Wednesday 21 May 2014

Back to the Future (Portfolio Buy)

One of the nice things about being a DIY Income Investor is that the 'cash bucket' quickly fills up giving the opportunity to invest in something new. This process means that the portfolio is gradually refreshed and that its constitution can be modified over time (in terms of the balance between dividend shares and fixed-income securities). Added to this, the annual ISA and SIPP contributions give a useful fillip to cash levels, meaning that even more renewal is possible.

Except sometimes, you might go back to an old favourite - something that you have sold off in the past. Deja vu, all over again.

It is not the first time that I have bought something that I have previously sold. Although I would not classify my investment style as 'trading' but there is a certain degree of comfort in buying a security that you have become familiar with in the past - particularly if there has been a major realignment of the share price.

Balfour Beatty (LSE:BBY) is the old favourite that I have repurchased. The forecast dividend yield is over 6% and the forecast p/e is a fairly modest 12.6 (meaning that it is probably not over-valued at the moment). On the downside, the forecast dividend cover is a bit scanty (at 1.3) and the future is a bit uncertain.

Balfour Beatty plc is all  about infrastructure, being the biggest construction and engineering company in the UK and the fifteenth biggest in the world. It is involved in UK and international projects in rail, road, utility systems and buildings markets.

I sold my BBY holding only in February 2014 - at a price of £3.14 (making a 26% profit in less than a year, when the yield had fallen to 4.5% - perhaps a validation of my 'sell' rule). However, since then Balfour Beatty have made hard going of it, announcing a substantial profit warning for its UK operations in its latest market update (May 2014) - losing its Chief Executive on the way.

The Strategic Review seems to have identified the in-house consultancy Parsons Brinckerhoff (which I came in contact with in my previous professional life) as a candidate for the chop: "having professional services and construction capabilities combined within one organisation has not delivered material competitive advantage for the Group". But given that the key problem seems to have been the mechanical and electrical engineering (M&E) and major buildings projects businesses in the UK, this does not seem like they are focusing on the main issues.

Anyway, they doing something, which the market always likes - despite the uncertainties about whether there are any more skeletons in the cupboard. This is a major international organisation with a sprawling footprint not only in the UK but also in the Middle East, Hong Kong, the US, Australia and elsewhere. We can probably expect a new Chief Exec to clarify the future direction and focus.

As always, once the decision to buy has been taken, all you can do is sit back and watch developments. And wait for the cash to flow in...

Now where have I seen that before?

[Purchase price: £2.2325]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

1 comment:

  1. The executive chairman and the CFO hinted during the conference call that the dividends policy will need to be reviewed, after the sale of Parsons Brinckerhoff. I am not sure if the v generous dividend payout will remain sustainable in the medium/long terms. Personally more interested in the Convertible Preference Share (BBYB)