Hello 2014!

Readers, I am sorry I have been remiss for the last quarter – with nil updates on my activity on this project.  There have been further purchases, as per my model, as well as some thinking (informed by a couple of writers) on my overall approach, on which I should update you.

Firstly, the purchases.  In mid-October De La Rue experienced a significant price drop – which I treated as a buying opportunity.  A nice, boring company with a decent yield in a set of markets I understand.  The market was racing up at the time, such that I didn’t jump in with too much money. Since the purchase there has been an increase in the nominal value of the shares – although as anyone who knows about De La Rue’s position vis a vis the new plastic banknotes will know, a contract for UK money printing is about to be lost to (as I understand it) an Australian ‘polymer’ (aka plastic) bank note printer.

In early December I completed the second of the quarter’s purchases based, on a technical analysis – which had been pushed out by a couple of months due to significant price drops in shares I already held / had been watching.  I threw caution to the wind with the output of the technical analysis – Games Workshop Group was the clear winner after analysis of the dividend level, cover, cash flows etc.  I have been cautious on this stock because of its historic volatility (the directors caused a share price slump during the last decade by cancelling the dividend), as well as the headwinds I think the business is likely to face due to 3D printing – which offers both opportunity for counterfeiting of its toys, as well as low-cost challengers to enter the space.  I would like to see the business diversify away from the traditional ‘bricks and mortar with an online shop tagged on’ model, although forays into computer games in the past have yielded poor results.  I would hope the directors address this again, as well as (if it does not already exist) build / publish a credible strategy for how they will cope with 3D printing.  The model in my head would involve 3D printing of toys in shops (rather than centrally), as well as an online distribution platform that enables gamers to design / customise / print their own miniatures at home.  An interesting opportunity for a third party with the right nous, I suspect.

So those are the purchases – now on to the annual review of my holdings!

“The Headline” – Capital Appreciation / Depreciation

Overall my share portfolio’s capital value has increased by 2.29% - which in poor in light of the FTSE All Share value change over the period my experiment has been running.  However, as you will see (and I am swiftly learning), asset allocation has been a significant factor in this overall performance.

The scores on the doors, ranked by capital appreciation change, is as follows:

              Caretech Holdings                           65.61%

              Aviva Plc                                         51.57%

              XP Power                                        39.74%

              Vodafone Group                              34.38%

              IG Group                                         30.50%

              Smith & Nephew                            27.55%

              Carnival Plc                                    23.29%

              Sainsbury (J) Plc                             21.99%

              Energias de Portugal                       7.22%

              Games Workshop                            5.51%

              Unilever Plc                                    4.18%

              Dee Valley Group                           1.49%

              Tesco Plc                                        -6.52%

              Greggs                                            -8.39%

              De La Rue                                      -9.88%

              Jardine Matheson ADR                 -23.66%

              EFTS Physical Swiss Gold            -34.60%

              Gold Resource Corporation           -38.63%

              African Barrick Gold                     -52.76%

That’s right – this year I was well and truly punished by the first gold price drop in 14 odd years.  In fact, if one was to ignore the commodity performance in my portfolio (gold, gold miners, Energias de Portugal) the overall performance would have been +19.00% (which is pretty much in line with market performance – good to know!).

So let’s now look at individual stocks, before coming back to the wider asset allocation point that 2013 has highlighted.

Caretech Holdings

I’d like to posit that the distinct differences between this care home operator and Southern Cross has become obvious to the market over the last 24 months.  Southern Cross, up to its eyeballs in debt and renting its buildings from third parties, is a very different proposition to this specialist provider.  Yes, it only operates in the UK and is exposed to the vagaries of local government funding – but it seems well run by the directors, who themselves are significant shareholders.

It has a dividend cover of 3.99 (i.e. it could afford to pay just shy of 4x the current dividend from existing profits) and has a dividend growth rate of c10% (last and next year’s predicted; significantly above inflation).

I bought this share because I had a decent understanding of the business, and I would certainly consider buying more shares in it in future.  Not adjusting for inflation the shares have yielded 5.39%.

Aviva

An interesting year for this company, it has been happily boosting cash by ditching underperforming units.  No doubt there is significant concern about its exposure to Europe, and yes the massive dividend was not maintained (do I remember ‘we hope we can maintain the dividend’?  Hope is not a strategy) – but the market has seen it as a less stinky share than it was two years ago, and if the board’s plan for the company can be fulfilled it will no doubt trade in line with its peers again (except, hopefully, with RSA which is in a bad place).

I doubt I will buy more Aviva in the near term, as I think I have hugely benefitted from both timing (i.e. buying when it looked knackered) as well as market sentiment – remember, it is still not really profitable.  

Aviva has yielded me 10.71% in dividends since purchase i.e. not annualised!

XP Power

It was one of those tipsters stocks when I bought it – listed in London, and operating out of Singapore, I liked the niche it seems to fill.  The share price is up massively, and the business could yet drive profits as it brings its own production facilities online (I remember something about a factory in Vietnam).

XP Power scores well for dividend growth (17.91% this and next year average); it has paid back 3.46% of its purchase price in dividends since the two tranches of shares were purchased.

Vodafone

I am not convinced many people could have predicted the year Vodafone has had – it had been on the cards for years, but I suspect tax was a big issue holding things back – but Vodafone is finally set free of its 45% stake in Verizon Wireless.  

 ‘Set free’?! You must be insane – it generated so much cash!  Yes, Verizon Wireless did chuck off cash, but:

• Verizon wasn’t paying it out and it controlled the company through the 55% stake
• The Americans massively overpay for mobile access, so I suspect price competition will increase over the coming years – making Verizon Wireless less of the cash cow it once was

Vodafone are now on the warpath in Europe, India, and Sub-Saharan Africa – all markets of interest (contrarian, huge, and high growth, respectively).  A German company bought up, and now possibly Sky in the UK on the menu – all to stave off possibly being bought by an American company?  It all sounds like good news for me.

There’s a share buyback in progress, which is pushing up the nominal value of the shares, and the yield was always decent with all the question marks over the company’s European position.  It has paid back 9.43% of the share purchase price in dividends since I got involved.

IG Group

My wife never liked IG Group as she sees it as the real spiv and gambly end of the London market.  I ignored her and bought two slugs of shares anyway.  It has been pretty quiet over the last year – nothing really jumps out of the back of my mind as big news on the company (so perhaps I should do some more reading on it to get up to date!).  The key stats are all at steady-eddy middle-of-the-portfolio levels, with the exception of markets exposed to (89!).  

Since purchase it has returned 7.22% of its purchase value as dividends, which is not to be sniffed at.

Smith & Nephew

This share to me is a real ‘safe haven’, with fantastic long-term growth potential.  The company specialises in joint replacements, as well as wound management.  As the world’s population ages, the types of product in which Smith & Nephew specialises will be increasingly needed.  

After Caretech, Smith & Nephew have the highest dividend cover in my portfolio – standing at 3.5x averaged over this and next year’s (predicted) profits.  The dividend itself is low, but I am willing to sacrifice a low pay-out (1.76%) for a good opportunity to grow – as it has, with a likely average of 28% growth over this and next year.

Since purchase, Smith and Nephew has returned 2.54% of its purchase price as dividends.

Carnival Plc

Remember Costa Concordia?  Something like £8bn wiped off the market value of the company because a few hundred millions of pounds worth of boat ended on its side, half submerged.  Costa Concordia is now back upright, and probably going to be scrapped – and the company is still in business and achieving bookings.  I said at the time I couldn’t see the world’s pensioners suddenly finding something better to do than go on cruises, and unsurprisingly they haven’t.  It isn’t the highest yielding company, but it exists in a market with massive barriers to entry (anyone out there want to buy a boat and try to recreate the distribution channels required? I think Stelios tried and I have no idea if it worked with that orange)

Carnival has returned 5.41% of its purchase value across the two tranches as dividends since I bought them.

Sainsbury’s

Tesco’s has been stuffed by inept expansion plans; Waitrose is growing aggressively; Morrison’s has given up on building its own online platform and has partnered with Ocado; Lidl and Aldi are attacking the low end of the market (successfully).  And Sainsbury’s? It seems to be surviving somewhere in the middle of the market – but for how long, I don’t know.

I like Sainsbury’s – I wouldn’t have bought into it if I didn’t.  I see it as a decent UK-focussed company that will probably eventually either expand overseas or get bought by a bigger player.  It’s not got the risk that Tesco carries, and I think it can successfully compete against Waitrose, Morrison’s, and ASDA, because it’s a good strong British brand.

It pays a decent 4%+ dividend that’s covered by 1.5x by profits – and it has a low variance in its EPS growth (i.e. it’s a steady eddy).  It has also returned 9.43% of its purchase value since I bought in, although that in part is a function of how early I bought it.  I don’t see myself buying any more of it, but I am quite happy of where it sits in the portfolio.

Energias de Portugal

My ‘distressed Southern Europe’ purchase, I liked EDP because it had a high trailing yield at the time I bought it, it is a significant shareholder in EDP Renovais (global top 3 wind farm builder / operator), and Portugal was not in favour with investors in general.

EDP is also well exposed in South and North America, which can be forgotten as it is associated mainly with Portugal. The Chinese Three Gorges company bought the Portuguese government’s stake in 2012, which also bodes well for the company as it should help access the massive Chinese energy market.

I like EDP, and I expect I will buy more shares in it in the future.

Since purchase, it has returned 4.89% of the value via dividends.

Games Workshop Group 

I was a big fan of Games Workshopping when I was a youngster, and my gut tells me that the ‘worlds’ the company has created will remain popular with children and young adults well into the future.  At the start of this post I outlined my concerns with the business, so all that remains is to say it has returned 6.32% of the purchase cost via dividends.

Unilever

Unilever’s a great company, isn’t it?  I can’t imagine it going anywhere in the long time, and whether a subsidiary of a larger corporate or standalone, I suspect Unilever and its brands will outlive me.  And that’s what’s important in my portfolio – this is my pension, after all!  

The dividend is well covered (>1.5x), regular, and decent (>3.5%).  The company is exposed to all the growth markets of the Far East, and it has recently taken majority control of its Indian subsidiary Hindustan Unilever – a country where there is a strong cultural affinity for British goods.

I also know the company is very committed to sustainability (and not the green wash type!) through my own day to day business – which is something that sits close to my heart and my wife’s heart.

Unilever has returned 5.12% of the purchase cost to me via dividends.

Dee Valley Group

The UK water industry is fairly consolidated, and if any company was to be acquired by a larger player it is likely to be Dee Valley – the smallest listed player in the market.  

Utilities like Dee Valley are real widows and orphans type shares – low volatility, regular dividends, with management teams unlikely / unable to run them into the ground.  I’d say that they fit well in to Peter Lynch’s investment criteria:

“Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it."

I have bought into Dee Valley Water once, and can see myself doing so again.  Since I bought in, the share price has gone pretty much sideways … but the shares have returned 7.17% of their purchase price.

Tesco

Poor Tesco shareholders – the last chief executive seems to have got out at the right time, leaving it for the current chief executive to pick up the pieces of the good sound bite / bad business decisions that were made before him.

And it’s not just Philip Clarke who has been burned – Buffett piled in in a big way and saw the share price drop subsequently.

But let’s get real.  Forget ‘Tesco’ – just read these facts:

• 30% UK market share
• Chinese joint venture
• Already learned the ‘US lesson’ (the US is not the best place to try and go when going international!)
• Already well entrenched in South Korea, Thailand, Poland, Hungary, and several other countries
• Well diversified range of ‘upsell’ products that have market traction alongside its core offering
• Third largest vendor of its type in the world

These facts speak for themselves – this is a serious company that is going nowhere.  Its dividend cover is 50% higher than Sainsbury’s, and the dividend itself is higher.  Yes, there are operational worries, but the company is certainly no high risk technology investment!

It has also returned 8.26% of the initial investment as dividends since I made my purchases.

Greggs

Another business you can easily understand – Greggs is the number one high street baker in the UK.  The year has been difficult – there was a big drop in the share price when the company predicted that profits would be lower than analysts were expecting, but was that to be expected?  Greggs holds the honour of being one of the only companies in the FTSE to consistently increase its dividend every year for more than a decade – who can turn their noses up at that kind of achievement?  I bought in on the weakness, and I expect that the business will continue to do well in the long run.  My only question is: how does a very British business like this diversify – either inside the UK or overseas?  A tough question.

Greggs has returned 4.42% of its purchase value to me via dividends.

De La Rue

I waxed lyrical about De La Rue earlier in the post, so I will not continue to bore you on this one.  De La Rue has returned 3.65% of the purchase value to me as dividends.

Jardine Matheson Holdings

I wanted some general Far East exposure, and Jardine Matheson seemed to fit the bill.  In some ways the company is like Tesco – it has a good name and tries its hand at a lot of things.  Google Finance says Jardines does: 

“engineering and construction, transport services, insurance broking, property investment and development, retailing, restaurants, luxury hotels, motor vehicles and related activities, financial services, heavy equipment, mining and agribusiness”

A pretty impressive mix – shame about the performance of the ADR this year (down nearly 25%).  I am not particularly worried about this, as I think this is another safe stock like Unilever – the company has been going for 150 years, and should easily manage the same again!

Since purchase, Jardines has returned 0.49% of the value to me as dividends – although the main dividend is paid in March each year (which I didn’t receive in 2013!)

EFTS Swiss Physical Gold

What to say? Gold had a horrendous year, and that is reflected in the next few three shares.  In January 2013 I wrote about the divergence between gold miner share prices and the gold price … there were two ways this could change – either an increase in the relative price of the miners, or a gold price plummet.  Damn.

And it doesn’t even pay a dividend!

Gold Resource Corporation

My second miner, some might say it has just had less time to fall in price that African Barrick.  However, Gold Resource Corporation was an attempt to learn from my African Barrick Gold ‘mistake’ – look for the miners where the all in production cost is low so that there’s plenty of room for significant changes in the underlying commodity price.

What’s interesting about Gold Resource Corporation is that it is really a silver miner in disguise, pulling a huge amount more silver out of the ground that it does gold (the two elements occur naturally together).  What’s also interesting is the company’s commitment to dividends, which are paid monthly – and each month investors are reminded that the company has returned more to investors in dividends than its market capitalisation on listing.

Its commitment to dividends remains, although the gold price has meant that the actual dividend level has dropped twice since I bought in – down to 1c per month (which should be well covered unless there’s another lurch downwards).  

Gold Resource Corporation has returned 1.60% of what I spent on its shares to me since purchase.

And it was Gold Resource, African Barrick (coming up :-(), and EFTS Physical Swiss Gold that got me thinking about asset allocation and portfolio theory … but more on that shortly.

African Barrick Gold

African Barrick Gold.  The dog.  The dead dog.  The dead dog of my portfolio.  If there’s one thing I regret with this share, it was not buying in at 97p when I thought ‘oh my god, can it get any worse?’ If I had, I’d not be sitting on the big loss I am not – but there’s not point on crying over spilt milk.  My foray into gold miners led me to pick a stock with a high cost of getting gold out of the ground in a developing country – and I paid for it.  Ok, so African Barrick has paid me 2.16% in dividends against the purchase price – but it has also lost a lot of value.  I suspect I will sit on this loss for a long time to come.

Would I buy more? Only if my portfolio balance told me to :-)