ITV vs WPP

[Jeffrey Beranek]

With a view to thinking what to do when SKY eventually gets bought out (probably for cash and/or undesirable US shares) the recent addition of ITV to the current portfolio seems like a fairly obvious candidate for reinvestment of proceeds, sound it happen. I use the ‘multiple choice’ option for most of my sectors and have followed the DL for about 5 years. I wasn’t entirely surprised by the addition of ITV because it has occasionally popped up on my radar as well. I was just wondering your thoughts might be on ITV vs WPP as choices, given that at least a third of ITV revenue is from advertised (arguably more) and most of WPP revenue is from advertising (much of which will be TV advertising). Could it be argued that these are actually in the same sector and could qualify as a multiple choice – especially if I might not own either of these two sectors if and when Sky gets taken out?

Thanks for the great newsletter. It’s intriguing how the approach appears to be both common sense and contrarian at the same time…

Jeff.

[Stephen Bland]

I don’t see them as in the same sector Jeff. I would not have chosen both for the current HYP if I did.

WPP is an ad agency meaning that principally, it earns income from creating ads for its customers. ITV earns income from selling advertising time, not creating the ads. Also differentiating the two, ITV is a producer of TV programmes, many of which it can then sell to others or have them sponsored as a further revenue source. I don’t think the business of a commercial television company and an ad agency are sufficiently close as to be in the same sector for our HYP purposes.

Sector classification is often a matter of opinion so yes, some may argue that these two are sufficiently similar to be in the same sector. However I don’t follow any official sectors or others’ views but make up my own mind on this. I appreciate that other people may see things differently but I just put forward my own views here.

As for SKY, if and when it eventually gets taken out I’ll give my views then on how to reinvest the proceeds in those portfolios which hold it but it’s far too early at present to consider that. The current bids are wholly for cash, no paper. Incidentally, SKY and ITV are in the same sector in my opinion.

Thanks for the nice comments. HYP investing is indeed mildly contrarian, which is the reason that portfolios may show capital growth long term even though that is not the purpose at all of the strategy.

[Birwa Shah]

Hi Stephen

Isn’t there an argument to be made for switching now from Sky to ITV given that they are in the same sector with the former a Hold on a lower yield and the latter as the latest Buy on the higher yield?

Another question that I’d like to ask is why you don’t keep the various portfolios open to capture shares from all other sectors not already in the portfolio where you have a current Buy? Is it because you have a minimum overall portfolio yield (e.g. FTSE 100 median) as I can’t see that you’d be over-diversifying with more sector representation?

Finally, keep up the good work! My family has been following your HYP strategy for nearly 19 years now, nowhere near eternity but long enough to have confidence that it works.

Kind regards

[Stephen Bland]

On your first point on switching from SKY to ITV, the default HYP position in the great majority of bid situations like this is to do nothing, a policy that on balance, in my opinion, will deliver the optimum long term benefit for HYPers rather than switching. A similar case could have been made when the first bid for SKY at 1,075p arose back in December 2016. Doing nothing has paid off handsomely with the sharply increased bid and in addition, SKY resumed dividends after a hiatus. Note also that HYPing, my style, in any event involves no trading for the same reason that I believe, for most, that doing nothing delivers the optimum long term rewards.

On your second point, the dividend schedule in each edition of TDL shows my latest Buy or Hold status for every share I have ever selected that still exists in any earlier portfolio, to enable readers to check such status or perhaps make selections of their own from them. When adding a new share to the current portfolio under construction, I do not look back at the old completed ones to capture shares or sectors because each new portfolio selection is based on my view of the share and market at the current time with no regard to the past at all.

I specifically wish to avoid being influenced in my current selections by any past selections, so as to prevent emotional attachments to shares. As I usually say with new selections that are repeats, this is due merely to coincidence in that the share is still attractive on a current view – good HY shares can remain so for years in some cases – and not in any way because I picked it before.

Incidentally the old portfolios are not forgotten, I publish an annual review of all completed ones each January.

Thanks for your kind words of encouragemement Birwa.

[Author]

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