Premier Miton Monthly Income Fund Manager
In this insight note, Emma Mogford, manager of the Premier Miton Monthly Income Fund and Premier Miton Optimum Income Fund wraps up this series of insight notes by lifting the bonnet on some well-known companies.
Time for something completely different
In my last two insight notes, I have been writing about why I believe we could be at a major turning point in markets. The decade of ultra-low monetary policy ended in 2020. No doubt covid and the Russian invasion of Ukraine were important catalysts in this trend change. In addition, I believe there are important underlying trends which mean the next decade could be quite different for investors than the last.
Three trends to watch out for
As a quick recap, there are three key trends which may support a more ‘normal’ interest rate environment. To give today’s environment some context, interest rates in the United Kingdom averaged 3.33 percent from 2000 until 2022 and in the decade before the Global Financial Crisis, when base rates dropped rapidly to provide some much needed liquidity in markets, the average interest rate was 5.0% (1997 – 2007).
- Firstly, there has been a significant increase in the amount of government intervention in the UK economy and elsewhere in the developed markets. Government spending in my view tends not to be allocated to the most productive parts of the economy and has recently been inflationary.
- Secondly the climate crisis has two important consequences. More severe weather events could have an impact on supply chains and food production. Secondly, we need to replace currently productive electricity and manufacturing plants with new greener forms which will cost money. The environmental debt created by decades of overuse of cheap fossil fuels now needs to be paid back. I believe this will contribute to lower growth and could be inflationary.
- Finally, globalisation is slowing down. As China got closer to the US’s superpower status there were always going to be questions about how the two co-existed peacefully – the Thucydides trap it has been termed. The balance of power is shifting to Asia driven by rapid growth in GDP per capita in the most populous countries: The GDP of India recently overtook the UK. Trade tensions and national barriers which are a solution to ‘populist’ politics are unfortunately negative for growth and inflationary.
To be clear, the future I foresee is not one of hyperinflation, but I do think interest rates are unlikely to go back to the zero-bound. In my last insight note I explained why the UK market with its mature companies and low valuation could be well placed to benefit from a decade which is less driven by falling interest rates.
Homing-in on investment opportunities
Talking about the attractive attributes of our domestic market, the UK market can sometimes feel a little bit of an abstraction, so I have picked out a couple of ‘real time’ examples. What ties them together is that they have valuation metrics which I would consider cheaper than their international peers. They are all profitable either because their industry has attractive characteristics, or the company has identified a niche where there are barriers to entry preventing new competitors driving down margins.
Finally, they all choose to pay a reasonable proportion of their profits out as dividends. They are in my largest 10 holdings in the Premier Miton Monthly Income Fund and Premier Miton Optimum Income Fund, as a quick read of the fund factsheets would show.
Despite regular advertising of its spread betting services on Bloomberg TV and in underground stations, this is a less well-known FTSE 250 stock with a market cap of over £3bn. In the last two years the company has grown its sales by 49% thanks to investments in new geographies such as Japan and due to the greater interest in trading amongst investors in the UK and Europe, their established markets.
The company’s share price of 824p is 7x their earnings per share in 2022 of 118p. This compares favourably to the current P/E of the UK’s FTSE All-Share index of 14.0x and 19.4x for the S&P 500 index in the US. IG Group is impressively profitable, in my view, with an operating margin of 49% last year. The company has a solid long-term history of paying dividends. In the last 12 months they have paid out 44.2p in dividends which is a dividend yield of 5.4% on today’s price of 824p. The source for all data points quoted is Bloomberg as at 23.11.22.
This is a good example of a company that can succeed in the new economic environment. Thanks to having more cash than debt they directly benefit from higher interest rates. I like that today’s valuation of the shares looks to be much more based on the cash profits it makes today.
GlaxoSmithKline is an iconic brand in the FTSE 100 and a top global player in the pharmaceutical industry. While the company have struggled to generate growth in recent years the management team have increased their potential for success by spinning off the non-core businesses and increasing the investment in research and development (R&D).
Today the share price is just 10.1x the forecast earnings in 2022 which is below the UK market and below many international peers. Based on the same metric, Bloomberg calculates the median (the middle value in a set of data) price to earnings ratio for European and US large pharma companies to be 14.4. The source for these data points is Bloomberg as at 23.11.22.
The large pharmaceutical industry has high barriers to entry by new competitors due to the stringent regulation around the approval of new drugs, thanks to these regulatory ‘brick walls’ GSK had an operating margin of 33%.
It is true that they had to reduce their dividend payment as part of their new more focused strategy, but they continue to indicate towards 40 to 60% of their profits to be paid out in dividends. The source for these figures is GSK.com.
Every time I start singing the praises of National Grid, one of my colleagues will quote Warren Buffet by saying ‘Beware the investment activity that produces applause; the great moves are usually greeted by yawns.’ I could not agree more in this case.
For me National Grid epitomises the beauty of investing in boring stocks. Over the last 5 years the total return (with dividends reinvested) from investing in National Grid shares has been 53% which is 32% better than the FTSE All Share and there is nothing boring about that. The source for this data point is Bloomberg as at 23.11.22.
Perhaps some investors look only at the 19% price return and miss the other 32% returned through dividends. The company are building critical electricity infrastructure which is required for the transition to net zero in their markets in the UK and US, as mentioned above.
The company fits with the profile of what I believe will work well in the new era; framed with a valuation based more on current profits rather than the promise of growth; the epitome of a ‘jam today’ company with a clear commitment to shareholder dividends.
The company management has said it aims to grow its dividend per share in line with inflation, even in the face of higher inflation and higher interest rates, due to the structure of the regulatory environment they operate in.
Investing must be lived forwards
The future is uncertain but the forward looking, underlying trends I see point me to think we are entering an environment of moderate inflation and moderate interest rates. I believe that investing in quality companies at a reasonable price is coming back into favour. This makes investing in the UK market and the likes of the companies I have detailed above an important bit of forward thinking.