Woodford Investment Management released a fund update on Friday and while there were a few tweaks to the portfolios, there was one key trade that stood out from the rest.
The fund manager has sold his entire stake in British American Tobacco (LON:BATS) (BATS.L) across both his Equity Income and Income Focus funds.
The update from Woodford Investment Management stated:
“We completely sold the fund’s position in British American Tobacco which has been present in the portfolio since its inception and has been a part of Neil’s mandates practically throughout his career. Neil owned stakes in tobacco companies before the dot.com bubble of the late nineties, but it was that episode of market history that marked a significant increase in tobacco exposure which has prevailed until recently. During the bubble, old economy stocks like British American Tobacco became completely unloved by the market – at the peak of the dot.com bubble in March 2000, you could have bought shares in British American Tobacco for just £2.25 per share. We have recently disposed of the holding at over £50 per share.
Over the last twenty years, tobacco has been the best performing sector in the UK stock market as a combination of dividend income, dividend growth and, over time, a re-rating to more appropriate valuation territory, resulted in material capital appreciation for investors and an even more substantial total return. We still retain some exposure to tobacco through Imperial Brands, which remains undervalued in our view, but the valuation opportunity elsewhere in the sector has largely played out. We have evolved the portfolio towards other areas of the stock market which we believe can deliver more attractive long-term returns to shareholders.”
Is the sale a surprise?
So am I surprised that Woodford has sold out of British American Tobacco? Yes and no.
British American Tobacco has been a true dividend growth champion over the years, raising its dividend from 32p per share 15 years ago to 169.4p last year, a compound annual growth rate (CAGR) of almost 12%. And Woodford has capitalised on this strong performance, having a significant holding in the stock since his Equity Income Fund’s inception.
Yet at present, I’m just not seeing a great deal of value in British American Tobacco.
Over the last two years, the share price has run from around 3,250p to 5,280p today – a gain of over 60%, and at that price, the stock’s forward looking P/E ratio is 18.5, relatively high for a defensive company. Last year’s dividend payout of 169.4 currently equates to a yield of 3.2%, which is not that high and therefore I can understand Woodford’s desire to look for other opportunities in the market.
In contrast, rival Imperial Brands appears to offer considerable more value, trading on a forward looking P/E ratio of 13.0 and sporting a trailing yield of 4.4%. Woodford clearly sees more value here, and I agree with him, having recently identified the stock in my Top Dividend Picks for July article.
Disclosure: Edward Sheldon, CFA owns shares in Imperial Brands.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.