Premier Miton Monthly Income fund manager
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
The concept of a ‘hero’ company is an interesting one and as an income focused investor the frame of reference can be slightly different, certainly over the last couple of years technology companies were grabbing the investment limelight. But today dividends have been thrown into focus as both an important part of an investment return and a vital source of income, something which many investors have become more reliant on as they move into retirement.
In terms of a hero income focused company, we are talking about two key factors – a reliable dividend payment and a growing dividend payment. The importance of dividend payments has been framed by the Covid-19 pandemic and secondly by the squeeze on domestic finances we are living through, where investors are maybe looking for reliable sources of income.
During the Covid-19 pandemic we saw many dividend payments being cut, suspended, or cancelled. Certain sectors were hit harder than others. The banking and finance sector were heavily impacted and so was travel and leisure, and certain oil and gas companies.
In my view it is important to look further afield for income hero companies – to look outside of the tried and tested. The focus therefore narrows to finding companies that are following a proven policy of increasing or stable dividends for a demonstrable period of time. Three of these dividend heroes stand out to us, where we think dividend growth could be sustainable over 2023 and beyond. Chances are they are not what you would consider a well-established dividend aristocrat.
Many investors are not that familiar with the 11th largest company in the FTSE All-Share Index. RELX, was previously called Reed Elsevier and while their brand name may be unfamiliar, their products are deeply ingrained in law and university libraries across the world.
The Reed Elsevier of old, had access to huge amounts of data thanks to its scientific journals and legal record keeping businesses. Their management spotted an opportunity to use this ‘big data’ to its advantage and are now a leader in data analytics and risk analysis tools. The percent of electronic business has gone from 22% in 2001 to 83% last year as the company have transformed itself.
In terms of dividends, RELX has just increased their final dividend to 10% higher than the previous year which marks the 11th year of increasing payments.
This is great example of an income hero in the FTSE All-Share Index, they have a low level of volatility in their earnings thanks to a large proportion of their business coming from recurring subscriptions. As a long-term investor, we were able to recognise the transition the business was undergoing which has supported profit and dividend growth.
This £6bn market cap company is a little celebrated British hero in the industrials sector. The largest division, detection, specialises in airport scanning equipment and chances are that you have walked through one of their body scanners last time you went to an airport.
The group have a collection of different businesses which all operate in attractive niches, leading to the company having good profit margins in our view. The John Crane business sells essential components to a range of industries, the biggest of which is the energy markets. Their increased focus on product research and development has come up with a new seal which can eliminate methane leakage in gas pipelines, both an attractive product enhancement and good for the environment.
Under new management and having sold their problematic medical division, we believe they will be able to increase the profitability of each of their divisions. In terms of dividends, at the end of last year, the company announced a final dividend of which is a 5% increase on the year before. We believe the company can continue to deliver good dividend growth.
IG Group Holdings
‘See it IG it’ reads the strapline on the ad, but what do IG Group do? IG Group is a less well-known FTSE 250 listed company which provides a platform for spread betting for individuals who want to trade markets and currencies. You might have seen their adverts on the tube, including a giant panda on top of the Empire State Building! The business was a big beneficiary of covid lock down thanks to more people having a lot of time on their hands and naturally taking up trading as a hobby! However, the growth continues, and sales were up 10% in the 6 months to the end of November 2022.
They expect their core markets to grow at 5-7% in the medium term. This division has seen a phenomenal growth in Japan which is testimony to the success of their tailored marketing and focusing on a market with an appetite for potentially high-risk financial trades. They expect similar high potential markets to grow even faster at 25-30% in the medium term given the low level of share in these markets.
But the company is shareholder aware, not just growth focused, and they increased their 12-month dividend by 3% and we expect future growth to be ahead of this. The current 12 month 44.5p dividend represents a 5.4% dividend yield. I believe this is good example of how UK income stocks aren’t boring and can offer both a growing dividend income and opportunities for capital growth.
Welcome to the UK. Home of the dividend payment.
Resilient income is one area in which UK equities have a competitive edge. Companies in sectors such as defence, utilities and pharmaceuticals are unlikely in our view to see dividends fall significantly, if at all. We prioritise quality at a low price, which is not difficult to find in the UK currently. The UK is home to many established, highly profitable businesses that can deliver a steady income. It also has one of the highest pay-out ratios worldwide and a heritage which prioritises dividends over share buybacks.
Heroes require patience
Like any epic story, it is important to give the hero characters time and be patient with them. We have conviction in the three companies we have written about in this article and the other positions we hold in the Premier Miton Monthly Income fund. We think carefully about the companies who are well positioned given what we see an environment of higher base inflation, even once the current shock inflationary period has washed through towards the end of 2023.
In our view, these three companies have a focus on resilience and growth of dividend payment. As the manager of a monthly income fund, investments that create a consistent source of income will always be heroes in my book.