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Investment Times

Looking for cash cows

| 18 January 2019 | A A A
Looking for cash cows

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

There’s a reason people say cash is king. Not notes and coins, necessarily. But what’s available after you’ve paid the bills.

Cash, in this sense, gives you choice and freedom. You can spend it on life’s luxuries, or save it for something bigger. More importantly, it helps you plan for the future. Manage your cash poorly and life can get quite difficult quite quickly.

It’s no different for companies.

Revenue is vanity. Profit is sanity. Cash is king.

Phenomenal products and services are no good if they’re sold for less than it costs to make them. It’s perfectly possible to generate many millions of revenue, but be virtually insolvent. Revenue is vanity.

Profit’s a better measure of success. A healthy profit probably means the business is doing something right. It’s got something people want to buy and is selling it for more than it costs to create it. Profit is sanity.

But until the profit’s in your hand (or the bank) it’s meaningless. It’s just a number in a set of accounts. Cash in the bank is what really matters. It’s what pays the bills, gets reinvested to grow the firm, and gets paid out as dividends. Cash is king.

Aviva Investors UK Equity Income

This is why Chris Murphy and James Balfour, managers of Aviva Investors UK Equity Income, spend a lot of time thinking about how much cash companies make and how they can grow their cash flow in the long run.

Cash in the bank is what really matters. It’s what pays the bills, gets reinvested to grow the firm, and gets paid out as dividends. Cash is king.

They like businesses that make a lot of cash now, and those that might make lots of cash in future, whether that’s because they’re growing strongly or recovering from a setback. Then they buy the shares for less than they think they’re worth.

Companies that make lots of cash often look a bit dull from the outside. They might make everyday essentials – stuff that’s cheap to make, but bought again and again, for example. But dull and boring can be a beautiful thing if the money being made is used to pay regular dividends. It can also mean the firm’s better equipped to handle whatever’s thrown at it, providing some stability when stock markets are turbulent.

Murphy and Balfour invest the core of the fund in this type of company. Prudential is a good example.

Paying dividends won’t always be the best use of cash though. This is why they also invest in companies willing to spend money to grow. This can lay the foundations for even more impressive growth, and the potential to pay rising dividends as the business evolves.

Finally, there are businesses that have endured a tough time, but are on the mend. As cash flow recovers so can dividends and the share price.

Murphy and Balfour bought the engineering companies Babcock and Smiths Group, for example, after what they saw as a period of mismanagement.

How it's performed

Chris Murphy’s used this approach to good effect since becoming manager of this fund in April 2009. He’s turned a £10,000 investment into £18,746 and paid over £6,500 in dividends. Investors who reinvested their dividends would have seen their £10,000 grow to almost £28,000. Please remember past performance isn’t a guide to the future.

Aviva Investors UK Equity Income - performance under Chris Murphy

Past performance is not a guide to the future. Source: Lipper IM to 30/11/2018

Why we like it

By blending different businesses like these, including higher-risk smaller and medium-sized companies, the managers hope to offer a good yield. It currently yields 4.6% with the potential for dividends to grow, but that’s not a reliable indicator of what you might get in the future.

There’s the potential for your investment to grow as well. Companies that generate a lot of cash and use it wisely – to boost growth or pay dividends – are often rewarded with a higher share price. The managers invest in relatively few companies so each one can have a big impact on performance, positive or negative. This is an approach we like, but it does increase risk. The fund will fall as well as rise in value, so you could make a loss.

Murphy’s placed cash generation and cash flow growth at the heart of how he thinks about companies throughout his fund management career, which stretches back to 1993. He’s done a superb job over the long term and we think he’ll continue to do so, along with James Balfour, on this fund.

Annual percentage growth
Nov 2013 -
Nov 2014
Nov 2014 -
Nov 2015
Nov 2015 -
Nov 2016
Nov 2016 -
Nov 2017
Nov 2017 -
Nov 2018
Aviva Investors UK Equity Income 3.6% 6.4% 4.8% 13.4% -4.8%
FTSE All-Share 4.7% 0.6% 9.8% 13.4% -1.5%

Past performance is not a guide to the future. Source: Lipper IM to 30/11/2018

More about Aviva Investors UK Equity Income, including charges and how to invest

View Aviva Investors UK Equity Income key investor information

Aviva Investors UK Equity Income

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The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.