The CF Woodford Equity Income Fund released its latest monthly update on Friday. The big news is that Woodford has done a U-turn on BT (LSE: BT-A). He’s dumped what was previously a top 10 holding of the fund.
Hanging up
On the one hand, we’re advised that the sale was “not prompted by a change in anything fundamental at the business,” and that Woodford and his team “support” BT’s strategy and believe the company is “performing well”.
On the other hand, we’re told that “for a while, we have had some concerns about its pension deficit and the relationship between the business and its regulator”. But then we’re also told that “these factors have not prompted the decision”.
Woodford falls back on an explanation he’s used a lot lately: he sees better opportunities elsewhere. I’m not altogether sure I buy the idea that the pension deficit and regulatory risk weren’t factors in his decision. Both have become more prominent of late.
Ofcom is flexing its muscles over BT’s Openreach business, while analysis by investment bank Macquarie, reported in the Telegraph last month, suggests BT is losing its grip on its pension deficit again. Macquarie estimates the deficit has rocketed 50% to £10.6bn in 18 months, putting dividends (current prospective yield of 3.8%) at risk.
Whatever the nuances of Woodford’s view of BT, there’s a stark takeaway from the update. He sees potential returns as sufficiently inferior, relative to some other stocks, that he’s sold his entire stake in the telecom company.
Potential superior returns
High Street stalwart Next (LSE: NXT) and subprime lender Provident Financial (LSE: PFG) are two stocks where Woodford evidently sees potential for superior returns.
Provident Financial has been a great servant to Woodford, and with the shares having come off their record highs of late last year, he’s been pumping more cash into the company.
Woodford’s money headed Provident’s way in January on “share price weakness”, in March on “groundless share price weakness”, and in the latest update we’re told of further buying “at what we consider to be very attractive valuation levels”.
Provident’s shares have since moved lower, so you can buy today at a significant discount to the prices Woodford has been paying. The current forward P/E is 15.4 with a prospective 4.9% dividend yield.
Next please
Next is another stock that Woodford reckons is at a “very attractive” valuation. The retailer’s performance has been rather disappointing since late last year — unseasonable weather and rivals upping their game have been factors — and the shares are now at levels not seen since 2013.
Woodford’s previous fund updates this year recorded buys of Next shares in January and March. On the latter occasion, he and his team said they believe the retailer will deliver “a very attractive long-term total return through a combination of its current dividend yield and continued growth in its free cash flow generation”.
That belief appears to be reaffirmed by the further share purchases recorded in the fund’s latest update. Next’s forward P/E is 12.1, while the prospective dividend yield could be as high as 6.8%, if this highly-cash-generative business continues to pay a special dividend on top of the ordinary payout.