Income Portfolio

Commenting on a post here Matt asked whether I would post details of my portfolios.  So here is a brief look at my Income Portfolio, with some comments and pretty pictures:




Click on chart to enlarge

This pie chart shows the split of my Income portfolio by the stocks that I hold.  Looked at another way by sector holding (thanks to Stockopedia for this):

Click on chart to enlarge

I am overweight the market in Industrials (BA.; PAY; IMI; HLMA; FENR) and Consumer Defensives (ULVR; RB.; TSCO; GRG).

 The table below shows a short profile of each investment:

Click on table to enlarge

The definitions of the columns are:

Fwd Yield on MV - Is the expected yield over the next 12 months based on the current share price.
Fwd Yield on cost - Is the expected yield over the next 12 months based on my average cost of purchase.
5 year Div CAGR - Is the compound annual growth rate of the dividend per share over the last 5 years.
Fwd earnings yield - Is the expected EPS over a rolling 12 months divided by the SP (the reciprocal of the P/E ratio).
3yr Div % of FCF -  This takes the last 3 years of dividends per share and shows it as a percentage of the last 3 years of free cash flow.  Important to do this over a reasonable cycle as one year's FCF can be misleading.
ROE - Reported earnings divided by the average equity ([opening and closing]/2).
P/BV - The share price divided by the book value.
Original purchase yr - The year in which the first purchase was made.  There may be purchases or sales in subsequent years.
TSR - Is total shareholder return (dividends not reinvested, I have to live off something :-)) and is calculated using the excel function XIRR allowing for the timing of cash flows associated with the investment to produce an annualised return.
  
I have highlighted in orange areas of concern or weakness: 

I view a current yield below 3% as a weakness, although companies such as Compass with a 5 year growth rate of 15.6% pa and a TSR of almost 25% pa compensate for this weakness.

Shell is the biggest disappointment for dividend growth, although it does have one of the highest yields.  The 3 yr Div % of FCF explains why this might be, although they have a good return on capital employed of around 25% (although this appears to be reducing in the past few quarters) and a low weighted average cost of capital (WACC) of 8.8%, they have a propensity to chase a large number of high demand capital expenditure projects that suck up a substantial amount of their FCF.

Of the other companies that appear to have a high percentage of 3 yr Div % of FCF are companies that are going through a period of change and likely to cut back on capital expenditure i.e. Vodafone (future sale of Verizon Wireless); Tesco (reduction in large scale super/hypermarket development); Greggs (cut back in new shop openings); Bhp Billiton (declared aim to reduce capital expenditure and increase returns to shareholders); Merose Industries (is somewhat like a private equity house and a recent disposal will change the profile).

The companies with recent low returns on equity are all due to exceptional costs being incurred during the year.  How exceptional these are can be seen by a quick look at the 5 year average for ROE, only ICAP and Tesco are in double digit returns with returns of 12.5% and 15.7% respectively.

GlaxoSmithKline has a very high P/BV, due to the book value being savaged by legal costs, penalties and write downs (I'm expecting more of this from China), this also accounts for the very high ROE.  Over 70% of their business is financed by debt, so consequently they have the lowest WACC.

Tesco and Greggs disappoint on the TSR, but I am expecting substantial changes over the next few years.

Over the past 5 years to 31 December 2012 the dividend income from my income portfolio has grown by a CAGR of 13.4% pa. which also includes numerous special dividends.  I'm not certain of replicating this every year, but at this rate it would double every 5.5 years.

My current portfolio has a weighted average forward yield of 3.8% and a forward earnings yield of 7.2% (i.e. expected to cover dividends 1.9x), with earnings expected to grow by about 8%.