Home » Posts tagged 'dividends'
Tag Archives: dividends
Dividend funds for the long-term
Since I last wrote about global equity income funds in May 2014 (issue 355), as my chart shows, performance has continued to be good. These funds are, in my view, ideal core holdings for most investors’ portfolios.
If you have large holdings in UK equity income funds, I think you need to beware of concentration in too few dividend-paying stocks. In the financial crisis, most UK equity income funds held lots of bank stock and took a big hit. Today, some hold lots of utilities and I can see these becoming a political football in the first half of 2015.
While I believe in dividend strategies over the long term – many studies have shown that buying higher-yielding shares beats growth stocks over 15 or 20 years – I have reduced my own UK holdings of equity income funds and increased holdings of global equity income funds. I am not yet drawing income from these investments, so I am not that concerned about the short-term fluctuations in dividends caused by exchange rate movements. Until the summer, the strength of sterling meant that the dividends paid by these funds had at best been static over the previous year. However, the usual “swings and roundabouts” can be expected – and the latest recent period of strength for the dollar will translate into higher sterling dividends in due course.The historic yields are pretty good. Some other funds (like M & G Global Dividend) have much lower yields because they aim for “growth and income”. I prefer equity income funds to yield over 3.5% but make an exception for the Invesco Perpetual fund because of its good record to date.
Newton Global Higher Income should be your selection if you are of a pessimistic or cautious frame of mind. Its holdings are mainly mega-cap blue chips. Its recent performance has been dull but I would expect it to do much better than its peers in bear conditions. For optimists, I would suggest Artemis Global Income where the manager prefers mid-cap stocks and is moving towards Asia. The Invesco Perpetual Global Equity Income fund has a somewhat stronger value bias and is probably in between the other two.
You may also want to consider widening your net with regional funds. I now own the JPMorgan Emerging Markets Income investment trust, which also comes in the form of an OEIC. The OEIC yields 4.4% and has 50% of its assets in Asia/Pacific. There is a huge universe of high-yielding stocks in Asian markets, and JPM data tell me that high-yielding EM stocks are at the biggest discount to growth stocks for a decade or more. I’m pretty confident I am buying cheap assets.
This valuation anomaly has pointed me to another income holding: Schroder Asian Income, yielding 3.8%. Manager Richard Sennitt has steadily outperformed the sector average over recent years.
My other dividend buy is on the other side of the planet: Standard Life Investments European Equity Income OEIC. Launched in 2009, it has produced good returns and the manager has adroitly shifted from defensive blue-chips to more cyclical stocks. The £2bn fund yields 4.1%. With the ECB committed to providing banks with oceans of cheap money, the market seems to me to be pretty strongly underwritten, provided that the recent upturn in company earnings is maintained. In the short term, political worries may dominate, but there are certainly plenty of cheap stocks in Europe.
Chris Gilchrist, December 2014
More scope from a tidier Johnson Service Group
The origins of Johnson Service Group can be traced back to 1780. Johnson Service was a textile related business which expanded over the years by acquiring other UK regional businesses such as Pullers, Zernys, Bollom, Crockatts, Smiths, Kneels, Harris Clean, Hartonclean and Johnsons.
In 1995, the group entered the hospitality services market with the acquisition of Stalbridge Linen Services and achieved UK market leadership in textile rentals with the acquisition of the Semara Group in 2000. The company undertook a strategic review in 2002 and disposed of a number of non-performing and non-core businesses. They included the Irish textile rental business and Washroom Services. The following year the group acquired Workplace Management which formed a new division which addressed the fast-growing market for facilities management (FM).
Expansion continued by strengthening the dry cleaning units in the South of England under the Johnson brand and through the acquisition of the upmarket Jeeves business in central London together with its overseas franchising operation. The retail dry-cleaning business of Sketchley was acquired in May 2004.
Later that year, the corporate wear side was strengthened with the acquisition of the UK’s leading corporate supplier, Dimensions. At the beginning of 2005 DCC Corporatewear joined the group to focus on the financial services and leisure sectors.
Disposals for new focus
During 2007 Wessex Textiles, which specialised in ambulance and paramedic clothing, was integrated into Dimensions Corporatewear which resulted in significant cost savings.
Towards the end of 2007 with indebtedness and financial gearing rising, the company decided to take action which ultimately led to the sale of the Corporatewear division and the disposal of Johnson Clothing Ltd, the leading UK supplier of clothing for people at work. This was completed in April 2008.
The group did not pay a dividend in 2008 but in 2009 paid 0.75p and has made gradual increases every year since. In 2012 the group made two acquisitions, Cannon and Nickleby, the latter being integrated into the FM division. Cannon was integrated into the Apparelmaster division and the plant at Newmarket was retained.
Since the reorganisation in 2008, adjusted pre-tax profits rose from £6.0m to £12.2m in 2009 and steadily progressed (£14.5m in 2010, £15.0m in 2011) to £16.3m in 2012.
At the interim stage for fiscal 2012-13, adjusted pre-tax profits were up to £5.5m against £3.6m H1 2012. The main change of emphasis in 2013 was the decision to sell off the FM division. The facilities management side was sold off to Bell Rock Bidco, a company specially formed to effect the acquisition. The consideration of £32.2m was on a debt-free basis which netted down to an initial £28m with a further deferred consideration of up to £2.2m.
The deal, completed last August, will enable the group to focus on the Cannon Textile Care business acquired in March 2012. The drycleaning business has been rationalised with the closure of more than 100 underperforming branches together with the disposal of the non-core Alex Reid business.
The managing director of the FM division resigned following the completion of the sale. Following completion, executive chairman John Talbot stated that the disposal of this FM side of the business represents a further step in the board’s strategy to create a single focused Textile Services business.
Good scope for dividend increases
He also commented that the strong results for the first half were in line with expectations and significantly ahead of 2012. The disposal of the FM activities will help reduce debt from £55.3m to £25.6m. This is a major step in the board’s strategy to refocus the group on the main core business of Textile Services.
The main Apparelmaster company provides clothing to more than a million industrial and food production people every week. The sale of FM will allow Johnson the scope to buy add-on businesses and hopefully give more flexibility to increase dividends as only around 25% of its profits are paid out as dividends. By concentrating on one main business, the company may appeal to a larger group wanting to expand their range of support services.
John Snowden December 2013
BHP Billiton: investment takeaway with a tasty dividend
To most of us, “BLT” denotes a bacon, lettuce and tomato sandwich. To stock market professionals, it stands for the world’s largest diversified mining group, BHP Billiton. The company was given the stock code BLT when it was formed from the merger of Australia’s Broken Hill Proprietary with the Anglo-Dutch Billiton 12 years ago. The Stock Exchange minion responsible for handing out EPIC codes at the time probably had a good chuckle.
Since then, BHP Billiton has enjoyed anything but the prosaic existence its EPIC code might suggest. It has tried to take over rival Rio Tinto and stirred up a veritable hornet’s nest when it sought to buy Potash Corporation of Saskatchewan only to run into implacable opposition from the local government. It has pumped many billions of dollars into US shale assets and developed the world’s largest copper mine, Escondida, in Chile. Above all, it has ridden the so-called commodity super-cycle that until recently buoyed the price of metals and other industrial raw materials for a decade or more.
The boom in commodity prices pushed BHP Billiton’s shares up to close on £27 in 2010 and 2011. Today, they are back to 1885p. The super-cycle peaked in 2011. A collapse in automobile output and construction in the western world following the 2008-09 crisis dented demand for steel — which in turn hit demand for iron ore, coal and much else. For a while, continuing strong demand from China held prices high. When Chinese demand started to flag a couple of years ago, prices nose-dived. In the year to end-June 2013, lower prices for iron ore, copper, metallurgical coal, nickel, alumina and other base metals reduced BHP Billiton’s annual revenues by a whopping $9bn.
Now, as a value investor, I look for opportunities to buy into asset-rich, well run companies when they are out of favour. No-one should doubt the quality of BHP Billiton’s assets, which are largely low-cost, long-life mines built around vast mineral deposits and located in stable economies. The company’s margins are among the best in the industry. In BHP Billiton’s case, a wealth of assets comes with modest debt levels and a dividend yield of 4.2%. It is the safety of that yield that has pushed the shares onto the buying list of at least one of the City’s largest wealth management firms.
After the fall in the shares, BHP Billiton is well worth a second look. For a start, metals prices may have turned the corner. Amid mounting signs of a pick-up in Chinese growth, and indications that de-stocking by steelmakers has run its course, the iron ore price has bounced from a low of $110 a tonne in May to $130 now. Copper, too, is up.
Secondly, a new CEO, Andrew Mackenzie, who took over in February this year, appears intent on simplifying the organisation, selling off peripheral assets, cutting costs and driving cash flow. As a token of his seriousness, Mackenzie has settled for a 25% smaller pay packet than his predecessor. Some $6.5bn of divestments were announced or completed in the year to end-June and a cost reduction programme was more than doubled in scale over the second half.
Strong asset support
Capital spending looks to have peaked, and is set to fall from $22.6bn to $16bn in the current year. Of 18 expansion projects under way, more than two-thirds are expected to deliver their first production by the end of calendar 2014. The one big exception is a $2.6bn investment in the huge Jansen Potash project in Saskatchewan where the company is taking its time in the hope that market conditions will have improved by the time the preparatory work is completed in 2016-17.
As it is, output across the group is set to grow strongly over the next couple of years. Production of iron ore alone should increase by 11% this year. This may do no more than offset continuing price weakness in certain markets. The price of thermal coal, used in power stations, has been falling for two years. The shale boom has put pressure on US domestic gas prices. By the company’s own assessment, overcapacity in the aluminium and nickel industries is likely to persist. But with its own “self-help” programme, BHP Billiton should be able to report stable to marginally improved earnings in the current year.
The numbers support the value thesis. BHP Billiton is structured in a similar way to Royal Dutch Shell. There is a dual listed structure, in this case involving a UK plc and an Australian limited company. The market capitalisation in our table relates to the plc only. Taking both companies together, the market value is around £100bn. The balance sheet shows net assets of around £45bn, but that equates to no more than the capital spend over the past three years. There is a lot of hidden value here.
Gearing of 29% is modest for a capital-intensive business. Cash flow is strong. In the decade up to 2011-12, BHP Billiton returned the equivalent of around £34bn to shareholders — either in the form of dividends or share buybacks. While last year’s dividend increase of just 3.6% was well below the long-run average, the company remains committed to a progressive dividend policy. There is a lot of headroom for further increases, despite the squeeze on earnings from lower commodity prices. Last year’s payment was still covered nearly twice out of earnings before exceptional items.
With its broad diversification across minerals and a robust balance sheet, BHP Billiton has a comforting solidity to it — as much a staple of the investment world as a BLT is in the lunchtime “to go” market. Short of another implosion in the world economy, it looks set to weather almost any storm — and bounce back in better times.
Peter Shearlock, October 2013
A blip for the RIRP but 2014 prospects look good
As I decide how to invest the remaining six £1,000 units of the £100,000 notionally available to the RIRP when I launched it at the start of 2008, I don’t know whether to laugh or cry at the extent to which I now find myself a victim of both my previous successes and conservative accounting.
The last published table in July showed that the overall growth in dividends over the years had raised my initial return on capital by 50%, more than twice the rate of inflation, from 4% to 6%. But this means that when I make a new or top-up investment, unless I now invest in something which will give me over 6% in the remaining 5 months of the accounting year — which is clearly impossible — my reported return for the year on the funds invested must by definition fall for each new investment I make.
Higher divis, but a falling yield
My two most recent investments in Direct Line and Reckitt Benckiser highlight the problem. Their latest dividend announcements mean each of them will pay me at least 5% more than had looked likely when I made my first investment. But because my first dividend from them is only the interim, they each only yield around a third of their full annual return in the rest of this accounting year. And since they have now paid their interims, any top-up investment will now yield nothing until next year.
In retrospect I should probably have adopted an annual time apportionment in calculating the return on newly invested capital, but I rejected this at the outset, partly because the maths is a nightmare, but mostly because what is important for investors is dividend flow, not clever accounting.
In previous years this hasn’t mattered because the organic dividend growth from previous investments had more than made up any slack. But this year has been my annus horribilis, with a dividend cut from RSA and total suspension of dividends and a rights issue at FirstGroup forcing me to eject the latter and crystallise some capital losses.
My end-year performance is not helped by two companies which have not raised their dividends this year. In Balfour Beatty I seem to have picked about the only UK construction company not to be confirming the green shoots of economic recovery. There had even been fears the company’s new CEO might have decided to cut the dividend to provide a fresh start, and the fact he hasn’t is interpreted by the market as encouraging. In normal times I can carry a sleeper or two, and though these are not normal times, the unattractive reinvestment alternatives means BB stays in, but on sufferance for the time being.
I am also starting to think I may have made a nasty mistake with BP. Despite having set aside a compensation fund the size of the combined GDP of a dozen of the United Nations’ smaller members, the Gulf disaster claims keep coming in, and the US government continues to threaten punitive fines. The progressive restoration of the dividend towards previous levels on which I had predicated my investment has ground to a halt this year, and insult has been added to injury by the “sterling effect”: the dividend is declared in US cents, and at the dates on which the last two sterling payments have been calculated, the pound has been relatively strong, so slightly reducing our income.
I have considered various measures to try and boost this year’s income to achieve our target of at least matching inflation. But even though I could engineer an inflation-beating rise in the actual income received by investing all the remaining funds in shares still to pay dividends before end-February, my method of accounting means that I would still be showing a fall in the yield on the total capital invested.
So I have decided to put aside the hair shirt, remind myself that my dividends over the 5 years are up by more than twice the rate of inflation, and stick to the fund’s basic investment rules which have more than proved their value so far.
BP: pay more, please
These are to top up thosecompanies where I do not yet hold my minimum 5 units of investment, whose fundamentals have not changed, and whose share price is below my average purchase price to date. I am ruling out BP because unless and until they can prove otherwise by resuming dividend growth, I assume their fundamentals have changed. This leaves only Direct Line and Reckitt Benckiser meeting the criteria to qualify for new money, so they each get another £1,000. Because they have now both paid their interim dividends for this year, the fund’s accounting problems are highlighted in spades because we have to wait until next summer to see any return at all on this new money.
The projected cash income for the year is slightly higher than last year, despite this year’s disasters, but the higher capital employed reduces it as a percentage. The RIRP needs nearly another £400 income to meet this year’s inflation target.
I continue to wrestle with this issue and am hopeful that in the January issue I can present a solution.
My consolation is that next year none of this should matter, and will just seem a blip. The fortuitous distribution of cash by Vodafone and a full year’s income from Direct Line and Reckitts should more than compensate for this year’s travails. And who knows, we may even get our maiden dividend from Lloyds.
This allows me to view with equanimity the Labour conference pledge to resurrect the Command Economy by imposing price controls on the energy companies. SSE and United Utilities make up over a tenth of the portfolio, and any rewriting of the acceptance by government of a need for a proper return on capital would indeed undermine the logic for holding such investments. But in investment terms the 2015 election is still far enough away for such posturings to be seen as random noise — at least for the moment.
Douglas Moffitt, October 2013