Investing on a low income.

Category: Uncategorised

What share to buy?

The first question I always get asked by newbie investors is focused around what share to buy. Through some seminars I’ve held at university recently I’ve had the opportunity to…

The first question I always get asked by newbie investors is focused around what share to buy.

Through some seminars I’ve held at university recently I’ve had the opportunity to gain valuable insight into how fellow students invest and what makes a share a buy for them.

But one thing has become clear – the last question newbie investors should ask is ‘what share to buy’.

No Comments on What share to buy?

Christmas clean up – Sorting out my portfolio

My portfolio was a mess! With many of my early investing mistakes still present in my portfolio I finally decided to bite the bullet. I CLEANED UP! All investors evolve…

My portfolio was a mess! With many of my early investing mistakes still present in my portfolio I finally decided to bite the bullet.


All investors evolve over time. We learn from our mistakes and adapt our strategies accordingly. But, what should you do if past mistakes are still evident in your portfolio?

It can be a painful process, that costs money in the short term BUT if a stock’s fundamentals mean it no longer fits with your overall strategy, couldn’t the capital tied up in it be deployed somewhere else?

3 Comments on Christmas clean up – Sorting out my portfolio

Take pleasure when others spend big – Debunking their spending

  Sometimes, frugal living is tough, and one of the hardest things about frugal living is watching others spending big. It’s sometimes hard to watch as your friends go on…


Sometimes, frugal living is tough, and one of the hardest things about frugal living is watching others spending big.

It’s sometimes hard to watch as your friends go on expensive holidays, buy expensive cars (mostly on finance) and enjoy the finer things in life.

BUT, we should take pleasure when others spend big!

No Comments on Take pleasure when others spend big – Debunking their spending

An in depth look at the UK mail sector and Royal Mail

Royal Mail. Since the government put Royal Mail shares on the market in 2013, investors can be quietly happy with their returns. Investors who bought in at day one at…

Royal Mail.

Since the government put Royal Mail shares on the market in 2013, investors can be quietly happy with their returns.

Investors who bought in at day one at a price of 330p a share would have seen a return of just over 35% to date, excluding dividends.

With good dividend stocks at decent prices hard to come by in the FTSE, I thought I’d take a closer look at Royal mail.

With an attractive growing dividend, this may be one for dividend growth investors to look out for.


What makes Royal Mail so interesting is that it’s a former state-owned monopoly which is still in transition from public ownership to private ownership.

The company still holds an effective monopoly in the letters market but are battling heavy competition in the parcel market.

Royal mail operates under two main divisions;

UK Parcels, International & Letters (UKPIL)

UKPIL operates in the United Kingdom collecting and delivering parcels and letters through approximately two main networks, the Royal Mail Core Network and Parcelforce Worldwide

General Logistics Systems (GLS)  .

GLS operates in continental Europe and the Republic of Ireland and has a ground-based deferred parcel delivery network in Europe. GLS provides parcel and express services, as well as logistics solutions.

A brief history;

In 2006 Royal Mail lost its monopoly on the UK parcel market when it became open to competition from companies such as UKMail, DPD and Hermes.

Although Royal Mail also lost its monopoly on letters in 2005, competitors just don’t seem interested in this ever shrinking market. The withdrawal of Dutch competitor Whistl in 2015 left the company effectively unopposed.

In 2013 Royal Mail was offered to investors for 330p a share, thus privatising one of the last surviving state owned companies in the UK.

The overall postal market

Royal mail’s two markets can be defined by the following statements;

Declining letter volumes and increasing parcel volumes.

In 2013, Royal Mail commissioned a review into future volumes from Pwc. The results can be seen below;

Screen Shot 2016-08-25 at 15.10.20 Screen Shot 2016-08-25 at 15.10.15

As the graphs clearly indicate, the UK has an increased demand for parcel services but a decreasing demand for letter services.

These trends are also clear in other developed countries and there are no signs of a reversal.

With a decline in mail volume, Royal mail is rightly positioning itself for the growth in parcels and cutting costs.

The parcel market and Royal Mail’s positioning

As we can see from the chart below, Royal mail continues to enjoy the lion’s share of the UK parcel market

Screen Shot 2016-08-25 at 15.23.40
Source: Royal Mail PLC 2015-2016 results

But, this dominance is declining year on year as is evident above.

The overall parcel market grew 6% growth  in 2015 and Royal Mail estimates a further 4% volume growth moving forward. This growth has allowed Royal mail to grow parcel volumes despite its declining market share.

Whilst focus on the parcel market appears to be a winning strategy significant hurdles exist that I’ll outline below.


The problem with Royal Mail’s strategy is the intense competition they face in the industry.

This is evident from the meager 1% revenue growth achieved from a 3% increase in parcel volumes. This is a worrying sign of declining margins to come.

If this trend is to continue then clear challenges await for the company;

2016 results show that the 1% increase in parcel revenue was offset by a 2% decline in letters revenue.

With the majority of Royal Mail’s revenue coming from its letters division this continued decline will slowly erode the balance sheet unless growth in other areas (mainly parcels) pick up.

Screen Shot 2016-08-25 at 17.40.15

As we can see from the above table taken from the company’s 2014-15 trading results Total letters accounted for £4,567mn of revenue as opposed to £3,190 for parcels.

Screen Shot 2016-08-25 at 17.43.40

The continued decline in letters revenue (although less than expected) as evidenced in the company’s 2015-16 trading results above creates a pressure on the company to deliver on parcel growth.

Even as the parcel market grows and parcel revenue increases it seems tough for Royal Mail to make a net gain on their overall revenue due to declining letter revenue.

Another revenue worry I have moving forward is the Royal Mails obligation to offer a universal service which means delivering to some very rural areas without the ability to charge more.

This is in stark contrast to competitors who can simply cherry pick the most profitable urban regions and rely on Royal Mail for ‘the last mile’ delivery. Royal Mail has hit back by ramping up the charges for this service but competitors have complained to the regulator Ofcom. With such murky legal waters ahead this certainly casts a shadow over the business.

Profit on the other hand looks promising if we strip transformation costs with profit up 5% in 2015.


Royal mail has done an outstanding job of turning the company’s finances around.

Debt is down significantly since 2012 and the company continues to make significant efficiency savings;

Screen Shot 2016-08-25 at 15.51.56

(Source: Ft Markets, Royal Mail Plc)

The group has also managed to shed 3,500 jobs since 2015 whilst also increasing productivity by 2.4%. These are promising signs for a company that needs to shed costs fast in order to maintain margins (especially in parcels) in a competitive market.

The company’s cash flow looks worrying at first glance;

Screen Shot 2016-08-25 at 16.09.57

But when you consider the transformation costs the company has occurred the weak cash flow becomes understandable.
Transformation costs in 2015 were £191mn, and the company projects further costs of £160mn in 2016-2017.

Most impressively is the operating profit margin now being achieved by the company as a result of these transformation costs with the profit margin jumping from 4.7% in 2014 to 6.1% in 2015.


Royal mail offers a tempting dividend yield of 4.2% and sits comfortably at a payout ratio of 54% from results filed in May.

With room for movement in the payout ratio the company could continue to increase its dividend payments even if earnings disappoint.

The company is also committed to a ‘progressive dividend policy’ meaning that dividend investors can be confident of continued dividend increases in the future.


Due to the scale of transformation costs it’s difficult to efficiently value the shares based on EPS.  Transformation costs in 2016-2017 are expected to come in at around £160mn.

Instead, I decided to use a dividend discount model to value the company’s shares.

As revenue is going to be difficult to expand in such a competitive market (and relative to management’s past performance) I see cost cutting measures as the main source of EPS growth for the company moving forward.

After a big dividend jump from 2014-2015 I expect dividend growth to stabilize at around 5% due to the above mentioned factors.

I factored in a 10% discount rate to account for the risk of our capital

The dividend discount model gives me a fair value of 442p a share. Meaning that this stock appears 15% overvalued by this metric.


Royal mail management is doing all it can to streamline the business moving forward, yielding impressive results with productivity and margins on the up due to a successful transformation strategy. But, there is only so far that transformation can go before the company is unable to continue to make large savings through efficiency.

The worry from then on would be the poor increase in parcel revenue relative to parcel volume achieved as this metric tends to point towards narrowing margins.

There’s too much uncertainty for me to buy the stock at this price but if the company goes on to continue to dominate the parcel shipping sector, investors should be handsomely rewarded with dividend growth and capital gains.


No Comments on An in depth look at the UK mail sector and Royal Mail

One stock I’d love to own – Just not at this price!

I absolutely love consumer goods stocks! Unilever (ULVR) is one of my core holdings and I just bought into flower foods (NYSE:LFO). I love Consumer good stocks because they are…

I absolutely love consumer goods stocks! Unilever (ULVR) is one of my core holdings and I just bought into flower foods (NYSE:LFO).

I love Consumer good stocks because they are generally very defensive and predictable investments. After all, even in recessions people still need to eat, drink and clean.

Stocks in this sector also boast superior margins, as the value of their brand mean that customers are willing to pay that much more.

What would you pay more for, Unilever’s Ben and Jerry’s or a Tesco copycat?

Consumer goods stocks in today’s market

With low interest rates people have been buying these defensive stocks for their dividends, which trump measly bank account rates.

High demand for these stocks have left them at high p/e ratios. For example;

Proctor and Gamble (PG) sports a p/e of 25

Unilever of 24.1

Colgate Palmolive (CL) of a whopping 48!

Even at these high valuations the stocks continue to climb and even Procter and Gamble whom are struggling with growth are up over 16% year to date.

With such high valuations I often sit back and watch momentum and demand drive these stocks higher, waiting patiently for an opportunity.

One stock that I have my eye on is Reckitt Benckiser (RB), a British consumer goods company that specialises in health and hygiene products.

Its rapid growth and impressive portfolio of products has caught my eye.

The company owns internationally recognisable brands such as Durex, Dettol, Clearasil, Veet, Strepsills and Scholl. With such a great portfolio of products I felt the need to take a closer look at the stock’s fundamentals;


Reckitt Benckiser’s sales growth has been impressive as of late with year end results for 2015 showing a further 6% growth in like for like sales at the company. What I love most about this company is it portfolio of Health products, which people will buy regardless of pressures on disposable income.

The growth in revenue from its Health division continues to be strong with a 14% like for like growth in2015.

Screen Shot 2016-08-19 at 09.31.26.png

But, as we can see from this tablefrom the company’s 2015 annual results this growth seems to be a tale of two halves.

The company’s Health segment continues to perform strongly but there are certainly signs of weakness in their home division and portfolio brands – investors should be aware of this.

Whilst Home and Portfolio brands make up a minority % of sales, further weakness in these divisions could neutralize (or certainly damage) the impressive growth in the health division.

We can somewhat see this concern play out in the EPS figures – EPS growth has not been strong with an average growth rate of only approx 1.6% since 2012. The company’s turnover has actually declined over the past few years from £9.485m in 2011 to £8,875m in 2015.


The company has paid a dividend since 2008 and has managed to increase its payments by 84% since then. The company’s payout ratio for 2015 was also a comfortable 54% meaning that there is room for dividend growth if EPS stay flat. Dividend yield based on 2015 year earnings is an anemic 1.9%


With no major red flags concerning the company thus far, it’s time for me to burst your bubble.

RB is not a buy!

I feel that this company is grossly overvalued, especially compared to its peers such as ULVR.

Looking over the past five years, we can see that the stock has an average 5-year p/e ratio of 20.2. But today we can see that the stock is trading hands for 30.8x earnings.

Even if we take the highest estimate for 2016 earnings of 301p per share the stock is still trading hands for 24.7 times earnings.

The 30.8 p/e ratio means the market is pricing this stock for some serious growth, something it has failed to deliver over the past five years. Yes, the growth in certain divisions is impressive but we must look at the company as a whole.

I was really interested to see what a dividend growth model valuation would give as a fair price for Reckitt Benckiser and I decided to be generous with my estimations too.

I factored in a 8% discount for the risk of our capital (As it’s a pretty steady earning stock in a great sector), and assumed that the company would grow its dividend by 6% annually (above its average 5 year growth rate of 3.85%).

Even with my very generous and optimistic figures the stock came in at a fair value of – 6,950p a share. Meaning that by my estimations the stock is at least 15.3% over-valued at present.


Reckitt Benckiser is a brilliant company that is powering ahead with the growth of its Health division. In an uncertain world it makes sense to invest in companies that have a great portfolio of essential health products that people will always need to buy. I’m confident that management can continue to deliver growth in this segment but the decline in their portfolio brands puts a question mark on the degree of overall EPS growth moving forward.

At a lower valuation I’d certainly roll the dice a bit and feel confidence that the intrinsic value I’d be getting would make any disappointment acceptable (relative to the price I paid). But, this company is priced for significant growth and that is far from certain.

If the company does indeed grow as projected then I expect the price to continue to climb higher, sustaining its current momentum which makes the stock unappealing in terms of valuation and yield. But, one slip will certainly lead to troubling times for the share price and ,hopefully, a buying opportunity for me!

Advice: Avoid at these prices, but keep an eye out.

Disclosure: I am/we are long ULVR, FLO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

No Comments on One stock I’d love to own – Just not at this price!

Why I just sold BP.

A tough enviroment and deteriorating fundementals mean BP is a sell for me.

Recent sell: BP.

I really hope that I don’t need to write too many articles like this. When I buy a stock, I want to hold that stock indefinitely. My hope is that as I only invest in high quality dividend growth stocks that these stocks will continue to perform and pay me an income for life. For me to have to sell one of these companies means that something somewhere went wrong.


In my portfolio I want predictability, not in terms of share price (frankly my shares could drop 50% for all I care), but in terms of the income that I gain from these shares. I need confidence that a company can meet its dividend obligations without fail. Unfortunately, I no longer feel that BP can continue to do so in the current environment.

EPS for 2015 came in at -0.35 a share whilst reported dividends per share were 0.40. This means that the company has had to take on debt and sell assets to fund its dividend. Judging by the continued weakness in oil price and Q2 results we can expect that BP will once again have to load up on debt to meet its dividend obligations this year. Although there are predictions that oil price will recover and whispers of any output freeze – the simple answer is that we don’t know if these events will happen.

I’m not happy to sit in hope.

Is it really prudent for investors to sit and hope something is going to happen or should they act on the information they currently have to hand?

I don’t like betting on what may happen and hoping that predictions materialise. The truth is, we don’t know when oil prices will rise  and I’m not comfortable in holding a stock that I feel is in a position of squeeze between pleasing shareholders (via dividend) and doing what’s best for the balance sheet and the company in the long-term. ConcoPhillips is a lesson to investors who think that oil majors can continue to take on debt with the company recently slashing its dividend from 74c per share to 25 per share. In my mind (from what I understand from the decision), ConcoPhillips made the correct decision to protect their balance sheet from further damage and to brace themselves for lower prices for long.

When I begin to look at BP’s fundamentals, its debt and continued asset sales I begin to feel like the prudent thing for the company to do would be to cut its dividend.

XOM Better placed.

I’m sure that BP will be just fine over the long-term once oil prices recover but their dividend remains in question.  Remember – dividend growth investors seek to grow their income from dividends over time and shouldn’t look for capital gains as a factor for investing.

I’m not selling out of oil altogether, I’m simply reducing my holdings in this volatile environment and placing my bets on a company that I feel is in much healthier shape. I won’t go into detail, but it’s clear to me that XOM is much better placed to ride out a situation where oil prices remain low for years to come. It’s balance sheet is superior sporting a much lower debt to equity ratio (by circa 60%), and its EPS are still in positive territory. It’s also worth considering that XOM has a AA+ credit rating from S&P as opposed to the A-2 BP holds. This means that any debt XOM does take on will likely have smaller interest repayments. These ratings are also indicators to the overall financial strengths of the companies.

I also feel much more confidence in XOM’s managements committment to its dividend with its 33 year dividend growth streak a testament.


BP isn’t going to disappear tomorrow, don’t worry. If you’re a share holder and are happy with the risks then by all means hold, who knows, it may pay of handsomely for you if oil prices tick up in the near future. Enjoy the yield! But, for me, the risk just isn’t worth the reward. When a stock’s current fundamentals are pointing towards danger and my holding in that stock is showing a 10% gain, I’m happy to lock in the capital gain (tax-free) and buy a stock that I feel has more solid fundementals.

1 Comment on Why I just sold BP.

Type on the field below and hit Enter/Return to search