Shares to buy, hold or sell: Ben Lofthouse
Rebecca Jones asks him which shares he has been buying, holding and selling in his fledgling funds.
BUY: SEAGATE TECHNOLOGY
With a market capitalisation of over $19 billion (£11 billion), Seagate Technology is the world's second-largest hard disk drive (HDD) manufacturer. Along with number one manufacturer Western Digital, Seagate occupies 80% of the HDD market and has enjoyed recent success in mass data, providing hard drives for remote 'cloud storage' centres across the globe.
Despite this, however, Lofthouse claims that Seagate remains a relatively unloved company, which is why he bought into it in April. "Seagate has a very strong balance sheet with not very much debt on it, plus a 3.3% dividend that is three times covered by earnings, and it's trading on a forward price-to-earnings (p/e) ratio of 10 times, yet it has been overlooked."
This, however, is all the better for Lofthouse, whose investment process is centred on identifying 'under-appreciated, undervalued companies' that have attractive dividend yields, strong market positions and good free cash flow.
Seagate certainly ticks all the above income boxes, but perhaps more importantly it also has the potential for strong growth in the medium term, which Lofthouse also focuses on. He believes it will be driven by the expanding need for data storage alongside a pick-up in PC sales, which he says is beginning to come through.
Seagate currently accounts for 1.5% of both the International Income Trust and the Global Equity Income fund. However, Lofthouse is not averse to increasing his holding, claiming he will use any weakness in the share price – $58.95 at the beginning of July – to buy more.
HOLD: DEUTSCHE POST
Like other mail services across the globe, Deutsche Post faces uncertainty over the future of its postal service, with volumes continuing to decrease as customers take to the internet to send and receive correspondence.
Nonetheless, Deutsche Post is a top 10 holding in both the International Income Trust and Global Equity Income fund at a weighting of 2.5% and 2.8% respectively, and since purchase in May 2012 it has returned 116%.
Again, Lofthouse cites an attractive p/e – currently 14 times compared to 17 times for its main competitor UPS – alongside a dividend yield of 3.6%, which has grown 14% in just over 12 months, as his reasons for buying.
However, the firm is still living down some bad business decisions, including a 'disastrous' expansion into the US that Lofthouse claims has created an "overhang of negative sentiment" toward the firm, while a shaky European economic recovery raises questions about future growth.
"Deutsche Post is not widely held as people aren't sure about its growth outlook. We have quite a large position, but we're waiting to see whether the German economic recovery continues; however, if the share price weakens at all we'll buy some more," says Lofthouse.
SELL: DELTA LLOYD
Lofthouse bought into Dutch insurer Delta Lloyd in August 2012, when former owner Aviva was selling it at a knockdown price of €10(£7.9) per share in an effort to shore up its balance sheet. Since then, Delta Lloyd's share price has performed well, rising to €18.93 by the beginning of July. However, Lofthouse has concerns about the future of the company and sold out of his 1.5% holding on 30 May at a share price of €18.50, securing profits of 85%.
"When we bought Delta Lloyd, it was trading at half its book value and on a p/e of 4 times while paying a 10% dividend yield. Now it's trading more around book value and at 8 times p/e, so it's still not expensive, but it has quite a subdued growth outlook. It pays out a very high percentage of its earnings in dividends and so its ability to grow that dividend is less likely from here," he says.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.