LuniHYP100: Year 10 review

[Luniversal]

LuniHYP100, or 'My HYP' as it was called on The Motley Fool boards (1), is ten today. It tests vintage-2000 pyadic principles: fifteen FTSE 100 stocks, equal weights, sound payout records, above-average yields, sectorally varied, all bought together, no unforced tinkering.

It seeks an above-market-average supply of purchasing power, optionally safeguarded against constituents' defaults by 'derisking' (see below). Capital preservation or enhancement are de trop.

LuniHYP100's original15 holdings were acquired on Jul. 12, 13 and 18, 2011: total gross cost £17,890. No capital has been added or withdrawn.

Original purchases:

BAe Systems (BA.)
British American Tobacco (BATS)
Centrica (CNA)
Glaxo SmithKline (GSK)
ICAP (IAP), renamed NEX (NXG) in 2016; partly replaced by CME (see below)
Pennon (PNN)
Reckitt Benckiser (RB.)
Reed Elsevier (REL), now RELX.
Royal Dutch Shell (RDSB)
SSE (SSE)
Standard Life (SL.), renamed Standard Life Aberdeen (SLA) in 2017 and 'abrdn' (ABDN) in Jul. 2021.
Tesco (TSCO)
TUI Travel (TT.), exchanged for its parent TUI (TUI) in 2015.
Unilever (ULVR)
Vodafone (VOD)

Whereas eight of the original twenty companies in my midcaps HYP have fallen to bidders since 2012, none in the Footsie bunch went bust or was gobbled except TUI Travel-- whose parent remains London-listed-- and NEX.

Small holdings in Indivior (INDV) and in TP ICAP (TCAP) plus CME were spin-offs by Glaxo and NEX respectively in 2014, 2016 and 2019. Vodafone and Standard Life returned cash in 2014-15 and Standard Life again in Jul. 2018, reducing weights in the portfolio. A purist might have held proceeds back for 'tail-swallowing' reinvestment; I treated them like special dividends.

Direct Line was added in 2018 using surplus receipts. It is the only decision required since launch; the low-maintenance mandate has been fulfilled if nothing else. No changes occurred in Year Ten except the cosmetic malarkey of share consolidation at PNN (Jul. 2021) and TSCO (Feb. 2021) following returns of cash after asset sales.

In short: a quiet life for 'Doris' the faineant shareholder, if with fewer uncovenanted benefits than from LuniHYP250.



INCOME

Initial historic yield averaged 4.6% against a benchmark (Footsie) yield of 3.1%: fairly High as in 'H'YP.

In 12-month periods, dividends declared (some paid after year end) with percentage changes in regular payouts were:

2011-12: £808, missing £92 due to 'dividend drag'. (2010-11 equivalent: £809.)
2012-13: £988, +17.6% (+5.1% underlying)
2013-14: £960, +5.4%
2014-15: £2,172, -3.7%
2015-16: £901, -4.5%
2016-17: £969, +9.7%
2017-18: £1,023, +5.5%
2018-19: £1,280, +7.2%
2019-20: £1,041, -5.8%
2020-21: £1,629, -16.2%


Total so far £11,772 including £2,330 in one-offs(2). Of that £1,001 came in special dividends, not quasi-capital disgorgements. The spike in 2014-15 was down to VOD's and SLA's returns of value totalling £1,182, plus TUI's £442 on the UK subsidiary's mop-up. The year 2018-19 brought a further £147 from SLA's return of value, also specials from CME (£6) and Direct Line (£31) which are semi-regular supplements.

Year Nine saw only £8, the annual bonus at CME. Year Ten has been burnished by £148 from Tesco, after its Asian divestment, £8 from CME, a quid from TUI-- something to do with a fractional entitlement on a bailout placing-- and (drum roll) a last-minute £607 from Pennon. This was long pondered and is gratefully received to plug the shortfall in pandemic-time regular distributions. PNN lifted the annual haul to the biggest since 2014-15.

All well and good, but periodic dividends in the first decade compounded, jerkily, at a paltry 1.2% pa versus inflation (RPI) of 2.9%. In real terms receipts including specials, £9,454 to date, were worth only 12% more in the tenth than in the first year. An income reserve is needed if a smooth flow must be ensured; see 'Derisking'.

Unlike the midcaps HYP, income lessened more often than it disappeared: 38 regular dividends were received, one fewer than in 2019-20. A tenet of pyad's theory is that Footsie giants are more reliable.


OUTLOOK

Over time five of the first 15 have given steadily if slowly rising payouts: BA., BATS, RB., REL and ULVR. All figured in my 'Sturdy Seventeen' of Jul. 2011. All five streams seem safe for now.

Direct Line sounds quite optimistic but halted its Admiral-like supplementary payouts pro tem. Others have clouds over income. Glaxo has frozen the dividend rate since Year 4 and its coming split between pharma and consumer healthcare-- predators permitting-- bodes ill for distributable cash. Opting to sell its waste disposal side and stick with water in the South West, Pennon's dividend rate should be lower than under x+RPI formulae hitherto allowed by Ofwat. 'abrdn' (oh dear) is an enigma, after more capital-account turbulence than any other member.

Shell and SSE fell from grace before the virus struck. Shell now talks of quickening the pace of restoration, after the dividend was chopped by two-thirds-- possibly the LSE's most seismic equity income shock for a century. SSE used to swear on its auld maw's grave that nothing would deflect payouts from rising. Now management trims and havers; but a special should emerge before the year end, after it flogged assets galore in 2020.

Tesco paused regular payments in 2015-16; they resumed very gradually. Centrica is a near-hopeless case, Vodafone still paying but without eclat; how a monopoly in domestic gas and a winning hand in cellphones came to those pretty passes is one for the business schools. (They too were in the Sturdy Seventeen, as was SSE.) TUI will be off the list till it escapes from German government life support, which may be noch nie.

Introducing LuniHYP100 on The Motley Fool (Jul. 18, 2011) I wrote that the three 'least orthodox' runners were ABDN. TUI and ICAP. I preferred ABDN to RSA and Glaxo to Pearson, and I rejected BHP Billiton. It went on to forfeit its uniqueness among miners as a steadily rising income dispenser, but has declared some whopping dividends as a cyclical payer, like its peers.


CAPITAL

Though not planning ever to sell, I follow values. Were they to lag revenue growth, it might portend trouble for the revenue stream: prices pushed down on fears of reductions.

Anniversary valuations, annual changes and performance against the FTSE 100 index were:

Jul. 2011: £17,890 (purchase)
Jul. 2012: £18,088, +1.0% year on year/+2.2
Jul. 2013: £23,039, +27.4%/+10.7
Jul. 2014: £22,779, -1.1%/-2.9
Jul. 2015: £24,023, +5.5%/+5.1
Jul. 2016: £25,104, +4.5%/+6.1
Jul. 2017: £27,302, +8.8%/-1.9
Jul. 2018: £28,216, +3.4%/+0.7
Jul. 2019: £25.332, -10.2%/-7.8
Jul. 2020: £23.249, -8.2%/+7.8
Jul. 2021: £23.028, -0.9%/-12.4
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In real terms, the portfolio fell by c.5% last year, the third decline in a row. It lacks miners, shops and banks, sectors now in recovery whose dividend histories and yields ruled them out in 2011.

Tonight LuniHYP100 was worth the same after inflation as when invested: +29% nominal where the FTSE 100 was +22%. The portfolio beat that benchmark in six of ten years, though Year Ten's 12% undershoot is much the worst. The 'value trade' for post-bug bounceback lost impetus in the second quarter.

Four constituents' share prices are up by half or more since acquisition: RELX +265%, Unilever +115%. BAe +79% and Reckitt +78%. Five are under water: Centrica is down 84%, Vodafone (but after capital return) 65%, Tesco (pre consolidation) 52%, Shell 41% and TUI 31%.

At (2) I rank the average monthly aggregate return for each constituent, taking in capital gains on paper and all income received. This can be compared with the LuniHYP250 returns posted last Friday. It shows how fishing only in the Footsie produced a more uniform set of outcomes than the more churn-prone midcaps mob.



BALANCE

Ignoring Direct Line, Indivior and CME-- too small and/or new-- a perfectly equilibrial portfolio would be +7% (one-fourteenth) in value per shareholding: the 14 original picks. After a decade this one houses two which account for more than one-tenth of total worth: REL, 19%, and Unilever, 11%. Four holdings are worth less than half the ideal one-fourteenth: Centrica, Shell, Vodafone (albeit after its return of value) and Tesco. Not an alarming skew.

Likewise income. Excluding the tiddlers, the top three suppliers of regular receipts over the past five years have been five different shares out of 14, while the bottom three have been four different ones.

The top three contributed 31% of regular income in 2016-21, the bottom three 8% and the middle eight 61%. Centrica and Tesco were among the drabbest payers throughout. Rotation at the strong end has been brisk enough to cast doubt on the notion that a HYP becomes perilously lopsided absent fiddling.




DERISKING

This process aims to convert lumpy income delivery into a quasi-index-linked withdrawal; purchasing power is preserved by setting cash aside for dipping into if dividends dwindle. There should be scope for occasional increases in the inflation-safeguarded spendable sum.

By Jul. 2015, it felt safe to boost the withdrawal rate from 4.0% at launch to 5.6%, which kept 12 months in the kitty by Jul. 2019. A year ago the bumped-up rate reduced that to 10 months' worth. It risked being drained fast after the pandemic panic ripped into payouts.

For Year Ten I stuck to the new rate and was spared blushes by Pennon's beneficence. Without it, failing to slash would have lowered the reserve to eight months at present-- too small for comfort even if dividends creep back up, since one cannot count on one-offs to avert disaster.

The reserve stands at 14 months. Thus far 12% of LuniHYP100's revenue has been stashed against income droughts: £11,784 collected, £10,381 spendable.

A stress test until 2031 envisages inflation, now 3.9%, at 4% pa from 2021-22, with income increasing by one-tenth this year but no specials. Rises of 5% pa, i.e. 1% real, would apply thereafter, also discounting windfalls.

The projection assumes not only no relapse in inflation but less exuberance in corporate earnings and boards' readiness to hand them out. On this downbeat scenario, the reserve would be emptied by Jul. 2025 if the withdrawal rate stayed at 5.6%+RPI. So the comfortable-looking 14 months now available is deceptive; a permanent trim for the withdrawal rate would buy more time.

Lowering it by 15%, to 4.76%+RPI, would cause the kitty to drop below a year's worth by the end of Year 14 and be almost exhausted by Year 21. By then LuniHYP100 would have collected £23,750 over two decades from the subscription of £17,900. As with the midcaps portfolio, the cut would be a setback for the theory, though 4.8% ain't bad.
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(1) :
Year 7 review (2017-18) here:

viewtopic.php?f=15&t=12738&p=180246#p180246

Year 8 (2018-19) here:

viewtopic.php?f=15&t=18603

Year 9 (2019-20) here:

viewtopic.php?f=15&t=24428&p=331513#p331513

Some small amendments and corrections to results were found necessary since the previous review was posted.

(2)
1 RELX £32 a month
2 ULVR 17
3 BA. 15
4 ABDN* 13
5 CME* 12
5 PNN* 12
5 RB. 12
8 SSE 7
9 BATS 6
9 GSK 6
11 TUI 4
11 VOD* 4
13 DLG 1
13 INDV 1
13 RDSB 1

16 TSCO* -2
17 CNA -5

* After capital upheavals

[funduffer]

Great review!

I realise how much I have missed this elegant prose, since you posted less regularly!

I think the missing sectors (miners, banks) are significant and suggests to me a HYP based on 20+ shares is a bit more robust to the kind of turbulence we have seen over recent years.

Despite this, it illustrates a realistic example of what you can expect from a HYP over a decade.

FD

[tjh290633]

INCOME

Initial historic yield averaged 4.6% against a benchmark (Footsie) yield of 3.1%: fairly High as in 'H'YP.

In 12-month periods, dividends declared (some paid after year end) with percentage changes in regular payouts were:

2011-12: £808, missing £92 due to 'dividend drag'. (2010-11 equivalent: £809.)
2012-13: £988, +17.6% (+5.1% underlying)
2013-14: £960, +5.4%
2014-15: £2,172, -3.7%
2015-16: £901, -4.5%
2016-17: £969, +9.7%
2017-18: £1,023, +5.5%
2018-19: £1,280, +7.2%
2019-20: £1,041, -5.8%
2020-21: £1,629, -16.2%

Something odd about the 2020-21 figure there. The figures cannot both be correct.

TJH

[88V8]

INCOME

2020-21: £1,629, -16.2%

Something odd about the 2020-21 figure there. The figures cannot both be correct.

I wondered about that. Perhaps Luni is checking that we're paying attention. I think the clue is in the regular payouts...

In 12-month periods, dividends declared (some paid after year end) with percentage changes in regular payouts were:

2019-20: £1,041, -5.8%
2020-21: £1,629, -16.2%

Year Nine saw only £8, the annual bonus at CME. Year Ten has been burnished by £148 from Tesco, after its Asian divestment, £8 from CME, a quid from TUI-- something to do with a fractional entitlement on a bailout placing-- and (drum roll) a last-minute £607 from Pennon. This was long pondered and is gratefully received to plug the shortfall in pandemic-time regular distributions. PNN lifted the annual haul to the biggest since 2014-15.

... as it works if one deducts the specials of £8 in 2019/20 and £764 in 2020/21.

V8

[monabri]

Surprising that the portfolio value is currently less than it was in July 20.

Will we see 5% increases in divi growth....methinks that's unlikely!