Seven of them are shown in the table along with some broad-brush performance indicators that have been rattled off from a database, so the figures should be treated cautiously. There is little doubting that four of these are shares in high-class companies - Rolls-Royce (RR.), Weir (WEIR), Elementis (ELM) and Smiths Group (SMIN) - even though their product cycle isn't exactly helping them currently.
Not the high-yielders you would expect
| Company | Pearson | Rolls Royce | Telecom Plus | Smiths Group | Weir | N Brown | Elementis |
|---|---|---|---|---|---|---|---|
| Code | PSON | RR. | TEP | SMIN | WEIR | BWNG | ELM |
| Share price (p) | 758 | 543 | 968 | 908 | 886 | 308 | 211 |
| Mkt Cap (£m) | 6,143 | 9,984 | 742 | 3,588 | 1,896 | 870 | 977 |
| Div Yield (%) | 6.9 | 4.2 | 4.4 | 4.5 | 5.0 | 4.5 | 4.9 |
| Cover | 1.2 | 1.8 | 1.4 | 1.9 | 1.8 | 1.8 | 1.4 |
| Profit margin (%) | 7.1 | 9.3 | 5.1 | 14.3 | 11.6 | 10.4 | 18.6 |
| Return on assets (%) | 3.1 | 5.8 | 9.0 | 10.4 | 7.5 | 9.5 | 14.3 |
| Return on equity (%) | 2.8 | -1.8 | 16.8 | 17.2 | -0.3 | 6.2 | 26.2 |
That's especially true of Weir - its exposure to the US shale-oil industry is now much more of a burden than a blessing than it was even two years ago. Back in 2010, sales generated from the US accounted for 24 per cent of the group's £1.6bn revenue; by 2014 that proportion had risen to 36 per cent of £2.4bn and maybe two-thirds of the increase was driven by the shale-oil boom, which is another way of saying that Weir is likely to struggle for some years to get its operating profits above the £400m at which they peaked.
However, these are times to remember that value tends to be more resilient than price. In that context, back in the summer of 2014, I crunched detailed numbers on Weir and concluded that there was anything between £10 and £15 per share of value. At the time, those figures paled beside the £26 share price, but they look much better now that the shares are below £9. The question, therefore, is whether Weir's underlying value has held up and the answer can only be found by getting back to the spreadsheets.
Meanwhile, Rolls-Royce clearly faces tough trading in 2016, and 2017 may not be much better. Predictably, this prompts speculation that the group's aero-engine divisions, which account for the bulk of operating profits (73 per cent out of £1.64bn in 2014), may not be the wonderful repository of long-term repair and maintenance revenues they were supposed to be. Yet, with more than 29,000 aero engines in service, it does not take much spending per engine to generate a lot of revenue for Rolls.
Newish chief executive Warren East has responded to the difficulties in the way that business leaders conventionally respond - with a re-structuring. Whether this will be much more than cosmetic and de-moralising - as so many are - remains to be seen. However, income-orientated investors such as Bearbull will wonder whether the dividend will survive the fun and games. That might be touch and go. The current pay-out costs about £430m - probably quite a lot more than the free cash Rolls will generate this year or next, even though the long term is secured by a £76bn order book, which is over five years' worth of revenues.
All this said, the two that seem to offer the most comfortable off-the-peg fit for the Bearbull Income Portfolio are Telecom Plus (TEP) and N Brown (BWNG). In part, this is because both are small-ticket operators - they get by making lots of small, near-cash transactions to consumers. As such, they have little in common with most of the existing portfolio.
That is borne out by the tendency of their share prices to move in opposite directions to the portfolio. The correlation co-efficient - a stat that measures this tendency - shows that, for monthly returns in the past five years, shares in Telecom Plus have moved in the same direction as the fund just 4 per cent of the time. Combine that with the points that Telecom Plus's share-price moves are much more volatile than the fund's and its average gain is higher, then the effect of holding Telecom Plus in the income fund could be an improvement in its risk-reward trade-off.
True, all that assumes the future will be like the past, but it remains the case that Telecom Plus, which is a successful mix of pyramid selling and a utilities on-seller, is much more a growth stock than the rest of the income fund (bar Zytronic (ZYT), perhaps). Meanwhile, specialist mail-order retailer N Brown is a great cash generator. True, there is not a lot of growth in the business - operating profits have been on a plateau for the past seven years - even so, in five of those years free cash flow has been comfortably more than the current cost of the dividend.
Okay, there is detailed number crunching to be done. But it seems there is an opportunity here to do some re-shaping on the Bearbull Income Portfolio.
