The good, the bad and the uggerly

[NeilW]

They don't take this approach at all. The fact you only consider their assets and not their liabilities should be a red flag in itself, let alone the non-interest income in their p/l accounts.

I did. But as usual, since you have a problem with me, you didn't notice it. I will leave it there and leave others to judge.

[bluedonkey]

Vodafone appears in the bottom half of Terry's list each year.

[micrographia]

I tend to simply look at the income they are providing on the rare occasions that frustration drives me to consider wielding the knife. So from a random selection from the bottom of your list I see

PHP - unblemished rising income record

SMDS - COVID blip, income back on track

I bought holdings in these over the last couple of years, so this is unsurprising as I wouldn't have done so had they shown a dodgier divi record.

WPP - don't hold, cut divi in 2019, not recovered to previous level but rising.

These I hold...

BLND - divi cuts 20/21, not recovered to previous levels, was hammered by COVID and now by interest rates. "We live on an Island and they're not making more land though".

TSCO - no divi as recently as 2017 and not setting the world alight since then either

SBRY - cut in 2017, slow rise in income since then.

Both victims of the great British supermarket wars of the last decade. But people still have to buy food, right?

LLOY - long term basket case saved only by the yield making it hard to replace the income if I sell it.

Aviva - income record like the edge of a saw blade for the last 20 years. Again, saved by its persistently high yield.

VOD - wtf? Another current high yielder.

And of course there is PSN. Let's go with "cyclical"?

Of that last tranche I've only bought SBRY and BLAND in the last decade or so, the latter a small top up as recently as this year because the divi looked sustainable or something . SBRY doing fine capital wise, PSN breaking even and I bought it with no illusions about the UK housing market so I'd be inclined to keep all 3.

Everything else in that group down by lots. However, they are all paying a divi and since they've been largely ignored for so long their relative contribution to portfolio income shrinks every year, so although I wouldn't miss them if I could find a viable place for the cash to go if I sold them, I don't feel a pressing need to do anything at the moment. Any big divi cuts, or if I was tidying up my portfolio with an eye on imminent retirement might finally see them go though.

EEM

[dealtn]

They don't take this approach at all. The fact you only consider their assets and not their liabilities should be a red flag in itself, let alone the non-interest income in their p/l accounts.

I did. But as usual, since you have a problem with me, you didn't notice it. I will leave it there and leave others to judge.

So, for instance, one of the largest liabilities would be current accounts which typically pay 0% regardless of interest rates, and the majority of assets are loans which are interest related and would vary as rates change, doesn't indicate to you there is a margin sensitivity around interest rates then?

As you say, lets leave it for others to assess.

[Charlottesquare]

I did. But as usual, since you have a problem with me, you didn't notice it. I will leave it there and leave others to judge.

So, for instance, one of the largest liabilities would be current accounts which typically pay 0% regardless of interest rates, and the majority of assets are loans which are interest related and would vary as rates change, doesn't indicate to you there is a margin sensitivity around interest rates then?

As you say, lets leave it for others to assess.

Agreed, the way their assets (and liabilities) get valued within the accounts will be massively influenced by market interest rates. (Accounting Standard setters have a lot to answer for)

Undernoted is an interesting summary of banks and IFRS(Note I have never prepared any IFRS accounts and never had any dealings with accounts for banks)

https://www.cpdbox.com/ifrs-for-banks/

[moorfield]

Some of those shares are disappointing in that I really expected better from what I believe are well run companies.

Higher interest rates have knocked some of them, so an easing of conditions may do the opposite - in which case it would be foolish to sell out provided the dividends are rolling in. Lloy is a perpetual disappointment as one would expect a bank to do well with high interests rates. And Smiths - what happened there? with everyone having home deliveries it should be a no-brainer.

Arb.

Quite. Quite a few people, me included, expected great things from SMDS given the huge shift to home delivery. We often have three deliveries a day. Our consumption of cardboard packing has increased greatly. I think we're quite typical. SMDS is close to getting the chop. I expect the day I sell will be the day before a takeover bid arrives and the shares go up 50%. There's already mergers or takeovers happening. Yield is OK though, meantime.

The problem SMDS has essentially is that cardboard boxes are a not particularly wide-moat business. Fat margins yes, but a low barrier of entry.

[BullDog]

Quite. Quite a few people, me included, expected great things from SMDS given the huge shift to home delivery. We often have three deliveries a day. Our consumption of cardboard packing has increased greatly. I think we're quite typical. SMDS is close to getting the chop. I expect the day I sell will be the day before a takeover bid arrives and the shares go up 50%. There's already mergers or takeovers happening. Yield is OK though, meantime.

The problem SMDS has essentially is that cardboard boxes are a not particularly wide-moat business. Fat margins yes, but a low barrier of entry.

Which is probably the driver behind the Smurfitt Kappa merger earlier this year. It wasn’t especially welcomed by Smurfitt shareholders IIRC. There was a brief flurry of activity sometime ago when it was rumoured a move was likely on DS Smith but it quickly fizzled out. Clearly the shares are in play and there's two things stopping me clicking the sell button. 1 The probability of a bid, but who knows when? 2 A pretty decent yield that doesn't seem especially likely to be cut.

I only hold four single company shares, SMDS being one of them. Holding at about 5% portfolio weight. But frying pan and fire is always at the back of your mind when mulling this stuff over. Often it's best to do nothing.

[moorfield]

Are those ugly ducklings about to turn into swans, or are the swans, dying swans? The eternal investment dilemma.

This is what Dogs of the Dow was created to exploit. You could adapt that into a Dogs of the HYP strategy perhaps? Just sell/rebuy the 15 highest yields each year, and repeat...

[BullDog]

Are those ugly ducklings about to turn into swans, or are the swans, dying swans? The eternal investment dilemma.

This is what Dogs of the Dow was created to exploit. You could adapt that into a Dogs of the HYP strategy perhaps? Just sell/rebuy the 15 highest yields each year, and repeat...

I couldn't hold my nose for long enough.

[tjh290633]

Are those ugly ducklings about to turn into swans, or are the swans, dying swans? The eternal investment dilemma.

This is what Dogs of the Dow was created to exploit. You could adapt that into a Dogs of the HYP strategy perhaps? Just sell/rebuy the 15 highest yields each year, and repeat...

There was an analagous Dogs of the FT30 run by the IC towards the end of the last century. I used that principle when I had to start an ISA in 1999. I excluded any share already held in my PEP, and the first selection included Allied Domecq, British Airways, Blue Circle, Royal and Sun Alliance, Stagecoach and Tate & Lyle.

With only £7k per year, my plan was to build up those holdings to the level of those in my PEP. It didn't take long to unravel, because ALLD spun off Punch Newco which led to me buying BASS and dumping the residual part of ALLD. Then BCI was sold to Lafarge and I added UU. to replace it. Next I dumped BAY, BASS became Six Continents and split into IHG and MAB. Next I added Rexam, SD IHG and bought George Wimpey. Next to go was MAB, to be replaced by Scottish and Newcastle. They were taken over and replaced by Trinity Mirror. I also added Premier Foods after trimming overweight shares. Wimpey merged with Taylor Wimpey, and I added DSG. sold Stagecoach and added William Hill, and then we were allowed to merge PEPs and ISAs, thank heaven.

Then came 2008 and the big crash, but that's another story.

As you can see, life is never simple.

TJH

[csearle]

The problem SMDS has essentially is that cardboard boxes are a not particularly wide-moat business. Fat margins yes, but a low barrier of entry.

I too felt that Smiths DS should be in the ascendancy given what they do and how much people avail themselves of their product these days.

I hadn't really considered their being held back by a large amount of competition.

I can see one barrier to entry (well I suppose if you've enough money then nothing is a real barrier) and that is that you need huge buildings equipped with huge machines. The buildings near(ish) me are colossal. C.

[kempiejon]

I've had SMDS for a decade or more, they came back quickly following the covid and ignoring that hiccup a good steady 10 years of rising income, currently a 6% yield. Slightly more recently I added Mondi another packaging firm, who soon after cut their dividend. The share price had looked good but is now back below my purchase price and only yields 4%.

[idpickering]

I've had SMDS for a decade or more, they came back quickly following the covid and ignoring that hiccup a good steady 10 years of rising income, currently a 6% yield. Slightly more recently I added Mondi another packaging firm, who soon after cut their dividend. The share price had looked good but is now back below my purchase price and only yields 4%.

I hold SMDS, and like the yield on offer and the diversification they bring to my HYP too, that’ll do for me.

Ian.

[Arborbridge]

The problem SMDS has essentially is that cardboard boxes are a not particularly wide-moat business. Fat margins yes, but a low barrier of entry.

Fat margins and a low moat? That seems counterintuitive: I'd expect fat margins to be sustained by a moat being large, not small.

Anyhow, I doubt I will be selling Smith's anytime soon and wouldn't rule out topping up if it fitted in with other factors.*

Arb.
*eg cash availability in different accounts and my attitude at the time to my IT:HYP ratio.

[chris]

As someone who has worked in the carton industry, I would argue that the barriers to entry are high. The minimum you will need is a large format 6 colour printing press that takes cardboard, a cut and crease machine and a gluing machine. In addition, you will probably need a window patcher. Those together will be a significant sum and as someone pointed out, you will need a large building to house this in.

The issue is not so much with the cost, it is the cost, together with the relatively low margins in the industry. In addition, the companies getting larger contracts have larger economies of scale to improve efficiency which will mean that they have a range of presses, cut and crease, window patchers and gluing lines with many millions in capital expenditure but the ability to run several machines at once with setters and operators as these involve a degree of skill.

The big contracts will usually stay with the big boys and so there are significant barriers to entry but there is probably excess capacity in the industry and therefore the buying up of other large companies may be more to do with reducing the available capacity over fewer companies and therefore being able to raise prices to get reasonable margins.

I was with a smaller company that was subsequently taken over but I doubt whether much has changed since then.

[monabri]

Net margin of ~5%. Quite skinny.