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Woodford buys more Capita despite dividend threat

Woodford Investment Management says cut to Capita dividend can't be ruled out as heavy share price fall sees the yield reach 8.4%.

 
Woodford buys more Capita despite dividend threat
 

Neil Woodford has bought more shares in Capita (CPI) despite fears over the dividend, as the outsourcing group continue to slump.

In an update to investors in the LF Woodford Income Focus fund, Woodford Investment Management said it had bought more shares in December.

Shares in Capita slumped last month after a subdued update dashed hopes of a 2018 recovery for the embattled outsourcing group. The stock has suffered fresh falls this week after losing a big contract to administer Prudential's life and pensions business.

That has continued the trend of the last two years, which has featured a string of profit warnings, with the shares down nearly 70% over that period.

Capita's dividend has now come under focus, with the shares now yielding 8.4%.

Woodford Investment Management said that yield suggested 'some investors fear a dividend cut may be required'.

'With a new chief executive now in place, clearly that eventuality cannot be completely ruled out, but having met Jon Lewis during the month, we are reassured that decisions around capital structure and the dividend will be informed by a clearer long-term strategy for the business, something we expect to hear more about later this year,' it said.

'In the meantime, we have maintained the portfolio's exposure to this business, seeing the potential for significant value creation in the future as Capita is restored to the high quality, successful and well-run business that it used to be.'

Capita was once a top 10 holding for Woodford's flagship LF Woodford Equity Income  fund, but now represents less than 1% of the £8.3 billion portfolio. The stock makes up 1.4% of his Income Focus fund.

Saga slump

That fund, launched last year as a higher-yielding alternative to the Equity Income fund, also suffered from the heavy fall in the shares of Saga (SAGAG) last month.

Shares in the provider of travel and insurance services for the over-50s are down 36% since December's profit warning, as the collapse of Monarch Airlines took its toll on the group's tour division and the broking business faced challenging conditions. That has seen the value of Woodford's holding fall to less than 1% of the Income Focus fund.

'Although this is clearly a disappointment, we believe it is yet another over-reaction by the market and that the shares still offer attractive value, with a yield of around 7% well covered by free cash flow,' said Woodford Investment Management.

'We are satisfied that this dividend is safe, but it is now less likely to grow than we had previously expected.'

Woodford did receive some good news last month in the rally of some of the other UK economy-focused stocks he has been buying into over the last nine months in his Equity Income fund.

'Some of the portfolio's more domestically-exposed businesses also delivered a positive contribution to returns, perhaps buoyed by the positive progress delivered in the Brexit talks,' said Woodford Investment Management.

'Shares in house builders Barratt Developments (BDEV) and Taylor Wimpey (TW), property company NewRiver Retail (NRR) and automotive-related businesses Redde (REDD) and AA (AAAA), for example, all benefited from a more favourable environment than of late, but in our view, remain at very depressed valuation levels.'

Prothena pain

The Equity Income fund and Woodford Patient Capital (WPCT ) investment trust meanwhile both suffered from the weakness in the shares of biotechnology company Prothena (PRTA.O) following November's announcement of a delay to the trial of its flagship drug. 

The stock has also come under attack from short sellers Kerrisdale Capital. Since the US hedge fund announced its campaign, the shares have fallen 35%.

Woodford suffered a torrid 2017 as a number of his major holdings ran into trouble, leaving his flagship Equity Income fund rooted to the bottom of the Investment Association's UK Equity Income sector over the year. Since launch in the summer of 2014, however, it remains in the top 10 in the sector. 

The Income focus fund is up just 2% since launch in April last year, while shares in the Patient Capital trust were today trading at 83p, having launched at 100p in April 2015.

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