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ISA Investors' Favourite Stocks: Oil and Utilities

While Lloyds proved popular among young ISA investors, oil companies and utilities stocks dominated the most purchased stocks list in March

Karen Kwok 5 April, 2017 | 3:03PM

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ISA investors have been snapping up oil and utilities stocks over the past month as the end of the tax year approaches, according to various online trading platforms. After a spectacular second half of 2016, pushing the FTSE 100 to record highs, the oil sector has struggled this year, but this blip may present a buying opportunity for investors.

Data compiled by fund platforms Hargreaves Lansdown and AJ Bell reveals that Royal Dutch Shell (RDSB) and BP (BP.) top the list of the 10 most purchased stocks by ISA investors in March. Small and mid-sized oil companies – higher risk stocks – proved popular among ISA investors aged 18 to 36 years old, according to The Share Centre. Ascent Resources (AST) and 88 Energy (88E) were the top traded equities by millennials within their ISAs between January and March.

Oil Price Outlook Mixed

OPEC's production cuts and strong demand growth means the short-term outlook for oil is the most promising it has been since the oil price crashed two years ago, however clouds appear to be gathering on the horizon, says Morningstar’s senior equity analyst Allen Good.

“Oil prices above current levels at any point in the coming months would in fact be pouring gasoline on the flames since it would certainly encourage even higher levels of US shale investment. This growth plus the eventual supply increases from OPEC is likely more than enough to erase any market tightness and throw crude markets back into oversupply,” said Good.

However, Richard Robinson, manager of the Ashburton Global Energy Fund argue that oil and oil stocks look positive on a six to 12 month view. He believes the oil price may move back to $65 a barrel by the end of the year. Oil is currently trading at $53.40 a barrel, according to the West Texas Intermediate crude oil benchmark.

The share prices of Royal Dutch Shell and BP are down 5.2% and 7.4% year to date respectively. With a yield of nearly 7%, the market is already pricing in a dividend cut while overly discounting the impact of Shell’s improvement potential, said Morningstar’s Good. Good added that Shell has set a course for improvement but the company still needs some help from oil prices.

Meanwhile, BP is reducing its cost base to survive in a world of lower oil price, said Good. Both stocks are rated three-star by Morningstar analysts, meaning analysts believe they are trading on their fair value estimate.

A UK-based oil reserves company Hurricane Energy (HUR) came sixth on the top 10 purchased stocks list compiled by AJ Bell.

Dividend Potential Drives ISA Investors to Utilities

Utilities stocks SSE (SSE) and National Grid (NG.) also proved popular among ISA and SIPP investors thanks to both companies’ commitment to grow their dividends above the inflation rate. Andrew Bischof, equity analyst with Morningstar said SSE’s management has an impressive focus on sustained dividend growth of 2% above inflation, and has increased the dividend more than threefold since 1999.  

Rise of Millennials Investing in ISAs

Millennials are more active than ever when it comes to ISA investing; the number of investments made within ISAs through The Share Centre for this age group has rose 16% in the three months to the end of March, compared to the same period last year.  

Under the shield of an ISA wrapper, most assets, subject to various annual allowances are tax free. This includes cash in special savings accounts, investment in stocks, bonds, open-end and closed-end funds. Among those options, 87% of investments so far this year by millennials were into stocks, The Share Centre said.

However, four out of top five trade stocks by millennials ISA investors are companies with “the form of smaller, higher risk punts”, said Graham Spooner, investment research analyst at The Share Centre. He advised millennials to instead build up a more balanced portfolio with a long term investment view.

Lloyds Attracts Investor Interest

Lloyds Banking Group (LLOY) also appeared on the most purchased lists, popular ISA and SIPP using Hargreaves Lansdown and AJ Bell, and millennials using The Share Centre.

“Lloyds Banking is the only income generative company to feature, but this is unsurprising given its prominence in the news agenda of late, as well as the attractive dividend and likely familiarisation with the age group,” The Share Centre said.

Lloyds a four-star stock by Morningstar analysts, meaning analysts believe the stock is trading below its fair value estimate. The stock has gained 4.4% year to date.

Derya Guzel, equity analyst with Morningstar expects the bank’s profitability to continue and the company will maintain its dividend policy of a pay-out ratio of at least 50%.

Guzel believes that the current economic and political outlook, mainly driven by the UK’s decision to leave the European Union, could affect Lloyds’ operation more than others’. However, Guzel believes Lloyds can weather any short term volatility.

“In our base scenario, factoring in some slowdown in GDP growth, we believe Lloyds will continue to increase its return on equity during our forecast period. After its restructuring, we believe the bank’s business model is well-positioned for the challenges that Brexit poses to the operating environment and possible changes in the regulatory framework,” said Guzel. 

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
88 Energy Ltd0.78 GBX0.00
Ascent Resources PLC0.18 GBX0.00
BP PLC485.05 GBX-0.66
Hurricane Energy PLC42.90 GBX-2.72
Lloyds Banking Group PLC60.19 GBX-1.26
National Grid PLC900.00 GBX0.11
Royal Dutch Shell PLC B2,226.50 GBX-0.87
SSE PLC1,308.50 GBX-0.34

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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