Wednesday 11 November 2015

Healthy Shares? (Portfolio Buy)

As a DIY Income Investor, I am interested in shares that pay a nice dividend. These 'high' yielders will (hopefully) give my cash a home that will provide a nice cash flow and minimise the risk of losing capital. And even better, I like it if the company management is explicit about its commitment to maintaining - and increasing - the dividend.

Unfortunately, you don't find a lot of that about - but such opportunities do exist...

How about this:

"XXX expects to pay an annual ordinary dividend of 80p for each of the next three years (2015-2017). XXX also plans to return approximately £1 billion (20p per share) to shareholders via by a special dividend to be declared on 3 February 2016."

How's that for commitment?

Other characteristics I look for in selecting a high-yield dividend share:
  • sustainable business model
  • diversified product range
  • international business activities
  • low debt
  • positive cash flow
Now, to be realistic, you'd be lucky to find all of those virtues in one company.

The DIY Income Investor portfolio has some cash available (unfortunately mainly because of some cash-outs from poor investments). What I usually do is review the existing portfolio (on the basis that I am more familiar with those securities that are already owned) and see if there are any with a reasonable yield that are under-represented.

I've been holding on to GlaxoSmithKline (LSE:GSK) for a long time - since 2007, in fact. I sold most of my holding in November 2011, taking a 30% profit. I held on to the rest as there was a reasonable return to justify a 'wait and see' strategy. In fact, the price has recovered to nearly what I paid for it and the yield has crept back up to nearly 6%, with a potential (as noted above) of a special dividend.

The big change over that time has been, of  course, the Novartis 'transaction' (as it is referred to) and the consequent re-structuring. The Q3 results give the latest picture and is worth looking at (the quote above is taken from it).

But first a caution: shares are not 'high yield' purely due to the generosity of their management. The market reflects uncertainty and concern over a company with a low price relative to the dividend. In other words: high yield = buyer beware.

The market concerns are probably related to the fall in profitability, due - it is claimed - to some dilution impacts of the Novartis acquisition.  The net cash inflow from operating activities for the nine months was only about one-third of 2014. The company says that this will change in the coming year. Net debt is down (at 30 September 2015, net debt was £10.6 billion, compared with £14.4 billion at 31 December 2014).

However, this is a well established and well diversified company with an extensive pipeline of products. I see healthcare as a key market segment for the future. So, given the management's positive view of shareholder returns, I'm ready to jump in again.

[Purchase price: £13.65] 

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. Well, if you could only buy them for that..... The decimal pont seems to have slipped!

  2. Good choice, I think DIY.

    If I was not already overweight with GSK I would be building up my position again now. Despite some headwinds they seem in pretty good condition for growth in the future. I think reducing the special dividend to 20p was wise (especially if it helps guarantee the ordinary dividend going forward).

    (PS: I had not actually noticed they had offered us a date on the special dividend declaration. A date for the diary!)

  3. Hi DIY,

    GSK are on my watchlist (and have been for a while), but still quite expensive for what I am willing to pay, although I have been waiting for the dip for sometime, I am kicking myself for not picking up at the 11.50 mark, but patience will (hopefully!) prevail at some point!
    Keep up the good work!
    London Rob

  4. Does the DIY income investor have any moral view on companies which spend enormous sums on kickbacks and political lobbying? In France they have a saying "l'argent n'a pas de couleur"!

  5. Worth updating your Portfolio page, it's just too old now... !