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).

Morgan Stanley review: BP downgrade to equalweight.

Interesting to read the views of Morgan Stanley on part of the oil sector: 
- uk.webfg.com: 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.

Galliford Try moving up today.

Galliford Try @ 955.50p, +75.50p (+8.58%), as at 11:36 Monday 12 March.

Not really sure what is going on here, but from the off, the price has shot up this morning. It looks to have peaked at 968.5p as at 9:26, before falling back and pushing on again to a lower peak of 959.5p at 11:26.
Falling again as I write though but could be showing a narrowing trading range on the day between 938 and 968.

No news to qualify such a sudden movement though, given that the shares have had time to take a breather following the results.
Strange to be in the dark, and it is something I have noticed since starting to be more active again. That being that actually relevant news and reporting is dragging so appears much later.
My usual source of information Digital Look is in the midst of a transformation to Web Financial Group and a new series of web page designs and menus.
In some ways this might be a good thing as the old site has become so advert cluttered that I have been unable to use my preferred browser, Chrome, as, combined with my disappointingly slow Fibre Broadband from Talk Talk, it just won't load my watchlists and portfolios. Instead I have had to find lesser used browsers like Edge to use. Or perhaps it is Windows 10 that is somehow affecting things in order to promote Edge.

But, disappointingly, the transformation also seems to be running hand in hand with a delay in newsflow too.

Anyway back to the question in hand, the increase in Galliford Try?
No idea.
Hopefully real and something fundamental (I've even checked the Galliford Try Media page for announcements), but as yet I don't know why.
Could it be a buying surge ahead of the 15 March ex. dividend date? At 28p per share that represents just 2.9% yield to a 952p share price so, its a good payout, but surely not reason enough for a circa 8% increase.

And, it doesn't seem to be a generic construction sector movement as the likes of Berkeley, Barratt etc. are down, as is Balfour Beatty, albeit a minor change.

The increase could also be an aberration or error at the trading desk though.

Recent reporting and progress: Rolls-Royce; Lloyds, Aviva.

An interesting few weeks of reporting with Rolls-Royce, Lloyds and Aviva coming back to the markets to report on progress.

Rolls-Royce in particular shot up more than 10% after reporting profits and cash-flow figures ahead of consensus expectations, as well as progress on its XWB engine program..
A definite feather in the cap of CEO Warren East following the series of profit warnings, and SFO investigations, that came thick and fast in the early stages of his appointment, a legacy of the previous anonymous leadership of his predecessors. 
The hard truths that followed have seen a plan of action by East that might soon find the company establish a new baseline after a series of cost cutting measures that has/will trim the groups headcount as well as its markets as it tries to once again reconnect with its core business technology to ensure investment and strategy are focused.

Despite the results and guidance for the next two years, the current rating still feels a little frothy and ahead of progress. The business is very much a long term one though and the success of the corrective strategy and return to its ratings equilibrium perhaps needs to be looked at with a minimum 5 year view (if that 5 year commitment data was publicly available), otherwise a leap of faith is required.

Back in February, another recovering giant, Lloyds also reported. Whereas R-R beat expectations, Lloyds came in slightly behind expectations.
But, results were still well received given the 20% increase to the dividend and a share buyback program (a pet hate of mine), being announced. PPI compensation is still a restraining factor in the bank but should now be starting to be less of an inertia as time moves forward.
Similar to the R-R story, since joining Lloyds CEO António Horta Osório has quietly gone about the business of addressing the bank's core markets , simplification, and dealing with regulatory fall-out, and after re-instating the dividend in 2015, the bank appears to be coming out of the other side of that transformation.
The shares initially improved by 2% following results.

Aviva also reported this week, and as with the 2 previous companies, R-R and Lloyds, a strategy of reducing cost, simplification, and reviewing its focus and presence in markets has taken place under CEO Mark Wilson.
Profits were up and, perhaps more importantly, capital surplus was well ahead of the Solvency II ratio giving the company excess capital to deploy.
As with Lloyds, this has seen the company increase its dividend and announce a share buyback program.
Although still generally positive the news was less well received and the shares initially fell but went on to recover those falls and subsequently advance as more positive reviews appear.

You will no doubt be aware that Rolls-Royce was my biggest player, and but for a difficult period and bad timing for me to come back into the news-flow, would probably still be my biggest holding due to my belief in the long term profitability of the aero-engine business and the current duopoly in long range markets. 
I did actually hold both of those companies albeit with GE a much smaller weighting in my portfolio.
As things stand, decisions were made and Rolls-Royce is no longer a holding, and its position as the largest holding has been taken by Lloyds.
Aviva is also a long term presence in my portfolio and currently the second largest holding behind Lloyds.
Together, these 2 financial service providers form a large (risky?), 42% weighting in my portfolio.

Dividend Pipeline and Thoughts.

So where do we sit with dividends in the pipeline at the moment?

Looking ahead:

                                              xD               Paid
SSE @ 28.4p                       18 Jan         16 Mar
Berkeley Group @ 56.75p  01 Mar        23 Mar
RDS 'B' @ 47c                     15 Feb        26 Mar
Imperial Brands @ 59.51p  22 Feb        29 Mar
BP @ 10c                             15 Feb        29 Mar
Galliford Try @ 28p             15 Mar        06 Apr

All currently showing with a decent yield even if they aren't all significant enough holdings to be a big contributor to my portfolio. 
However, March looks like a good month for dividends (particularly from Berkeley Group), and I do see them all as contributors as they all help the aggregate yield of my portfolio.

I have started to question my current strategy though, which has been solidly in place since the credit crunch of 2008. 
Dividends have always seemed a nice source of real rewards and as such have always played their part in my overall investment strategy but it seems I haven't completely muted the siren call of fast, exciting gains, only suppressed it.

But, its noticeable that, with less holdings, there are now more months without the little excitement of a dividend coming in.

Is that the required discipline? 
It certainly has been, but I have felt that things may have stagnated a little in my portfolio with 2 years of minor falls before a return to a steady double digit gain in each of the last 2 years.
Painful as it was, it might be that turning over and cutting back on my portfolio to release funds for real-life projects turns out to be a blessing in disguise as it has brought new turnaround stories, and more dividends, as well as losing some of the perennial underperformers that hid in the darkest corners of my portfolio.

February 2018: Portfolio Update (Try-ing times!).

Onto February 2018, and markets again fell sharply in a continuation of January's end.

Already doom and gloom rolling in like "The Fog". 

Markets did recover a small amount before falling again at the end of Feb. 
It will be interesting to see if this level can be a new base for markets to consolidate or will there be more falls to come.

As it is my portfolio fell -2.53% v. the FTSE's -4% with a mixture of big falls and little falls plus a few little gains.

Concerning to see BAT, Imperial Brands, National Grid and Vodafone leading the fallers.

Elsewhere, you might notice a new addition this month, along with a couple of small top-ups (Imperial Brands, National Grid), I have added Galliford Try to the mix.
I have been tempted by its profitable house building arm for some time given that it came off highs and it has had a further step fall in the wake of one of its partners on the Aberdeen Western Peripheral Route Contract (AWPR), Carillion, descending into liquidation.
The other partner being Balfour Beatty which has had its own long running issues.

But, it seems to have taken the right steps, instigating a cash call to fund the shortfall created by Carillion no longer being an investing partner in the AWPR, which will enable it to continue to invest in opportunities within its Linden Homes, and Partnership and Regeneration arms.

The company has also re-iterated that it has already taken steps to withdraw from fixed price, all-risk projects, such as AWPR.

In another prudent step it has shaved its dividend to bring it into line with what was a stated future goal, it being to maintain a twice covered (by pre-exceptional earnings), dividend.

On a cautious note it should be noted that in April of last year, the company did lose Greg Fitzgerald (CEO and Chairman), a company man of 30 years and probably, a more than integral part of its success, to Bovis shortly after a failed merge with the struggling house-builder. 

It increases my portfolio's exposure to UK house builders to 13%, with Berkeley Group forming the larger part of that.

Its also a turnaround story of course but perhaps one that should never be, we shall have to wait and see, and keep a close eye on its progress of course.

Galliford Try now vies with the battered utility company, SSE for the position of smallest holding in my portfolio. SSE currently taking the honours although Galliford has only been included for a couple of weeks.

The spider that was Carillion collapsed in January of course, leading to widespread concerns as its web spread far across National and International Infrastructure projects and maintenance contracts, including our hospitals, schools and other public services.
Its anticipated that this will take time to resolve and likely to be on a piece by piece basis.
As ever, the way the company reported and was managed is a concern as it managed to hide its problems for such a long time and its with trepidation that one looks wider and asks how common is it and is there another bear trap out there for unwary investors.

Elsewhere, dividends were added from Vodafone, BAT, and Apple.

Merchant Adventurer's Index
			Forecast	1 month	YTD	All time
	Price	% holding	Div. yield	% gain	% gain	% gain
Lloyds	68.80p	29.02%	0.00%	-1.02%	1.09%	11.43%
Aviva	505.60p	13.60%	4.18%	-1.48%	-0.18%	41.35%
Berkeley Group	3854.00p	11.66%	0.00%	-2.82%	-8.17%	64.30%
National Grid	740.20p	11.20%	6.05%	-8.02%	-15.30%	61.16%
BP	475.15p	10.99%	5.50%	-5.18%	-9.10%	14.20%
Apple **	$178.26	9.94%	0.95%	8.56%	2.30%	341.71%
BAT	4295.50p	3.03%	3.64%	-10.86%	-14.40%	28.06%
Imperial Brands	2619.00p	2.93%	5.36%	-9.64%	-14.05%	13.85%
Royal Dutch Shell	2321.00p	2.67%	0.96%	-7.01%	-7.47%	-9.84%
Vodafone	203.75p	2.07%	5.78%	-9.20%	-13.30%	-19.24%
SSE	1225.00p	1.25%	7.48%	-6.09%	-7.20%	6.44%
Galliford Try	918.00p	1.27%	13.33%	7.72%	7.72%	7.72%
Cash		0.38%	0.00%
		100.00%	2.62%
				1 month	YTD	All time
Virtual Portfolio gain (incl. Dividends)
- 1 month gain   2526.26	2462.37			-2.53%
- YTD gain         2583.68	2462.37				-4.72%
- 98 month gain 1000.00	2462.37					146.24%
Unit Price - £	2.46237	(Starting price - £1)
FTSE gain (excl. Dividends)
- 1 month gain   7533.60	7231.90			-4.00%
- YTD gain         7687.80	7231.90				-5.93%
- 98 month gain 5412.88	7231.90					39.18%

Transactions:
02/02/2017	Div	Vodafone @ 4.24p per share
08/02/2017	Div	BAT @ 43.6p per share
15/02/2017	Buy	Galliford Try @ 8.5218p per share
19/02/2017	Div	Apple @ 38.02p per share
22/02/2017	Buy	Imp.Brands @ 2620.57p per share
22/02/2017	Buy	National Grid @ 756.54p per share
Notes:
*     US Dividends are adjusted for exchange rate and 15% withholding tax
**   Sterling : Dollar exchange rate = £1: $1.39058 as at 28/02/18 *** Sterling : Euro exchange rate = £1: $1.13706 as at 28/02/18

Click to enlarge, X to close.

Brexit pushback?

Finally, some pushback on the EU's bully boy tactics.
Today's news from the Times:
"Britain will refuse to pay its multibillion-pound Brexit divorce bill until Brussels backs down on attempts to keep Northern Ireland subject to European Union rules, David Davis warned last night. In an uncompromising letter sent to Tory MPs, the Brexit secretary said that Britain would not finalise financial payments to the EU until “all the issues” of concern to Britain had been addressed. "

Its been a sad, demoralising affair so far, as the UK seeks to sabotage itself and seemingly do the EU's work for them by undermining its own negotiating position.
From what I can see the EU have long since stopped negotiating, instead seizing on any reported split in opinion in UK papers and use it to make a statement of their own about their confusion as to what the UK's negotiated requests are. Which only serves to widen the cracks causing the UK to wage a negotiation on all sides rather than just the one outward side.

And the usual problem abounds, who are all these people? On one side are the recogniseable heads of state, on the other faceless European bureaucrats.

Well you will have to excuse me, but the EU negotiators should be dealing and speaking with the UK Gov'ts negotiating team, not the papers or any dissenting voices on either side. Those are internal affairs. And, anything else is a shallow attempt to gain leverage and take advantage of the situation (and that goes for both sides).

The people of the UK, all political parties, and the media also need to recognise this and close ranks. Again and again, whenever you hear or read an opinion, you have to ask what is in it for them? Personal ambitions, career enhancing, or just being heard to say I told you so?
Time and time again, disruption and weakness (the winds of change), are used as the smoke screen for a coup or democratic change of power with promises of something better, which ultimately is no improvement to the situation at all, as you are too weakened and disjointed. Personal ambitions and advantages are advanced however, and you find yourself having been just a pawn in someone else's game.

It seems that there has been a lack of respect throughout the whole affair too, from no voters attempting to label yes voters as lacking in education (can anyone truly determine which side has the most free will and the least amount of indoctrination?), to politicians manipulating the truth/facts, and worse, looking to advance their own agenda's at the cost to the UK, as well as EU negotiators speaking to the press directly at every opportunity to report how badly the UK negotiating team is doing, are they missing the point of a negotiation? Or taking advantage?

Its also not so long since that the Irish people voted against the EU's treaty of lisbon. Can't recall the issue of borders being a factor in that one. It also seems to me given the UK's bailout of Ireland during the credit crunch, it continues to give more relevant support which seems to be forgotten.

I have little confidence of this ending well for the UK, unless we stand behind the appointed negotiating representatives of this country and allow them to do their job.
Anything less, then, putting aside the interests of the few being advanced, the British people as a whole will likely be paying more for a weak negotiation and for longer.