After the lull of May and June, this past month has been a busy one on the stock purchase front. I have so far bought a total of 5 shares in July. Even though markets have propelled higher from the lows seen earlier this year, there are a number of interesting opportunities currently available in the small cap space. It seems that with the current macroeconomic ongoings, investors are leaving small British companies for dead. Investors are pricing in worst case scenarios for some of these stocks. And this is where as a private investor I can simply take my time, look at the various opportunities and pick the stocks that offer the greatest returns going forward.
Three of the five purchases have been in stocks listed away from the FTSE 350. Three of these have been in the small cap space away from the FTSE350 and thus not eligible for the monthly stock purchase programme (More on this in a minute). But for now I will give you the names, Airea Plc, Fevertree Plc and Scapa Plc. All three companies mentioned have durable underlying quality and as a result of recent share price weakness, they have become attractive long term holds. I will be writing about them in a different post so check back soon.
The reason the above three stocks do not fall under my monthly stock purchase programme is due to my broker only allowing me to buy FTSE350 listed stocks via this programme. This is perhaps due to higher liquidity in FTSE350 stocks as opposed to other London listed stocks.
The way these monthly purchases work is I need to pick stocks the night before which my broker will deal for me the very next day. Like me, there are hundreds or thousands of individuals giving a broker these same instruction. This happens once a month. As such, the broker can trade in bulk and offer dealing discounts to me and other customers. I am only charged £1.50 for the monthly stock purchase programme as opposed to the normal dealing fee of £9.95.
So clearly there is a big advantage of a lower dealing fee by using this method to buy. I am giving up slight control as I am not too sure what price I am paying till the deal goes through – as opposed to an instant trade where you know exactly what price you are paying. And that is perhaps why the programme is restricted to FTSE 350 stocks. Larger stocks tend to be less volatile so I am likely to get a price within 1% or so of the price I want to pay. Of course, these stocks tend to be volatile on results day or when trading updates are issued so I avoid placing trades on companies that are due to release sensitive market news on the day the monthly stock purchase takes place.
The other huge advantage of the monthly programme is that I am able to buy smaller positions in companies. Due to the lower dealing cost of £1.50, it is justifiable to make small purchases of c£150 in companies. Paying a dealing fee of £9.95 for a £150 stock purchase is madness due to the commission being almost 7% of your purchase. Paying high fees relative to your investment are a huge drag on performance!
This way I can buy small positions in companies that I really like but have valuations at the top end of my comfort zone. That way if they power ahead I do not kick myself for not having a position. And if they fall in price, providing the underlying economic value of the business is the same, I can simply go bargain hunting and snap up the shares int he company.
Buying small stakes also allows me to strategically increase my position in companies I am already invested in. Two such companies are Associated British Foods and XP Power. In fact, these are the two companies I bought more off during my July monthly stock purchase programme –
- ABF – Bought 9 shares at £24 each.
- XPP – Bought 11 shares at £21.50 each.
Both companies are currently suffering from sentiment issues. XPP being an industrial is currently being negatively viewed due to the macroeconomic tensions on the horizon. There is also the little matter of an ongoing trade war between China and the USA. XPP has a factory in China and investors are scared that any tariffs placed on China will impact XPP negatively. Investors seem to be discounting XPP’s factory in Vietnam which can take on additional capacity if needed. It will be interesting to see how the trade war plays out but I remain positive on XPP and I believe the management are talented enough to navigate the company through any stormy weather ahead.
ABF has also been hit by a number of sentiment factors. The first is the so called death of retail. But looking at ABF’s biggest money spinner, Primark, there has been no such downturn in the numbers as of yet. In fact, I was in a Primark store two weeks ago and it was absolutely rammed. It took me between 5 – 10 minutes to pay for my items.
ABF also seems to be hit by the weak pound. As a good chunk of ABF’s revenues are derived from the UK, the weakening pound will cause a headwind for result. This is because raw materials and products are purchased abroad in foreign currency. And as the pound gets weaker relative to other currencies, items abroad get more expensive. Thus in order for ABF to compensate for the higher input prices, they either need to raise their own prices or reduce margins. This is a tricky position to be in. Especially considering ABF’s Primark operates in the budget conscious pace of the market.
Regardless of this, I still think Primark is a good buy at current levels. The company has a confluent of factors going in its favour, top line growth, a healthy balance sheet, strong free cash flow generation, an undemanding valuation, strong returns on invested capital and a well covered and growing dividend.
Talking of the dividend, the purchases of XPP and ABF have added £12.60 in annual dividend income to my portfolio.
Looking at my portfolio as a whole, it is now expected to provide me with £3,562 in annual dividend income.
I cannot understate how blessed I am to be in this position. To have close to £300 rolling into my account every month without me having to lift a finger is truly a great position to be in. Yes it has taken hard work to get to this position. I have diligently been buying shares every month. I have been meticulous in my research. I have been consistent in my approach. But if I was to quit investing today and simply let my money ride, the money would still roll in. It is purely passive. It doesn’t require any effort from my part going forward.
But I am not looking to quit now. I will keep going in order to build that dividend income. I want my dividend income to cover all my expenses. Looking at my progress, it is certainly possible. Financial Freedom is no more a dream. It has now become a possibility.