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The bull and the bear part three – breaking down our clients’ top share holdings

We take a look at both sides of the coin for some of our top client 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 may no longer fit with your investment goals.

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

Read part one and part two.

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 will rise and fall in value, so you could get back less than you invest.

Vodafone Group – calling on connectivity

Our reliance on being connected to the digital world at all times isn’t going anywhere, making telecoms like Vodafone a potentially attractive long-term investment. The rollout of 5G adds to the appeal, as the faster network means more connected devices and will only add to our dependence on connectivity.

But it’s expensive to build and maintain a mobile network, and the cost to gain access to the 5G spectrum has been steep. Last year Vodafone shelled out €1.2bn to gain access to the faster network. The group also expanded its network in Germany, the Czech Republic, Hungary and Romania when it took over Liberty Global in an €18.4bn acquisition. This added €8.2bn to the group’s debt pile, bringing the grand total to €40.5bn.

Vodafone annual capital expenditure (millions)

Scroll across to see the full chart.

Source: Refinitiv, 20/10/2021. Green bars are analyst estimates.

That sounds like a lot, but it’s part and parcel of running a major telecom. The debt is 2.8 times the group’s underlying cash profits, which is within management’s targeted range. However, it can quickly become a burden if conditions turn sour.

While the staggering cost to gain a seat at the telecoms’ table is enough to keep smaller competitors from entering the arena, competition among the handful of large operators is fierce. Customers are easily swayed by price, and that’s a battle none of the companies want to fight.

Vodafone’s answer has been developing service bundles – customers who use Vodafone for their broadband, fixed line and TV will find it harder to switch. This doesn’t guarantee customer retention though. We think this lack of differentiation between providers is a risk.

Holding on to customers is essential if Vodafone’s to continue paying its dividend, and with a prospective yield of 7%, that’s a huge part of the investment case. Remember though, yields are variable and not guaranteed.

The bottom line

Vodafone’s established itself as a major player in the telecom space, a feat in and of itself. The opportunities as 5G continues to gain momentum are sizable and we think Vodafone could benefit. For now, the group’s on steady ground and the dividend looks well supported. But customer retention remains a question mark for us and we’d like more proof that Vodafone’s base is getting stickier.



Aviva – boring can be beautiful

Being called boring is typically an insult, but when it comes to investing in insurers like Aviva, it’s a compliment. The group’s cash-generative business means it can return its profits to investors by way of dividend payments and capital return programmes. With a 6.1% prospective yield on offer, this makes up the bulk of the investment case. Yields are variable and not guaranteed.

Aviva’s spent the past year fine-tuning its strategy to drill down on its key markets, the UK, Ireland and Canada. The result was a bumper performance with the group delivering some of its best ever sales figures in the first half.

Aviva annual revenue (millions)

Scroll across to see the full chart.

Source: Refinitiv, 20/10/2021. Green bars are analyst estimates.

Investors are enjoying the fruits of this shift. Management increased the dividend by 5% at the half-year and pledged to send £4bn back to shareholders through dividend payments and share buybacks.

With revenue growth ticking over, management’s turned its attention to reducing costs to keep the good times rolling. By the end of the year, the group’s expecting to trim costs by £225m compared to 2018 levels, with a further £75m on the chopping block for 2022.

Digitisation has been a key part of this cost reduction strategy, and it’s something we see as a key advantage for Aviva going forward. Aside from lowering costs, the group’s digital strategy should also make it easier to cross-sell.

The bottom line

Aviva’s set itself up for success with a focused strategy and strong growth prospects. As long as the group’s able to maintain its revenue growth from the new lower cost base, we think shareholder returns could be well sheltered, although there are no guarantees.



BT Group

The internet is a service that the world can’t live without, so BT’s in a more secure position than some others. But as we explained above, operating within telecommunications is an expensive undertaking. The group’s growth prospects lie in the rollout of fibre broadband and 5G, which will cost about £1.3bn over the next five years.

BT annual capital ependiture (millions)

Scroll across to see the full chart.

Source: Refinitiv, 20/10/2021. Green bars are analyst estimates.

While the outlay is expensive, it should ultimately lower costs in the long run as the new network will be cheaper to run. Add to that management’s aims to digitise the customer experience, and BT’s expecting to save £1bn per year through 2023, and £2bn per year from 2025.

On paper, this makes sense. But a lot can happen in six years, especially in the age of the internet. There’s a chance BT will have to shell out more than expected in order to keep its network current.

The pandemic dinged BT’s revenue as the closure of pubs hurt sports revenue and working from home meant some corporate customers dropped off the radar. Management suspended dividends as a result, though they’re expected to resume this year.

The group’s prospective yield of 5.4% isn’t nothing, but it’s not quite as robust as it used to be. As always, yields are variable and not guaranteed. As we emerge from the pandemic, those headwinds should start to subside. But it could take time before BT’s confident enough to restore the dividend to its former glory.

There’s also a chance BT could be considering the sale of its sports business, which would generate an influx of cash. The group’s net debt sits comfortably at 2.4 times cash profits, which means proceeds of a sale could help accelerate the infrastructure upgrade and be funnelled back to investors.

The bottom line

BT has its attractions, but the group is up against some headwinds – this is reflected in the group’s valuation. It has a price to earnings ratio of 7, which is slightly lower than the long-term average.

Execution will be key moving forward – the group’s ability to restore dividend payments depend on it. BT’s move to digitise the customer experience and improved infrastructure should offer long-term tailwinds as the 5G rollout gains momentum, but as ever, there are no guarantees.



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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