and consequent fairly major price change, I've updated Berkeley's line. This is not something I've done in general - one can waste a lot of time futilely trying to base one's share selections on absolutely up-to-date data! But major news does merit an update.
Persimmon has the best yield, there's not much to choose between the first three on the other figures, and it's got the longer dividend record. So I think it fairly clearly beats Taylor Wimpey and Berkeley. Bovis is quite a lot better on cover, is paying dividends in a much more traditional way, and has staged a very nice dividend recovery over the last 5 years or so, so things aren't quite so clear with regard to it - but it's got a significantly less good yield and market cap, and I don't feel that adds up to a case that it's a better choice than Persimmon. So Persimmon takes the sector as far as I am concerned.
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Admiral ADM Insurance 1650.00p £4,565m 5.96% 5.83% 1.05 1.03 OK ****
Legal & General Group LGEN Insurance 272.70p £16,227m 4.13% 4.92% 1.48 1.42 Good **
Old Mutual OML Insurance 208.60p £10,360m 4.17% 4.49% 2.06 2.10 Good
Standard Life SL. Insurance 415.00p £8,234m 4.10% 4.41% 0.93 1.28 OK ***
Aviva AV. Insurance 512.50p £20,755m 3.53% 4.09% 2.67 2.08 Cut ****
Legal & General has the second best dividend yield in the sector and an excellent reputation among HYPers (*), so is the share to beat in this sector. Admiral doesn't do it for me: its dividend policy of paying out almost all its earnings as dividends, about half of which they call ordinary dividends and half special dividends, means that either you treat it as a fairly low yielder with decent cover (by only counting the ordinaries) or, as in the above table, as a high-yielder with wafer-thin cover. Things have gone well for it over the last few years, but when business hits a bad patch (which it will over the years - repeatedly), I cannot see its decent dividend record being sustained. Indeed, their choice to call around half of their dividends specials pretty blatantly says "we're giving you upfront warning that we will cut the payout immediately earnings are down"...
Aviva loses to Legal & General on every front except a mildly better market cap, and Standard Life doesn't even have that exception.
Old Mutual gives Legal & General the best run for its money: I regard the choice between them as quite finely balanced, with Legal & General having the better dividend prospects and mildly better market cap, and Old Mutual the better cover. I've ended up going for Legal & General on essentially a "gut feel" tiebreaker.
(*) Which I have to confess does make me a bit nervous - there are too many past examples of shares with such reputations that have ended up coming a cropper! But only a bit - somewhat paradoxically, that's because they demonstrated several years back around the time of the financial crisis that they do bend in a storm rather than break. Take a look
athttp://www.legalandgeneralgroup.com/i ... nd-histo... to see how it's done. They halved their final dividend between 2007 and 2008, nearly halved their interim between 2008 and 2009 - and yet their total dividend for 2011 was back above 2007 levels. (And as an aside, they're a really spectacular example of why "sell immediately on the first dividend cut" isn't necessarily a good idea: that first cut, of the 2008 final, would have been announced in early 2009. One only needs to look at a long-term share price chart for Legal & General to see what a bad mistake that would have turned out to be!)
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Marston's MARS Leisure 173.40p £983m 4.04% 4.22% 1.84 1.87 OK **
William Hill WMH Leisure 365.80p £3,143m 3.34% 3.44% 2.45 1.87 Good ****
Greene King GNK Leisure 963.00p £2,581m 3.09% 3.27% 2.05 2.03 OK ****
Marston's yield is quite a lot higher than either of the other two and the covers are acceptably high. Its only real weakness is the rather low market cap, but that isn't enough to counterbalance the yield advantage in my view, and so Marston's gets this sector's nomination as far as I am concerned.
Company EPIC Sector Price Market cap H.Yield F.Yield H.cover F.cover Record Black marks
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Pearson PSON Media 823.00p £6,807m 6.20% 6.56% 1.31 1.31 OK **
UBM UBM Media 506.50p £2,237m 4.21% 4.24% 1.81 1.80 Poor *
Pearson has the much higher yield, but low cover, while UBM looks rather safer on the figures above. Pearson is also known to be restructuring itself, which is always a bit fraught - one needs to trust management rather more than usual to know what they're doing... A fairly finely balanced decision, and I'm going to look at the debt figures to ry to get a further clue:
Pearson: Net debt £1,639m (up to £2,289m in subsequent interims, though that rise looks partly seasonal, say 60% seasonal, 40% non-seasonal), gearing 173%, debt multiple 3.0 times, interest cover 4.3 times.
UBM: Net debt £538.0m (a bit down to £519.6m in subsequent interims), gearing negative equity situation, debt multiple 4.3 times, interest cover 7.3 times.
Hmm... Cannot say I see a strong reason for preferring either of those sets of debt figures over the ot
Moderator Message:
Edited to remove excess spaces to make it flow. Raptor.