Monday, 19 March 2018

Musings: Vodafone and Direct Line.

Vodafone @ 199.62p as at 16:00 19/03/18
Direct Line @ 385p as at 16:00 19/03/18

Not sure why, but just considering a swap out of Vodafone for Direct Line, the general insurer. 
Vodafone has been a good investment for me delivering around half of its original investment, more than 49%, back in dividends alone which with all of the capital restructuring and spin-offs helps balance things, overall gain on Vodafone falling to 29.56% as a result.
However, that isn't the whole story as part of that capital reduction was spun off into an investment in Verizon which itself recorded a total 53.32% gain (9.76% in dividends and 43.56% in share price gains).
Combining the 2 has given me an estimated 47.60% gain overall.

But, its becoming a little dull waiting for the new Vodafone to deliver on its strategy, whilst continuing to pay dividends over and above earnings per share, from the cash from the sale of its Verizon Wireless stake.
This imbalance looks set to continue for a few years to come which makes me question whether I have an investment in a viable business. Thats probably a little unfair, with the real question being what the business will eventually look like.
The current share price has surged a couple of times by 20% plus of its current level and analysts forecast higher still. But, I have lost the vision of why it might actually justify that higher level if/when it comes to fruition.
Similarly, one of the drivers is speculation of a deal to be done with Liberty media over overlapping assets, but cost cutting aside, this does little to confirm to me that the eventual business might have the cashflow and profits to maintain a growing dividend.
It has been gently increased year upon year, and it must be planned to meet with the eventual financial performance of the envisioned entity.

So, I'm sat on my hands and waiting for jam tomorrow with a little jam today. Will the business transform or will the world and profits be a different commodity when it eventually gets there. Is it transforming to survive in this new world or lead enough to profit.

And then along comes Direct Line into my sphere of vision. A general insurance business benefiting from recent premium increases announcing a 44% increase to the dividends (incl. special)
I haven't had the best success with insurance company investments, Aviva is long running, and RSA didn't quite work out. But they are a notable favourite of Warren Buffett for the ongoing cashflow that they maintain in collected premiums which form a float from which to make payouts, should they be required. 
As it is, Buffett's Berkshire Hathaway owns Berkshire Hathaway Re., General Re., Geico along with more smaller investments.

From Barclays (6 Feb 18: 
Barclays upgrades Direct Line expects it to be highlight of results season):
"We believe investors should view the UK motor sector as an attractive, defensive, income sector. At this part of the cycle, we believe investors should continue to invest in the sector, but we do have a preference for those insurers…that focus on value over volume, are not reliant on policy growth and have attractive valuations and dividend yields."

At 371.5p at the time of publishing:
"Barclays said Direct Line has a total expected return of 19% over the next 12 months."

So, I'm holding Vodafone with its forecast:
- double digit earnings per share for the next 3 years, 
- a high PE of 21 falling slightly to 17 
- a 6.6% dividend forecast to be 47% higher than eps falling to 17% higher
- the more optimistic brokers estimating between 25% and 50% gains in the share price

Direct Line:
- single digit earnings per share for the next 2 years
- a middling PE of 12 times falling slightly. I say middling as its higher than multi product life assurer Aviva with 9 times and lower than peer group  insurer, Admiral with 16 times.
- a forecast 7.6% yield that is 92% of earnings or 1.08 times covered. Not always the best comparison but a datum nonetheless.
- the upside estimates a much lesser 4 to 17%

Not a straight forward like for like comparison as they are both very different beasts in very different industries.

And not all clear cut, but more a view on a high dividend with a speculative vision v. a high dividend and probable cash cow. 
If it can execute the vision then Vodafone should deliver a better combined return in the long term whereas Direct Line is probably just a steadier income stream.
They both have threats of course, Vodafone might not deliver in the new world as the industry costs become more commoditised, particularly under competitor pressure. There is also the ongoing investment costs in infrastructure or auction licenses, or even new markets e.g recent announcements of working with Samsung on smart home devices.

Direct Line is more a view on big hits from natural disasters, or regulation to the industry.

Perhaps neither should be in my portfolio, and I should search out something more balanced between growth and income (one leading to the other in an ideal investment).

Tuesday, 13 March 2018

Morgan Stanley review: BP downgrade to equalweight.

Interesting to read the views of Morgan Stanley on part of the oil sector: morgan-stanley-downgrades-bp-cuts-target-for-shell
particularly given that 2, BP and Royal Dutch Shell, hold places in my portfolio and a weighting of around 13.66%.

In their latest release Morgan Stanley have downgraded BP to equal weight from overweight instigated by a couple of things:

  1. By its own strategy Total is preferred to BP on the basis of an assumption that BP will make reducing debt a priority over the dividend and Total have recently increased their dividend.
  2. The broker has limited itself to 2 overweight recommendations (by sector?), and as Royal Dutch Shell is on overweight, moving Total to overweight from equalweight forces its hand to downgrade BP.
More a discipline thing than any particular change in BP's improving position but Morgan Stanley do also point out that, by 2019, Total will have a stronger, more secure 1.5 times cover to the dividend by free cashflow v. BP's 1.1 times.
That being said, at current share price levels (not directly to cashflow), BP currently yields 6% v. Total's 5%, a discount which Morgan Stanley also recognises as potential for an increase in BP's share price as confidence in its dividend grows.

And, by paying down its debt, ultimately BP's free cashflow should potentially accelerate in the longer term.

Anyway, despite the discipline of only maintaining 2 overweight recommendations I'm not sure its hugely relevant to holders of one or the other of these 2 companies.