Star fund manager Neil Woodford's best-known stock holdings are FTSE 100 income giants such as GlaxoSmithKline (LSE: GSK). But some of Mr Woodford's most successful investments in recent years have been in smaller companies.
Today I'm going to look at three stocks from the Woodford Equity Income Fund, starting with a £500m mid-cap you may not be familiar with.
Serious cash generation
The Woodford Equity Income Fund is the second-largest shareholder in AIM-listed accident management company Redde (LSE: REDD). Mr Woodford's flagship fund has a 22.94% stake that's worth £115m.
Redde's share price has risen by 651% over the last five years, creating a nice capital gain for early investors. But the secret to the firm's present-day appeal is lies in its cash generation. Almost all of the firm's profits are converted into free cash flow and paid out as dividends. For example, during the final six months of 2016, the firm's post-tax profit of £15.6m resulted in dividend payments of £15.0m.
Redde's earnings per share have risen by about 40% since 2014. The business doesn't appear to require much in the way of capital expenditure and most assets are leased. The stock currently trades on a forecast P/E of 16, with a prospective yield of 6.3%. Although this sector is traditionally a risky place to invest, Redde does appear to be the pick of the bunch.
Mr Woodford's appetite for pharmaceutical stocks is well documented. I share his views on the long-term growth potential of GlaxoSmithKline, which I hold in my own income portfolio. Glaxo shares currently trade on a 2016 forecast P/E of 15.2, with a prospective yield of 4.7%.
However, while this seems affordable, I don't think Glaxo is especially cheap at the moment. In my view the group's net debt of £13.8bn needs to be taken into consideration. This gives Glaxo an enterprise value (market cap plus net debt) of £100.6bn. According to the data service I use, Glaxo has an EV/EBITDA ratio of 22.4. This is quite expensive, and is certainly much higher than the equivalent figure of 12 for AstraZeneca.
I believe that GlaxoSmithKline is likely to deliver attractive long-term returns from current levels, but short-term progress could be limited.
A rare 6% property yield
Property stock NewRiver REIT (LSE: NRR) owns a mix of shopping centres, warehouses, pubs and other assets. The Woodford Equity Income Fund has an 18% stake in NewRiver that's worth £145m. This suggests to me that Mr Woodford is fairly comfortable with the group's accounts and sees further long-term upside from the stock.
NewRiver's income credentials are certainly attractive. The stock offers a forecast yield of 6.0% for the current year. That's well above average for the property sector. Although the current price/book ratio of 1.2 doesn't provide much protection if property prices fall, NewRiver's finances seem sound enough to me.
The group has an average unexpired lease term of 6.8 years and a 96% occupancy rate. Debt levels are acceptable to me, based on September's loan-to-value ratio of 38%.
I'd rather buy NewRiver shares at a discount to their book value. But I can see the stock's income appeal and would consider buying at current levels.
Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.