Before launching his own investment company in 2014, Neil Woodford spent more than 26 years with Invesco Perpetual where he earned his reputation as one of Britain’s most formidable stock pickers. Over that period, he turned £1,000 of investors’ money into around £23,000, which is impressive.
So, I’m taking notice of the top holding in two of his funds, which is the FTSE 100’s Imperial Brands (LSE: IMB), the fast-moving consumer goods company supplying products for smokers.
Going against the crowd
However, Neil Woodford’s new funds have been underperforming since he set them up in 2014 and he’s been getting some bad press about it. But he’s no stranger to that. His previous success came from getting the big calls right and investing in areas that many other fund managers avoided at the time, which led to earlier periods of under-performance. Yet he stuck to his often-contrarian stance and prospered in the end.
For example, he piled into tobacco stocks in the early 1990s when they were out of favour with investors and their valuations were low. At the time it looked like aggressive legal action by the US authorities would force the cigarette makers into bankruptcy. But Mr Woodford bet against that happening and he was correct. The tobacco firms went on to prosper and Neil Woodford’s shareholdings prospered with them.
At the beginning of the century when everyone was riding the market higher in the dotcom boom, he avoided over-priced technology stocks, which led his fund to underperform many other funds. Then the bubble burst along with everyone else’s gains and Woodford came out ahead. He went on to sell out of bank shares when he thought they were over-valued, well ahead of the last decade’s financial crisis when many bank names plunged as much as 95% or so. He also loaded up with pharmaceutical shares when patent-expiry concerns had pushed them down and earnings were declining – it was a smart move because they went on to bounce back.
Neil Woodford’s long-term track record of outperformance has often been achieved at the cost of periods of short-term underperformance. I think there is a good chance that the current period of weakness in his funds will end up looking like another of those short-term blips in the end.
A high, growing dividend yield
Right now, It looks like Imperial Brands is a high-conviction pick because it is his largest holding in two of his funds. The Income focus fund has a weighting around 8.49% of Imperial Brand’s shares and the next-largest holding is only 4.54% of the fund. Then, in the Equity Income fund, 8.63% is allocated to the firm, which compares to the next-highest holding of 6.71%.
Yet the share price is down around 37% since the summer of 2015 and the firm looks out of favour with investors in general. As a consequence of the fall, the valuation has plummeted and the dividend yield has shot up. At the recent share price around 2,611p, the forward price-to-earnings ratio for the trading year to September 2019 sits just over nine and the forward dividend yield is 7.8%. Meanwhile, the underlying business has lost none of its defensive, cash-generating qualities and looks capable of paying the ongoing dividend.
I think the dividend-growth potential is attractive and sits well alongside the undemanding valuation. That’s why I’d pile into Neil Woodford’s top holding right now.