It seems that in all my recent stock purchase posts, I have talked about Brexit and the opportunities it provided to buy shares at discounted prices. So I am going to spare you the details this time and just say that Carillion’s share price dropped so much in the wake of the Brexit vote that it became a screaming buy.
I bought my shares at 235p a piece and at this price, the valuation placed on the company was so low and the pessimism surrounding the company was so high that the father of value investing, Benjamin Graham, would be licking his lips. Carillion is one of those companies you buy because it is so damn cheap! With a P/E of just 6.7, a dividend yield of 7.76%, and a dividend payout ratio of 52%, it is easy to see why I jumped at the opportunity to buy shares in this support services / construction company. Which ever way you look at it, long term investors will be very happy buying Carillion at such a low point.
The most shorted stock on the stock exchange
So this begs the question, why has Carillion become so cheap? Apart from the obvious effects of the Brexit vote / impending recession in the UK, one of the reason for the shares in the company trading at a single digit low valuation is due to it being the most shorted stock on the FTSE.The reason hedge funds have shorted the stock is to mainly to do with the failed takeover of Balfour Beatty 2014, the oil price drop as Carillion has a big operating base in the middle east, slowing growth in the core UK market and like every other company in the UK these days, a large pension deficit.
Another reason for the share price falling over the past year is due to a dividend cut potentially being on the cards. The current dividends are not fully covered by the free cash flow that the company is producing. So this begs the question, how is the company funding the dividend? Carillon has been funding its dividend in recent years by disposing some of its assets. The company has been able to sell its equity stakes in PPPs (Public Private Partnership projects) which has brought in £311m of cash to help pay a rising dividend.
People are so pessimistic about the company and the stock price reflects this. Essentially, the negativity surrounding the companies future is already baked into the stock. Since they could potentially be a dividend cut, the negative consequences of that are already priced into the stock. But this is not necessarily a bad thing. Because the stock is trading at such a low multiple, it only takes a little bit of good news to send the shares rocketing. Just look at what happened to BHP BIlliton and Anglo American earlier this year. When they announced dividend cuts, instead of the share price falling, they intact rose dramatically. This is what I mean when I say that you need to buy stocks which have odds heavily staked in your favour. With Carillion, it will only take a little bit of good news for this to turn out to be a fantastic investment over the long run.
The best investors have a contrarian spirit. They don’t care about the consensus. They draw their own conclusions.Contrarians understand that fear and greed cause people to push prices too high or too low. So the key is to look at market fluctuations as your friend rather than your enemy.That way, you can profit from folly rather than participate in it.
Just look at what three great investors have had to say on this:
- Warren Buffett – “Be fearful when others are greedy, and greedy when others are fearful.”
- Lord Rothschild s – “The time to buy is when there is blood in the streets.”
- John Templeton, the man who almost single-handedly pioneered the field of global investing, said the best bargains can be found only “at the point of maximum pessimism.”
My purchase of Carillion (LON: CLLN)
I bought 64 shares in Carillion for my high yield account. With the current dividend of 18.25p, I am expecting to receive £11.68 a year from the company.
This will go very nicely with my other high yielders, Royal Dutch Shell, Legal & General and UIL Ltd. Including my carillon purchase, the total dividend I expect over the coming year from this high yield portfolio is just over £160.