The world's dullest share
Stock market prices are never predictable. But one illuminating metric identifies the shares with the most stable characteristics.
BHP Billiton is one of the world’s biggest companies, with a 153-year history, an A+ credit rating and a progressive dividend policy that aims to hold or increase dividend payments every six months. It’s Australia’s flagship company and arguably the world’s leading mining brand. It’s also the dullest major share on the planet – or, at least, that’s what a metric known as “implied volatility” suggests.
The implied volatility of a share is a measure of how much the market expects its price to fluctuate. It is derived from the price of options related to that share (options being financial instruments that give investors the right, but not the obligation, to buy or sell something for a specified price on or before a specified date). A low implied volatility means that options traders believe the share price will be relatively stable over the period covered by the options under analysis.
As of 27 August 2013, BHP Billiton shares had the lowest implied 30-day volatility of any share with a market capitalisation of over US$10 billion (excluding firms where a parent company controls the majority of outstanding shares, leading to limited liquidity and unusually low volatility in the stock).
Of course, implied volatility isn’t a constant number. It changes depending on market conditions, usually decreasing during bullish periods and increasing during bearish ones. However, the list of companies with the lowest implied volatility consistently includes some familiar names and industries.
As the top 10 shows, these “dull” companies are typically large multinationals, operating in sectors such as consumer staples and healthcare.
Aside from decent dividend payouts, these firms have several traits in common, such as relatively steady earnings and fairly solid demand for their products. It’s precisely because their business and cash flow are reasonably predictable that movement in their shares should be too.
Of course, implied volatility only represents market opinion and it may turn out to be wrong. Events such as a drug safety scandal or mining accident could mean a share turns out to be far more volatile than its implied volatility predicted. But if you’re an investor looking for shares that are least likely to give you a rollercoaster ride, these kinds of companies – and the funds that hold them – are one place to start.
Since the steadiest shares tend to be those of large multinationals, there are usually only a few listed in any given market. So if you want to build up a portfolio of these kinds of firms, you may need to turn your attention internationally. Keep in mind, therefore, that international investments may be affected by currency fluctuations that can reduce the value of your original sum invested. As with all equities, such shares can fall in value and you may get back less than you invested.
Keep in mind that overseas investments may be affected by currency fluctuations that might reduce their value in sterling. As with all equities, overseas shares can fall in value and you may get back less than you invested.
* Excluding firms where a parent company controls the majority of outstanding shares, leading to limited liquidity and unusually low volatility in the stock.
The ten “dullest” major stocks
|Company||Stock market(s)||Implied volatility*|
||Australia (ASX:BHP), US (NYSE:BHP, NYSE:BBL), UK (LSE:BLT), South Africa (JSE:BIL)||14.37|
|2||Merck & Co||US (NYSE:MRK)||14.45|
|5||General Electric||US (NYSE:GE)||15.25|
||Netherlands (XAMS:UNA), UK (LSE:ULVR), US (NYSE:UN, NYSE:UL)||15.79|
|7||Verizon Communications||US (NYSE:VZ, NASDAQ:VZ)||16.31|
|8||Wells Fargo & Co||US (NYSE:WFC)||16.35|
|10||Philip Morris International||US (NYSE:PM)||16.53|
* 30-day implied volatility (annualised) from at-the-money options, as at 27 August 2013.
Investing in shares is not suitable for everyone. Managed funds are likely to be a better alternative for most investors. If you are unsure seek independent advice; neither Barclays Stockbrokers nor Barclays International Bank offers advice on investing in shares.
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