You are here: Home - Investing - Experienced Investor - News -

Fund manager view: Unearthing dividend growth in a low yield world

0
Written by: Hugh Yarrow
04/11/2016
Two key risks are currently facing investors right now, debt and valuations. While there is no miracle cure for either, there are stocks out there that can demonstrate a balance and we look at three.

Aside from Brexit-related bumps in the road, we believe there are two key risks that confront equity investors: debt and valuations. The low interest rate and inflation environment makes growth hard to come by, but also makes debt cheap.

Using debt to juice up earnings growth is therefore tempting for CEOs, and leverage levels across the market are creeping up. At the same time, persistently low interest rates and bond yields have led to a valuation environment that is less attractive than it was six or seven years ago.

Balancing quality and value

There is no miracle cure for either of these issues. However, we believe the best response is to maintain an appropriate balance between quality and value at all times. As income investors, this means combining good potential for future dividend growth with attractive current dividend yields.

Below are three examples of stocks that demonstrate this balance, and have released reassuring recent trading updates:

Page Group

In July, we initiated a new holding in recruitment company Page Group on an initial yield of 4.5% when the share price fell sharply following the referendum result. Third quarter results this week demonstrated the group’s global diversity (only 22% of the group’s profits come from the UK and of that only 4% is from financial services) and structural growth opportunities.

Page’s results were also a reminder of how patchy the growth environment is around the world – both by geography and industry. The UK, Hong Kong and Brazilian markets are tough for Page currently, as is the global financial services sector. However, it is seeing strength in Continental Europe, Latin America (ex-Brazil) and Australasia – as well as the global technology and procurement sectors.

Meanwhile, cash continues to pile up on the balance sheet, a favourite characteristic of ours. Page’s dividend is growing at 5% and the company also recently announced a supplementary special dividend.

Victrex

Victrex is a global leader in the niche market of high performance polymers. Polymers have several advantages over metal in applications such as planes, cars and medical implants – they are light, strong, more easily processed and water resistant. By switching from metals to polymers, customers can therefore save money, reduce production time and improve the performance and energy efficiency of their products.

Victrex’s differentiated products and high levels of customer embeddedness also create effective barriers to entry. The company generates strong cash flow and has no debt, allowing averaged dividend growth of 15% per year over the last decade. Long-term growth prospects are good, but end markets have been mixed recently, and we added Victrex to Evenlode at a yield of 3.5% in the January sell-off. As with Page Group, the cash position on its balance sheet is quietly ticking up.

Pepsi

We introduced Pepsi to the portfolio last month to replace Evenlode’s holding in SABMiller (recently acquired by AB Inbev) on a dividend yield of nearly 3%. Pepsi is one of the great global franchise businesses with a market leading position in both savoury snacks (Walkers, Doritos, Lays etc.) and soft drinks (Pepsi, 7Up etc.) Pepsi has some debt but a strong balance sheet in the context of its repeat-purchase business model, and has a habit of consistently converting earnings to cash flow.

The company has increased its dividend for 44 consecutive years, testament to the business model’s resilience through good times and bad, and has increased its dividend by +% this year. We think future dividend growth potential is excellent, particularly in the context of the company’s growth runway in newer markets.

Hugh Yarrow is manager of the Evenlode Income fund

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

ISAs: your back-to-basics guide for 2018/19

Here’s everything you need to know to make the most of your unused ISA allowance ahead of the 5 April deadli...

A guide to Sharia savings accounts

A number of Sharia savings products have upped their game in recent months, beating more familiar competitors ...

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

  • RT @STEPSociety: UK Ministry of Justice abandons plan to increase EW probate fees, described by STEP’s Emily Deane TEP as a stealth tax on…
  • RT @STEPSociety: UK Ministry of Justice abandons plan to increase EW probate fees, described by STEP’s Emily Deane TEP as a stealth tax on…
  • RT @STEPSociety: UK Ministry of Justice abandons plan to increase EW probate fees, described by STEP’s Emily Deane TEP as a stealth tax on…

Read previous post:
£500 cashback on offer from Lloyds Bank to remortgage customers

Lloyds Bank is offering a £500 sweetener to remortgage customers switching to it from another lender.

Close