2 Neil Woodford shares I’d snap up for 2019

I’m not going to pretend that well-known fund manager Neil Woodford’s share-picking prowess has been celebrated much by anyone lately. That’s because his funds haven’t been doing well over past two or three years, and many of his share picks have gone down rather than up. However, I admire the dividend-led strategy that enabled him to outperform the market in the past, and I think it’s worth revisiting some of his picks that are paying big dividends right now.

Great shares for a diversified portfolio

I wouldn’t bet the farm on these two, but as part of a diversified portfolio of shares, I think Neil Woodford’s top holding by value, smoking products supplier Imperial Brands (LSE: IMB), and construction and development firm Watkin Jones (LSE: WJG), are worth digging into. Imperial Brands’ projected dividend yield for the trading year to September 2019 is running above 8%, and City analysts expect Watkin Jones to pay a dividend yielding close to 4% for the year to September 2019. So, at first glance, both companies are good candidates for a dividend-first investing strategy.

Watkin Jones develops and constructs multi-occupancy properties focusing on student accommodation and build-to-rent sectors. It’s a good business and the firm has a record of growing revenue, normalised earnings, operating cash flow, and the dividend. City analysts following the firm expect further annual advances in those measures over the next two years or so. Meanwhile, earnings cover the dividend payment more than twice, and there’s decent support for earnings from operating cash flow. In October, the firm said in a trading update that it has a “strong” development pipeline that provides “excellent” future earnings and cash flow visibility.

Despite the macroeconomic headwinds blowing from Brexit, and the general nervousness in stock markets that we’ve been seeing, there’s no sign that Watkin Jones is suffering any weakness in its operations, and the outlook is robust. I think the firm could be a great example of Neil Woodford’s current-declared strategy of buying out-of-favour UK-facing cyclical firms because, to him, they look undervalued.

No sign of stalling operations

Imperial Tobacco’s trend of growing earnings, cash flow and dividends shows no sign of stalling, despite a collapse in the share price since 2016. City analysts predict solid progress over the next couple of years, but the valuation rating has plummeted. Has the firm lost its defensive credentials, then? I don’t think so, but investors are worried about something. Perhaps it’s the unpredictability of the regulatory environment for smoking-related products.

I think, in general, defensive firms suffer from their own type of cycle where they fall in and out of favour with investors. This means the valuations of such companies tend to be alternatively high and low as the cycle plays out. Right now, we seem to be in a low phase of the cycle, so I think it is worth picking up a few Imperial Tobacco shares to collect the fat dividend while waiting to see what happens next. In November’s final results report, the firm said it’s “well positioned to deliver strong, sustainable shareholder returns,” and I’m inclined to take a chance that the directors might be right in that assessment.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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