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The FTSE giants that need to keep Neil Woodford happy
BAE Systems is not the only FTSE 100 company that needs to keep star fund manager Neil Woodford sweet.
by Gavin Lumsden on Oct 23, 2012 at 12:02
Watch out, Woodford's about
Neil Woodford is the country's best known and most powerful fund manager. He manages £23 billion in the popular Invesco Perpetual High Income and Income funds and through the Edinburgh Investment trust.
The Citywire A-rated fund manager underlined his influence this month when he helped scupper BAE Systems' attempted merger with EADS. Using Invesco's 13% stake in the defence contractor he publicly expressed his opposition to the deal, which he said threatened BAE's business in the US and undermined its dividend payments policy.
He reportedly summoned BAE boss Ian King to his Henley on Thames office to demand an answer to why King had turned BAE's previous strategy on its head.
According to the Financial Times Woodford and other big investors in BAE are still angry and are demanding that King and his chairman Dick Olver resign.Next: BAE is not alone
Big stakes in big dividend payers
But BAE Systems is not alone.
Woodford's strategy of seeking out businesses that can sustain long-term dividend growth is one of the main factors behind his success.
It also means that as his equity income funds have grown the size of Invesco's stakes in some of these big dividend payers has grown.
But Woodford's 'buy and hold' approach doesn't mean he can't move fast when conditions change. He quickly dumped his big holding in Tesco after the supermarket group's historic profits warning in January.
Here, then, are the other FTSE 100 companies that will be keener than ever to keep Woodford sweet.Next: Capita
Private Eye famously dubbed the outsourcing giant 'Crapita' for a series of mishaps on public sector contracts, such as London's congestion charge, over the years.
Hapless victims of the Arch Cru investment scandal will know Capita better as the funds administrator forced by the City regulator to contribute to a £50 million compensation scheme after the Arch Cru funds were suspended and their illiquid holdings revalued.
For Woodford and his team, however, Capita is an undervalued income stock. Invesco has built up a 21% stake in the £4.7 billion support services company in response to a consistent track record of dividend growth.
Recently some analysts have tired of what they perceive as Capita's lack of international ambition, but it's possible the group's reluctance to expand overseas reflects its largest shareholder's wish to conserve cash and maximise investor payouts.Next: BT
Invesco has established a 10% holding in BT, an impressive amount for a company valued at £17.25 billion.
The company tarnished its income credentials in 2009 by halving its dividend after incurring huge losses in its IT services division. BT has since repaired its reputation with investors by rapidly regrowing dividends ahead of inflation and resolving the problem with its pension scheme deficit, which was burning the company's cash almost as fast as it was generating it.
BT boss Ian Livingston will have to watch the group does not get bogged down in an expensive bidding war over sports broadcast rights as it takes on Sky in the pay-TV market. For now, though, BT's defensive characteristics as a quasi-utility combined with its shareholder focus is keeping the company in Woodford's good books.
BT remains in the top 10 of his Income and High Income funds, despite taking some profits earlier this year, and is also a top holding in the Perpetual Income and Growth investment trust run by colleague Mark Barnett.Next: Smith & Nephew
The arrival of chief executive Olivier Bohuon at Smith & Nephew nearly 18 months ago signaled the start of Invesco's interest in the £6 billion medical devices company.
Invesco has bought 10% of its shares since then as the new boss has taken steps that Woodford and his team like, such as positioning it for growth in emerging markets, simplifying the corporate structure and increasing dividend payments.
Bohuon is looking to make acquisitions, which could be risky, but as these are meant to accelerate growth it appears to meet with Woodford's approval.Next: Reckitt Benckiser
Invesco has held over 5% of Reckitt Benckiser for most of this year, much of it in Woodford’s and Barnett’s funds. The firm has kept faith with the £26 billion consumer goods company after the unexpected departure of former chief executive Bart Becht last year.
Becht left big boots to fill, having become famous for overseeing a sixfold rise in the share price of the household cleaners group in over 10 years in charge. His replacement, Rakesh Kapoor, has got off to a good start, attempting to do the right things by focusing Reckitt on its fastest-growing health and hygiene sectors and the big 'Bric' emerging markets.
Last month Kapoor poached Adrian Hennah, the chief financial officer of Smith & Nephew, after finding he could not work with Liz Doherty, who held that position at Reckitt.
'Liz and I have agreed that Reckitt Benckiser's and her way of working are not as well matched as either of us would like, and now is the right time for her to move on to a new opportunity,' Kapoor said in a statement.
For his sake let's hope that Kapoor doesn’t hear his shareholders say the same thing one day.Next: AstraZeneca
The ousting of David Brennan as chief executive of AstraZeneca in April was the first dramatic sign that the Shareholder Spring had arrived.
Brennan was pushed aside just before the drugs company's annual general meeting. His extravagant pay package made him vulnerable in light of his failure to plug Astra’s lack of a decent product pipeline despite splashing $15 billion on buying US biotech MedImmune in 2007.
Later Woodford said he had not been surprised by Brennan’s departure. Certainly not as Woodford is regarded as having a hand in his removal!
According to the last stock market announcement, Invesco held nearly 5.5% of Astra, with the stock also a top 10 holding in Woodford’s two main income funds and Barnett’s Perpetual Income & Growth investment trust.
Despite its problems Astra has provided shareholders with a secure and growing dividend for years. Its chairman Leiff Johansson assured investors in August that dividends would not be threatened by a strategic review by incoming chief executive Pascal Soriot.Next: Tate & Lyle
Are Woodford & Co going sour on Tate & Lyle, the £3.4 billion maker of sweeteners and starches?
Probably not: although Invesco nearly halved its stake from 9.6% to just under 5% over the summer, this was probably profit taking following a spike in the share price to a five-year high.
With a track record of paying well covered and rising dividends, Tate & Lyle is ticking the right boxes as far as Woodford is concerned.Next: Imperial Tobacco
Woodford and his investment team at Henley have long been fans of the cash-generating powers of tobacco companies. Around 5% of the Invesco Perpetual Income and High Income funds are invested in Imperial shares, with Invesco holding over 6% of the company’s equity, putting Woodford at the top of its investor relations list.
With the shares trading at a discount to international rivals, despite offering a well-supported forecast dividend yield of 5%, it looks like Woodford will be rolling in those shareholder payments for some time to come.Next: Rolls-Royce
It is hard to see what could happen to damage Invesco’s relations with Rolls-Royce, the second-largest maker of aircraft engines, but then the same would have been said about BAE Systems until recently.
There are similarities between the two companies. As with BAE, Invesco is the top shareholder with a near 7% stake, according to the last stock market announcement. Like BAE, Rolls-Royce is a leader in its field, producing high-quality engineering, which in its case taps into the rapid expansion of civil air fleets in Asia. Like BAE, Rolls-Royce generates a significant part of its revenues from after-sales maintenance contracts, which help give it visibility of earnings even during an economic downturn.
As long as chief executive John Rishton does nothing to spoil that business model he can probably look forward to his visits to Henley.Next: Morrisons
According to Reuters, earlier this year Invesco held 5.5% of the shares in Morrisons, which put it behind rivals Blackrock and Threadneedle and way behind the Morrison family holding of 9%.
In July Woodford said he was happy with holding Morrisons in his High Income fund, despite signs that the UK’s fourth largest supermarket group was losing market share.
‘We remain comfortable with our investment – the company has committed to grow its dividend by at least 10% this year and next, and continues to benefit from significant self-help measures which help to mitigate what remains a highly challenging trading environment for the entire retail industry.’
If ‘self-help’ includes listening to top shareholders and prioritising dividends, Morrisons is probably in the clear. Its dividend is well covered by earnings and at the current share price provides a forecast yield of 4.3%.Next: Tesco
Woodford dumped Tesco shares after its shock profits warning in January, its first in more than 20 years. His rejection of a stock that suddenly looked ex-growth seemed justified, particularly in light of the recent plunge in half-year profits as Tesco desperately upped investment in the UK to prevent sales in its home market falling further.
What has been strange is to see Warren Buffet, the ‘Sage of Omaha’, who like Woodford is also a devotee of value investing and dividends, pile into the company’s shares as Woodford & Co headed for the exit.
There is no suggestion yet that Woodford is changing his mind. However, a note from UBS analysts last week raised the intriguing possibility that investors like him might shop again at Tesco. UBS upgraded the retailer to ‘buy’, reckoning it was considering switching to a more cash-generative strategy that could see up to £15 billion returned to shareholders via increased dividends and share buybacks in the next six years. Has Tesco’s boss Philip Clarke been talking to Woodford?
More about this:
Look up the funds
Look up the shares
- AstraZeneca PLC (AZN.L)
- BT Group PLC (BT.L)
- Capita PLC (CPI.L)
- Imperial Tobacco Group PLC (IMT.L)
- WM Morrison Supermarkets P L C (MRW.L)
- Reckitt Benckiser Group PLC (RB.L)
- Rolls-Royce Holdings PLC (RR.L)
- Smith & Nephew PLC (SN.L)
- Tate & Lyle PLC (TATE.L)
- ARM Holdings PLC (ARM.L)
- Tesco PLC (TSCO.L)