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Woodford buys Royal Mail for £2.4bn income fund

Woodford buys Royal Mail for £2.4bn income fund

Neil Woodford has bought a significant position in Royal Mail and backed two companies which have recently come to market.  

The purchases were among five new holdings added to his CF Woodford Equity Income fund in July.

Woodford (pictured) believes Royal Mail’s shares are now more attractively valued after the recent reversal following their strong performance on last year’s initial public offer (IPO).

He has invested 1.5% of his fund's assets, which now stand at £2.4 billion, into the stock.  

‘This [Royal Mail] is fundamentally a very attractive, cash generative business. It has its challenges, not least the competitive threat in profitable, densely populated areas. But it has its opportunities too, such as slowly working to bring its cost base into line with its competitors,' Woodford said.

‘Royal Mail has an operating margin of 4.6% compared to 8-10% for most of its peers. We have been impressed by the management team and believe it is well-placed to capitalise on the long-term opportunity to deliver a better service to its customers and generate sustainable shareholder value.’

Other new positions included long term favourites Oakley Capital and Raven Russia, while he also participated in the IPOs of Spire Healthcare  and Abzena.

Abzena was floated by intellectual property commercialisation firm Imperial Innovations – another of Woodford’s holdings – raising £20 million from initial and existing shareholders.

‘Abzena is the fourth Imperial Innovations’ company to join the public market in recent months, demonstrating the strength in depth of its exciting and valuable portfolio,' he said.

Glaxo weakness

Poor performance in GlaxoSmithKline, the fund’s second biggest holding, proved to be a drag.

The decline in the stock was triggered by a disappointing trading update, with poor performance in its respiratory franchise leading to revenue, profit and earnings all declining and missing consensus expectations by some margin.

However, it did meet dividend expectations with a 6% increase and Woodford believe the investment case remains very much intact, which prompted him to buy more shares towards the end of the month.  

‘A long conversation with Glaxo’s chief executive post results has allowed us to maintain confidence in the long term investment case, despite this near term setback,’ Woodford said.

‘Glaxo remains a very cash generative business and it is a very cheap share in our view, with a starting yield of 5.5% and the prospect of modest but sustainable long-term dividend growth.’

This weakness was offset by better performance from the likes of HSBC and Capita, with the latter showing ‘double digit growth in revenue, profit, earnings and dividends.’

Tobacco consolidation opportunity

Meanwhile Woodford was surprised the market greeted news of further consolidation in the tobacco industry negatively.

He believes Reynolds American's purchase of Lorillard was ‘good news’ for the company  as it created an opportunity for them to take a step forward in terms of scale, efficiency and brand portfolio strength.

Woodford pointed out BAT stands to benefit being a 42% shareholder in Reynolds, and is interesting for Imperial Tobacco, which intends to buy some of the attractive brands Reynolds/Lorillard need to sell for antitrust reasons.   

Woodford said: ‘This represents a great opportunity for Imperial Tobacco to improve the fortunes of its US business and, again, if consummated, is expected to deliver very attractive returns and earnings enhancements.

‘This is a sector that has created considerable shareholder value through M&A in the past. Tobacco companies have done this by doing the right deals, at the right price, at the right time.’

To back this argument, Woodford bought more shares in Imperial Tobacco and Reynolds American, although he did sell his exposure to Altria to maintain the fund’s weighting to the sector at broadly the same level.

Complacency

The UK stockmarket posted a small negative return in July and Woodford is surprised it was not more drastic given the geopolitical tensions in the world.

Woodford said: 'Having moved broadly sideways all year so far, the market took a nervous step downwards in the last couple of days of July in a move that has continued thus far into August.

‘It isn’t a drastic move, in the context of some that we have seen in recent years, but equity markets have lacked volatility this year and a feeling of complacency appears to have crept into some parts of the market.’

He added: ‘We have been a bit surprised by the market’s lack of concern about some of the geopolitical events that have been brewing in the background – the unrest in Ukraine/Russia and Israel/Gaza, for example, initially shrugged off by the market, but in recent days the market seems to have become, quite rightly, a bit more concerned.

‘These issues are not positive for an already troubled global economic outlook and do not look easy to resolve.’

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