Hobson: Stocks for Your Pension Pot?

THE WEEK: Morningstar columnist Rodney Hobson considers the winners and losers of this week's stock market news

Rodney Hobson 17 April, 2015 | 3:04PM
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Must Do Better

The big question for those eyeing up their pension pots and wondering how much to withdraw is this: Would you do better with the money than your pension provider?

It is a question you must answer when you reach pension freedom age, and you must answer it truthfully. It is no use bemoaning poor returns from annuities if you are going to squander the cash and end up with no income at all.

Most of us save for our pensions because we are forced to do so. We should choose to invest to produce an income in our old age, rather than rely on a government pension that will come under increasing pressure as the population ages.

Whether you have reached 55 or not, at least some of your money should be going into shares in solid, profitable companies. The fact that the FTSE 100 index has reached new highs and shares are no longer cheap should not put you off buying for the long term each time the index dips. The average Briton will be retired a long time.

A Lesson Worth Learning

It used to be a favourite type of school exam question: “Compare and contrast…”

Some lessons are worth remembering and the technique worked well when Diageo (DGE) and Unilever (ULVR) announced updates this week. Unilever came out of the examination rather better.

The two companies are in very different fields, Diageo producing drinks including Johnnie Walker whisky, Smirnoff vodka and Guinness stout, while Unilever is renowned for food and beauty products including Bovril beef extract, Lipton’s tea and Dove soap. Diageo is more focussed while Unilever is spread across more consumer categories.

Yet both are global players with well-known brands and both depend on consumer spending. You would expect them to rise and fall together. After all, if we need to cut down on the booze we can also manage without beauty products or eat our salad without Hellman’s mayonnaise.

Diageo reported net revenue down 0.7% in the first three months of 2015, complaining of tough conditions in emerging markets. This seems odd given that Unilever reported revenue up 12.3% in the same three months thanks to buoyant emerging markets.

Both companies are struggling in Europe but Unilever is also doing better than Diageo in North America.

Unilever shares understandably rose on the news but I think they still look better at this stage than Diageo, which slipped back. Morningstar analysts believe Unilever is a tad overvalued at present, however; while Diageo shares are seen as slightly undervalued. Both companies offer yields close to 3%.

Read All About It

The big fear at WH Smith (SMWH) when its highly successful chief executive Kate Swann left was that the news and stationary retail business she had turned round would start to flounder again. Such fears have proved unjustified as her successor Stephen Clarke has carried on her policy of putting improved profits ahead of higher sales.

So while sales fell 5% in the six months to the end of February, pre-tax profits rose a very respectable 4%. Swann wisely led the shift from the struggling High Street to bustling railway stations and airports and the travel side saw sales and profits rise 7% in the latest period. High Street profits were up too, by a more modest 2%, despite a continuing fall in sales.

I have looked at WH Smith several times and been tempted to invest but each time a buying opportunity arose I had no spare cash to take advantage. I regret missing the chance but I am reconsidering after the shares succumbed to profit taking. It is not too late to look at a stock that has a yield of 2.6% and better prospects than most in the retail sector.

Ask the Workers

I certainly wouldn’t put supermarket Morrison (MRW) in my pension pot but anyone looking for a punt should consider a news item this week. New chief executive Paul Potts proposes to reduce the bloated head office staffing levels and put more workers into the stores. He has been touring stores and actually worked in one over Easter.

It reminds me of Justin King’s arrival at Sainsbury (SBRY) some years ago. King recognised that Sainsbury’s problems were at the centre and it was no use blaming store managers as his predecessor did. Above all else, King listened.

If Potts is listening, this will be the turning point for Morrison. 

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not necessarily the views of Morningstar UK.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Diageo PLC3,733.50 GBX0.43Rating
Morrison (Wm) Supermarkets PLC  
Sainsbury (J) PLC292.60 GBX1.35Rating
Unilever PLC3,662.00 GBX-6.97Rating
WH Smith PLC1,582.50 GBX1.15

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.