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Shares aren’t a one trick pony

Not all stocks are created equal. Here’s a look at how some shares might be more diverse than you think.

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.

A lot of people avoid investing in shares because they can be riskier than funds. Funds are made up of lots of different investments, meaning if one company’s share price falls, the effect could be cushioned by the performance of others.

But not all stocks are created equal. Some of the UK’s individual listed companies have huge breadth, which can offer some shelter if one part of the business struggles.

Whether that’s through geographical diversification – meaning they rely on a number of different countries for revenue – or have customers spanning a broad range of product markets. Individual shares aren’t necessarily a one trick pony, and they could offer opportunity while still suiting how much risk someone is happy taking.

This article isn’t personal advice, if you’re unsure if an investment is right for you, ask for advice. Remember, all investments and any income they produce can go down as well as up in value, so you could get back less than you invest.

An Asian opportunity disguised as a UK stock

Many of us will have heard of HSBC. The name is an abbreviation of ''Hong Kong and Shanghai Banking Corporation''.

We might twig that HSBC has Asian routes but from an investor’s perspective, we feel the sheer scale of its Asian exposure can be clouded. That’s probably because it’s such a well-known face on so many of our local high streets. But in reality, HSBC makes just under two thirds of its pre-tax profit in Asia.

With a market cap of £84.2bn, it’s one of the UK’s biggest companies. But as you can see, a UK label doesn’t mean you’re getting a UK company. HSBC’s profit drivers are decidedly international. And it’s pumping a lot of money into becoming even more Asia-focused.

The pivot away from developed markets is taking longer than planned, but overall we’re supportive of the plan. Not least because a focus on emerging economies could be an exciting future growth opportunity – one you might not think you could gain access to as a UK share investor.

The other big plus where HSBC’s concerned is its prospective 4.4% yield, which looks sustainable thanks to having more capital than expected. Remember though, yields are not a reliable indicator of future income and no dividend is ever guaranteed.

The elephant in the room is low interest rates. These are a nightmare for banks because it makes it a lot harder for them to make money on the loans they offer. As long as interest rates stay on the floor, HSBC will be held back. Together with the longer-than-planned turnaround means there are some near-term challenges.

We think that’s reflected in the valuation. The group’s shares are trading at 0.6 times the value of its assets, so there could be some upside if conditions become more favourable. Overall, we think HSBC’s international exposure, huge scale and prospective yield, means it could be a diverse option for investors to consider.

Remember though, yields are variable and not a reliable indicator of the future.



Master of all trades

Some UK companies are hiding enormous international revenue streams, others offer some diversification because they cover a broad range of products.

Associated British Foods (ABF) is one of those businesses. The group owns Primark – and this makes up just under half of group revenue in normal times. But beyond that, and slightly more in keeping with the name, ABF is an eclectic mix of food businesses. These include Premier Foods, which is responsible for the likes of Jordans cereals and Kingsmill, as well as an Ingredients division, which handles things like yeast and other bakery components.

These parts of the business did well during lockdown, which helped offset some of the effect of Primark’s store closures. Full year revenue was down 12% last year, and profits fell 35%. That does sound extreme, but those falls would’ve been even more severe were it not for food stuffs picking up the slack.

There’s also a sizeable Sugar business, which makes about £1.6bn in revenue a year. There are some near-term tailwinds. The main one is an increase in sugar prices, but operationally the bigger plants are also doing much better. This is significant because while we’ve been very impressed with Primark’s trading since restrictions lifted, it’s not firing on all cylinders yet. The sugar business is on hand to sweeten the numbers.

The sugar industry is cyclical though – it goes through highs and lows. So it can’t carry the load all the time, and there are no guarantees.

ABF has an enviable balance sheet too, with £1.5bn of net cash at the last count. That means it should have enough resources to stomach some ups and downs.

Essentially, the Primark owner is about as far from being a one trick pony as possible. As the last year demonstrates, when one area of the portfolio struggles, another can help pick up the slack. Who knew Country Crisp and fast fashion could be such close bedfellows? As ever though, there are no guarantees and like with any investment, you could get back less than you invest.



Everyone needs soap

Unilever is another UK giant. Chances are your kitchen cupboard and bathroom cabinet hold at least one of the Dove and Ben & Jerry’s maker’s products.

Unilever is a truly global company. Just under half of the group’s €50.7bn of annual turnover comes from outside Europe and The Americas. We admire the split between emerging and developed economies. In all, 2.5bn people use one of its items every day.

But it’s not just geographically diverse, Unilever’s products span a large range too. A lot of the business is geared towards things that you and I pick up at the supermarket to use at home, like Marmite. But it also caters towards restaurant and hospitality trade. There’s also a significant beauty and home care portfolio.

Now, as you can imagine, the out-of-home (hospitality) side of things really struggled in the pandemic because no one was eating out. But the beauty of such a diverse business model meant other areas could help pick up the slack. In 2020, the group recorded underlying sales growth of 1.9%.

The fact that such a huge number of people use Unilever’s staples means revenue is more reliable than for other companies. Everyone needs soap. (The jury’s still out on Marmite though). The point being, this visibility gives Unilever the firepower to pay an attractive dividend. The prospective yield for the next 12 months is 3.4%, and we're also encouraged by the €3.0bn buyback programme.

Remember though, no dividend is guaranteed and yields are not a reliable indicator of future income.

The power of Unilever’s diverse footprint and product range is immense. But there are things to keep in mind. Growth has been sluggish, even a bit disappointing, for a while. In order to speed things up, the group’s undergoing a major portfolio overhaul. First up will be the sale of the tea business in developed markets – household names like PG Tips are among those being cast out. Other sales and acquisitions will follow.

This won’t just generate a lot of short-term restructuring costs, but it will take time too. Unilever is a large and complicated beast, so change takes a while.

Overall, it’s hard to overstate Unilever’s enormous size and importance to the global consumer network. These are fantastic assets that offer great diversification, and should ultimately hold it in good stead. In the medium term though, investors shouldn’t be expecting exciting levels of growth, and the market’s likely to be sensitive to any setbacks to the turnaround.



What to remember

Investing in an individual company doesn’t mean the focus of that investment is narrow. There are some options out there for investors that would like to hold an individual share, but don’t want to expose themselves to as much risk as something more specialised. But it’s also really important to remember that as individual stocks, there tends to be a bit more ups and downs than with a fund and past performance is not a guide to the future.

Diversification – the investor’s tool we all need to talk about

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.

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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