Review of 2015

I've been very boring over the last 12 months.  I made one purchase, way back in January, buying a small number of shares in F.W.Thorpe, a British lighting manufacturer. At least I made it a good one - they rose from 136p to 241p over the year, paying a dividend of 3.6p along the way. I also sold my BP shares at 403p for a small profit, worried about what the sliding oil price would mean for them.  They now stand at 354p, so I can count both transactions a success.  Other than that I've sat on my backside and done nothing.

Overall my portfolio has ended up in the black over the year, but only just - up 0.6% (a capital loss of 1.6% outweighed by dividends).  I marginally beat the FTSE 100.

Here's how my shares have done:

• F.W.Thorpe was the star performed with 81%.
• NatWest Preference shares did well with 8.6%.
• IS15 made 1.8%.
• BP fell 2% in January before I sold it.
• Berkshire Hathaway bring up the rear with a loss of 7.6%.

Sadly I have 10 times as much invested in Berkshire Hathaway as I do in F.W.Thorpe - if the positions were reversed I'd have made 28% this year.

Heinz / Kraft

Heinz are merging with Kraft.  What does this mean for Berkshire Hathaway?  I haven't seen a rigorous analysis in the press, so I thought I'd have a stab.


First, let's look at Berkshire's holdings in Heinz:

• They own 50% of the common equity, 425m shares, with a cost of $4.25bn.
• They hold $8bn of preference shares, paying 9% per year.
• They hold warrants for a further 46m common shares, exercisable at 1c per share.
• 3G hold the remainder of the equity.

A $10bn dividend is being paid to Kraft shareholders, funded by a common equity investment from Berkshire and 3G.  Let's assume the warrants are exercised as part of the transaction (don't know if that's true).  That leaves Berkshire holding 52.5% of Heinz and paying $5.25bn for the additional equity.


So Berkshire will have paid a total of $9.5bn.  Heinz shareholders will have 51% of the company.  So Berkshire will have 26.8% of the combined company.


Kraft are currently trading at $83.  Stripping out the $16.50 dividend that leaves $66.  There are 600m Kraft shares at the moment.  There will be around 1220m shares in Kraft Heinz.  Berkshire will hold around 320m of them.  The market is valuing Kraft Heinz at $80bn.  Berkshire's share of that is about $21bn.  Not bad.


When considering return on investment though:

• You can ignore the new $5.25bn that they are investing as part of the deal - that wasn't invested in 2013.
• You can't ignore the money invested in the preference shares, since this was key to doing the Heinz deal in the first place.

So realistically:

• They put in $12.25bn in 2013.
• They've received about $1.5bn in dividends on the preference shares.
• At the point of the deal they'll have $16bn in equity and $8bn in preference shares, so $24bn.

So a total return of about 100% over 2 years, for a very safe investment - the preference share component made it much less risky than a pure common stock investment.


Not bad!


But what about 3G?  They put in $4.25bn originally and $4.75bn now, and are getting 290m shares or $19bn.  On their original investment of $4.25bn they're making $14.4bn, or 240% over 2 years.


They made a riskier investment and got a correspondingly greater reward.

New investment F. W. Thorpe

A couple of days ago I invested a small amount in F. W. Thorpe, a small family company that designs, manufactures and sells lighting solutions in a variety of markets.

I bought my shares at 136p.  They form 3.3% of my portfolio.  I've been watching them for a while and decided to buy a few shares - I may buy more in future.  The market cap is £156m, revenue last year was £63m, profit after tax of £10m (nice margin), net assets £77m, of which £70m is tangible and about £34m is cash or equivalent (very conservative balance sheet).

They're not cheap, at a P/E of 15, but if you strip out the cash they look much more reasonable.

With regard to Tesco I decided to wait and hear their trading update before deciding whether to put some money back in - and the market clearly liked what it heard, so count that a missed opportunity.  Presumably the lack of mention of a rights issue was a big factor.  I originally bought them expecting downside protection, dependable dividends and upside potential of international growth.  I was wrong on all 3 of those, it seems.  Should I invest now as a recovery play?  I'm not sure they're cheap enough for that (and even less so at 210p than 188p).

Sale of BP

I bought BP at 379p per share in September 2011, when the oil price was $100 per barrel.  I've just sold it today at 403p per share, with the oil price under $50 a barrel.  Yes, for most of that period the share price was higher, touching 520p at one stage, so it's annoying I didn't sell earlier - but 520p is cheap with oil at $100, and 403p is expensive with oil at $50.

Sale of Tesco, IS15

For the record, since I include all buys/sells in this blog, over the last few days I sold:

• All my Tesco shares at £1.88, to crystallize the capital loss to offset 2014 income taxes.
• 13% of my IS15 bonds at £106.16, to raise some cash.

Review of 2014

Another year ends, and it's time to look at how my portfolio has performed.

Overall I'm up a little over 4%, or 7% with dividends.  In the same period the FTSE 100 is down just under 3%, or up about 0.5% with dividends included.  However, that 7% hides an extremely mixed bag of investments.

I had only 5 holdings at the start of the year, and I finished with 4.  In order by size of holding on 1st January 2014:

• Berkshire Hathaway were 34% of my portfolio at the start of the year, and they are up 34% (in sterling).  They're now 50% of my portfolio.
• IS15, my short-dated UK corporate bond ETF, was 25% of my portfolio, returned 4% (mostly in dividends) and is now 24% of my year-end holdings, after I sold a small number to raise cash.
• Tesco has had a shocker - from 18% of my portfolio down to nothing, because I sold on New Year's Eve to use the capital loss in my 2014 tax return.  I may buy them back again and hope for a recovery.  In all, even accounting for dividends, they lost 40% of their value over the year.
• My NatWest Preference shares were 15% of my holdings, now 19%, returning 10% in capital gain plus 7% in dividend payments.
• BP are down from 7.5% to 7% of my portfolio, returning -11% over the year.

If I'd sold Tesco on 1st January 2014 I would have been up 17.5% for the year.  If I'd sold Berkshire Hathaway instead I'd be down 7%.

I now face something of a dilemma - most of my shares look expensive, or at least not cheap:

• Berkshire Hathaway no longer looks cheap, trading at 1.66 times net assets.  A rough guide to fair value is 1.6 times.
• With oil prices under $60 per barrel, BP doesn't look cheap either.
• NWBD yields under 7%
• The Yield to Maturity (YTM) on IS15 is only 2.2%.

Ideally I'd like to keep my money in shares or bonds in the UK.  But the GBP/NOK exchange rate is better than it's been in years, and cash in Norway pays better than the UK.  So perhaps the smart move is to cash in my investments and move the proceeds to Norway.  Something for me to ponder in the months ahead.

Tesco

Recently I've only been posting at year-end and on the rare occasion I make a trade, but the shenanigans at Tesco are worth talking about.  I won't go into the painful details, they're plastered all over the papers.

My Tesco shares are down 37% so far this year (including dividends).  Ouch!  What has that done to my overall portfolio?  In fact I'm still slightly in profit for the year, thanks mainly to Berkshire Hathaway, my largest holding, up 21% in sterling terms.  The FTSE 100 is slightly down for the year, even including dividends, so I'm marginally outperforming.  But of course that's little consolation when Tesco are dragging down my overall performance from ~11% to under 2%.

Thanks to the precipitous drop, Tesco is now only about 10% of my portfolio, from a peak of 26%.  At least they can't do too much more damage to my wealth from here...  unless I buy more!

Why did I buy Tesco in the first place?  My reasoning from the last time I bought in April 2012 was that they:

• Are dominant in the UK and therefore have economies of scale, making it hard for competitors.
• Have a trusted brand which they can leverage in other markets.
• Are in a cautious economic environment in which their current profits are depressed.
• Have a high-growth international business.
• Are in a non-risky business requiring little in the way of capital investment and R&D.
• Are in a business that is largely inflation-proof.

So what went wrong?

• Competitors appear to be assaulting their position quite effectively.  Tesco may have economies of scale but it clearly doesn't give them enough pricing power to stop shoppers defecting to Aldi and Lidl.
• Their brand is being dragged through the mud due to their recent financial irregularities - how many people are going to want a Tesco bank account when the papers are full of stories of missing cash?  Thus an accounting problem has a double-whammy effect on the share price both directly and indirectly.
• When times were good Tesco's employees were buoyed by the company share plan that they were encouraged to join - presumably they're now quite dispirited due to the recent falls.  Again, a multiplying effect linked to the share price.
• Their international business hasn't been looking so hot recently.
• Non-risky business - yes, except for the Germans stealing your lunch, and your own executives fiddling the books.  And a sector with cut-throat competition may mean nobody makes any profits, even if revenues are highly predictable.
• Capital investment demands may be higher than expected - and there's a suspicion that Tesco have been under-investing for several years in order to boost the bottom line.

So, not everything as rosy as I predicted.  On the other hand, revenue has been stable for several years, they're currently valued at less than a quarter of their revenue, approximately equal to their book value.  But Sainsbury's is valued even lower, at a sixth of revenue and 75% of book, and their share price has fallen almost as much as Tesco this year, so it's not obvious that Tesco are a bargain at this price.

So what am I going to do with this dog of a share?  One thing I know for sure - I'll be selling these shares before the year end to crystallize the capital loss, which I can offset against income tax in Norway.  But will I buy them again come January 1st?  That's the question...