Dividend progress from our holdings

Charlie Huggins (CFA) - Fund Manager

1 September 2017

When we select stocks for the fund the first thing we look at is the ability of each company to grow its dividend. In the short term, stock markets are volatile and different sectors move in and out of favour. Dividend growth however rarely stays out of fashion for long because over time it is one of the major drivers of share prices.

With the latest round of corporate results behind us, all of our holdings have now made announcements regarding their half year or full year dividend. Only one holding has significantly underperformed our dividend expectations. Provident Financial announced another profit warning last week and said it is unlikely to pay a dividend this year. In Steve’s blog, we talked at some length about this disappointing news.

We are pleased to report that of our remaining 27 holdings, 25 have announced growth in their most recent dividend pay-out. These dividend performances mean that we remain confident in achieving the initial income target set for the fund at launch.

In the table below we have grouped our holdings according to the level of dividend growth delivered. Please note dividends are variable, not guaranteed and quoted yield figures are not a reliable indicator of future income.

*Dividend growth for Fidessa and Paypoint relates to the ordinary dividend and ignores special dividends.

Non-growers

The lack of dividend growth from AstraZeneca and GlaxoSmithKline was very much in line with our expectations. Both companies have suffered an extended period of patent expiries which has put pressure on cash flows and resulted in dividends remaining flat for a number of years. We aren’t expecting dividends to grow from either holding in the near term, especially following the recent failure of AstraZeneca’s mystic trial. However, we think both companies are past the worst with regards to patent expiries and expect cash flows to improve as new drugs are launched. In the meantime these companies are offering yields in the region of 5% which will make a valuable contribution to the fund’s income this year.

Stalwarts (1-5% growth)

Seven of our companies grew their pay-out by up to 5%. Most of these we would regard as income stalwarts, capable of paying high levels of income that we think can grow steadily no matter what the economy throws at them. Tritax, National Grid and Primary Health Properties fall into this category. They are never going to be the fastest growing holdings, but currently each yields in the region of 4.5%, providing a bedrock of income that we hope will grow at least in line with inflation.

Steady Eddys (6-10% growth)

Pleasingly, around a third of our names grew their dividend by 6% to 10%. Both of our tobacco holdings grew their pay-out by 10% reflecting their very strong cash generation in the period. We do not expect the recent announcement from the US regulator regarding lowering nicotine levels to interrupt dividend progress in the near to medium term. Standard Life chose to increase its dividend by 8% which we view as a strong vote of confidence, following its merger with Aberdeen.

Fast growers (10% plus)

Even more encouraging is that a third of our holdings have announced dividend increases of more than 10%. In the main these holdings offer lower yields of c. 1.5% to 3%, but with the prospect of strong dividend growth in the years ahead, although this of course is not guaranteed. We are particularly pleased with the dividend growth achieved by Ascential (up 20%), BCA (up 12.5%) and Sanne (up 37%) which reflects the strong progress that each business is making.

In many cases dividend growth has been boosted by weaker sterling, with the likes of Reckitt Benckiser, Relx and WPP choosing to align their dividend progression with actual profit growth in the period, rather than constant currency growth. We expect dividends to keep growing from these holdings, but probably not at the same pace.

Growth of 18% in Lloyds’ interim dividend reflects the bank’s on-going recovery, a decade on from the financial crisis. Although conduct issues like PPI continue to cast a shadow, we are encouraged by the underlying strength of capital generation underpinning the dividend.

Growth of 18% in Unilever’s second quarter dividend reflects the outcome of its strategic review, with the group promising higher margins and cash flow in order to support enhanced cash returns to shareholders. Despite the very strong share price performance over the last few months, the shares still yield almost 3% and analysts are predicting double digit dividend growth out to 2019.

Conclusion

Overall we are encouraged by the dividend growth being delivered by the majority of our holdings, which underpins our confidence in achieving the 3.9p per unit payment we are targeting for the fund’s first twelve months. Thereafter, we will seek to grow the dividend steadily, balancing the need for income with our long term capital growth objective.

Please note the author or his connected parties hold shares in AstraZeneca, GlaxoSmithKline, Tritax Big Box, British American Tobacco, Imperial Brands, Paypoint, Standard Life Aberdeen, Ascential, Reckitt Benckiser and Sanne.