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Three stock picks for income and growth

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09/10/2014
William Meadon and Sarah Emly, co-managers of the JP Morgan Claverhouse Investment Trust, pick three stocks to provide both income and capital growth.

The UK remains an attractive hunting ground for dividend income and has a long-standing corporate culture of shareholder friendly management that prioritises the return of capital to shareholders. Even as corporate earnings have declined in the aggregate market over recently years, UK dividends have actually seen positive growth, leading us to remain constructive on the market. Generally improving economic growth, corporates in good shape and a gradual return of M&A activity continue to justify a positive view on the asset class. 

From an investment perspective, there is a trade-off between absolute yield and growth in income. As a result, we seek companies that can deliver attractive earnings growth as well as a sustainable and growing dividend. We’re looking for companies focused on cash generation that demonstrate a willingness on the part of management to return any excess cash to shareholders 

Here are stock examples that exemplify our investment strategy:

Next PLC is a UK retailer that has gone from strength to strength.  It has been a long-term holding for JP Morgan Claverhouse Investment Trust because it meets key characteristics that we seek.  Despite the recession, it has succeeded in delivering both earnings and dividend growth due to its strong focus on customer demand, efficient service and reasonable value for money through both high street stores and a strong internet presence. Next has consistently focused on cash generation, which has led to underlying dividend growth of 15 per cent. In 2014 they have also paid out 3 special dividends of 50p per share. We continue to like the stock as it demonstrates strong growth in underlying dividends as well as a proven track record of cash generation. 

Imperial Tobacco is a cash generative and defensive stock that has consistently delivered 10 per cent per annum dividend growth. It currently yields over 5 per cent and the company remains committed to their long-term dividend growth strategy. The company has recently announced a proposed deal in the US that should provide opportunity to bolster both income and growth.

ITV is a company that has undergone a profit recovery under the management leadership of Adam Crozier and Archie Norman. This has involved strategic cost cutting, a disciplined focus on cash generation and the diversification of revenue streams.  For example, ITV has successfully expanded its footprint of drama productions sold internationally, such as ‘Downton Abbey.’  They have also shown a consistent track record for returning excess cash to shareholders, having issued a special dividend of 4p/share in the first quarter of 2014, as it did in the first quarter of 2013.

In summary, our outlook for UK equity income remains constructive. Current consensus is anticipating both earnings and dividend growth in 2015. UK equities offer an attractive starting dividend yield (market yield of 3.5 per cent) versus UK gilts as well as an attractive rate of growth of that income.

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