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can we spot a cutter?

General discussions about equity high-yield income strategies
kempiejon
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can we spot a cutter?

#222436

Postby kempiejon » May 17th, 2019, 11:50 am

This article has some suggestions https://www.youinvest.co.uk/articles/in ... ay-be-safe
I think it's freely available without registration etc.

Dividend cover, according to earnings
Dividend cover, according to free cash flow
Interest cover and net debt
The size of the pension deficit or surplus

For my HYP I like to look at a long history of increasing dividends, usually 5 years or sometimes 4 and a forecast, a long history and the size of increases within the available history might offer some insight into the companies' commitment to future dividends. I use dividenddata as a quick screener and also the companies' own investor relations pages. I also look for cover and debt from earnings but no so much free cash flow. Vodafone as a recent example has not been topped up in my HYP as is had poor cover from earnings - I like to see above 1.5 except for utilities where I let that slip to about 1. VOD would have qualified for others I understand on cover from free cash flow. I do not really use the pension nor shorting as I know others do.
When I look at a company and I used to think I tried to find value other metrics and ratios came into play and I wouldn't ignore them when making HYP decisions.

Sometimes I have been unlucky or missed useful details out there but by having a portfolio of shares so far my income has held up despite some howlers. I doubt I'm much better/luckier than I was when I began HYPing but I think I'm currently doing as much as I can to keep my income stream safe.

Alaric
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Re: can we spot a cutter?

#222439

Postby Alaric » May 17th, 2019, 11:57 am

kempiejon wrote:Dividend cover, according to free cash flow


One point in the article which I think is misleading is this:-

An extreme example of this is Carillion which was profitable and in theory offering an 8%-plus dividend yield just before it went bust owing to weak cash flow.


Carillion only appeared to be profitable by virtue of accounting treatments that booked profits years before they would actually be earned. It then compounded its problems by paying out these yet to be earned if at all amounts as dividends.

Minesadouble
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Re: can we spot a cutter?

#225137

Postby Minesadouble » May 29th, 2019, 9:18 am

For me, two or more profit warnings sets the canary chirping away in the coal mine.
One profit warning I can excuse, a succession suggests Management hasn’t a real grip of the business.
Of my losers, I think this was true for Carillion, Tesco and Pearson and probably a few others.
(Patisserie Valerie came out of the blue and was a total loss for me, but AIM and not HYP, so O/T).
Just my view, but a few profit warnings usually spell trouble.

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Re: can we spot a cutter?

#225156

Postby Dod101 » May 29th, 2019, 9:54 am

A yield of more than 60% over the FTSE100 average should sound a warning. There are a few around at the moment but not all of course will cut. A profit warning also needs to be looked at very carefully because they do not often come singly.
But this has been debated many times in the past.

Dod

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Re: can we spot a cutter?

#225171

Postby SalvorHardin » May 29th, 2019, 10:20 am

I second multiple profit warnings and yields substantially above the benchmark. Double the FTSE100 yield is huge warning sign IMHO. The problem is that when the yield reaches this level it's because of the fall in the share price as the market has already priced in a dividend cut and/or falling profits.

When it comes to banks and insurers, one profit warning would be enough for me. Companies in these industries can get into horrendous trouble because of their being able to massively gear up their asset base. So the first sign of trouble is a strong indicator IMHO that there's more to come. As Warren Buffett says, "there's never just one cockroach in the kitchen". Profit warnings have this habit of coming in threes.

When it comes to banks, I'd keep an eye open for profit warnings from other banks. Banking is one of those sectors with huge contagion risks due to interbank lending, derivative counterparty risk, etc. Also banks love to copy what other banks are doing, so if bank A has been caught by something dodgy there's a good chance that bank B has similar problems but they haven't (yet) been reported.

Another sign is the company's bond yields heading towards junk bond levels. When it comes to assessing the financial soundness of a company, I'd place more worth on the opinions of the bond market than the equity market.

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Re: can we spot a cutter?

#225172

Postby Alaric » May 29th, 2019, 10:24 am

Dod101 wrote:A yield of more than 60% over the FTSE100 average should sound a warning. There are a few around at the moment but not all of course will cut.


So that's any stock above 7.2%.

From the current FTSE 100

    Evraz 15.87%
    Centrica 12.81%
    Persimmon 11.92%
    Imperial Brands 9.67%
    SSE 9.37%
    TUI AG 8.53%
    Standard Life Aberdeen 8.19%
    BT Group 7.83%
    ITV 7.40%
    Aviva 7.35%

data from the dividenddata site.

Evraz have a Chelsea connection

https://en.wikipedia.org/wiki/Evraz

According to https://markets.ft.com/data/equities/te ... ?s=EVR:LSE
In 2018, EVRAZ plc reported a dividend of 1.18 USD, which represents a significant increase over last year. The 7 analysts covering the company expect dividends of 0.73 USD for the upcoming fiscal year, a decrease of 38.22%.

Lootman
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Re: can we spot a cutter?

#225175

Postby Lootman » May 29th, 2019, 10:29 am

SalvorHardin wrote:I second multiple profit warnings and yields substantially above the benchmark. Double the FTSE100 yield is huge warning sign IMHO. The problem is that when the yield reaches this level it's because of the fall in the share price as the market has already priced in a dividend cut and/or falling profits.

I'd go further and say that is in the very nature of any high yield strategy that you are agreeing to take an elevated risk both that your income may decline and that your capital may erode. Nobody questions that reasoning when investing in high yield bonds, AKA junk bonds. So why would shares be any different?

If you want more jam today them you are essentially accepting that, one way or the other, you get less jam tomorrow. And taxes aside it will probably all net out in the fullness of time. The market isn't stupid and confers that extra yield as the reward needed to take the extra risk.

Now, maybe if you are very clever then you can sort the wheat from the chaff and out-perform through a HY strategy. Terry appears to have done so. But to go from there to the idea that most or all people can do that is a stretch. And especially for a methodology that is supposed to be simple. The reality is that predicting winners is extremely difficult even for the professionals. Doris really is a sitting duck.

Itsallaguess
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Re: can we spot a cutter?

#225178

Postby Itsallaguess » May 29th, 2019, 10:41 am

Lootman wrote:
SalvorHardin wrote:I second multiple profit warnings and yields substantially above the benchmark. Double the FTSE100 yield is huge warning sign IMHO. The problem is that when the yield reaches this level it's because of the fall in the share price as the market has already priced in a dividend cut and/or falling profits.


I'd go further and say that is in the very nature of any high yield strategy that you are agreeing to take an elevated risk both that your income may decline and that your capital may erode.


I think that depends.....

Many people seem to think that a 'High Yield Strategy' means that we should always pursue the highest-available yields.

I very much prefer a 'High Yield Strategy' that takes a more pragmatic approach, and which tends to nowadays stay well clear of ultra-high-yielding share-selections, but still fishes in a relatively high-yield pond that I'm really quite content with...

'High' doesn't always have to mean 'Highest'.....

Cheers,

Itsallaguess

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Re: can we spot a cutter?

#225180

Postby Alaric » May 29th, 2019, 10:43 am

Lootman wrote: The market isn't stupid and confers that extra yield as the reward needed to take the extra risk.


By similar logic, it would appear to reduce the yield on shares where the dividend is hoped or anticipated to increase at a faster rate than the market average.

Dod101
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Re: can we spot a cutter?

#225197

Postby Dod101 » May 29th, 2019, 11:12 am

Alaric wrote:[
So that's any stock above 7.2%.

From the current FTSE 100

    Evraz 15.87%
    Centrica 12.81%
    Persimmon 11.92%
    Imperial Brands 9.67%
    SSE 9.37%
    TUI AG 8.53%
    Standard Life Aberdeen 8.19%
    BT Group 7.83%
    ITV 7.40%
    Aviva 7.35%



According to https://markets.ft.com/data/equities/te ... ?s=EVR:LSE
In 2018, EVRAZ plc reported a dividend of 1.18 USD, which represents a significant increase over last year. The 7 analysts covering the company expect dividends of 0.73 USD for the upcoming fiscal year, a decrease of 38.22%.


That's about right. I would have expected more but those 10 will do for now. The first three are set for a drop in the dividend and SSE has already told us of one. Not all of the others will cut their dividend and indeed the ongoing enigma of Imperial Brands has already confirmed a 10% increase for the current year. The dividend for SLA and BT must be questionable though.

I hold none of those except for Imps and may sell it down if the price ever recovers. I may say that I have never heard of Evraz

Dod

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Re: can we spot a cutter?

#225231

Postby Alaric » May 29th, 2019, 12:48 pm

Dod101 wrote: I would have expected more but those 10 will do for now.


Here's the same for the FTSE250 where the average for the index is much lower at 3.02%

Everything above 7.0% so as to get the last two. Familiar names !

    Plus500 24.47%
    Kier Group 18.64%
    Galliford Try 12.90%
    Stobart Group 12.78%
    Royal Mail 11.98%
    NewRiver REIT 10.05%
    Hammerson 9.32%
    William Hill 8.92%
    Crest Nicholson Holdings 8.90%
    Saga 8.85%
    IG Group Holdings 8.45%
    Dixons Carphone 8.38%
    Hastings Group Holdings 7.18%
    Petrofac 7.14%

Alaric
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Re: can we spot a cutter?

#225261

Postby Alaric » May 29th, 2019, 2:35 pm

Dod101 wrote: I may say that I have never heard of Evraz


Anyone with a high dividend tracker may have lots of it.

From

https://www.blackrock.com/uk/intermedia ... -en-gb.pdf

TOP HOLDINGS(%)
EVRAZ 3.33
STANDARD LIFE ABERDEEN PLC 3.30
VODAFONE GROUP PLC 3.11
PERSIMMON PLC 2.85
CREST NICHOLSON HOLDINGS PLC 2.59
WPP PLC 2.52
BRITISH AMERICAN TOBACCO PLC 2.44
IMPERIAL BRANDS PLC 2.40
TUI AG 2.40
PETROFAC LTD 2.37
27.31

50 holdings from the FTSE350 according to the literature.

I wonder how they do the weights for the index it tracks.

Lootman
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Re: can we spot a cutter?

#225321

Postby Lootman » May 29th, 2019, 6:04 pm

Itsallaguess wrote:
Lootman wrote:
SalvorHardin wrote:I second multiple profit warnings and yields substantially above the benchmark. Double the FTSE100 yield is huge warning sign IMHO. The problem is that when the yield reaches this level it's because of the fall in the share price as the market has already priced in a dividend cut and/or falling profits.

I'd go further and say that is in the very nature of any high yield strategy that you are agreeing to take an elevated risk both that your income may decline and that your capital may erode.

I think that depends.....

Many people seem to think that a 'High Yield Strategy' means that we should always pursue the highest-available yields.

I very much prefer a 'High Yield Strategy' that takes a more pragmatic approach, and which tends to nowadays stay well clear of ultra-high-yielding share-selections, but still fishes in a relatively high-yield pond that I'm really quite content with...

'High' doesn't always have to mean 'Highest'.....

I'd agree that a lower yield HYP is less risky than a higher yield HYP. That does not contradict my premise that any deliberate adoption of a higher-than-market yield is going to increase risk. It's just that the further up that yield curve you go, the more risk you take. So a VHYP is riskier than a HYP. A HYP is riskier than a LHYP. And a market-rate yield would carry the same risk as the market.

Note here that I am not suggesting therefore that a lower-than-market yield is safer still. Nor am I advocating a LYP. Simply that the more you vary from the index, the more your risk and returns will vary from that index. You could of course do better, just as you could if you only bought one share and got lucky. But you'd need to be able to articulate why before the fact and demonstrate that you were successful after the fact.

OhNoNotimAgain
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Re: can we spot a cutter?

#225375

Postby OhNoNotimAgain » May 29th, 2019, 9:53 pm

Alaric wrote:
Dod101 wrote: I may say that I have never heard of Evraz


Anyone with a high dividend tracker may have lots of it.

From

https://www.blackrock.com/uk/intermedia ... -en-gb.pdf

TOP HOLDINGS(%)
EVRAZ 3.33
STANDARD LIFE ABERDEEN PLC 3.30
VODAFONE GROUP PLC 3.11
PERSIMMON PLC 2.85
CREST NICHOLSON HOLDINGS PLC 2.59
WPP PLC 2.52
BRITISH AMERICAN TOBACCO PLC 2.44
IMPERIAL BRANDS PLC 2.40
TUI AG 2.40
PETROFAC LTD 2.37
27.31

50 holdings from the FTSE350 according to the literature.

I wonder how they do the weights for the index it tracks.


Evraz has a mkt cap weight of 0.32% in the FTSE 350 so a ten times overweight is a big bet. But it only accounts for 0.66% of the dividend income.

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Re: can we spot a cutter?

#225382

Postby MDW1954 » May 29th, 2019, 10:20 pm

Itsallaguess wrote:
Lootman wrote:
SalvorHardin wrote:I second multiple profit warnings and yields substantially above the benchmark. Double the FTSE100 yield is huge warning sign IMHO. The problem is that when the yield reaches this level it's because of the fall in the share price as the market has already priced in a dividend cut and/or falling profits.


I'd go further and say that is in the very nature of any high yield strategy that you are agreeing to take an elevated risk both that your income may decline and that your capital may erode.


I think that depends.....

Many people seem to think that a 'High Yield Strategy' means that we should always pursue the highest-available yields.

I very much prefer a 'High Yield Strategy' that takes a more pragmatic approach, and which tends to nowadays stay well clear of ultra-high-yielding share-selections, but still fishes in a relatively high-yield pond that I'm really quite content with...

'High' doesn't always have to mean 'Highest'.....

Cheers,

Itsallaguess


I couldn't agree more. For me, two requirements trump all else: a yield above the Footsie average, and my own view of a share's dividend sustainability. While I accept that this latter criterion is subjective, the higher the yield, the less likely I am to view the dividend as sustainable. Rare exceptions: sector-specific malaise, such as we saw temporarily afflict the resource sector in early 2016.

MDW1954

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Re: can we spot a cutter?

#225414

Postby Lootman » May 30th, 2019, 7:25 am

MDW1954 wrote:the higher the yield, the less likely I am to view the dividend as sustainable.

Yes, there is a correlation between yield and risk. The market demands and confers a higher yield as a compensation for the perceived risk.

So it is misleading to suggest, as some have, that the problems start at 50% over the market's average yield, or 60% or 100%. It seems highly unlikely that there would be such step changes. Rather there is a smooth relationship between yield and risk, starting as soon as you exceed the market yield.

Now, whether that graph is a straight line or some sort of curve, I don't know. But I am very sure that it is not a series of steps.

Nor was I suggesting that a 0% yield is the safest of all. It's not, as that will give you all the speculative out-and-out growth names. Rather the least risk is at the market, and deviations in yield in either direction increase risk. That said, lower yielding shares are at less risk of cutting their dividends for the simple reasons that the payouts are less ambitious, dividend cover is higher and the amount at stake is less.

I happen to think that the 4% market yield currently available on UK shares is a very good number, and well above inflation. I am not interested in pushing things beyond that, when the price is less diversification, less safety margin and a higher risk of cuts and losses.

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Re: can we spot a cutter?

#225425

Postby Alaric » May 30th, 2019, 8:20 am

Lootman wrote: Rather the least risk is at the market, and deviations in yield in either direction increase risk.


Let's not forget that the yield on the FTSE 100 Index includes all the high dividend potential cutters. The dividend yield on the 250 is much lower.

Being an index weighted by capitalisation, the top 10 are going to have a considerable effect.

    HSBC Holdings 6.16%
    BP 6.00%
    Royal Dutch Shell A 6.05%
    Royal Dutch Shell B 6.01%
    Diageo 2.01%
    AstraZeneca 3.77%
    GlaxoSmithKline 5.21%
    British American Tobacco 7.22%
    Rio Tinto 5.23%
    Unilever 2.86%
    Reckitt Benckiser Group 2.67%

from the dividenddata site

Eliminating the double counting of Shell, that makes 7 of the top 10 over the market average of 4.55%. The yield weighted by capitalisation for the list comes out at 5.1%.

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Re: can we spot a cutter?

#225430

Postby Dod101 » May 30th, 2019, 8:41 am

Lootman wrote:[So it is misleading to suggest, as some have, that the problems start at 50% over the market's average yield, or 60% or 100%. It seems highly unlikely that there would be such step changes. Rather there is a smooth relationship between yield and risk, starting as soon as you exceed the market yield.

I happen to think that the 4% market yield currently available on UK shares is a very good number, and well above inflation. I am not interested in pushing things beyond that, when the price is less diversification, less safety margin and a higher risk of cuts and losses.


I do not agree with Lootman's first point in this quote. Some shares will inherently have a higher yield than the market average just as some will have a lower one. Shares which have gone ex growth, such as the tobaccos even in normal times, will usually have a higher yield as will the utilities, simply because of the nature of their business. That is the investors' reward for accepting not much growth. I think it can be historically shown that any such shares may have a yield in the order of say 50% above the average for the FTSE100 on a consistent long term basis.

Some with a perceived growth rate higher than average, such as say Unilever, Diageo and the like will have a lower than average yield as investors are prepared to forego income in favour of higher growth. Some of that ilk will have no yield if they can find better ways of exploiting their market than handing cash out as dividends. Investors will accept that.

So as always with investing I do not think there are hard and fast rules; it is usually a matter of degree, but I do not think that it follows that a higher yield necessarily increases 'risk' (however you define that) or that a lower yield reduces it.

On the second point, I want something more than the market average if I can get it, at least for my Hypish portfoilio. I have what I call a Growth Portfolio as well, where the yield is well below the market average, but even so I look for my overall holdings to give me a bit more than the market average. It depends how many millions you are investing of course.

Dod


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