Weekend reading: Sell oil, buy drugs

My weekly commentary followed by this week’s links to blogs and financial articles.

Star fund manager Neil Woodford caused a stir this week by revealing he has sold his holdings in oil giants BP and Shell.

Woodford believes the oil majors dividends are not secure, which makes them untenable in his £18 billion equity income fund.

The Telegraph reports:

Mr Woodford believes the oil businesses face significant headwinds as they seek to find new oil reserves at a reasonable cost and that the short-term economic conditions are such that oil prices could fall, making the companies’ dividends unsustainable.

He said: “Of course, these are companies that are affected by the global recession. But it is also getting increasingly expensive to find new oil and gas reserves and when you look at the cash-flow dynamics, you see that at the sort of oil prices we are now seeing, both Shell and BP fail to generate enough cash to cover both their capital expenditure and their dividends.”

As a result, he no longer wants to invest in oil. But why should we care?

• Firstly, Woodford has a great track record. One of the rare fund managers who regularly beats the index, he’s out-performed other managers in his sector with a 59% gain over the past five years, versus 25%. He’s beaten all his peers over the past three years.

• Secondly, he sold banks before the crash. He never bought dotcoms during the tech bubble. He has good form making big calls.

• Finally, just six giant companies account for 50% of the FTSE’s dividend income. They are AstraZeneca, GlaxoSmithKline, HSBC, Vodafone – and Shell and BP.

If these oil companies cut their dividends, everyone who invests in the index will see their income drop.

It’s even worse if you’re in the US. Big US oil majors aren’t benefiting from a weak domestic currency as much as we are in the UK. Your dollar income will fall further.

Now most of us are best ignoring such speculation and dripping money into an index tracker. Dividends will come, dividends will go, but over time we’ll benefit from a stake in the nation’s economy.

But those of with an active portfolio are on notice. Woodford is backing pharma — AstraZeneca, GlaxoSmithKline –to provide the income he craves. They look cheap, but their future income streams are less than secure as patents expire.

Which future do you believe in?

From this week’s personal finance blogs

• The case of the delusional investor – The Psi-Fi Blog

• Handling money and marriage – Free Money Finance (via Wealth Pilgrim)

• Testing investment strategies – Oblivious Investor

• How to prepare for the demise of the dollar – Consumerism Commentary

• No penny stocks for her – The Digerati Life

• 101 ways to save money on food – The Wisdom Journal

• Get paid to snoop – Money Watch

• Finally, Adam Baker is now sharing all his spending online. The maniac! Frugality will go out the window as he’s forced to buy more flowers and presents to keep everyone onside 😉  – Man Vs Debt

Other interesting financial and money articles

• Keep your cash safe from politicians – The Independent

• Diversification is getting harder – Financial Times

• ETFs got more popular in the UK as active funds crashed – Financial Times

• It’s too soon to sing a requiem for the dollar – Financial Times

• 50 ways to save cash shopping – The Telegraph

• The economy stumbles. Second stimulus? – The Economist

• Conservatives will raise retirement age to 68 – The Times

• When will the gold party stop? – Motley Fool

• AT&T reverses policy on Internet calls on iPhone – New York Times

• And finally, the coolest teenager in the world? – The Independent

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