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3 Recovery Plays From the Leading UK Equity Income Fund: BP plc (BP), Tesco Corporation (TESO), RSA Insurance Group plc (RSA)

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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 plc (ADR) (NYSE:BP) (LSE:BP), supermarket titan Tesco Corporation (USA) (NASDAQ:TESO), and leading general insurer RSA Insurance Group plc ?

BP plc (ADR) (NYSE:BP)

BP plc (ADR) (NYSE: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 Corporation (USA) (NASDAQ:TESO)

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%.

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