3 Recovery Plays From the Leading UK Equity Income Fund

LONDON -- For more than 30 years, Sanlam Private Investment's "White List" has been offering an impartial guide to U.K. equity income funds with a track record of delivering rising dividends and long-term capital growth.

In its annual review, published in January, the White List identified JO Hambro UK Equity Income as the top fund by overall merit.

Three FTSE 100 recovery plays, which feature in the fund's top 10 holdings, caught my eye. What are the attractions of oil giant BP (LSE: BP  ) (NYSE: BP  ) , supermarket titan Tesco (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) , and leading general insurer RSA Insurance Group (LSE: RSA  ) ?

BP
BP's calamitous oil spill in the Gulf of Mexico in April 2010 saw its shares sink from more than 650 pence to less than 300 pence within the space of three months. The price recovered to 500 pence by early 2011, but the shares have made no further progress in the two years since.

On the face of it, that's surprising, because the market has a lot more quantitative information on BP's liabilities than it had back at the start of 2011. We've also seen the resumption of dividends since then and a satisfactory resolution -- barring any major shock -- to BP's problematic TNK-BP partnership with Russian oligarchs.

But maybe sentiment is beginning to turn. The market shrugged off a 19% decline in BP's annual profit announced on Tuesday this week, as well as news that the U.S. Gulf of Mexico states are seeking $34 billion in damages. The shares ended the day up 1.5% at 469 pence. Based on that share price, BP is rated on just eight times forecast earnings for 2013 and offers a forward yield of 4.8%.

Tesco
Tesco's profit warning just more than a year ago -- its first in two decades -- wiped nearly 5 billion pounds off the value of the company at a stroke. It wasn't quite what had been intended by Tesco's "Big Price Drop" Christmas campaign!

The shares reached a low of about 300 pence, having traded at more than 400 pence in the lead-up to Christmas. In the past two or three months, the shares have been recovering and now trade around 360 pence.

The market has reacted positively to CEO Philip Clarke's claims that the U.K. recovery is on track and to news that Tesco is abandoning its plans to conquer America -- although the latter was previously one of great long-term hopes of investors. (To use a football analogy, it seems that at the end of the day the U.S. Fresh & Easy chain became to Clarke what Mario Balotelli became to Roberto Mancini.)

At 360 pence, Tesco's shares are trading at about 11.5 times forecast earnings for the year to Feb. 28. If analyst expectations of a flat or marginally increased dividend prove accurate, the yield on offer is a bit more than 4%.

RSA Insurance
RSA Insurance (formerly Royal and Sun Alliance) is the biggest Footsie company in the general-insurance sector -- or "non-life insurance" sector, to use the official classification. The group's global network spans 140 countries and provides property, casualty, motor, and household insurance to more than 20 million people.

RSA shareholders suffered a torrid time around the turn of the millennium, including a double dividend cut. But the company has been on a long-haul recovery since, and despite the financial crisis, it has managed to increase its dividend every year.

However, in the last year or two, the market has once again been pricing RSA for a dividend cut. At a share price of about 130 pence, the forecast dividend gives a yield of 7% -- more than double the Footsie average. In such situations, one of two things can happen to bring the yield to a more normal level: a dividend cut or a significant share-price rise. The managers of the JO Hambro UK Equity Income fund appear to believe in the latter prospect.

Recovery bargains
One of the three shares I've highlighted above is not only among the top holdings of the U.K.'s leading equity income fund, but has also been heavily backed by U.S. investing legend Warren Buffett. You can help yourself to a free and exclusive Motley Fool report that gives a full analysis of the company's prospects. This report will help you decide for yourself whether billionaire Buffett has bought a blue-chip bargain and whether the stock is still an attractive investment today. "The One British Blue Chip Warren Buffett Loves" can be in your inbox in seconds -- simply click here.


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