In the recently released February Fund round-up of Neil Woodfords equity income fund, there were a few transactions that stood out to me as being rather contrarian.
Selling Out Of The Takeover Target
The fund has now disposed of its entire position inSmith & Nephew (LSE: SN). Mr Woodford acknowledged that a bid for the company may well lead to a considerable appreciation in the share price. However, with the share price at an all-time high, he felt that there were better opportunities elsewhere. It is true that the company trades on a fairly lofty forward multiple of around 19 times earnings and expects to yield less than 2%. It is also possible that the deal was sealed whenStryker,the US healthcare company, announced a $2 billion share buyback last week, finally quashing hopes that a bid was about to be announced.
Topping Up On The Unloved
Centricawas the largest detractor to the funds performance in February, after the company cut its dividend with its full-year results. Mr Woodford didnt feel that the dividend cut was necessary but this may have simply be down to the new chief executive, Ian Conn, taking the opportunity to get any bad news out of the way early in his tenure rather than risk a credit downgrade. It is fair to say that a dividend cut was already largely reflected in the share price. Centrica washit by a combination of factors recently:
- US and UK weather conditions;
- The oil price collapse;
- Political and regulatory pressure.
However, he felt that these issues will abate and its long-term valuation attractions will become much more apparent. He topped up on both Centrica and SSE, which was weak in sympathy.
Whilst we will have to wait until May for SSEs full-year results and its final dividend, it did release a third-quarter trading update on 26th January. It stated that:
- SSE still expects to report an increase in the full-year dividend for 2014/15 that will at least be equal to RPI inflation;
- Confirms that SSE is targeting an increase in the full-year dividend for 2015/16 of at least RPI inflation, with annual increases thereafter of at least RPI inflation also being targeted.
Where Does That Leave Us Investors?
With no dividend cut, SSE still yields over 6% but with RPI currently at just over 1% I wouldnt expect outsized increases, either. Whilst Centrica has bitten the bullet by re-basing its dividend, this will assist in reducing its debt and maintain capital expenditure in the long run, it may be seen as a smart moveas may Neil Woodfords top-ups.
Over at the Motley Fool, we like to invest over the long term and don’t get caught up in market moves if the long-term story hasn’t changed. Sometimes, that involves a contrarian play with companies that are currently out of favour with the market. Over the long term, we can make sensible judgments on how a business is likely to perform and whether the price is right.
If you’d like to see for yourself what I’m talking about, then let me present to you this special free report — The Fool’s Five Shares To Retire On . It’s currently FREE to view and contains the five shares thatwe believe could be perfect for building a long-term portfolio. If you’re looking for investment ideas, which you can act on right away, I would suggest that this would be an ideal place to start.
Click hereto get instant access without obligation.
Do NOT buy these stocks
Theres lots of opportunity out there in todays market but theres also PLENTY of danger.
In anticipation of Champion Shares PROs brief opening to new membership a few short weeks from now, the analyst team behind the Motley Fools most exclusive service has agreed to share 3 stocks they believe YOU would do best to avoid.
PRO research is rarely made available to the general public. To find out the names of these “don’t buy” companies — and to claim your 100% FREE copy of Steer Clear Stocks right away — simply click here.