The stock market saying Sell in May and go away; buy again on Leger Day harks back to the days when the entire City was more concerned with the summer seasons round of sporting and social events than with trading shares.
Some studies purport to show a persistent underperformance by markets during the summer months. So, why not sell your shares ahead of the lull and buy again after the seasons last Classic horserace the St Leger in mid-September?
For one thing, the theory doesnt always work; and, for another, some individual stocks will soar, even when the market as a whole is directionless. In fact, the only 100% certainty about selling in May and re-buying in September is that youll rack up trading costs, which can be one of the biggest drags on long-term investment returns. Youll also almost certainly miss out on some dividends, which, conversely, are a major contributor to long-term returns.
Vodafones current earnings have been vastly reduced, following the $130bn sale of its stake in US company Verizon Wireless early last year. Vodafone is set to post earnings per share of 6.5p for the year ended 31 March 2015 when it announces its results on 19 May down from 17.5p last year. That puts the company on a sky-high price-to-earnings (P/E) ratio of 34.5.
Earnings arent expected to improve much in the next couple of years, as Vodafone invests heavily for the future. But long term, that investment and an economic recovery in Europe where Vodafone has been hurt in recent years could reward faithful shareholders. In the short term, if you sell in May, youll miss out on the companys final dividend for this financial year. Analysts are expecting a payout of 7.9p a yield of 3.5%; or, put another way, the equivalent of 35 free shares for every 1,000 you own.
The shares of mining companies havent really done much for three or four years except drift lower in the face of weak metals prices. Selling now and buying back later might seem like a good idea, but share prices can often turn before industry fundamentals say they should. While BHP Billitons current-year forecast P/E of 14 isnt particularly cheap, miners P/Es can be pushed much higher than that very quickly when the market starts to anticipate an upswing in the earnings cycle.
As with Vodafone, if you sell BHP Billiton in May, youll miss out on the final dividend (Billiton has a 30 June financial year end). The miners annual payout is split more equally between interim and final than Vodafones, and the yield on Billitons final will probably be around 2.8%. In addition, though, Billiton is looking to enhance shareholder value by demerging part of its business, with shareholders automatically being entitled to free shares in the spin-out company South32. If youve gone away and dont come back until Ledger Day, youll have missed your free shares in South32 (or the opportunity to cash them in).
SSE one of the UKs Big Six energy firms was out of favour with the market at the backend of last year, as investors fretted about threats of political interference in the energy market from Ed Miliband if Labour wins the upcoming General Election. However, the shares have recovered lately, and could rally further if Labour fails to get into power. Anyone selling their SSE shares today, hoping to buy back cheaper in September may be disappointed.
Theyll certainly miss out on what should be one of the best final dividends declared this summer. SSEs expected final would give buyers of the shares today entitlement to a yield return of 4.1% long before the St Leger comes around.
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