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  • The bull and the bear part four – breaking down our clients' top share holdings

    We take a look at the case for and against some of our top client share holdings.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    This article is more than 6 months old

    It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

    We encourage investors to take a long-term view when buying shares, but a periodic review of what's in your portfolio is no bad thing. It's often more difficult to sell shares than it is to buy them, but sometimes the story changes for a particular stock and it might no longer fit with your investment goals.

    This is the last of our four-part series in which we look at some of HL clients' top holdings to outline both sides of the investment case.

    Read parts one, two and three.

    Investing in individual companies isn't right for everyone – it's higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

    This article isn't personal advice. If you're not sure whether an investment is right for you, seek advice. Investments and any income they produce will rise and fall in value, so you could get back less than you invest.


    Banks are somewhat of a hot topic these days as the will-they, won't-they debate over interest rate hikes rages. Broadly speaking, the lower the rate the less money Barclays makes on its loans. Net interest margins, which measure the difference between what the bank charges customers and pays for funding, are stuck at 2.9%.

    No one can predict with certainty where rates are headed, though. So long-term investors should keep in mind there's more to Barclays than interest rate speculation.

    The types of loans that customers take out also impact net interest margins. People have taken advantage of lockdowns and the lack of foreign holidays to paydown high-interest debt, so credit card borrowing has fallen. However as Covid-related uncertainty lifts, Barclays is seeing card balances start to recover, which should boost profitability.

    Another benefit of dissipating Covid-19 concerns has been the release of bad loan provisions. This has added a helpful tailwind which could boost shareholder returns in the short term, in addition to the bank's 3.9% prospective dividend yield. Remembers all yields are variable and not guaranteed and not a guide to future income.

    Barclays is more diversified than some of its UK peers. It has varied sources of income and about half of its income is due to come from outside the UK. It's this diversification that makes Barclays shares attractive.

    Chart showing Barclays revenue breakdown

    Scroll across to see the full chart.

    Source: Company 2020 annual report.

    The group's investment banking arm is a particular beacon of light, making up just under half of total revenue. It's carried the bank through the past year as borrowing rates plummeted, as fees for completing big corporate deals don't relate to interest rates at all.

    The bottom line:

    All banks' fortunes are inherently tied to the economy and Barclays is no exception. But Barclays is one of the more defensive picks in the banking sector, at least where interest rates are concerned, due to its diversity. While there's a case for an interest rate hike in the near-to-medium term, it's unlikely to be a substantial one.

    We think the group stands to benefit from an improving rate environment and increased consumer borrowing, but might not suffer as much as some if things don't improve as expected.




    Tesco without doubt has benefitted from the pandemic. But now the world's heading in a more normal direction, it bears asking whether the supermarket giant is worth holding on to.

    Sales growth of 3% post lockdown suggests it probably is. That might sound underwhelming, but coming after the unprecedented supermarket rush in 2020, Tesco's managed to not only hold onto customers but secure a greater share of their wallet. It's a testament to the strength of Tesco's business that it can successfully weather supply chain issues where competitors struggled.

    Back in 2020 the group sold its Asian businesses in order to sharpen its proposition, a move that took a bite out of revenues, but was the right call in our view. Excluding the impact of those disposals, the group's sales growth has been on a steady upward trajectory.

    Chart showing Tesco annual revenue (millions)

    Source: Refinitiv, 21/10/21. Green bars are estimates

    But heavy is the head that wears the crown. Tesco's having to fend off low-cost competitors like Aldi and Lidl, which could start to put pressure on margins. For now the group's in a strong position. However, we can't rule out a price war as supermarkets grapple for market share heading into the festive shopping season.

    Costs are another issue to consider – demand's been through the roof, yes, but the cost to serve it is also running higher. Time will tell whether Tesco's able to boost profit growth after shelling out for more staff and digital upgrades.

    The bottom line:

    The market seems unbothered by those challenges – the group's shares change hands for roughly 13 times profits, slightly above the long-term average. We tend to agree that Tesco looks well-placed to cope with these hurdles. A 3.8% prospective dividend yield makes any turbulence more palatable, although as ever no dividend is ever guaranteed.



    Legal & General

    It's hard to replicate Legal & General's business model. That's somewhat of a superpower in the world of business.

    Legal & General is an insurer, yes, but the group's business is anything but boring. The group takes on final salary pension obligations in exchange for a lump sum. The cash is managed by the group's investment management arm, taking a cut of the profit and paying out over the life of the contract.

    The group has some £1.3tn assets under management and has been expanding internationally. All of that's to say Legal & General are huge, and they're good at what they do. That kind of skill and scale is hard to replicate and it's a major advantage.

    The group's 6.9% prospective dividend yield is another attraction, particularly as Legal & General's earnings cover it. That's expected to continue steadily rising through 2024. However, no dividends are guaranteed.

    There are drawbacks to being a heavily regulated asset manager though. For one, the group's required to invest its own capital behind its pension products to make sure they're paid. Add to that the group's £5.7bn debt pile, and you'd be forgiven for questioning whether the group will be able to continue growing its dividend at the same rate.

    Chart showing Legal & General's long-term debt

    Source: Refinitiv, 21/10/21.

    The bottom line:

    Legal & General's got some obstacles to clear, but you can't argue with the group's strong position and impressive operating model. While we concede that dividend growth might not be quite as robust moving forward, the current yield and coverage ratio are still attractive, though not guaranteed.



    Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

    This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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