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Large-cap, high-yield update

Created:
28 April 2008
Written by:
David Stevenson

April has been a solid month for this portfolio, helped in part by a strong performance from resources stocks. Overall, the portfolio is now down just 0.5 per cent - Persimmon continues to drift lower as confidence in the building sector fades, while my newest buy, BP, has stormed ahead 15 per cent in just one month.

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Although that price increase is very gratifying, I'd caution that the resources sector is due a pull back any time now. Oil prices have shot up - along with food and particularly grain prices - and we think these rises are completely unsustainable in a looming global slowdown. When the correction comes, I expect BP to lose some of those gains.

Shares in both Hays and William Hill have slowly been making progress, in part because the City is beginning to warm the defensive characteristics of both companies. Marks and Spencer's is having a bit of a nasty time as consumers cut back on spending and I expect the share price to continue falling, with one barrier potentially at around 300p.

Nevertheless, I'm still a buyer for the long term, and the same applies to Persimmon, despite its nasty trading statement last week. This company has weathered a real house price recession before, so I've no doubts it can cope with the current downturn - and I note that at 608p, the shares are well below NAV of 775p and yield 8.5 per cent.

Large-cap, high-yield, low-correlation portfolio

Name EPIC Return per cent Close Price per cent 1 month ago Capital (£m)
BP PLC BP. 12.5 5.75 15.93 108394.6
William Hill PLC WMH 0.7 3.9575 13.56 1374.6
Hays PLC HAS 7.8 1.1025 3.28 1542
Marks & Spencer  MKS -11.9 3.62 -6.46 5743.1
Persimmon PLC PSN -11.7 6.085 -12.88 1824.9

You can now track this portfolio of shares in semi-real-time (share prices are delayed 15 minutes) using the link below. We assume a £1000 investment into each constituent, so the number of shares is rounded up or down to get as close to this figure as possible. We make no allowance for stamp duty or dealing costs. The 'Cash balance' figure (in red) represents the total amount invested, less any proceeds from disposals. The 'Totals' line (in blue) is the current value of the constituents. Clicking on the company names will take you to more financial data and articles on the constituent companies.

Track the large-cap, high-yield portfolio here...

There are two new additions to the portfolio this week, as follows:

• Buy Greene King at 517p. This East Anglian based brewer and hotels group is an absolutely bankable long-term blue chip winner, especially when you consider that it's trading at just over 7 times earnings, has a yield of nearly 4.6 per cent and owns a bank of property that could easily be turned into a real estate investment trust (Reit). The shares are lowly rated even compared to peers and there's been some very positive broker comment recently from UBS and Goldman Sachs. The former has set a 750p price target, while the latter points out that the stock trades at a price-to-book (PB) ratio of 0.67 times compared to a sector average 0.93.

More articles and financial data on Greene King...

• Buy GKN at 282p. A weaker pound spells good news for the remnants of the British engineering industry, especially those with strong global niches and an excellent export profile. Car parts and aerospace group GKN fits the bill. Trading in recent months is already strong; results in February showed sales up 7 per cent, as well as an 11 per cent rise in underlying full-year pretax profit based in part on strong performances from its aerospace and OffHighway divisions. Looking to the future GKN also noted that it has won "exceptional levels" of new business for the year ahead. Trading at 8.3 times estimated future earnings, and on a yield of just under 5 per cent, I think GKN should be able carry on boosting profits and overcome the oft-repeated concerns about its ability to free up cashflow to service its debts.

More articles and financial data on GKN...

LARGE-CAP LOW CORRELATION BASICS...

The aim of the screen is to buy solid, dividend paying large or mega caps, for the long term. And here's how I've tried to do it:

• Relatively large cap. That means a minimum of £500m in market cap

• Above average dividend yield – minimum 4.5 per cent.

• Share price to cash flow must be positive and be below 10

• The beta (volatility compared to the market) should be low.

• The correlation with the stockmarket should also be low - as close as possible to 0, but preferably below 0.8

• Dividend payout rising each and every year over the last 5 years. The dividend payout also needs to be well covered – that means EPS is at least twice the dividend payout. In sum, we want hard evidence that the company can afford the dividend

• Avoid any stock where analysts expect a fall in earnings of more than 10 per cent in the coming year

Read the original feature about this screen...

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