Sustainable profits?

I have written a lot about whether the Help To Buy scheme has artificially inflated the new-build market and the profits of housebuilders. The market seems to think so, despite the protestations of the companies involved. Persimmon has a staggering dividend of 10.8% and a price-to-earnings ratio (P/E) of 7.7. The dividend would not be this high and the P/E this low if the market thought that Persimmon’s profits were sustainable. Nevertheless it needs to be considered whether the price is really low considering the risks.

I think the share is worthy of closer inspection. The company has over £1bn in cash because of the profitability of its operations. It currently has an operating margin of 29% which makes profits extremely safe at current levels. With the amount of cash it has in the bank, I think the dividend is sustainable in the near future so the income potential for this share should outweigh the risks.

Solid income share

Aviva (LSE: AV) is another company that has a very high dividend, standing at 8.1%, again this is a case of the market anticipating the company having a fall in profits in future. I think this assessment is particularly unfair as Aviva has a good track record of paying a healthy and sustainable dividend. The dividend is easily covered by the free cashflow in the companies accounts.

Asset rich

The company is also very asset rich. Depending on your point of view, this could be a good or a bad thing as assets can be difficult to liquidate (turn into cash) so they can become problematic if they stop generating income. However, this is not currently a problem for Aviva and shareholders could be in for some bumper paydays if the company decides to start selling off some of its foreign businesses. It is currently trading below book value so you could argue that any future profits from the firm are a bonus as your initial investment is covered by assets.

Of course, a business trading below book value normally means there are investor concerns about the underlying operation. However the problem for Aviva seems mainly to be that its business is uninteresting.

Both Aviva and Persimmon can be bought in an ISA which will protect the profits from the taxman. Or you could invest in a Lifetime ISA, if you’re eligible, and the government will gift you 25% extra when you put up to £4,000 in per year. This can then be withdrawn when you reach 60 or buy your first home.

The post Saving for retirement? Here are two income shares I’d buy for an ISA appeared first on The Twelfth Magpie.

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• Up 50% with a stunning 6.4% yield! How do Aviva shares do it?
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RobertFaulkner1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Income potential

Picton is a closed-end investment company that focuses on UK commercial property. Shareholders benefit from the rents paid on the properties, which is paid out regularly as a dividend. The dividend currently stands at a healthy 4.3% and is covered 2.8x, which is well above the 1.5x coverage that is a rule of thumb for well protected dividends.

A closed-end investment company is one that does not issue new shares, therefore the price of the shares is reflected in the demand for them rather than the underlying value of the assets. Picton currently has approximately £674m of UK property, and after you consider cash and debt, that means each share has a ‘value’ of 92.2p compared to the current price of 88.2p. Therefore this structure for the company occasionally gives you the opportunity to buy shares at a discount to the net asset value of each share.

The Brexit problem

There are concerns about the impact that Brexit will have on the value of UK property and I suspect this is the main reason why Picton is currently trading below its net asset value. Fortunately, I think the firm’s management has spread the risk of its portfolio well. The industrial sector is where the highest weighting of commercial property is located, which is seen as one of the safer areas. In addition, its portfolio is sufficiently diversified so that risks are somewhat mitigated in the event of a chaotic Brexit.

Preferential asset class

The main reason that I’d buy this share over a buy-to-let is for the benefits of owning shares over property itself. There are a lot of costs associated with buy-to-let that need to be considered before you can start thinking about your profit. Stamp duty, maintenance, and insurance to name just three. On the other hand, shares require only a small fee of around £10 to purchase and investment companies will then charge an ongoing fee for the management of the fund. In the case of Picton this is 2% which is considerably less than would be required for a buy-to-let.

Shares in an investment company also offer you diversification and liquidity. When you own shares in Picton you hold property in a wide variety of locations that is exposed to a range of sectors. This reduces the risks that you would face if you owned just one property. You can also easily buy and sell shares in a company (known as good liquidity) if you need to access cash or become concerned about your investment. By comparison, it could take months and cost thousands in fees to sell a property.

Long-term income

I think that Picton offers a much more attractive long-term income investment than buy-to-let. Brexit may be casting a shadow over all UK property right now, but it will stabilise eventually and  this is a solid investment for someone who wants to own bricks and mortar without the headaches.

The post Buy-to-let yields are plummeting, here’s one property stock I’d buy instead appeared first on The Twelfth Magpie.

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RobertFaulkner1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

1. Start with a good fund

Begin by investing monthly savings into a low-cost passive index tracker. These funds track the performance of all the companies in a particular index. This could be the FTSE 100 or you may prefer a fund that tracks the whole global stock market. The benefit of these funds is that they will replicate the average performance of the whole index with very low fees. This means that you do not need to know anything about the stock market or keep up to date with the news. The average yearly growth for the FTSE 100 over the past 20 years has been 5.4% excluding dividends, a better return than most investors have achieved over the same period. 

If you invest £160 a month into a fund that returns 5.4% annually, after 47 years you will have a very respectable total of £410,457. This sounds like a lot, but the reality is most people live for a long time after the age of 67 and this might not go as far as you might think. So how do we get from less than half a million to a million?

2. Take advantage of employer pensions

Fortunately you can immediately take advantage of the workplace pension scheme, and your employer will have to contribute 3% of your salary from April 2019. Many employers will voluntarily match a higher amount than this. If you earn £30,000 per year then your employer will have to put in an additional £60 per month. I suspect this will also rise over time as people become more concerned about how adequate the state pension is. This calculation also ignores that your wage will probably start below this but end up higher.

There are several options but I would go for a self-invested personal pension (not a workplace pension, but your employer can contribute to it along with/instead of contributing to your workplace scheme). A SIPP lets you manage your money and invest in a passive tracker as mentioned above. With a SIPP you can choose exactly what products to invest in and will not pay income or capital gains tax on any profit.

3. Make the most of tax benefits

A SIPP gives you 20% tax relief on what you pay in. Therefore investing £160 a month would also return you an additional £40. Combined with a 3% employer contribution, this rises to £300. If you are lucky enough to have an employer that matches your contribution, then it would put in £200 for your £160+£40, taking the total to £400. This monthly contribution would earn you just over £1m when compounded at a growth rate of 5.4% over 47 years. This may not sound easy now, but in reality your contributions are likely to be lower today and exceed this further down the line.

With rising living costs and an ageing population, I think UK citizens should be concerned about whether the State Pension will be sufficient in the future. Fortunately if you start early, employer pensions and careful management can help you save for a comfy retirement.

The post Save a million for retirement with just £160 a month appeared first on The Twelfth Magpie.

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RobertFaulkner1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Landlord struggles

This won’t change much for most buy-to-let landlords, but it will have a massive impact on those in the higher tax bracket once the transition has finished in 2020. In future they will pay 20% tax on income that would have been eligible for tax relief, as well as 40% tax on the rest of the profit. Landlords will also pay capital gains tax on any rise in the value of a rental property that they sell, further reducing any potential profit. These changes are in addition to a number of other reasons why BTL can be a precarious asset class.

Some of the fall in rent prices has been attributed to a reduction in demand from EU citizens. This is likely to continue when we do get around to leaving the EU. However I suspect the government’s schemes to build new homes may add to this trend in future as the amount of new-builds slowly increases. 

A better option

Instead of investing in property, I’d be more interested in putting my money into perennially undervalued housebuilder, Taylor Wimpey (LSE:TW). There are a number of reasons to avoid this sector right now, including its reliance on the controversial Help-to-Buy scheme and ongoing Brexit concerns. However I think these risks are built into the valuation.

Taylor Wimpey has a very cheap price-to-earnings ratio (P/E) of just 8.9 and a huge dividend of 9.9%. It also has over £700m in cash, which means the dividend is safe for the present. In addition to this, it also has a lot of assets invested as working capital. While this is not as useful as cash as it can’t be utilised, Taylor Wimpey’s entire assets divided by the shares equates to 98.5p per share. The share price is currently 185p, so this means less than half of the value of the shares is related to the future performance of the company. Bear in mind though that this is a rough measure, and not all assets are as easy to liquidate as cash.

Cheap as houses

The concern with construction companies is that there could be a cyclical downturn which could be very damaging if the additional risks of Brexit and a possible end to Help-to-Buy become a reality. This has led to the share price lagging behind the performance of the company which has seen profits more than double in the past six years. The P/E has fallen from nearly 20 to less than 10 over the same period.

Even considering the risks, I think Taylor Wimpey looks like a good long-term investment if you are an income investor. The 10% dividend is huge and is supported by a mountain of cash.

The post Why I’d buy this FTSE 100 housebuilder over a buy-to-let appeared first on The Twelfth Magpie.

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RobertFaulkner1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Deal or no-deal?

This news will be welcomed by Remainers who will now push for a second referendum with renewed vigour, despite Parliament so far voting one down. It certainly seems likely that there is nonetheless a majority in parliament who are opposed to Brexit in any form and a second vote is now a very real possibility. Whether you believe this would be wrong as it ignores a change that was voted for by a majority chunk of the electorate, or that it reflects the realities of a representative, rather than direct, democracy, the question here is, what does it mean for investors?

The FTSE 100 and FTSE 250 have recovered slightly from the lows at the end of last year indicating that confidence is returning to the stock market. This could be because investors are prepared to accept that returns will continue in spite of the result of Brexit negotiations. Alternatively, it could be that remaining is becoming a more likely option. Despite this slight improvement for holders of FTSE companies, it still feels to me like the market is muted and the risk/reward ratio is skewed against investors.

Growing pains

My focus is centred around growth stocks and this category seems to be struggling more than most at the moment with companies needing to demonstrate strong growth just to maintain value. One example is Burford Capital, a law-focused investment management company, which released a stellar set of results yesterday. In a bull market I think these results would have seen a rise of at least 10%. However, after an initial rise yesterday, the price fell back to its previous value, still well below the highs of last year. Had these results been poor, the share price would have fallen significantly.

This presents investors with a problem, they are accepting mediocre returns in return for a high-risk investment. So what do I think they should do? There is another way of looking at the weakness of the FTSE and that is as a buying opportunity. A lot of companies’ valuations now look cheap in comparison to where they arguably should be, and that could change if there is a positive economic outcome to the ongoing Brexit negotiations. Nevertheless even the most optimistic among us will struggle to predict what that would be at this stage.

Don’t count on politicians

I’d certainly recommend caution when buying FTSE shares as the risk/reward ratio for investors is skewed unfavourably. However, if you’re looking to buy and hold for the long term, we may well look back at this period as a great time to buy a number of shares. Fortunately, the success of the stock market has always been because of the inventiveness of companies, not the competence of politicians. With this in mind, I’ll stick to the advice that “time in the market is more important than timing the market”.

The post Brexit: Should I avoid buying FTSE stocks? appeared first on The Twelfth Magpie.

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Robert Faulkner owns shares of Burford Capital Ltd. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Pound-cost averaging

Pound-cost averaging is how every beginner investor should approach the FTSE 100. It involves putting a small part of your portfolio into the stock market at regular intervals over several years. The idea is that this will spread your risk evenly so your portfolio doesn’t suffer from market fluctuations.

Whether you like this strategy will probably depend on your personality. If you’re like me and prefer to pick stocks instead of investing in passive or managed funds, then it’s likely you’ll also want to try and find the optimal time to invest to maximise your returns. This brings me on to the next two strategies.

Buying on the dips

Buying on the dips tries to maximise returns by buying when stocks are cheapest and therefore best value. Warren Buffett is the master of this strategy, and his approach is simply to acknowledge that he can’t predict the market but he can tell when an equity is below its business value. Therefore he will keep buying more as long as the price is falling and is below his target price.

This approach requires an immense amount of discipline to manage cash so you don’t become fully invested too early and also to not get scared when the rest of the market is panicking. This might sound easy, but in my experience it can be extremely stressful.

Momentum investing

Momentum investing is less concerned with picking the bottom of stock market dips and more concerned with when it is rising. This approach looks to moving averages and improving confidence as the trigger for increasing the size of investments.

This approach has a significant handicap over buying on the dips which at no point tries to time the market. Buying falling equities can be painful to watch, but as long as you’re patient the market will recover and you should make a profit over time. However, momentum investing requires you to make forecasts about what the market will do in the future. This puts a lot of pressure on the investor about when they should withdraw and inject more capital.

Time in the market

Two of these strategies therefore have a big advantage over the third, which is that time in the market is much more important than timing the market. One study found the difference in returns between investing at the best possible time versus the worst possible time only realised a 30% difference in total returns when investing the same amount each year over a 30-year period. All investors will end up somewhere between these two extremes so the likely difference seems relatively small to me.

Avoiding entire periods of poor performance such as between mid-2007 to mid-2009 and then investing heavily after would help returns, but there is little to no evidence that this can be achieved with foresight. The logical conclusion therefore is that you should focus on saving as much as possible and not lose too much sleep over the fortunes of the FTSE 100.

The post Worried about the FTSE 100? This is the best way to time the market appeared first on The Twelfth Magpie.

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Misplaced loyalty

AO World sells a variety of appliances online, although white goods are what’s best associated with the brand. The problem with white goods is that they don’t need to be replaced very often. The best online businesses like Ocado, ASOS and Boohoo (LSE: BOO)all rely on repeat business, but if you only sell goods that need to be replaced every 5-10 years then I’m not sure customer loyalty is quite so important.

AO has been running a high growth strategy where the company deliberately operates at a loss to gain market share. This is a viable strategy that is used by Amazon and Netflix among others in the online space to ‘land grab’ before raising prices to generate enormous profits. This works for businesses that strongly benefit from customer loyalty but I’m not sure this applies to the products that AO is selling. At the moment AO is simply selling its products for less than they are worth, so it makes sense that revenue and sales are growing. As the investing adage goes, ‘revenue is vanity, profit is sanity’.

Betting on Europe

The company has used fundraising to expand into Germany and the Netherlands where it has applied the same strategy to grow revenues by running at losses. But until the company is able to demonstrate it can generate profits off these revenues, I don’t think they add up to much. With some companies starting to be hit by Brexit uncertainty, I think this could add to the difficulties they are having in Europe.

John Roberts stepped down as CEO in 2017, but two years later he is back in the hot seat after his replacement stepped down from the role. After 20 years as a company, AO is still raising new capital to fund losses and there is only one way that I’d bet this company will go. It looks like The Times may have had the last laugh when they commented at the time of the company listing “on no account should any readers buy shares in this business”.

A better option?

If I was looking to buy a fast growing online business I’d prefer to buy Boohoo. It may have a high valuation but it has proved that its expansion is funded by profits rather than shareholders capital. The price has been volatile recently as shareholders have grown concerned about the management prioritising its own investments ahead of shareholders’ interests, but I still think the growth justifies the premium price. The company has grown profits (not just revenue) for the past 6 years, and looks good to continue growing!

The post Why I’m bearish on this FTSE 250 company (which started as a bet!) appeared first on The Twelfth Magpie.

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Robert Faulkner does not have a position in any company mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This was possible as you could easily buy a home with a mortgage. The profits would cover the interest on your mortgage and provide an income, or you could put the money toward paying off the mortgage to increase your assets. This was once a fantastic option for those who were willing and able to participate. However too many rental properties coupled with a lack of new supply has made it very difficult for new buyers to find a home, which has made BTL landlords a target for the government.

A dangerous move?

The government has introduced a new system to change the way tax is calculated on rental income. The result does not have much of an impact on the basic rate taxpayer, who will essentially still pay 20% tax on profits after expenses and mortgage interest is deducted. However, higher rate taxpayers (those who earn over £46,350) will effectively pay 20% tax on all rental income, whereas previously, interest payments were fully tax-deductible.

The effect of this is that it will make owning properties with low profit margins very difficult for higher rate taxpayers. This could diminish the size of returns or even lead to rental income becoming insufficient to pay off interest that is due on the mortgage. These changes will not come into full effect until 2020 but if I was a higher rate taxpayer, I would not be considering buy-to-let at this time. Even if you can make a profit after interest, any serious maintenance expenditures could still eat into both that profit and your savings.

Safe as houses

In addition to income, another reason to invest in BTL has been the presumption that the value of the property would increase over time. It is true that UK house prices have outperformed the FTSE 100 over the last 20 years. But the ‘cons’ are starting to outweigh that big ‘pro’. New buyers will now face a huge increase in fees that will eat into any profits; home buyers now pay 3% stamp duty with an additional 5% stamp duty for homes in the £250,000 to £925,000 bracket; and you will also pay at least 18% tax on any capital gains you make from the sale of a second home.

Build savings for retirement

One of the main benefits of investing in property is that you can buy it with other people’s money (a mortgage) and this advantage remains. However with the increases in tax and stamp duty in addition to capital gains, I think investors with cash now have much better options than putting down a deposit on a second home. Taking out a tax-free stocks and shares ISA can provide investors with a wide range of options that do not require significant risk or high levels of knowledge of the stock market. My recommendation for a new investor would be a diversified tracker fund paid into with small regular payments to smooth out market fluctuations.

The post Building a retirement fund? Why I’d avoid buy-to-let appeared first on The Twelfth Magpie.

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Total returns

Income is one of the advantages of dividend stocks, but if you take all your dividends as income, you miss out on the compounding effect of reinvestment. For example, if you bought a stock that paid a 5% dividend it would take just over 14 years to see a 100% return after reinvestment. However, it would take 20 years to earn 100% if you didn’t reinvest your dividends as you would lose the benefits of compound interest.

By contrast you would probably be hoping for a 100% return in a much shorter time if you invested in growth stocks. The argument for a company offering growth over paying dividends is the belief that you could generate higher returns by reinvesting in the business compared to what it would be able to pay out.

Quality not quantity

When considering dividend stocks it is easy to be attracted to high dividend yields. Unfortunately, a very high yield is often a precursor to a dividend cut as investors sell in expectation of bad news, which lowers the share price, raising the dividend percentage. Therefore it is important to look at both dividend cover and free cash flow per share to make sure that a dividend is safe.

A rule of thumb for well protected dividends is coverage of 1.5x or more by earnings-per-share. It is also important to check that free cash flow per share is greater than the dividend per share or the company will not be able to pay it with taking on debt. If profits are regularly decreasing, then this indicates that dividends are likely to be reduced over time.

There are stocks available that offer both growth and dividends for the ambitious investor. The risk with this approach is that growth stocks can often offer high dividends just as their growth is slowing. This can lead to a correction in the share price as growth investors move their money to new stocks.

Best of both worlds

But one growth stock I like that also offers dividends is Games Workshop (LSE:GAW). I think there’s potential for international expansion because of the encouraging sales growth in America of over 25%. Forecasts for this company are consistently conservative as demonstrated by earnings forecasts being raised three times in the past year. It may be more profitable than forecasts imply. There is a dividend of 4.3% which is covered 1.4x times for the coming year which is less than my rule of thumb, but as I am confident of the growth on offer, I don’t expect the dividend to be threatened by reducing earnings-per-share. The company is also confident of its growth as it is investing in a new factory. This is holding back profits this year but this investment should pay off in years to come with increased production.

There are certainly arguments for both approaches but in my mind the answer lies in the circumstances of the person asking the question. Dividend stocks are considered less risky which is beneficial if you are nearing retirement. However, if you’re looking to grow your pot, like me, then a higher-risk growth strategy could work.

The post Why I’d invest for growth over dividends appeared first on The Twelfth Magpie.

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Robert Faulkner owns shares of Games Workshop. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This relative lack of volatility is unusual for growth stocks and I think the fact that the P/E ratio has always hovered around 30 is significant. This ratio is used by a lot of investors, including myself, as the primary valuation tool of a stock. The importance of this ratio is not as a buy or sell signal but as a quick evaluation tool about what you can expect from a stock. My rule of thumb is that 15 or below is a value stock with no, or low growth, 15-30 is a growth stock and 30 or above is a premium reserved for very high growth companies.

What happens if it stops growing?

Rightmove has been sitting where I would expect a quality growth stock to be, and this relates to its consistent earnings growth. However, growth will not last forever and when it slows, I am expecting a revision in the share price as investors move to new opportunities. If the P/E were to fall to around 15, at the bottom end of the growth range, this would be a fall of around 40% from its current P/E of 24.

Why would growth stop?

One of the main reasons Rightmove has been so consistent is because market conditions have changed little. The housing market has been strong and the firm has had little competition. You can see from the chart how consistently revenue and earnings have grown, boosted by its near-monopoly on the sector so it could raise its prices without competition.

However in December’s RICS survey on the housing market it describes deteriorating market sentiment and a reduction in sales expectations. Stock levels for estate agents are now sitting near record lows and are reducing further. This suggests we may need to brace for some problems appearing in its results on March 1. The company has embarked on a share buyback programme, generally seen as a sign of management confidence, but seeming confident and being confident are not always the same thing.

Increased competition

More generally I am concerned about how long Rightmove can keep up its astronomically high margins and return on capital. This is normally a good thing, but if they are too high, then it gives competitors a good chance to undercut them. Purplebricks looks like it is struggling to reinvent the property market, but others like Onthemarket are coming after Rightmove’s market share. Onthemarket’s model is centred around getting estate agents on board by undercutting prices and is working as Rightmove’s fees are unpopular among estate agents. The challenger looks unspectacular to me, but if it can gain market share by charging less than the bigger player’s 74% operating margin, it could work.

With virtually every UK estate agent using Rightmove, and new competition that they like more, I think it may be nearing the end of its remarkable growth. There are also unfavourable market conditions that would make me very concerned if I was a shareholder.

The post Why I’m bearish on this stock that’s soared over 2,500%! appeared first on The Twelfth Magpie.

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Robert Faulkner holds no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.