UK Edition
Questor noted yesterday, with a little disappointment, the early redemption of the Burford Capital 6.125pc 2024 bond as of today, and how it leaves a little hole in the income-generating portion of the Questor portfolio.
Other fixed-income options are worthy of further research as a potential home for any cash that is to be reinvested but the equity market still has income potential too and one potential staple for yield-seekers remains the life insurance giant Legal & General.
A long-term holding in the Questor portfolios, the FTSE 100 member may catch the eye of those who seek income, or inflation protection, for three reasons.
First, the forward yield is 9pc, according to analysts’ consensus dividend forecasts. This is supported by strong cash flow and a robust balance sheet that comprehensively meets the regulatory capital requirements of the Solvency II regime.
Such a yield outpaces anything on offer from cash and Government bonds and even covers the prevailing rate of inflation.
Second, the shares look cheap on a mid-single digit earnings multiple. While equities naturally come with greater capital risk than cash or bonds, Legal & General’s lofty yield and lowly valuation potentially offer the ideal combination of downside protection and upside potential.
Finally, the company is one of the few that may welcome higher interest rates, rather than cringe at the prospect. The healthy balance sheet is one of the reasons why, but another is that higher rates may revive the bulk annuities market.
When interest rates were at zero and pension funds in deficit, employers had to sit, suffer and contribute. Now that rates are higher and many schemes are much better funded, or even in surplus, they can look to de-risk their balance sheets and defined benefit pension schemes with a bulk purchase annuity.
This should drive volumes for life-insurers after a fallow spell that was one of the many unintended consequences of zero‑interest rate policies (ZIRP) and Quantitative Easing (QE).
Some investors may blanch when confronted with a 9pc-plus dividend yields on the grounds it looks too good to be true.
This column sympathises as many members of the FTSE 100, past or present, have, in recent years, been offering a similar yield or more, on paper, only to then serve up a dividend cut and not deliver – Vodafone, Shell, Persimmon and Centrica as examples.
But a rule of thumb may provide comfort, one that was also a victim of ZIRP and QE. The axiom states that any yield more than twice the UK 10-year gilt yield is likely to prove too good to be true.
The UK 10-year is yielding 4.66pc, so L&G admittedly only just scrapes under the threshold, but the strong cash flow and balance sheet offer further reassurance and it seems confident too, given its goal to raise the dividend by 5pc in both 2023 and 2024 to 20.34p and 21.36p respectively, under the five-year capital generation and earnings growth plan for 2020-24.
The next update due is the half-year results for 2023 on August 15. It’s worth staying on the right side of Legal & General in Questor’s view.
Questor says: hold
Ticker: LGEN
Share price at close: 226p
Update: MJ Gleeson
Our initial analysis in May of the housebuilder and land development specialist MJ Gleeson is not exactly off to a flyer, as we already sit on a book loss.
But we knew it would be a bumpy ride with patience needed, and last week’s trading update contained no nasty surprises. The £225m cap still feels low relative to net assets on the balance sheet of £278m, while it is well-placed over the long term to meet the acute need for affordable housing.
As expected, completions in the year to June will drop from 2,000 last year to 1,723, bang in the middle of the guided range.
This hints at weakness even in the “affordable” housing market segment which usually attracts young, first-time buyers – MJ Gleeson’s average selling price of £186,200 is way below the national average put at £285,923 by the latest Halifax survey.
One intriguing trend is how more than 20pc of sales in the second half of the year went to buyers over 55, more than double seen a year earlier, a possible sign that people downsized because they could not afford the mortgage on their previous home.
That again reinforces the value of MJ Gleeson’s proposition, and a net cash balance sheet provides a valuable buttress. Keep buying Gleeson shares.
Questor says: buy
Ticker: GLE
Share price at close: 385p
Russ Mould is investment director at AJ Bell, the stockbroker
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