Another replacement suggested by the methodology I follow (or at least my version of it) below. I know that replacement (or "substitution" as the methodology refers to it) is not to everyone's taste. If you want to follow some of the discussion along those lines, go to the following, but I don't propose to rehash any of it. If you're interested, stay tuned, if not, fair enough.
We have discussed these two stocks a while back, when I was first looking to build my pseudo-HYP. You can find that discussion within here if interested
Since then, the share prices have behaved as follows
- PHNX then 617.20 now 482.20 (down 21.9%), yielding 10.78%, according to Dividend Data
LGEN then 271.00 now 222.50 (down 17.9%), yielding 8.83%, as above
If I am going to switch, it's a shame I'm a bit slow - PHNX rose 2.07% on Friday compared to LGEN's 0.32%
The methodology typically uses an approximation called the "Rule of 20" (but actually depends on your investment horizon and assumed interest rates, as it is in effect based on discounted cash flows). So, if you're trying to work out the effect of a single annual cost, you times it by 20. The methodology uses the reverse process after discounting for the effect of uncertainty (i.e. in dividends). Carver's research suggesting taking the dividend differential and dividing by 5 (from his statistical analysis, reflecting the uncertainty) then multiplying by 20 to get a present value.
Here, that would give
- 10.78-8.83=1.95%
1.95/5=0.39%
0.39*20=7.8%
Clearly, with all the above, you can use your own time horizon and assumptions about interest rates - I'm OK to use the approximation.
So, how does that work in this case. Let's assume my current LGEN investment is worth £2000.00, which it is there or thereabouts. I/we need to compare the cost of the transaction versus the statistically assumed future upside. On stocks such as these with the (small) amounts I purchase, I've been able to get very tight pricing (indeed, usually the right side of the midpoint) but I'm going to make one further conservative assumption - that I'm going to lose 0.1% bid-offer pricing. So the cost for selling and buying are
- Sell LGEN: (£2000.00 *0.999)-£3=£1995.00
Buy PHNX: (£1995.00*(0.994)-£3=£1980.03
Where the 0.994 is 0.5% Stamp Duty and the aforementioned 0.1% bid-offer pricing. The 0.999 is similarly defined and £3 is what IBKR charges for a trade. So a cost of transaction, in round terms, of £20.
The upside is the discounted dividend increase. This is
- £1980.03*7.8%=£154.44
where both figures are as derived above, which suggests the trade is very much worth doing. Anyway, this will have been of interest to some, but not others. My apology in advance to Carver and any readers for any errors above.
The key remaining question is whether there is different (and if so, then adequate) reason not to do the trade, based on fundamentals or something else?
Regards, Newroad