Emma Wall: Hello and welcome to Morningstar TV. I'm Emma Wall and joining me today is Job Curtis, Manager of the City of London Investment Trust. Hello, Job.
Job Curtis: Hello. Good morning.
Wall: So what are your three stock tips?
Curtis: Well, at the larger cap end of the market where I see most value at the moment and the three stock recommendations are – or tips are HSBC, BP, and Marks & Spencer.
Wall: So why have you chosen these?
Curtis: All three stocks have got reasonable dividend yields. Perhaps we’ll start with 
HSBC (HSBA), which is the largest bank in the U.K. stock market; traditionally very conservative. It's got a lot of virtues, very strong capital ratios, and a very good geographical spreads, some 50% in the Pacific and emerging markets. Over the last year they’ve really cut out some of their smaller territories and they are focusing more on more profitable territories where they have got stronger market share. They are benefiting from recovery in the U.S. operation, which was disastrous a few years ago. I think with a dividend yield of around 4.8% and very strong dividend growth in prospect and the price-to-book ratio of about 1.2 times, it does seem quite modestly rated within context of stock market where so many shares have performed exceptionally well. This one looks sort of very solid value especially for the income seeker.
Wall: And BP?
Curtis: BP (BP.) is, in some respect, slightly more controversial. It's now slightly over three years since the Macondo spill in the Gulf of Mexico, and they are obviously still embroiled in the U.S. in legal disputes. I think initially they were somewhat naive with the U.S. lawyers and they are now taking a stronger line. That does overshadow the stock a bit. I think that's – as a result, it's actually on a very cheap valuation. It's yielding over 5% and P/E of around 8 times. Actually as a result of the Gulf of Mexico spill, they’ve done a number of things. They’ve sold-off some elements of their portfolio, ended up with a much – with some high quality portfolio and they have done a good deal in Russia, where they really had a successful joint venture operation at least, but they fell into dispute with the Russian owners of it, and they’ve sold out to Rosneft and they now have a 20% stake in Rosneft, which is the major Russian oil company, which looks like a good investment to me.
So all in all, both Shell and BP have lagged the market over the last year and they certainly sort of underperformed the rising oil price just in the last month or so. So they look really quite good value to me and I think this one is more of a slow burn. I think it's on a significant discount with some of the parts, some 25%, 30%, and I don't think that discount will be realized until the U.S. legal situation is sorted, which will in time. So it is more a two to three-year view perhaps in BP, but in the meantime you’re paid while you wait with a 5% dividend yield.
Wall: So, HSBC and BP are making global efficiencies. What about your third?
Curtis: Well, Marks & Spencer (MKS) is, obviously, much more U.K. story. They are actually in terms of the future growth, part of the growth will come from moving a bit overseas with many franchise operations going back into Paris and that should help grow sales and profit. So, in addition, they are expanding more aggressively into the Internet; they have lagged online. But I think what's particularly interesting about Marks & Spencer is that they are investing very heavily in CapEx in some of their processes and proving their distribution. That CapEx program is ending over the next year or so and I think on broker’s forecast, one, its estimate is going to free up something like £250 million of surplus cash flow. So you could end up seeing Marks & Spencer – yields about 3.7% is slightly lower than the other two, but you could see a quite a virtuous circle with share buybacks in a way that Next has done so successfully and helped its stock price.
If you look at the underlying core business, the food business is the strong one and growth is like-for-like and it is quality operation. The problems have certainly been in general merchandising. But I think with the slightly better outlook for the U.K. consumer, with house prices improving and interest rates forward guidance staying low, I think this could be quite interesting. It's a mixture of recovery play as well as having some top-down factors benefitting as well.
Wall: Job, thank you very much.
Curtis: My pleasure.
Wall: This is Emma Wall for Morningstar TV. Thank you for watching.
