The Lemon Fool

I've not been overly impressed with the suggestions that my HYPTUSS spreadsheet has been coming up with. I use this excellent tool, even though I have a bunch of ITs (and some ETFs) in my portfolio, so it doesn't exactly meet the "HYP" doctrine.

In looking for value ideas, I took an arbitrary filter of Fcst Cover>1, PE <10, and looked at the 8 investments remaining out of the starting list of nearly 40. Note that this filter automatically removed all of the ITs!

What was left:
Stock Cover PE
Aviva 1.8 5.6
BAT 1.6 8.5
BT 5.1 5.4
IMB 1.9 5.4
ITV 4.3 7.6
L&G 1.6 6.7
RIO 1.6 9.3
SDRC 1.9 8.8

I am wary of adding to my significant positions in tobacco, like the dividends, bit worried that the capital value seems to be ever shrinking.
Wary of insurance companies as I don't really understand their accounts (and I topped up a big chunk of L&G at the end of March, when it seemed to be on fire sale).
Already topped up BT in the hope that they are a longer term recovery - at some point interest rates will rise, and the pension deficit shrink.
Ambivalent about ITV. Britbox may help their fortunes, but linear TV scheduling in in secular decline, and their core audience is aging/dying out.
Which leaves me looking at RIO and Schroders....
As far as I can tell from the accounts, Schroders has a net cash position, which should enable them to ride out any turbulence.
Would appreciate any perspective on this line of thinking

Centrica. Well you did ask for "value ideas" ...

But IMB would be my stand out dividend paying pick from your list.

TUK020 wrote:at some point interest rates will rise, and the pension deficit shrink.

That's unlikely. The belief in interest rates as a control tool is a 50 year myth that has reached the end of the road. Asset price suppression no longer works - if it ever did.

Check the peak interest rate at the top of every cycle over the last several decades and observe the trend.

Here are my own numbers for IMB. The Cash Profits calculation strips out working capital changes which can manipulate FCF. See Oakley Chapter 10 for an excellent explanation.



The decline and recovery of dividend cover following its rebase can be seen clearly. What's less obvious is the difference between Cash Profits and FCF, which is due mostly to the tax and interest that IMB pays rather than capex.

Oakley's "EPV" calculation values IMB at ~4300p, but I would apply some caution to that and wait to see what the trading statement and finals bring next month. Nonetheless, 1365p looks like an opportunistic valuation to me.

NeilW wrote:

TUK020 wrote:at some point interest rates will rise, and the pension deficit shrink.

That's unlikely. The belief in interest rates as a control tool is a 50 year myth that has reached the end of the road. Asset price suppression no longer works - if it ever did.

Check the peak interest rate at the top of every cycle over the last several decades and observe the trend.

So you postulate a cycle exists but at the same time consider it unlikely that rates will ever be higher than now? How does that cycle work then?

TUK020 wrote:I've not been overly impressed with the suggestions that my HYPTUSS spreadsheet has been coming up with. I use this excellent tool, even though I have a bunch of ITs (and some ETFs) in my portfolio, so it doesn't exactly meet the "HYP" doctrine.

In looking for value ideas, I took an arbitrary filter of Fcst Cover>1, PE <10, and looked at the 8 investments remaining out of the starting list of nearly 40. Note that this filter automatically removed all of the ITs!

What was left:
Stock Cover PE
Aviva 1.8 5.6
BAT 1.6 8.5
BT 5.1 5.4
IMB 1.9 5.4
ITV 4.3 7.6
L&G 1.6 6.7
RIO 1.6 9.3
SDRC 1.9 8.8

I am wary of adding to my significant positions in tobacco, like the dividends, bit worried that the capital value seems to be ever shrinking.
Wary of insurance companies as I don't really understand their accounts (and I topped up a big chunk of L&G at the end of March, when it seemed to be on fire sale).
Already topped up BT in the hope that they are a longer term recovery - at some point interest rates will rise, and the pension deficit shrink.
Ambivalent about ITV. Britbox may help their fortunes, but linear TV scheduling in in secular decline, and their core audience is aging/dying out.
Which leaves me looking at RIO and Schroders....
As far as I can tell from the accounts, Schroders has a net cash position, which should enable them to ride out any turbulence.
Would appreciate any perspective on this line of thinking

I have holdings in all of these except BT (bargepole for me) and ITV.

I have reduced AV (excess CG offset and low confidence), have no wish to add to tobacco and am hanging in there with LGEN, RIO and SDRC. Overweight in LGEN - a bit of a gamble. RIO is the one I have most confidence in (long-term). SDRC? Well the divi is fine, capital performance is lagging - but I am happy to just sit on it.

TUK020 wrote:Already topped up BT in the hope that they are a longer term recovery - at some point interest rates will rise, and the pension deficit shrink.

I wouldn't touch anything with a significant pensions deficit. BAE for example. One day the govt will require that they be made whole, at the expense of divis. Too Orwellian? I would have said so, once.

Recent comment in The Times: Britain’s traditional pension funds would need fantastically improbable returns from shares to erode their huge deficits over the next ten years, according to a warning yesterday from one of the pension industry’s leading consultants. Share markets over the past three centuries have delivered an average of 3.1 percentage points a year in excess of cash returns, yet pension funds would on average need excess returns of 9 percentage points to clear their shortfalls, Willis Towers Watson said.

I hold SDRC, and their Prefs STAB and STAC. Decent cover which is so rare nowadays, and non-challenging p/e. If you're itchy to do something, one could do worse.

V8

As a conservative bet I would go for Schroder (the non voting shares of course) It is conservatively run and is doing quite well I think in the circumstances. However like all active fund managers it will be under pressure as far as fees are concerned. The dividend looks secure though. Legal & General is fine as well though and they have paid their dividends this year.

If you do not mind tobacco, BAT is probably the better of the two, although as has been said, Imperial has a trading statement coming on 8 October. It will be interesting to see what they have to say.

I hold all four shares mentioned here.

Dod

88V8 wrote:Recent comment in The Times: Britain’s traditional pension funds would need fantastically improbable returns from shares to erode their huge deficits over the next ten years, according to a warning yesterday from one of the pension industry’s leading consultants. Share markets over the past three centuries have delivered an average of 3.1 percentage points a year in excess of cash returns, yet pension funds would on average need excess returns of 9 percentage points to clear their shortfalls, Willis Towers Watson said.

Any idea of a source, or link, to where Willis Towers Watson say this? I can't find it on their website.

88V8 wrote:I hold SDRC, and their Prefs STAB and STAC. Decent cover which is so rare nowadays, and non-challenging p/e. If you're itchy to do something, one could do worse.V8

Isn't SDRC Schroders and STAB/STAC Standard Chartered?

Dod101 wrote:As a conservative bet I would go for Schroder (the non voting shares of course) It is conservatively run and is doing quite well I think in the circumstances. However like all active fund managers it will be under pressure as far as fees are concerned. The dividend looks secure though. Legal & General is fine as well though and they have paid their dividends this year.

If you do not mind tobacco, BAT is probably the better of the two, although as has been said, Imperial has a trading statement coming on 8 October. It will be interesting to see what they have to say.

I hold all four shares mentioned here.

Dod

Your point about managers being underpressure is an interesting one. If we are looking for bad news, we can find it in any company we choose, I've often thought. All seems well at Schroders, but we are told that more people are turning to low cost solutions and cutting out managers - if that really happens in a massive way, they are surely on a sandy foundation.

Everything is a gamble these days, and probably always was. Which is probably why trackers are popular.

Arb

I was really referring to the popularity of trackers/passives where clearly the active manager cannot compete on fees so it increases the pressure in two ways, one, the need for the active manager to do better than a tracker and the other his fee income is dropping. You can see that with houses like Baillie Gifford and several others. That I think is what has hit Schroders for example.

Of course those who love trackers should remember that if there were no active investors, there would be no trackers since they are merely derivatives of the active market.

Dod

langley59 wrote:

88V8 wrote:I hold SDRC, and their Prefs STAB and STAC. Decent cover which is so rare nowadays, and non-challenging p/e. If you're itchy to do something, one could do worse.V8

Isn't SDRC Schroders and STAB/STAC Standard Chartered?

Oops, yes, sorry

dealtn wrote:

88V8 wrote:Recent comment in The Times....

Any idea of a source, or link, to where Willis Towers Watson say this? I can't find it on their website.

Mmm, I just saw it quoted in a Times article, and in an online news-sheet about three weeks ago. It may have been an interview extract.

V8

dealtn wrote:

88V8 wrote:Recent comment in The Times: Britain’s traditional pension funds would need fantastically improbable returns from shares to erode their huge deficits over the next ten years, according to a warning yesterday from one of the pension industry’s leading consultants. Share markets over the past three centuries have delivered an average of 3.1 percentage points a year in excess of cash returns, yet pension funds would on average need excess returns of 9 percentage points to clear their shortfalls, Willis Towers Watson said.

Any idea of a source, or link, to where Willis Towers Watson say this? I can't find it on their website.

or a global pandemic to cull the pensioners?