Fund manager tips: five companies paying sustainable dividends
Rio Tinto, Rolls Royce, Centrica and BHP Billiton are among the FTSE-100 giants to have slashed their dividend since the start of 2016.
And it seems like we’re not completely out the woods yet.
“Further dividend cuts could follow in 2016,” says Adrian Lowcock, head of investing at AXA Wealth.
“Dividends in the UK look under pressure as weaker commodity and oil prices combined with slowing global growth have already led to some big dividends cuts being announced.”
For many income investors, the goal at the moment is to identify stocks paying a sustainable dividend. These may not necessarily be the most headline-grabbing rates but will hopefully continue to pay out and grow their dividend steadily.
Here, Jamie Clark, a fund manager in the macro-thematic team at Liontrust, picks five such stocks.
Virgin Money Holdings
As the incumbent banks have retrenched and rebuilt since the global financial crisis, challenger Banks such as Virgin Money have been able to operate with a measure of impunity. The incumbents in contrast are beset by sizeable legacy issues ranging from the regulatory imperative to rebuild capital buffers to the operational difficulties of coping with creaking IT infrastructure and cumbersome and costly branch networks. If we compare Virgin with an incumbent such as Barclays, we see Virgin’s common equity Tier 1 ratio (a measure of its capital buffer as a percentage of risk-weighted assets) of 17.5% is well ahead of Barclays’ 11.4% (both December 2015), a level so low it has announced the sale of its African unit with a view to boosting capital. This contrast in capital adequacy is reflected in their respective ability to pay progressive dividends.
Barclays recently announced a cut to its dividend payment from 6.5p in 2015 to 3p for 2016 and 2017 (taking the yield from 4.0% to 1.8%), Virgin is by contrast expected to grow its yield to 1.8%, 2.4% and 3.4% in 2016, 2017 and 2018 respectively. When investing with a long term time horizon, it is important to look at dividend growth potential rather than the current yield level alone.
Demographic change is ultimately the dynamic driving rising free cashflow and a parallel growth in dividends for life insurers and pension providers such as Aviva. It is well documented that the UK, along with most developed countries, is aging as healthcare innovations increase longevity and contraception curtails births.
In recognition of this trend and the associated cost of providing for an expanding elderly cohort, both business and government have sought to mitigate their obligation by shifting responsibility to the individual. The recent Budget announcement of an increased ISA allowance and the new Lifetime ISA are consistent with this endeavour to encourage savings. Savings and pensions providers are clear winners from these trends, and have a fantastic opportunity to gather sticky, remunerative, long-term assets through product innovation and partnerships. Aviva is well placed to benefit from this benign operating environment, while also generating synergies from the integration of recently-acquired Friends Life. We expect healthy free cash flow to support a 2016 dividend yield of around 5%.
We believe that the global telecoms sector is on the cusp of transitioning from ‘value’ to ‘growth’ and undergoing a material rerating in the process. It is clear that a multi-play offering is key to enhancing customer loyalty and reducing churn rates. The growing importance of TV content has shifted the telecoms and media landscape from one of ‘triple-play’ in the noughties to ‘quad-play’ now. We take the view that this content push will be key in enabling operators to leverage unprecedented rates of data consumption and convert it to top line growth, which, we infer, will translate into increased operating cashflow and dividends.
BT, the UK’s incumbent fixed-line operator, has transformed its growth outlook. Its BT Vision and BT Sport content have formed the backbone of its growth in the consumer space and shift away from its traditional wholesale and regulated activities. Its acquisition of a mobile network through EE was also a very shrewd move, immediately transforming the business to a genuine quad-play offering consisting of TV, broadband, landline and mobile. Its annual dividend has grown at a compound annual rate of 12% over the last 5 years, a trend which we think it can sustain.
Growth in data consumption is a global phenomenon: Cisco recently reported that global mobile data traffic grew by 74% in 2015. In fact, with British American Tobacco estimating an industry cigarette volume decline of 2.3% in 2015, there are reasons to believe that telecoms is the heir to tobacco’s title of equity income addiction sector. This data consumption ‘addiction’ is no weaker on the other side of the Atlantic; a survey by The Boston Consulting Group found that almost a third of adult respondents would rather give up sex than their mobile phones.
AT&T is a US operator which – similarly to BT – has enhanced its prospects through acquisitions. It has bought satellite operator DirecTV, making it the largest pay TV provider in the US. While AT&T benefits from the aforementioned long-term drivers, its US dollar exposure provides some short term attraction to sterling investors at a time when Brexit risks are weighing heavily on the Pound.
Galliford Try is not immune to the volatility that characterises the housebuilding sector. However, we believe that it is well-placed to generate secular growth, given its exposure to the retail housing market, low cost/social housing and regeneration projects. UK housebuilders are beneficiaries of the large shortfall between the number of annual house completions and the volume of UK housing stock growth necessary to accommodate longer life expectancy and immigration (as well as replacement of existing stock).
Another driver for Galliford Try’s business is the growth in contract work and self-employment. This, coupled with house price rises, slowing wage growth and lender caution, is placing home ownership beyond the reach of growing numbers of people, opening up significant growth opportunities in social/low-cost housing and regeneration, where Galliford Try enjoys significant experience and positive relations with relevant authorities. Since its share consolidation in 2009, Galliford Try’s dividend has grown rapidly, from 12.5p in 2010 to 68p in 2015.