Writing on the firm’s blog on Friday, he said the firm was not worried about the impact of a bond market sell-off on so-called bond proxy stocks, a number of which are held within the Woodford Equity Income Fund.
“If equities with bond-like characteristics traded on the same valuation as bonds, there would be reason to worry. Arguably, some equities do and many others are over-valued in our view, but, importantly, not the ones that we have invested in,” he said.
Explaining that the firm is attracted to companies where the starting dividend yield is attractive and confidence that long-term dividend growth can be maintained is high, he added: “If there was a continued correction in bond markets in the near-term, the portfolio could be affected by sentiment towards ‘bond proxies’ but, longer-term, there is still a fundamental valuation attraction to all of the stocks that we have invested in.”
Using defence, security and aerospace firm, BAE Systems as an example, he pointed out that at a historic yield of 3.9%, BAE’s dividend yield is currently higher than the yield on its corporate bonds.
“This sort of valuation anomaly is not just confined to BAE Systems – it is widespread amongst the largest holdings in the equity income fund’s portfolio. In our view, it is indicative of both the over-valuation of bond markets currently and the under-valuation of select high-quality, dependable growth stocks,” he said.
Indeed, he said, all dividend-bearing equities should be viewed as bonds with variable coupons and no predetermined maturity.
“This makes equities a less ‘certain’ proposition than bonds but, in the current valuation context, equity investors should be well-rewarded in the long term for embracing that uncertainty, particularly in businesses that can provide sustainable dividend growth going forward.”
