LuniHYP100: Year 8 review

[Luniversal]

Here is a eighth-birthday report on LuniHYP100, or 'My HYP' as it was called on The Motley Fool boards(1). It tests vintage-2000 Pyadic principles: fifteen FTSE 100 stocks, equal weights, sound payout records, above-average yields, sectorally varied, all bought within a week, no unforced tinkering.

LuniHYP100's holdings were acquired on Jul. 12, 13 and 18, 2011: total gross cost £17,902. No money added or withdrawn afterwards.

Original purchases:

BAe Systems (BA.)
British American Tobacco (BATS)
Centrica (CNA)
Glaxo SmithKline (GSK)
ICAP (IAP), renamed NEX (NXG) in 2016. Partly replaced by CME Inc.
Pennon (PNN)
Reckitt Benckiser (RB.)
Reed Elsevier (REL), renamed RELX in Feb. 2015.
Royal Dutch Shell (RDSB)
SSE (SSE)
Standard Life (SL.), renamed Standard Life Aberdeen (SLA) in Aug. 2017.
Tesco (TSCO)
TUI Travel (TT.), exchanged for its parent TUI AG (TUI) in 2015.
Unilever (ULVR)
Vodafone (VOD)

Nothing went bust or was gobbled except TUI Travel, whose parent remains London-listed, and NEX/TP ICAP (see 'Takeover' below).

Small stakes in Indivior (INDV) and TP ICAP (TCAP) were spin-offs by Glaxo and NEX respectively in 2014 and 2016.

Vodafone and Standard Life returned cash in 2014-15 and Standard Life again in Jul. 2018, reducing weights in the portfolio. A purist might have held proceeds back for 'tail-swallowing' reinvestment. I treated them like special dividends.


INCOME

The initial historic yield for the 15 shares averaged 4.6% against a benchmark (Footsie) yield of 3.1%: fairly High as in 'H'YP.

In 12-month periods, dividends declared, some paid after year end, were:

2011-12: £808, missing £92 due to 'dividend drag'. (2010-11 equivalent £809.)
2012-13: £988
2013-14: £960
2014-15: £2,548
2015-16: £913
2016-17: £982
2017-18: £1,036
2018-19: £1,280

Total so far £9,516, including £1,935 in one-offs(2). The spike in 2014-15 was down to VOD's and SLA's returns of value totalling £1,182, plus TUI's £442 on the UK subsidiary's takeover. The last year brought a further £147 from Standard Life's return of value, also specials from CME (£6) and Direct Line (£31).

Regular dividends compounded, jerkily, at 5.1% pa versus inflation (RPI) of 2.6%. Last year they were up by 7.3% before RPI inflation of 2.9%. But in real terms recurrent payouts fell in Years 4 and 5 by c.5%. An income reserve is needed if a smooth flow is vital; see 'Derisking'.

The average annual 'derisked' yield (on capital at the beginning of each financial year) has been 4.2%, including 4.3% in 2018-19 and the year before.

Eight shares gave steadily rising payouts: BA., BATS and SSE weakly, PNN, RB., RDSB, REL and ULVR more robustly. For RDSB, ULVR and VOD receipts were usually magnified by sterling weakness against the dollar or euro, though that can always reverse. TUI's absorption produced a permanent dividend boost even after horrid non-reclaimable German withholding tax.

Tesco halted payments in 2015-16; they have resumed modestly. Centrica and now Vodafone have inflicted severe cuts. Glaxo and NEX lapsed to freezes, which continue. SSE's dividend looks dodgy after its showroom spinoff plan conked out. Shell, however, may soon start growing the dollar rate again.

On the whole this is not a picture of buoyancy. A net drop in income this year would not surprise me at all.


CAPITAL

Though intending never to sell, I follow values. Were they to lag revenue growth, it might portend trouble for the revenue stream-- prices pushed down on fears of reductions.

Anniversary valuations were:

Jul. 2011: £17,902 (purchase)
Jul. 2012: £18,088, +1.0% year on year
Jul. 2013: £23,039, +27.4%
Jul. 2014: £22,779, -1.1%
Jul. 2015: £24,023, +5.5%
Jul. 2016: £25,104, +4.5%
Jul. 2017: £27,302, +8.8%
Jul. 2018: £28,216, +3.4%
Jul. 2019: £25,332, -10.2%


In real terms the portfolio declined by more than one-eighth last year, much the heaviest fall to date. Lately its 'value' blue chips, aka 'bond proxies', have been spurned by punters who fear upsets. Even so, LuniHYP100 was worth one-sixth more after inflation than when invested: up by 42% nominal where its FTSE 100 benchmark was +33%.

LuniHYP100 beat the Footsie in four of eight years. In 2013-14 it had lagged by 2.9 points, in 2016-17 by 1.9 and in 2017-18 by 0.7. Compound annual growth to date has been 4.4%, against 3.4% for the Footsie and 2.6% for the Retail Prices Index.

Since launch the winners on price have been RELX (+245%), Unilever (+150%) and Reckitt (+83%). The worst were divi-destroyers: Tesco, down 43%, and Centrica, -73%.


BALANCE

Ignoring minor positions in Indivior and CME, a perfectly balanced portfolio would be 6.7% (one-fifteenth) in value per shareholding. After seven years this HYP houses two which account for more than one-tenth of its worth: REL, 16%, and Unilever, 12%. Three holdings are worth less than half the ideal one-fifteenth: Centrica, Vodafone (albeit after a meaty return of value) and Tesco. So the scatter is not too scattered.

Likewise income. Excluding the tiddlers, ideally equal regular payouts from the 15 between 2011 and 2019 would have totalled £500 apiece. In reality the biggest payers were Standard Life with £746 and TUI with £744. The smallest was Tesco with £157. The only other share to provide less than £400 was Reckitt Benckiser with £384. There are no wild skews in this group.


TAKEOVER

As recorded on Nov. 13, I missed the deadline for selling CME in the market: its US-based, German-listed stock was part of the offer for NEX . In the apathetic spirit of Doris, avoiding American regulatory hoops, I have retained CME; it is not a high yielder but pays quarterly and appears to have good income prospects besides a sound past.

This prevents my having to think about a new share, since only £600-- half the unit cost of a sixteenth entrant-- is lying around in uninvested cash. (There have been far fewer 'events, dear boy' in this Big Board group than in my midcaps HYP.)


DERISKING

The derisking process aims to convert lumpy income delivery into a quasi-index-linked withdrawal; purchasing power is preserved by setting cash aside for dipping into if dividends dwindle. There is scope for occasional increases in the inflation-safeguarded spendable sum.

LuniHYP100 began on a withdrawal rate of 4.0%+RPI. Inflation being low, after three years the difference between income received and spent already amounted to nine months' spending. The SL.,TUI and VOD windfalls equated to more than a year's extra income. They swelled the reserve to 23 months' worth by Jul. 2015, so it felt safe to tap it by boosting the withdrawal rate to 5.6%. That leaves 16 months in the kitty after a small addition to the reserve for last year. Thus far 17% of LuniHYP100's revenue has been stashed against income droughts.

The goal was to add an average of one month extra to the buffer each year until 12 months was reached. My current stress test posits inflation at 3% pa (lately 2.9%), the average since the early Eighties. Growth in regular dividends is projected at 4% but with absolutely no one-offs. On that downbeat scenario, the reserve would slowly diminish until it stood at only four months' worth in 2021, after twenty years.

Should income growth freeze but not contract, against inflation of ~3% pa the reserve would be kaput seven years from now, unless the 5.6% withdrawal rate were cut. But derisking seeks to prevent such trimming. To envisage a permanently frozen inflow argues against relying on UK equity income, not specifically against using a High Yield Portfolio to get it. To assume nary a fillip from Pyad's 'market trading' (corporate events) is gloomy as well.


CONCLUSION

The 5.6%+RPI derisked yield suffices and feels safe. (Ditto 5.7% from my midcaps 'LuniHYP250', launched a year later and reviewed on Jul. 13.) Starting with 15 holdings has not capsized the portfolio or resulted in huge internal divergences. Pyad's contention that 'market trading' tends a portfolio better than intervention suits my passive temperament, and has not been traduced by LuniHYP100.
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(1) Year 7 was reviewed on Jul.19, 2018. I have corrected capital calculations this time on discovering that the amount of shares held in Standard Life Aberdeen since 2015 should be 433, not 495.

(2) That is 19% of total income from one-offs; whereas in LuniHYP250 with its much busier history of 'market trading' it was 25%. The bigger the stocks, the quieter Doris's life.

[monabri]

viewtopic.php?p=180064#p180064

(In case you were wondering about dividends from Direct Line ..it was discussed in the Year 7 review. )

[Luniversal]

https://www.lemonfool.co.uk/viewtopic.php?p=180064#p180064

(In case you were wondering about dividends from Direct Line ..it was discussed in the Year 7 review. )

Thanks for that. I should have noted in the OP that Direct Line (DLG) was bought on Nov. 13 with proceeds from the NEX-TP ICAP bid. I got 369 at 321p, absorbing the standard unit cost per share of ~£1,200 including expenses. This is the only full substitution required since launch.

[88V8]

On the whole this is not a picture of buoyancy. A net drop in income this year would not surprise me at all.

Just eight years, and so many cutters and holders.

It seems as if the golden age of HYP has, for the moment, ended.
Those halcyon days of double-digit CAGRs that would go on and on.

We didn't know it was a golden era. One never does, until afterwards.

Perhaps it will return.

It was an act of foresight on your part to run the parallel B7 & B8. Very much of its time, at this time.

V8