IanTHughes wrote:To those of you who believe that HYP1 at 18 is dangerously unbalanced and that a proportion of the capital of the largest holdings should be redeployed, can you please explain where you would redeploy that capital?
To help you decide, the forecast yields of the top 4 holdings by value are:
Persimmon PLC (PSN) – 11.04%
British American Tobacco Group (BATS) – 7.21%
Rio Tinto PLC (RIO) – 5.79%
BT Group (BT-A) – 6.04%
I do appreciate that there are some other high yields on offer above 6.00% but such a re-balancing would surely reduce the forecast income of the Portfolio. An odd suggestion for what is first and foremost an Income Strategy.
Of course, many on here would suggest that they would never had allowed a portfolio under their control to get so un-balanced in the first place. In which case I have another couple of questions:
At what point historically would the above 4 holdings have been trimmed back and how much of the subsequent increase in income would have been lost by such tinkering? How sure could you be, when undertaking such trimming, that you would have located a new home for the redeployed capital that would have done as well or better, income-wise.
You're making a false assumption, namely that 'trimming back' would necessarily have been involved in not letting the portfolio get so unbalanced. The BT holding arises from re-investing the large takeover proceeds from Associated British Ports (then about 12% of the portfolio value) in a single holding in 2006, and the BATS holding from similarly reinvesting the large takeover proceeds from Gallaher (then about 10% of the portfolio value) in a single holding in 2007. Both of them could instead have had 1/15th = 6.7% of the portfolio value re-invested in a single replacement holding, with the rest of the takeover proceeds used for some carefully-chosen top-ups of existing holdings, or had the takeover proceeds split 50:50 between two replacement holdings, without deviating from HYP1's 'no tinkering' policy in the slightest.
As regards how good the new homes for the capital concerned would have been, doing either of those two would probably have been better than putting it all into BT for the Associated British Ports takeover, as the BT holding has not done very well on either capital (pretty much unchanged from
"about £14,000" being reinvested) or income (historical dividend of 11.9p in 2006 becoming one of 15.4% this year is an acceptable but decidedly lacklustre 2.2% annualised growth rate) - basically, the BT holding's current position is due to the Associated British Ports holding having done very well rather than any sort of superior performance from BT.
For the Gallaher takeover, doing either of them would very likely have been worse than putting it all into BATS, as that has performed very well: on capital, the takeover proceeds of
£13,560 have nearly doubled (despite recent falls), and on income, the historical dividend in 2007 of 15.7p+40.2p = 55.9p has become 56.5p+43.6p+48.8p = 148.9p this year, a very good annualised growth rate of 9.3%.
Anything more definite or exact than those "probably better" and "very likely worse" verdicts isn't IMHO possible without far too much risk of hindsight bias. My guess is that the overall effect would probably balance out as somewhat worse, but not by so much as to make it really clear.
Up until this year, the above would have resulted in HYP1's income and capital being considerably less unbalanced - though still unbalanced in a pretty major way. I'm only saying that it would have been possible to avoid HYP1 becoming
so unbalanced without tinkering, not that it would have been possible to avoid it becoming quite considerably unbalanced without tinkering. I.e. HYP1's record gives an exaggerated impression of the imbalances caused by 'no tinkering' because its reinvestment policy also contributed in a fairly major way - but
only an exaggerated impression, not a false impression.
This year, Persimmon's massive dividend rise and its consequential rise to top income producer means that what is now the biggest income imbalance is not similarly affected by an arguably-much-too-big takeover proceeds reinvestment. The holding does arise from reinvesting takeover proceeds, I think from the fairly closely-spaced takeovers of Resolution and Scottish & Newcastle in the spring of 2008, evenly split between Pearson and Persimmon, and I think the amount invested in the holding was in the rough region of £6k. But unfortunately, it happened during HYP1's 'dark year' from early 2008 to late spring 2009, when pyad wasn't writing either articles or posts for TMF, and so I've no exact details. But if I'm even approximately right, that was rather less than 1/15th of the portfolio value at the time and so no more undiversified than the original 15 purchases were.
However, the big question about Persimmon to my mind is to what extent to think of its dividend as an ordinary dividend that can reasonably be expected to continue into the future. What the company has said about that (at least as far as I'm aware) is essentially all contained in
https://www.persimmonhomes.com/corporat ... eturn-plan, but that raises distinct doubts about it continuing by (a) being described as a "
Capital Return Plan"; (b) anticipating no increase in 2019 or 2020; (c) anticipating a just-over-50% reduction in 2021; (d) having no stated dividend policy beyond 2021. For the owner of an income portfolio with an interest in it continuing to produce income for many years to come rather than just the next few, that's got to raise questions about whether to treat Persimmon's current dividend as a rather extended genuinely-special dividend, i.e. basically 'bonus' income, rather than as part of their regular income - or at least as being partially bonus income rather than regular (and if so, how big a part?).
And I at least pay considerably more attention to what companies say and don't say about their future dividend intentions than I do to outsiders' speculations about them. Doesn't mean those intentions are definitely what is going to happen (many dividend cuts over the years have made that clear!) and doesn't mean that the company won't change those intentions (as Persimmon have done a number of times over the last few years, though fortunately in a positive direction) but IMHO it's worth paying attention to. But unfortunately in Persimmon's case, their stated intentions seem to me to raise questions without really helping to answer them.
In short, HYP1's income situation seems to me to currently be making a lot of hay while the sun is shining on Persimmon, but whether / how long the company even intends to stay in the sun seems distinctly more questionable than is usually the case for a HYP holding. So it strikes me as considerably more likely that the Persimmon income imbalance will correct itself over the next few years than that the BATS, BT or Rio Tinto imbalances will do so.
Gengulphus
