Income Reshuffle

Steve Clayton - Fund Manager

25 January 2018

We have been making some changes within the HL Select UK Income Shares portfolio. Our aim is to raise the growth rate of the portfolio’s holdings, whilst diversifying the sources of income. We have trimmed some holdings and introduced a few new names, taking the number of holdings to just over 30.

We have trimmed the position in GlaxoSmithKline (GSK) and introduced a holding in Royal Dutch Shell. Dividend prospects for the latter have improved significantly as a result of a major programme of cost-cutting and rising production volumes.

Why we bought Royal Dutch Shell

Like other oil producers, Shell’s earnings were hit when oil prices fell in 2014. The company responded by aggressively cutting costs and also bringing new, low cost production assets into the group through a merger with BG Group. This has left the group much more strongly cash generative and reinforced Shell’s dividend-paying capabilities.

Historically, Shell has an unparalleled track record for paying its dividend through thick and thin, having maintained or increased it every year since the end of the Second World War. Although, of course, dividends and yields are variable and not guaranteed.

GSK trimmed

We see emerging risks around GSK’s dividend. The Board has stated an intention to continue paying 80p per share in 2018, but has made no commitments beyond then. GSK’s newish CEO has come from the Consumer Healthcare division, and there are major asset packages up for sale in that sector. If GSK decide to pursue major deal-making, they may well need equity to fund it and the current dividend cost would be a major hurdle to clear.

Elsewhere, we’ve taken some profits out of the holding in Sage Group, but retain a significant position. National Grid gets a haircut too, as we bring down our utility exposure in the face of rising regulatory pressure on pricing and an unhelpful political environment.

New positions being built

New names are coming in to the portfolio, with an emphasis on stocks capable of strong dividend growth, ahead of absolute yield. These positions are still in the process of being built up, and will not be revealed until complete. Some should complete in the next week, others could take longer.

One new holding, for instance, is almost 90% complete, but finding the remaining stock, at the price we want to pay, rather than the price that a seller might wish to receive, is easier said than done.

We’ve taken a variety of strategies to cover the dealing necessary to achieve the desired positions. In larger, more liquid names we’ve been able to use programme trading, where a broker is instructed to deal in a basket of stocks simultaneously for an extremely low rate of commission.

Smaller and medium sized companies are higher risk and often harder to trade. Here we select individual brokers to handle each order, with precise instructions as to the strategy they should adopt. Cash has to be balanced throughout, with sales and purchases kept in balance to avoid excess cash building up or dipping into an overdrawn position.

The fund’s financial year runs to Sep 30 2018 and we expect to continue declaring dividends of 0.3p per month through until August, with a variable payment for the September month, reflecting any special dividends or other income received but not already paid out by the fund.

Please remember that a dividend declared for any given month is actually paid to investors at the end of the following month. If you hold Accumulation units in the fund, then these dividends are rolled up into the value of your units. That is why the price of Accumulation units is higher than those of Income units in the fund.

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