In the mid-90s, my wife had a pleasant problem. After seven years of work at a FTSE 100 business, she held a large number of employee shares. These were very valuable, worth more than our London home, in fact. To diversify her portfolio, I suggested she invest with star fund manager Neil Woodford.
Britain’s best fund manager
Over a 26-year period from 1988, Neil Woodford built a reputation as the UK’s #1 fund manager. At his peak, Woodford managed total funds worth £26bn. Fortunately for my wife, the Invesco Perpetual High Income fund was the top-performing UK equity fund over the 16+ years she was invested in it.
Neil Woodford’s star crashes to earth
Inspired by his success, Neil Woodford quit in 2014 to start his own firm, Woodford Investment Management. Alas, Woodford then came crashing down to earth.
Exactly a year ago today, Neil Woodford ‘gated’ his Woodford Equity Income (WEI) fund, preventing investors from making further damaging withdrawals. Today, WEI stands as the UK’s worst-performing fund. In hindsight, the reasons for Neil Woodford’s failure were simple:
1. Woodford kept losing money by backing unsuccessful companies.
2. He abandoned his strategy of buying ‘value’ shares (lowly rated shares, usually paying high dividends).
3. Neil Woodford invested heavily in smaller businesses and private, unquoted (off-market) and illiquid (hard to sell) shares.
4. Woodford confused investors in his ‘income’ funds, because few of his major holdings paid decent dividends and several had never paid any.
A Neil Woodford FTSE 100 old favourite
If I were picking an old-school Neil Woodford value share today, I’d buy into a mega-cap (FTSE 100) company with a simple business model, huge cash flow, solid earnings and a high and reliable dividend.
One company that fits all five criteria is British American Tobacco (LSE: BATS). As I explained last month, BATS is a very simple business. This £74.4bn company sells tobacco and cigarettes to an addicted audience (of which I am sadly one). Familiar BATS brands include Dunhill, Rothmans, Lucky Strike and Camel.
This is obviously not a share for ethical investors – you won’t see the $1.1trn Norwegian oil fund investing in BATS. However, BATS was a core holding in Neil Woodford’s original high-income funds. That’s because BATS kept pumping out rising dividends during various market meltdowns, including the near-death experience of 2008/09.
BATS is a value share, not a smoking-hot growth share, so I wouldn’t expect its share price to shoot the lights out. Its appeal comes from the mountain of cash it pays out in quarterly (and special) dividends. On its own, it pays out almost 5% of all dividends paid by UK-listed companies, so you don’t get much bigger than a BATS dividend.
At the current price around 3,235p, the shares trade on a price-to-earnings ratio of 13.1. Last year’s dividend of 210.4p per share gave a tasty dividend yield of 6.5%. The latest quarterly dividend will be paid on 19 August to shareholders who own or buy shares before 9 July.
Finally, BATS shares are up almost 14% over the past 12 months, despite the coronavirus crisis. Adding dividends gives a 20%+ return in a year. Sure, BATS is a FTSE 100 ‘sin’ stock, but its shares have been ‘saints’ for decades, as Neil Woodford knows!