getting through this year

[Dod101]

If I get through to the 4 June and Legal & General in fact pay (are allowed to pay) the dividend they have promised I will be a little more sanguine about dividends than I was when HSBC was bullied into cancelling its dividend at the end of March.

My strategy for this year is to sell some HSBC if the price reaches something like the £4.50 I had in mind. Will we see that this year? Many seem to have the same idea as me because when the price gets much over £4 it falls back again, so there is what might be called negative momentum.

I would also like to sell some Imperial Brands, not particularly because of the 'rebasing' of the dividend; I more or less expected that, but simply because I have concluded that we are unlikely to see much growth in the tobaccos.

I think I would probably selectively return to utilities or to foreign parts but I am wary of the hassle of holding overseas shares.

Just some random thoughts.

Dod

[Alaric]

I think I would probably selectively return to utilities

Severn Trent reported today. The dividend yield is around 4% at the current price. They intend to increase the dividend by 4% each year plus an inflation index.

https://www.investegate.co.uk/severn-tr ... 00034051N/

This strong financial position was a factor in our decision to declare a final dividend of 60.05 pence in line with our AMP6 dividend policy of growth of RPI plus at least 4% per annum.

[G3lc]

Yes Dod, but what companies would you buy that match the “quality” of the ones you talk of selling?

[Dod101]

Yes Dod, but what companies would you buy that match the “quality” of the ones you talk of selling?

I would not be selling all my holding in either of the companies I mentioned but I must say I do not see Imperial as being much of a quality company. I have held it for at least 20 years and have as I have said before, long since extracted more than my original investment, not that that really matters today.

HSBC if left to its own devices can like most banks make a real hash of things, as it did in the first decade of this century. It has a wonderful franchise but things keep getting in the way of its realising the benefit of it, the latest of course being the Covid situation. Even at its current price I hold more than I want to. It is the only bank that I do hold because I think the other UK incorporated banks are considerably worse.

So what to buy? Well I alluded to that. Maybe a UK utility or two. I currently only hold National Grid. Obviously Pennon seems to be the flavour of the month, but maybe SSE or Severn Trent. As Alaric mentioned, their report this morning sounds quite good.

I would be happy to branch out overseas but I am afraid of coming unstuck like Warren Buffett with Tesco so maybe another internationally oriented IT.

Dod

[IanTHughes]

I think I would probably selectively return to utilities

Severn Trent reported today. The dividend yield is around 4% at the current price. They intend to increase the dividend by 4% each year plus an inflation index.

No, not quite.

The "Asset Management Plan 6 (AMP6) has now run its course and has been replaced by AMP7. It is still intended to increase the dividend by the rate of inflation, but no extra on top.

https://www.investegate.co.uk/severn-tr ... 00034051N/

AMP: Asset Management Plan; AMP6: the regulatory period from 2015-2020; AMP7: the regulatory period from 2020-2025
.
.
.
Dividends

In line with our AMP6 policy to increase the dividend by at least RPI+4% each year, the Board has proposed a final ordinary dividend of 60.05 pence per share for 2019/20 (2018/19: 56.02 pence per share). This gives a total ordinary dividend for the year of 100.08 pence (2018/19: 93.37 pence). In January we announced that our dividend policy for AMP7 will be growth of at least CPIH.

Still, in these times that cannot be considered bad


Ian

[Bouleversee]

Yes Dod, but what companies would you buy that match the “quality” of the ones you talk of selling?

That takes me back to a conversation many years ago with a friend who was getting rather irritated with the way his broker kept going on about the "quality" of M&S which I think he had lost money on. Look where M&S is now. I think the word is pretty meaningless In the context of investment since companies can change drastically over the years with changes in management, mores and circumstances beyond control. Knowing what we now know about the effects of tobacco and viruses on the respiratory system, I can't see much growth in the tobacco companies though no doubt there will still be some who are so addicted that they will puff on regardless, especially since there is now a theory that smoking makes one less likely to get the infection though less likely to survive if you do.

[Bouleversee]

P.S. to previous:

I am very glad I hung on to my utilities (including 7 Trent) despite the fear of a Labour victory but it remains to be seen whether that fear will return before the next election. I wouldn't put money on Boris's charm working next time round the way things are going. Actions speak louder than words.

[SalvorHardin]

That takes me back to a conversation many years ago with a friend who was getting rather irritated with the way his broker kept going on about the "quality" of M&S which I think he had lost money on. Look where M&S is now. I think the word is pretty meaningless In the context of investment since companies can change drastically over the years with changes in management, mores and circumstances beyond control.

IMHO "quality" means a company with one or more of Warren Buffett's "moats"; factors which restrict the ability of competitors to compete with it and prevent its products and services from being commoditised. Examples of moats are products with strong brands, prime locations, lock-in effects, large economies of scale and barriers to entry. Companies lose their quality label when their moats are weakened or breached.

Marks & Spencer is a company which used to have a good moat, with the quality of its clothes creating a strong brand. Its reputation has declined over the years and competitors like Next, Primark and the supermarkets have taken much of its market share. There has been a lot of disquiet amongst its core customers for many years over its product range. Rising business rates, inflexible rent agreements, plus changing consumer tastes and shopping habits (shopping online and at out-of-town developments) have all eaten away at the profitability of the vast majority of town centre retailers (M&S is heavily dependent upon town centre footfall).

Many HYP candidates are companies with weak or non-existent moats. The lack of moats, or erosion of their moats, has caused their share prices to fall and thus their yields to rise. ITV is a great example of a strong moat that has been eroded. Back in the 1980s ITV was one of four channels available to UK viewers and the ITV companies' shares were highly rated. Nowadays ITV has to compete against hundreds of satellite channels and streaming services where customers are able to time shift much of their viewing and skip adverts using their own equipment. That's why its shares are trading at a price-earnings ratio of under 6.

The combination of the coronavirus and the lockdown has severely weakened many moats. The oncoming economic depression will hammer the more indebted companies. Companies operating in sectors where social distancing cuts the number of customers that the business is now able to serve compared to pre-lockdown days are going to suffer badly (passenger airlines, disco pubs and night clubs, that's you) until the rules are relaxed and customers decide that it's safe to go back to "normal".

[dealtn]

That takes me back to a conversation many years ago with a friend who was getting rather irritated with the way his broker kept going on about the "quality" of M&S which I think he had lost money on. Look where M&S is now. I think the word is pretty meaningless In the context of investment since companies can change drastically over the years with changes in management, mores and circumstances beyond control.

IMHO "quality" means a company with one or more of Warren Buffett's "moats"; factors which restrict the ability of competitors to compete with it and prevent its products and services from being commoditised. Examples of moats are products with strong brands, prime locations, lock-in effects, large economies of scale and barriers to entry. Companies lose their quality label when their moats are weakened or breached.

Marks & Spencer is a company which used to have a good moat, with the quality of its clothes creating a strong brand. Its reputation has declined over the years and competitors like Next, Primark and the supermarkets have taken much of its market share. There has been a lot of disquiet amongst its core customers for many years over its product range. Rising business rates, inflexible rent agreements, plus changing consumer tastes and shopping habits (shopping online and at out-of-town developments) have all eaten away at the profitability of the vast majority of town centre retailers (M&S is heavily dependent upon town centre footfall).

Many HYP candidates are companies with weak or non-existent moats. The lack of moats, or erosion of their moats, has caused their share prices to fall and thus their yields to rise. ITV is a great example of a strong moat that has been eroded. Back in the 1980s ITV was one of four channels available to UK viewers and the ITV companies' shares were highly rated. Nowadays ITV has to compete against hundreds of satellite channels and streaming services where customers are able to time shift much of their viewing and skip adverts using their own equipment. That's why its shares are trading at a price-earnings ratio of under 6.

The combination of the coronavirus and the lockdown has severely weakened many moats. The oncoming economic depression will hammer the more indebted companies. Companies operating in sectors where social distancing cuts the number of customers that the business is now able to serve compared to pre-lockdown days are going to suffer badly (passenger airlines, disco pubs and night clubs, that's you) until the rules are relaxed and customers decide that it's safe to go back to "normal".

I agree with much you are saying here.

One minor point I would say though is that you categorise ITV only as a broadcaster. Its associated moat here has definitely waned, but it is also a "maker" as well as a broadcaster, with perhaps approaching half of its revenues from ITV Studios. Now, it won't have a strong moat here either, although there are several strong "brands", but the picture you paint of it is only half the story I suggest.

[MrFoolish]

I never understood why tobacco companies got away with their moat for so long. I mean, making cigarettes isn't exactly rocket science. Was it just brand loyalty? Did people habitually nip into their corner shop for their usual newspaper and the same brand of fags?

I can't see them getting away with it when it comes to vaping. Surely with the rise in online shopping and Chinese gadget makers there's just too many other potential players.

[Arborbridge]

I think I would probably selectively return to utilities

Severn Trent reported today. The dividend yield is around 4% at the current price. They intend to increase the dividend by 4% each year plus an inflation index.

https://www.investegate.co.uk/severn-tr ... 00034051N/

This strong financial position was a factor in our decision to declare a final dividend of 60.05 pence in line with our AMP6 dividend policy of growth of RPI plus at least 4% per annum.

I was also wondering about Severn Trent. The trouble is, with two such companies already (UU and PNN) it might be a bit greedy. OTOH it seems a fairly stable outfit for income, and the state policy is encouraging.

[Arborbridge]

So what to buy? Well I alluded to that. Maybe a UK utility or two. I currently only hold National Grid. Obviously Pennon seems to be the flavour of the month, but maybe SSE or Severn Trent. As Alaric mentioned, their report this morning sounds quite good.


Dod

Isn't Pennon shining because they are flogging off their right arm - Viridor? Or have I got that wrong. I think that's why the share price zoomed to make it one of my biggest holdings. Actually, I could be fully justified in trimming both Pennon and AZN, and taking the profits to SVT.

Arb.

[Arborbridge]

Yes Dod, but what companies would you buy that match the “quality” of the ones you talk of selling?

That takes me back to a conversation many years ago with a friend who was getting rather irritated with the way his broker kept going on about the "quality" of M&S which I think he had lost money on. Look where M&S is now. I think the word is pretty meaningless In the context of investment since companies can change drastically over the years with changes in management, mores and circumstances beyond control. Knowing what we now know about the effects of tobacco and viruses on the respiratory system, I can't see much growth in the tobacco companies though no doubt there will still be some who are so addicted that they will puff on regardless, especially since there is now a theory that smoking makes one less likely to get the infection though less likely to survive if you do.

I remember in the HYP nursery school which was TMF, we were always hauled over the coals for taking about "quality" in companies. It was a word we always tried to avoid.
I imagine "quality" is talked down because it relies one's judgment of the management (the Smell Test) rather than the numbers produced. I'm not sure Dod would agree?
Quality can deteriorate as management's morph.

Arb

[Arborbridge]

About moats and declining thereof: I was pretty peeved at Greene King being bought out last year. One of my more solid companies, owned continuously since 1990's.

But boy, I now feel I had a lucky escape. Taken out at a good price, but look where it would be with C-19 - I'm sure I would be suffering a massive fall in price and no dividend.

Sometimes the luck runs in one's favour.

Arb.

[SalvorHardin]

I never understood why tobacco companies got away with their moat for so long. I mean, making cigarettes isn't exactly rocket science. Was it just brand loyalty? Did people habitually nip into their corner shop for their usual newspaper and the same brand of fags?

I can't see them getting away with it when it comes to vaping. Surely with the rise in online shopping and Chinese gadget makers there's just too many other potential players.

The tobacco market has huge barriers to entry, caused by governments banning advertising and requiring shops to hide tobacco products from the customers. Consqequently anyone trying to enter the tobacco market is going to have a very hard time in informing potential customers about their products.

The result is that the incumbents end up with a stronger position. Also they don't have to spend as much as they previously did on advertising and marketing because of the inability of their existing competitors to do the same.

It's Bootlegger and Baptist theory in action. The Baptists wanted to ban the sale of alcohol on Sundays (and eventually outright prohibition) whilst the bootleggers want to restrict the legal sale of alcohol so that customers will be more likely to buy from them. A win-win situation despite each side being on the different side of the argument. It's a field of regulatory economics, links below:

https://en.wikipedia.org/wiki/Bootleggers_and_Baptists

"Bruce Yandle of Clemson University explains why politics makes such strange bedfellows and the often peculiar alliance of self-interested special interests with more altruistic motives."

Vaping doesn't have the same barriers (yet). Though the industry is no doubt working with regulators to create a similar barrier.

https://www.econtalk.org/bruce-yandle-on-bootleggers-and-baptists/

[Bouleversee]

Even my old stalwart James Fisher and Sons, a family firm for a long time beloved by cognoscenti such as Lord John Lee and certainly regarded as a quality company by most people, soo far as I could gather (now under a new CEO), has collapsed dramatically since Covid pounced and the oil price fell, presumably because of its connection with the oil industry though it also operates in connection with wind farms. Its dividend was always well covered and I was surprised when it suspended it. Never a high yielder but up to now has risen regularly. I really don't understand the savage drop in the s.p. but presumably there must be a reason.

Experian, on the other hand, is doing well and paying an increased dividend; I suppose there will now be an awful lot of people wanting to borrow money so that is not too surprising. Too late to buy now, I fear, or I would top up my ISA holding, though I see Shore Capital are recommending it as a buy..

Have HYPers changed their views on what is regarded as high yield now that so many dividends have been cancelled? Anything is better than nothing, after all.

[OLTB]

About moats and declining thereof: I was pretty peeved at Greene King being bought out last year. One of my more solid companies, owned continuously since 1990's.

But boy, I now feel I had a lucky escape. Taken out at a good price, but look where it would be with C-19 - I'm sure I would be suffering a massive fall in price and no dividend.

Sometimes the luck runs in one's favour.

Arb.

Thanks Arb and I think that the luck you mention above is two fold - one the chance to sell (or in this instance get taken out) at a decent price and two, your decision of where you invest the sale proceeds. In hindsight, my decision to re-invest the takeover proceeds into Merchants IT to ensure I maintained the dividend from GNK was currently a good one (income wise, not capital wise!). If I had chosen to re-invest into say Marstons to carry on the sector exposure, I might be thinking differently.

Cheers, OLTB.