GlaxoSmithKline, BP, Tesco, Vodafone and British American Tobacco are the most-held stocks among its customers, presumably thanks to investors’ perception of these as reliable, safety-first sources of income.
However, according to investment research manager Sheridan Admans (pictured), some of these stocks have much more to offer than a 4 per cent yield, while others face more of an uphill struggle.
Here he reveals which ones are which.
GlaxoSmithKline
Admans says the pharmaceutical giant’s popularity is down to its defensive, income-paying characteristics, which make it ideal as a core holding. However, he adds that it also has strong growth potential.
"The prospects from the group’s R&D [research and development] are promising and should be a material driver of organic growth. Investors will be pleased to see new drugs coming to the market," he said.
"Earnings per share growth in 2013 is expected to be 3 to 4 per cent, which is positive for investors. The business is very cash-generative and is committed to using this for increasing dividends, share buybacks and bolt-on acquisitions. Over the last three years the dividend yield has grown at an annualised rate of 6 per cent."
GlaxoSmithKline has returned 103.75 per cent over the past 10 years, compared with 120.82 per cent from the FTSE 100.
Performance of stock vs index over 10yrs
Source: FE Analytics
According to FE Analytics, 391 of 3272 funds in the IMA universe hold GlaxoSmithKline in their top-10.
FE Alpha Manager Neil Woodford is a fan: his SJP UK High Income fund has the highest weighting of any fund in the IMA universe to the stock, at 10 per cent of AUM, while his Invesco Perpetual Income fund has the second-largest weighting, at 9.05 per cent.
BP
Admans says BP is slowly beginning to overcome the fallout from the Gulf of Mexico oil spill.
"Investors should now look beyond the disaster," he explained.
"The company is restructuring its portfolio to become a more focused oil-and-gas producer and offers good potential for long-term growth. BP has reinstated competitive dividends once again, gaining investor’s confidence."
"The continuing effect of divestments means that production in 2013 is still expected to be lower than 2012, despite four major upstream projects due to be productive by the end of the year."
"However, investors will be pleased to hear new projects are set to increase production, operating cash-flow and earnings momentum in the medium- to long-term."
Over 10 years, the stock has returned 56.64 per cent, but its share price is still down 23.11 per cent since the Gulf of Mexico oil spill in April 2010.
Performance of stock since Apr 2010
Source: FE Analytics
According to FE Analytics, 302 funds hold BP in their top-10.
Despite being traditionally viewed as a defensive dividend-payer, a number of special situations funds bought into BP following the Gulf of Mexico oil spill to take advantage of its depressed share price.
For example, Tom Dobell made it the top holding in his £7.3bn M&G Recovery fund shortly after the disaster.
Tesco
Another popular stock that has had a tough time recently is Tesco, although Admans is not as optimistic about its recovery potential as he is about BP’s.
"For a long time, supermarket giant Tesco has benefited from the price-conscious consumer and strong positioning in the UK," he explained. "However, recent results have been weaker due to strong competition from its rivals."
"We still remain confident in the management and their ability to turn the UK operations around. However, we believe the implementation of its new strategy and the regain of market share will take some time."
"Given the slow pace of global economic growth is likely to remain a challenge, as well as fierce price competition and promotions, we continue to recommend investors 'hold' for now."
The stock has returned 126.02 per cent over the past 10 years, but this is 40 percentage points down from the peak share price it recorded in this period, in November 2007.
Retail investors’ fondness for Tesco is not matched by their institutional counterparts – just 32 funds hold Tesco in their top-10, making it the least popular stock on the list in this regard.
Among these are the five crown-rated Invesco Perpetual Income & Growth fund and the four crown-rated CF Ruffer Equity & General portfolio.
Vodafone
Admans says Vodafone is best suited to investors seeking nothing more than a steady source of income.
"With a forecast yield of 5.4 per cent, it continues to be a top dividend payer in the FTSE 100," he said.
"However, current challenges and investment in expansion of data services mean it's a struggle to see any short-term catalyst to push the share price higher."
"Investors will be pleased to see Vodafone seeking new areas of potential growth for its business. It continues to pursue its debt-reduction plan, concentrating on its core growth activities, and cash-flow is expected to strengthen this financial year."
The stock has returned 145.14 per cent over the past 10 years.
Performance of stock over 10yrs
Source: FE Analytics
According to FE Analytics, 348 funds hold Vodafone in their top-10. Its high yield means this list is dominated by income portfolios, including the five crown-rated Jupiter High Income and Cazenove UK Equity Income funds and the £950m Schroder Income Maximiser portfolio.
British American Tobacco
Admans says that despite the fact that British American Tobacco is listed in the UK, it is a multinational company in every sense of the word, offering investors exposure to fast-growing emerging markets as well as more developed ones.
"British American Tobacco [BAT] is a global brand experiencing good volumes of growth and its geographical spread is its core strength."
"Recent results stated the company had offset weakness in southern Europe with pricing in its key emerging market regions: the Middle East, Africa and eastern Europe. Cost-savings have also come from factory rationalisation, system standardisation and productivity savings."
"Pressure on disposable incomes is likely to continue to impact BAT’s bottom line in its developed market operations, although some of this should be offset by growth efforts in emerging economies."
"For now, BAT is a strong 'hold' for income-seekers given the attraction of the dividend and its rate of growth."
Over the last decade, British American Tobacco has delivered the highest returns by far of any stock on this list, at 712.54 per cent.
Performance of stock over 10yrs
Source: FE Analytics
FE Analytics data shows 238 funds hold it in their top-10. Among these are income heavyweights such as Woodford’s Invesco Perpetual High Income and SJP UK High Income funds, and Newton Higher Income. It is also the top holding in Morgan Stanley Global Brands.
