HL SELECT UK INCOME SHARES
HL Select UK Income Shares - July Review
8 August 2018
The UK market began the second half of the year strongly with a total return, including dividends, of 1.3% during July. Strength was driven by the consumer staples sectors, which provided around half of the market’s overall return and health care stocks which delivered much of the rest.
Positive sentiment came from signs that trade tensions could be easing and generally positive economic growth indicators. The US reported its strongest pace of expansion for several years.
Darker clouds came in the shape of sharp falls in the prices of some leading US technology companies after disappointing earnings reports from Facebook and Netflix.
The fund made progress during the month, improving 0.4% in value, although this was less than the wider market return. Positive impacts to the fund’s relative performance came from its positions in the Consumer Staples sectors, offset by weaker outcomes from Consumer Discretionary and Technology sector holdings.
In the table, we compare performance of the biggest positive and negative stocks by their relative contribution to the fund’s return*. Remember these details are over a short period of time and past performance is not a guide to future returns.
|Stock||Contribution to relative return (%)||Stock||Contribution to relative return (%)|
|BCA Marketplace||0.24%||Domino's Pizza||-0.30%|
|Close Brothers||0.17%||Greene King||-0.29%|
|Imperial Brands||0.10%||XPS Pensions||-0.12%|
Past performance is not a guide to the future. Bloomberg 01/07/2018 – 31/07/2018
*Relative contribution: The best way to explain this measure is with an example. BCA Marketplace went up by 7.1% in the month. Through the HL Select UK Income Shares fund, you have a 3.7% position in this company but if you had invested in the UK Stock Market (FTSE All-Share index) instead, you would have 0.1% exposure to BCA. The difference between these weightings, multiplied by the company’s performance, is BCA’s relative contribution to your return.
For most of these companies there was no obvious reason for their positive or negative contribution. But we did have many of our companies report trading updates during the month, so we’ve taken the opportunity to write a longer update on each of these stocks.
AstraZeneca (AZN) reported encouraging half year results. At the headline level one could be forgiven for thinking otherwise, for revenues fell by 5%. But beneath the surface, we think the trends are heading in the right direction.
AZN is going through its last major patent expiry for some years to come. AstraZeneca’s newer medicines are growing strongly, up 69% and the Chinese market is also performing well.
A year or so ago, AZN had a disappointing outcome for a trial of its Imfinzi lung cancer drug but subsequent trials have delivered more positive outcomes and AZN look to be building a very valuable oncology franchise with new drugs targeting an increasingly broad range of cancer types.
Reckitt Benckiser (RB) have raised their outlook for the full year, following a strong second quarter. RB reported 5% sales growth and a 12% increase in earnings per share, allowing the group to lift the interim dividend by 6%. The shares jumped 8% on the day of the announcement.
RB is busily splitting itself into two divisions, one focused on consumer and infant health, with the group’s Home and Hygiene products in the other.
Progress is said to be on track, and $75m of an expected $300m cost savings from the integration of Mead Johnson Nutrition (MJN) into the Health business have been secured so far.
RB look to be delivering against targets, after a few tough quarters. MJN, which took RB into the infant formula market in China and the USA is looking increasingly promising. The business had been struggling when RB acquired it, but sales are now moving apace, led by renewed strength in China.
Last year was a tough one for RB, but growth now looks set to accelerate. Strong cash flow underpins the dividend, which we expect to grow consistently given improving profitability and ample dividend cover although there are of course no guarantees.
Diageo, purveyors of Guinness and Johnnie Walker, released full year results that were pretty close to market expectations.
Diageo’s consistency is its greatest attraction. The group has generated over a billion pounds of free cash flow in each of the last fifteen years, supporting an unbroken record of dividend growth, stretching back into the last millennium.
With margins set to rise and exchange rates posing less of a headwind to growth, the outlook for the group seems encouraging.
British American Tobacco’s (BATS) half year results contained few surprises, confirming the group is on track for another year of constant currency earnings growth.
The sector has been a weak performer over the last year because of regulatory pressures and concerns over the transition from traditional combustibles to Next Generation Products (NGPs). The sharp rally in the share price following these numbers suggests to us that the valuation already reflects a lot of bad news.
Despite slower than expected uptake of Next Generation devices in Japan and South Korea, BATS remains confident of exceeding £1 billion of NGP revenues in 2018, with a number of new launches planned for the second half.
Growth in the traditional cigarette portfolio is also expected to pick up. Meanwhile, cash generation remains robust, underpinning a prospective yield of 5% (variable and not guaranteed). We acknowledge that the transition to NGPs creates uncertainty for the wider industry, but the evidence so far suggests BATS is up to the challenge.
Rightmove’s half year results showed double-digit growth across the board (including a 14% rise in the interim dividend), although this wasn’t enough to prevent the share price from falling.
The shares had been very strong up to that point and with no new positive catalysts we are not surprised to see some profit-taking.
This growth is all the more impressive given the pressures being faced by the group’s estate agency customer base, which is suffering from a very low level of housing transactions. To us this speaks volumes about the value its products provide.
As well as the core listings business, Rightmove provides lead generation and administration tools that are integral to the day-to-day operations of its customers. This explains why the Rightmove subscription is one of the very last things an estate agent will cut back on in difficult times.
So long as market conditions don’t deteriorate to the point where large numbers of estate agents start exiting the industry, we think the prospects for Rightmove remain strong.
Ascential’s half year results were slightly mixed, with a very strong performance from Money 20/20 and digital-subscription products offsetting weaker performances from the marketing brands – Cannes Lions and MediaLink.
Having met with management we are reassured that the declines in marketing should prove temporary, reflecting industry pressures but also internal actions from the company to raise long term growth prospects.
For example, the Cannes Lions festival underwent a major restructuring this year, with the number of days shortened and the removal of several award categories.
The changes have been very well received by customers giving the group confidence that Cannes can return to growth next year.
Outside of marketing, the portfolio remains in strong shape and the balance sheet is now debt free following the recent disposal of the Exhibitions business for £284m. We expect this money to be used for acquisitions which further bolster the group’s digital credentials.
|Annual percentage growth|
|July 2013 -
|July 2014 -
|July 2015 -
|July 2016 -
|July 2017 -
|HL Select UK Income Shares||n/a*||n/a*||n/a*||n/a*||4.0%|
Past performance is not a guide to the future. Source: Lipper IM to 31/07/2018.
*Full year data prior to July 2017 is not available.
Please note the author and/or his connected parties own shares in Reckitt Benckiser, Ascential, Sanne Group, Imperial Brands, AstraZeneca and British American Tobacco.