Job Curtis: Shell 6% Yield is Safe

Gold Rated investor Job Curtis of City of London trust highlights three companies in his portfolio offering sustainable income

Emma Wall 12 March, 2018 | 10:48AM

 

 

Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give his three stock picks is Job Curtis, Manager of the City of London Trust.

Hello, Job.

Job Curtis: Good morning.

Wall: So, what's the first stock you'd like to highlight today?

Curtis: Well, my first stock is a very large global stock. In fact, it's the largest stock by market capitalisation in the London Stock Exchange. It's Royal Dutch Shell (RDSB). And I think it's been a self-help story here. Over the last few years they have reduced their costs very significantly and they also bought BG at the bottom of the oil bear market, which has been a very good acquisition for them.

It's given them high-quality assets in Brazil, oil fields in Brazil as well as enhanced their leadership in LNG, which is the fuel of the future. So, Shell is offering a 6% yield, slightly over 6%. So, I mean, it's a very big company. It's not going to soar away, but I feel that the 6% yield is safe and in addition, you can see some re-rating potential and some capital growth on top of that. So, for me, it's a stock I'd expect a double-digit return over the next 12 months.

Wall: And it is a stock that despite the fact that the oil price has recovered significantly from the real lows, remains quite out of favour. People are still quite nervous about mining companies, aren't they?

Curtis: Well, yes. It had a strong move from the lows in 2017 and it's treaded water so far this year. But I think the oil price outlook, as you say, is a lot better. I mean, global growth has been strong. And as all the main oil companies have been cutting back on exploration, it's sort of tightened the market. I mean, there has been increased supply from U.S. shale producers, but it's not in my opinion enough to sort of dent quite a positive backdrop for the oil price.

Wall: And what's the second stock?

Curtis: The second stock is more domestic. It's Lloyds Banking (LLOY), which is obviously now 100% owned in the private sector. The government took 40% of stake during the financial crisis. And it's really rebuilt its capital ratios. It is a leading mortgage and banking group within the UK. It's purely domestic. And it's on about a 4.5% dividend yield and it's relating its share price to its book value, it's on about 1.2 times, which is quite low really for a profitable domestic bank.

I've seen banks in other countries, other jurisdictions, on much higher ratings. So, I think, this will be a good dividend stock going forward. It's gone back to what it was originally. And it provides some dividend growth on top of that 4.5% yield and I think there is some re-rating potential.

Wall: As you said, it is very domestically-focused. How much then do you consider the domestic economic outlook, because we do have some clouds on the horizon in the UK?

Curtis: Yes. I think if you are very fearful of the UK economy, then this is not the right stock. But if you've got a relatively sanguine outlook and think we're a resilient country and whatever comes, we'll manage, then I think Lloyds – I think it's baked in a lot of pessimism about the domestic economy. And so, I think it looks quite interesting from that point of view.

Wall: And what's the final stock today?

Curtis: Well, the final stock is a similar theme really. It's domestic and it's our leading or biggest real estate investment trust, which is called Landsec now. It's used to be, for many years also known as Land Securities (LAND). It's been around a long time. And it's actually standing on a discount to its net asset value of around 30% which is unusually high. It's reduced its debts in recent years.

So, its loan to value is in the low 20s. And its average lease length from very blue-chip class tenants is around 9 years. And it's mixture of London offices and very high-quality shopping in London and shopping centres. So, it's very out of favour, the whole real estate sector or bits of the real estate sector. But it's offering a 4.5% dividend yield and I think, again, it's not for somebody who is very nervous about the UK economy. But if you are taking a reasonably optimistic view, it's looking excellent value.

Wall: Job, thank you very much.

Curtis: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
City of London Ord430.50 GBX-0.12
Land Securities Group PLC951.00 GBX-0.94-
Lloyds Banking Group PLC61.57 GBX-0.82
Royal Dutch Shell PLC B2,659.50 GBX1.29
About Author Emma Wall

Emma Wall  is Senior International Editor for Morningstar