November saw the roar of the value rally. Global equities surged with several regional markets recording their best monthly performance ever. It is not often a presidential race gets overshadowed but with the year we’ve had, news on vaccine developments and approvals proved to be the biggest catalysts behind the stock market rally. Strong efficacy data from vaccine manufacturers galvanised hopes that an end to the Covid-19 pandemic could be in sight. Against that, various Western countries ramped up restrictions to slow the spread of the virus. On balance, investors were heartened by the increased prospect of a recovery, boosting the stocks that would benefit most from an economic rebound.
The UK market was one of the hardest to rally due to its heavy weighting in so called old economy stocks – the types that tend to do well once consumption rises and economies open up again. Despite this, I believe the UK market to be still cheap.
A recent piece by renowned stock picker Nick Train who runs the £8 billion Lindsell Train Global Equity Fund emphasized the point I have been making for a number of month now, the UK stock market is cheap as compared to its global peers.
Many commentators believe there is good reason for this to be the case; currency effects, the overhang of Brexit, and the sectoral composition of the indices.
Take the US market as an example which has delivered a total return of over 300% over the past 10 years. The reason for its strong run is its heavy weighting towards new economy tech stocks. On the other hand, the heaviest weighting on the FTSE 100 are by companies stuck in the old world, financial, oil and mining stocks. That is why it has had a total return of only 60% over the past 10 years.
And this total market underperformance is hurting individual stocks. Stocks in companies of equal quality to their overseas counterparts are trading at cheaper valuations as compared to their overseas counterparts. Just look at Unilever vs Procter & Gamble. Shell vs Exxon Mobil. RB vs Clorox. BP vs Chevron. BAT vs Phillip Morris. Diageo vs Brown Forman. The list goes on and on. No wonder many companies are considering a secondary listing on the US markets. Britain seems unloved. And stocks on the markets here are truly in the dumps.
Here’s what Nick Train had to say:
‘I know this is partly me talking out of self-interest, but I really think there is a tactical opportunity in UK-listed companies today when you simply compare valuations and share price performance with similar companies around the world. It is clear asset allocators are placing a discount on a London listing.’
And the people at Lindsell Train are far from the only fund managers who think UK equities are attractively valued.
The fund managers at Majedie wrote a post recently on this exact topic. The fund house put the case forward for UK equity returns to beat least as good as those of global equities in the years ahead. They are key reasons for this:
- The attractive valuations of many UK stocks versus their international peers
- The UK market is deep, with a wide pool of best in class global businesses
- The UK represents a more balanced, diversified index than before.
The piece is well worth a read. They even provide a comparison of the ROICs of UK listed shares as compared to their global shares as well the P/E ratios of those same shares. Unilever as an example has a higher ROIC than Procter & Gamble but trades at a much cheaper valuation as compared to its US counterpart. It is no wonder I bought shares in Unilever recently (I will write a separate post on this purchase so check back).
December Stock Purchases
During my December monthly stock purchase programme, I bought the following shares:
- HL – Bought 23 Shares at £14.42 each.
- RB – Bought 3 shares at £64.31 each.
- GSK – Bought 14 shares at £13.95 each.
- SGE – Bought 79 shares at £5.66 each.
As mentioned above, I also purchased shares in Unilever during the month. But as that was a rather large purchase by my standards, I will do a separate write up on it.
In regards to Hargreaves Lansdowne, Reckitt Benckiser, GlaxoSmithKline and Sage, all 4 are high quality companies. Companies that I would be happy to hold forever.
Looking at HL, RB and Sage in particular, they have the characteristics I look for, high returns on invested capital, strong free cash flow conversion ratios, strong balance sheets, recurring revenue streams and growing markets.
From the three, I would say Sage is currently the weakest due to increasing competition from Intuit and Xero. But Sage is aware of this and has decided to invest more heavily in to the business. As a result of the increased reinvestment within the business, the markets expects a lower amount of cash to be returned to shareholders. This is why the market has knocked the share price down. For long term investors, this increase in investment should be seen as a plus as it will ensure Sage remains relevant in this new ever competitive world.
GSK on the other hand is a play on its consumer franchise division. I have written previously on the hidden value within UK conglomerates. The hidden value with GSK is its consumer health division. GSK has some of the strongest brands within this area; Panadol, Advil, Voltaren, Eno, Centrum, Nicorette, Sensodyne, and Aquafresh, to name a few. The intention is to spin this division off within the next couple of year. Once this happens, I predict a massive rerate of the business and I doubt we will be able to buy GSK at these levels again.
Looking at the four purchases made, I have increased my dividend income by £36 a year. This has brought the total dividend my portfolio is expected to generate to £3,970 a year. Considering this figure was £3,926 this time last year and with all the dividend cuts the markets faced this year, I am rather pleased with the progress made this year.
I feel truly blessed to be in this position. I have gone from earning £0 in dividend income four years ago to now having a decent four figure dividend income stream.
It is a wonderful feeling knowing my money is working hard for me. The money is pouring in from all parts of the world. If someone drinks a coke in Australia, money comes in. If someone eats a Doritos packet of crisp in China, money comes in. If someone transacts using a visa card in India, money comes in. If a company in South Africa uses Pastel, money comes in. If someone uses Fever tree as a mixer, money comes in. If someone buys clothes from Primark , money comes in. You get the picture.
The greatest part of all this is that the money is purely passive. The money gushes into my account regardless of what I do. If I wanted to sleep all day, the money would pour into my account. If I spent my days playing video games, the money stream in. If I was to go on holiday, I would find money in my account upon my return. This is the power of passive income.
The goal is to use your money to make money instead of using your time to make money.
Spending your time as you see fit will bring you more satisfaction than spending your money.
Many think clothes and accessories make you look rich, but I believe a man who is debt free wears the confidence on his face. The ability to be patient, thoughtful and unhurried in decision making belongs to the man whose time and money is his own.
As we close the chapter on one decade and move into the next, my goal will be the same, to keep growing my passive income and to hopefully one day be able to cover all my expenses from pure passive sources.
10 years looking forward feels like an eternity. 10 years looking back feels like yesterday. Make financial decisions today that you can look back on with gratitude instead of remorse. The future is coming faster than you think!
Have a good new year and stay safe!