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Investors favoured banking, supermarket and mining stocks last month, according to Morningstar Data.
Banks Top the Charts for Equity Investors
Lloyds Bank (LLOY) remains on top as the most popular stock on Morningstar.co.uk last month. The stock is currently rated as undervalued by Morningstar analysts. The bank has retrieved itself gradually after its ill-considered acquisition of HBOS in 2008, according to Morningstar analyst Erin Davis. The U.K. government, which remains the bank’s biggest shareholder, has begun selling its stake in Lloyds. In 2014 the management announced plans for a nominal dividend, its first since 2008. Management also hinted that it eventually plans to return up to 70% of earnings through dividends.
Our Morningstar analyst expects a 2016 forward dividend yield of at least 4% - although Lloyds has yet to reinstate a dividend following the financial crisis.
One of the largest banks within the U.K., Barclays (BARC), also grabbed investors’ attention last month thanks to recent news headlines featuring the appointment of new CEO Jes Staley. Staley has a strong background in investment banking and analyst Erin Davis thinks that his appointment signals Barclay’s intention to maintain an important presence in investment banking.
The firm’s investment bank has struggled to build scale and control costs which invoked investor fury in 2013 when bonuses grew despite a drop in revenue. It is now going through the process of cutting the size of its investment bank in half, to less than 30% of risk-weighted assets, Davis said. Therefore analysts are looking forward Staley’s next move to improving the investment bank’s profitability. Thus the bank’s strong retail business reported good results. Personal and corporate banking saw revenue climb 1% compared with the year-ago quarter. Barclaycard saw profits grow 40%, as revenue climbed 15% on growth in the U.S. and the stronger dollar, while operating costs grew more slowly at 7%. Return on average equity was 22.3%, according to Morningstar Data. Barclays now pays an income of 3%.
Intense Rivalry in Supermarket Shares
Investors do not limit themselves in bargaining for groceries among supermarkets; supermarket shares are popular as well. Tesco (TSCO), which is second on the most popular hits list, is considered undervalued by Morningstar analysts. Two other retailers, Sainsbury (SBRY), which pays 7% yield and Morrisons (MRW), which yields at 8.9% also feature in the top 10.
The grocery industry has become increasingly competitive following the rise of challenger low-cost retailers Aldi and Lidl in an environment of low economic growth and stagnant wage growth. Constant price war and changing shopping habits put pressure on traditional supermarkets.
Switching costs are non-existent in grocery retail, and competing on price while sustaining excess returns is a tough proposition.
Morningstar analyst Ken Perkins believes Tesco's scale allows the firm to operate more efficiently than many competitors, and its convenient locations and loyalty program should continue to drive traffic. But Perkins does not have confidence in Tesco's ability to sustain excess returns over the long term to assign the firm an economic moat.
Commodities Slump Keep Investors Clicking
The commodities slump last year dragged down mining share prices, but raised much attention among investors. Royal Dutch Shell (RDSB), BP (BP.), Glencore (GLEN) and BHP Billiton (BLT) all feature in the top 10 most popular securities last month.
Yields look attractive due to supressed share prices: Shell pays an income of 7.4%, and BP yields at 6.7% and BHP Billiton pays dividend at 11%.
Glencore's mining portfolio is decidedly overweight higher-risk countries with relatively underdeveloped institutions and limited legal safeguards for foreign investors, according to Morningstar analyst David Wang. Despite disclosures afforded by the initial public offering and subsequent filings, the marketing business remains incredibly opaque to outsiders.
Shell shares have lost 26% over the past year, according to Morningstar Data. But it is not all bad news – according to analysts the firm has strong cash flow from operations which should be sufficient to fund investments and pay its dividend. However, should oil and gas prices retreat for a prolonged period, the company may need to increase its debt load.
Relative unknown, small company Flowgroup (FLOW) also proves its popularity among investors last month due to a contract signed with Shell last month. Flowgroup and its subsidiaries are engaged in developing and commercializing alternative and efficient energy products and supply home energy. The company now has £46.8 million market capital.
