Please click on the web link below to watch a short video of my interview on Bloomberg TV this morning, discussing BP’s results and prospects for the oil price and oil companies.
Tuesday, 3 February 2015
IB Times Article, Video: Barratt, Berkeley and Taylor Wimpey are safe bets for building returns
Please click on the web link below to read the original International Business Times article and watch the short video interview:
What should be the investors' mantra in 2015? I would vote for "Income, income, income", given the paltry interest rates on offer from bank and building society savings accounts. You can forget UK gilts (government bonds) as a source of income too, as a 10-year gilt only offers a pre-tax yield of 1.3% per year.
Within UK stocks, one of the most attractive homes for cash is your Isa (don't leave any Isa top-ups to the last minute in April) and any recently liberated private pension savings is in UK house builders such as Barratt Developments (code BDEV), Berkeley Group (BKG) and Taylor Wimpey (TW).
As a group, house builders such as these have enjoyed strong performance in share prices, gaining 20% since June of last year while the FTSE 100 index has struggled to remain flat (Figure 1).
Figure 1. House Builders Leave the FTSE 100 in the Dust
Source: Stockopedia.com
Yes house price inflation is slowing but prices are still rising
Unless you have been living on Mars these past few months, you will most likely be aware that UK house price inflation is slowing, with the Nationwide Building Society reporting a monthly gain in average prices of only 0.3% in January 2015, resulting in a yearly gain of 6.8% and driving the average price of a UK property up to a new all-time high of £188,446 (Figure 2).
Figure 2. House Prices Up 6.8% Over the Last 12 Months to £188,446 Average
Source: Nationwide
There are a number of economic factors that should support house prices over the year ahead, perhaps allowing for modest further house price inflation over 2015:
- Lower unemployment (latest rate down to 6%) and improving wage growth (+1.6% year-on-year)
- Lower energy costs on the back of lower petrol prices and lower utilities bills, boosting household discretionary income
- Lower average mortgage interest rates as banks and building societies become more aggressive in chasing new mortgage and re-mortgaging business, with a two-year fixed rate for a 75% loan-to-value (LTV) mortgages heading down toward a new low of 2% (Figure 3).
Figure 3. UK Average Mortgage Rates Keep Falling
Source: Bank of England
These economic and house price trends bode well for new build house prices for the remainder of 2015, with the latest Council of Mortgage Lenders' statistics highlighting a surge in first-time buyer mortgage borrowing, a healthy sign for the overall housing market.
Higher house prices herald higher profits
The surge in UK house prices has evidently been a boon for these house builders, with large house-building operations in the hot London and south east regions benefiting from higher prices for new build homes. These price gains have in turn driven higher levels of profitability for this group, reaching a historically elevated average of over 15% in 2014 (as measured by return on equity, Figure 4).
Figure 4. House Builders' Profitability Levels Hit Historic Highs
Source: Stockopedia.com
Higher profits deliver delicious dividends
The direct result of this growth in house builders' profits is a bumper dividend crop for investors; this is a welcome income stream at a time when yield is becoming increasingly hard to find not only in the UK but indeed around the world.
Expected dividend yields this year range from a relatively lowly 2.6% in the case of Redrow to a very tempting 7.3% offered by Berkeley Group (BKG, Figure 5).
The house-building sector offers an average 5.3% dividend yield, which you can harvest without paying any tax if you buy the shares within a stocks and shares Isa.
Figure 5. House Builders Offer a 5.3% Average Dividend Yield
Source: Stockopedia.com
All in all, I believe the bumper profits and premium dividend yields on offer from Barratt (BDEV), Berkeley (BKG) and Taylor Wimpey (TW) all merit a closer look for potential inclusion in an Isa or personal pension income portfolio. Why not delve into those delicious dividends?
Wednesday, 28 January 2015
Video Clips from my appearance this morning as Guest Host on CNBC Europe Squawkbox
CNBC Europe TV:
Video Clips from my appearance this morning as Guest Host on CNBC Europe Squawkbox
Video Clips from my appearance this morning as Guest Host on CNBC Europe Squawkbox
Please click on the links below to view the short video clips:
TalkTalk may follow O2 and succumb to telecom takeover mania
International Business Times Article Link: Click Here to View
The airwaves have been awash of late with UK telecom takeover stories. Firstly Telefonica's UK mobile phone operator arm O2 is reportedly to be sold to Hong Kong billionaire Li Ka Shing's Hutchison Whampoa, the owner of the Three mobile phone network, for £10bn.
Figure 1a. UK Mobile Operators' Market Share: Current situation
Source: Jeffries Investment Bank
O2 plus Three's combined UK mobile market share would rise to 40% from Three's current 12% share, easily becoming the UK's largest mobile operator (Figure 1a and b).
Figure 1b. UK Mobile Operators' Market Share: If O2 and Three are Merged
Source: Jeffries Investment Bank
Secondly, both Deutsche Telekom and Orange are potentially ready to sell their combined UK mobile operation EE to BT, who is looking to buy its way back into the UK mobile network business some 13 years after selling its mobile arm BT Cellnet, which eventually turned into O2.
BT's potential purchase of EE fits with the predictions made by the credit ratings firm Standard & Poors, who expect to see more fixed-mobile combinations in the UK telecoms market as key players seek both revenue and cost synergies.
Vodafone the wallflower at the mobile phone party?
Looking at the four UK mobile phone incumbents, the only operator so far not mentioned in this merger and acquisition merry-go-round is the number three player ranked by customers, Vodafone.
Believe it or not, even at a total market capitalisation of nearly £64bn currently, mobile phone juggernaut Vodafone (LSE code: VOD) has been talked of as a potential acquisition target in the global telecoms sector, ever since it agreed to sell:
- its 50% share of US mobile operator Verizon Wireless back to Verizon for £54bn
- its 44% share in French mobile operator SFR back to majority holder Vivendi.
Who could afford to buy Vodafone? Two much larger suitors have been identified in the recent past: US telecoms giant AT&T and the leading Chinese mobile phone network, China Mobile. In terms both of market capitalisation and annual income generated, these two telecoms companies dwarf Vodafone (Figure 2a and b).
Figure 2a. Vodafone is dwarfed by China Mobile, AT&T
Source: Finviz, Stockopedia
Figure 2b. Vodafone is dwarfed by China Mobile, AT&T
Source: Finviz, Stockopedia
In fact, AT&T and China Mobile are not the only two potential suitors mentioned, as back in September last year Japanese conglomerate Softbank, the owner of Japanese mobile network Softbank Mobile (formerly Vodafone Japan) and US mobile network Sprint, was also earmarked as a potential bidder for Vodafone.
Vodafone as predator rather than prey
Given Vodafone's size, it would certainly be a huge undertaking for any acquirer to pursue. But as well as being a potential takeover target, Vodafone can also be seen as a potential acquirer itself in the rapidly consolidating UK telecoms market.
Indeed, Vodafone's CEO Vittorio Colao recently warned that were BT to move aggressively into the mobile telecoms space, then Vodafone would retaliate by moving into the consumer broadband business, where it has been thus far absent.
But how would it accomplish this strategic move, given that thus far in broadband it only serves business customers, after buying out Cable & Wireless's UK broadband network?
One potential target could be TalkTalk (LSE code TALK), one of the premier consumer broadband network operators, serving four million customers in the UK.
TalkTalk is today the fourth-largest broadband internet provider in the UK (Figure 3), achieved largely through offering very cheap combined "triple-play" offerings (broadband internet, telephone and television services).
TalkTalk CEO Dido Harding has even gone as far as to state that:
"If [Vodafone] decides it simply has to quickly have a fixed-line asset, then I'm not naive enough to think that we're not one of the companies it would look at".
Figure 3. TalkTalk is the fourth-largest UK broadband internet provider
Source: Ofcom
Two potential takeover targets in UK telecoms to choose from
So there you have it – two ways to play ongoing consolidation in the UK telecoms sector: Vodafone and TalkTalk.
Note that Vodafone offers a juicy dividend yield of 4.8%, and TalkTalk is close behind with a prospective yield of 4.7%. Not bad dividends to pick up while you are waiting for a potential takeover.
Edmund Shing is the author of The Idle Investor (Harriman House), an expert columnist and a global equity fund manager at BCS AM. He holds a PhD in Artificial Intelligence.
Wednesday, 21 January 2015
Direct Line can insure solid yields for income-hungry investors
Watch my IBTimes Video: Click Here
Direct Line's tootling red telephone television advertisements may have been annoying but they were certainly memorable. The same can also be said for another of Direct Line's insurance brands, Churchill – yes that one, with the nodding dog and the "Oh yes!" catchphrase.
A collection of top insurance and rescue brands
Aside from the main Direct Line telephone and online insurance brand, the Direct Line Group also operates the Churchill, Privilege insurance brands and the Green Flag breakdown assistance business.
All in all, Direct Line is one of the UK's biggest insurers, with a UK personal motor insurance market share of 14%, and a UK home insurance market share of 17%. Overall, this puts Direct Line third in terms of UK insurance business written after Aviva and AXA.
The Direct Line brand relaunches with Winston Wolf
Business remains solid despite continued pricing pressures in the property and casualty insurance market. Direct Line's recent brand overhaul should boost new business, with the Winston Wolf character appearing on TV adverts highlighting the improved Direct Line customer offering.
It should allow the company to compete more effectively with the proliferation of insurance price comparison websites such as comparethemarket.com. Remember, Direct Line doesn't appear on any price comparison websites.
Impressive cost reduction boosts profits
The cost base is also being managed impressively, with the company's total costs down 6% over the first nine months of 2014 compared with the same period in 2013. Continued efforts to reduce costs are a prime driver for profit growth over the next two years, with earnings per share forecast to rise steadily in 2015 and 2016 and dividends following (Figure 1).
1. Direct Line Is Forecast Earnings, Dividend Growth This Year, Next
Source: stockopedia.co.uk
A key feature of Direct Line's restructuring effort is the sale of its international operations to Spanish insurer Mapfre for £430m, generating a pre-tax gain for the company of £160m. Most if not all of these sale proceeds will be returned to shareholders once the deal has completed and the cash hits Direct Line's bank account, representing potentially a bumper dividend.
UK Car Insurance Premia to Go Up By Up to 10%
According to the AA,
"The cost of car insurance could rise by up to 10% in the coming year, and home insurance premiums are unlikely to go any lower.
The latest index of the cheapest deals on the market showed that the cost of annual comprehensive car insurance had risen by 0.2% to £540 in the final three months of 2014.
But the total was still £200 cheaper than the peak in 2011, the AA said.
It predicted rising motor insurance bills during 2015."
Source: BBC News
This would clearly be good news for Direct Line's profitability.
But best of all, a sustainable 7% dividend yield
We come to what is possibly Direct Line's key attraction for income-hungry investors: a 7% dividend yield (Figure 2)! This is more than double the 3.4% on offer from the FTSE 100 index as a whole, and well ahead of all other major UK insurers who offer 4.3% on average.
2. Direct Line Offers the Best Dividend Yield of the Major Insurers
Source: stockopedia.co.uk
Go with the price flow
Direct Line's price trend is positive too, with its share price hitting a new one-year high at 305p (Figure 3). While most retail investors recoil with horror at the thought of buying a share at its high, professional investors like to do this, as it shows that the share has strong upwards price momentum. Academic studies tell us stocks that go up generally continue to keep going up.
3. Direct Line Share Price is Breaking Out!
Source: stockopedia.co.uk
Buy into Direct Line's impressive consumer story
In short, I see the Direct Line story as a success story in consumer finance, with some of the most instantly recognisable and thus strongest brands in the form of the red telephone and the Churchill dog, and with an enviable record of high customer satisfaction, crucial for winning repeat insurance business over the long-term.
Given the choice between a buying shares in a bank or an insurance company, I would today plump for an insurance company given the attractive dividends on offer, plus a more stable regulatory environment (which is clearly not the case for the banks).
In Direct Line, we have a stock that is simultaneously offering a tempting 7% yield and which is hitting new one-year share price highs – now that is a good deal.
Put your money where your mouth is and buy the mighty US dollar in 2015
International Business Times Article + Video Link
What goes up tends to keep on going up. This is a good mantra for those wondering where to focus their investments now that 2015 is upon us.
One of the most striking trends in financial markets over the past half-year has been the stunning ascent of the US dollar against virtually all other major currencies, including sterling, the euro and Japanese yen. For a UK-based investor, a simple investment in US dollars in mid-July when £1 bought you over $1.70 would have yielded a return of over 13% to date (Figure 1), with £1 only buying just over $1.50 today.
Figure 1: US Dollar Has Gained 13% Against Sterling Since mid-July
Source: Bloomberg
Why the US dollar should remain top-dog currency in 2015
Of course, you might look at Figure 1 and take fright: why should you buy into a currency that has already done so well?After all, it is not every day that a major currency pair like GBP/USD (sterling against the US dollar) moves by this much in a few months.
I see several reasons for the US dollar to make further gains against sterling:
1. The forthcoming UK general election in May introduces all manner of political uncertainty into the UK economic equation, making sterling a more unattractive currency to invest in until at least after the elections are held and the composition of the new government known.
The recent rise of the Ukip vote has added a big variable into the traditional calculation of likely voting outcomes: how highly will Ukip poll come May and could it prevent either of the two traditional parties of power gaining an absolute majority?
2. If the Conservative Party is elected, then Prime Minister David Cameron is likely to proceed with an EU membership referendum. If the Labour Party is elected, financial markets could well react negatively to a less business-friendly administration. Both outcomes would introduce yet further economic uncertainty and undermine the attractiveness of the pound.
3. The UK economy continues to slide closer to deflation with an inflation rate of only 1% and falling, dragged down by the eurozone, which has already registered a negative December inflation print of -0.2%. This will prompt the Bank of England to delay yet further any interest rate hike, again making sterling less attractive versus the US dollar, where an interest rate hike is likely to happen sooner.
How much more could the Greenback gain against the pound? Well a cursory glance at the long-term chart of the US dollar against sterling would suggest there is still some way to go to hit the US dollar's highs reached back in 2009 and 2010 (Figure 2).
Figure 2: US Dollar Can Still Go Some Way to Reach 2009, 2010 Highs
Source: Bloomberg
Two easy ways to invest in US dollar exposure
Buying US dollars: The most obvious way to take advantage of this trend is to buy US dollars with pounds, particularly if you are thinking of going on holiday to the US sometime this year, as those they could become more expensive the longer you leave it.I recommend ordering currency online via well-established, regulated institutions such as Best foreignexchange.com, which is offering a rate of over $1.50 per pound, or the currency websites of high-street supermarket chains such as Asda and Tesco, both of which are offering over $1.48 per pound with free click-and-collect services.
Buying US shares via an ETF: The second option is to invest in exposure to US stocks via an exchange-traded fund. Both the Nasdaq and S&P 500 indices remain in long-term uptrends despite the market sell-off of the past few days (Figure 3).
Figure 3: Nasdaq, S&P 500 Indices in Uptrend
Source: Bloomberg
My preferred US stock ETFs, which you can buy in pounds on the London Stock Exchange (via your preferred stock broker), are:
- The Powershares EQQQ Nasdaq-100 UCITS ETF (code: EQQQ), which carries heavy weightings to high-growth technology and biotechnology stocks
- The iShares S&P 500 Minimum Volatility UCITS ETF (code MVUS), which carries exposure to US large-cap stocks, focusing on those stocks with lower risk.
Both of these ETFs will give you exposure to US stocks in US dollars with your pounds, and so should benefit not only from any continued gains in US stocks but also from further gains of the US dollar against sterling.
Happy dollar investing in 2015!
2 Bloomberg TV Interviews on European Central Bank, Oil Price
Bloomberg TV Interview 1: Market Is Expecting a Lot From Mario Draghi: Shing
Bloomberg TV Interview 2: Falling Oil Is an Underplayed Risk: Shing
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