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Large cap, high yield update

Created:
22 July 2008
Written by:
David Stevenson

Blue chips are having a hard time, especially those based in the UK and not dependent on resources. That bear market in blue chips also spells trouble for our my large cap portfolio - it's had an absolutely terrible four weeks, plunging by 17 per cent in value. Apart from one sell, there are no major changes to the portfolio.

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But it could all get a lot worse - we look at a doomsday scenario that suggests potential massive falls in the price of Britain's leading blue chips. We don't think the unthinkable will happen but underlines why we're so cautious about current share valuations.

The Portfolio

It's been yet another absolutely horrid month for this portfolio. It doesn't really matter that I think this is a great long-term defensive portfolio, packed as it is with solid UK blue chips.

Last month (June) the portfolio was down 10 per cent, but that loss has opened up to 27 per cent, a 17 per cent drop in valuation in four weeks. The FTSE100 is down 11 per cent in the same time, although that figure is flattered thanks to the preponderance of resource stocks in the key index.

The biggest drop came from two companies - Marks and Spencer, which as you might have noticed is having a horrid time, and builders supply giant Travis Perkins. Both of these stocks are down just over 30 per cent. But then again most of the other shares had a terrible time - GKN was down 22 per cent over the last four weeks, beaten only by Hays and William Hill.

Normally I'd trigger big stop loss orders on these falls, but to be honest I'm loath to do so now. If anything, I'd be looking to top up holdings in Marks & Spencer, especially at levels below 200p, and Greene King if it falls below 400p. at the moment we'd recommend sitting tight and riding out the losses.

However, I draw the line at Travis Perkins. A total loss of 52.5 per cent is a scary figure, and I have a horrible feeling that it could go an awful lot lower as the construction supplies specialists start to track the huge falls experienced by the house builders. It could get a lot worse, so out it goes at 464p.

Name EPIC Close Return % Capital (£m) Price % 1 month ago
BP PLC BP. 5.095 1 95748.3 -13.24
Marks & Spencer Group PLC MKS 2.3975 -38.2 3779.9 -33.45
GKN PLC GKN 2.0175 -28.5 1422.8 -22.55
Hays PLC HAS 0.76 -25.1 1046.2 -23.62
William Hill PLC WMH 2.6925 -27.5 935.3 -26.08
Greene King PLC GNK 4.4725 -13.5 601.6 -8.26
Travis Perkins PLC TPK 4.64 -52.5 569.4 -32.31
SOLD
Persimmon PLC PSN 2.5825 -37 774.9 -38.69
Average -27.663
FTSE 100 UKX 5150.6 -11.11

Track this portfolio online. We assume an investment of £1,000 in each company, and make no allowance for stamp duty or dealing costs.

THE RATIONALE BEHIND THE SCREEN

The idea is that this screen finds rock-solid, large-cap stocks that pay healthy dividends. Such shares rarely come cheap, so I don't expect them to be bargains.

• 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

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