STOCKS | FUNDS | INVESTMENT TRUSTS | PENSIONS AND SAVINGS

VOL 20 / ISSUE 01 / 11 JANUARY 2018 / £4.49 SHARES WE MAKE INVESTING EASIER give yourself an income boost with stocks and funds yielding more than5%

THE INVESTMENTS WHERE YOU CAN SIT BACK AND LET THE CASH ROLL IN WHAT TO DO WITH YOUR WORLDPAY TAKEOVER PROCEEDS: PAGE 9 SCOTTISH MORTGAGE INVESTMENT TRUST

COSTS MAKE A REAL DIFFERENCE TO PERFORMANCE – OUR ONGOING CHARGES ARE JUST 0.44%*.

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A company’s ability to exhibit exponential growth lies at the heart of the Scottish Mortgage Investment Trust, managed by Baillie Gifford.

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Standardised past performance to 30 September**:

2013 2014 2015 2016 2017 Scottish Mortgage 35.9% 27.6% 4.2% 37.0% 30.4%

AIC Global Sector Average 23.6% 12.1% 5.1% 21.8% 21.6%

Past performance is not a guide to future returns. Please remember that changing stock market conditions and currency exchange rates will affect the value of the investment in the fund and any income from it. Investors may not get back the amount invested.

The Trust’s risk could be increased by its investment in unlisted investments. These assets may be more diffi cult to buy or sell, so changes in their prices may be greater.

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*Ongoing charges as at 31.03.17. **Source: Morningstar, share price, total return as at 30.09.17. Your call may be recorded for training or monitoring purposes. Scottish Mortgage Investment Trust PLC is available through the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA, which are managed by Baillie Gifford Savings Management Limited (BGSM). BGSM is an affi liate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. EDITOR’S VIEW Plenty of opportunities despite markets rallying We talk to a smaller company fund manager about spotting investment ideas in the current environment

he markets have started the group RWS (RWS:AIM) and New Year in a bullish manner pharmaceutical provider/services firm T with a repeat of the same Clinigen (CLIN:AIM) could double in size trend seen in 2017: mid and small again over the next two to three years. caps are outperforming larger companies. IMPORTANCE OF DELIVERING Many of you may assume high ON A PROMISE market levels make it harder to find The key to successful small cap investing decent investment ideas. In reality is to back companies who deliver on we’re still finding plenty of stocks well their stated intentions. That might be worth buying at current levels. making acquisitions which always add The key is taking a long term view of a company value; or being able to hit or exceed earnings and looking at its prospects versus rivals and guidance on a regular basis. broader markets. This approach resonates with Power says management strength is one of the how FP Octopus UK Micro Cap Growth Fund most important factors behind his investment (GB00BYQ7HN43) manager Richard Power picks decision making. He likes managers with a clear stocks for his portfolio. vision and who are able to deliver. He says there are still ‘pockets of the market’ Big success stories for the Octopus fund no that present exciting opportunities for investors. longer in the portfolio include Fevertree Drinks Indeed, eight new names were added to his (FEVR:AIM) and construction group Breedon portfolio in December 2017, which he says (BREE:AIM). ‘Unlike some micro-cap funds, we is unusual as it is higher than normal for don’t sell a stock when it is no longer a smaller the fund. company. We like to maximise the potential of a business. MARKETS REMAIN ATTRACTIVE ‘We sold Fevertree when it was worth £2.6bn You may consider the large number of additions due in part to Schweppes’ comeback. We sold by Octopus to be a surprise given the widespread Breedon when it was worth £1.3bn as it had by chatter that markets are overdue a correction. then already seen earnings upgrades and made a However, it illustrates how market experts are still large acquisition.’ finding opportunities. As for future potential portfolio stars, Powers Recent additions to the Octopus portfolio says Angling Direct (ANG:AIM) could be ‘the next include gaming sector service provider Sumo Gear4Music’ referring to the musical instruments (SUMO:AIM). Power also picked up a stake in retailer which has increased more than five-fold in Best of the Best (BOTB:AIM) whose share value since summer 2016. price took a hit in December after the gambling He also favours media group Future (FUTR) company said it would have to pay higher taxes. which is also one of Shares’ top stocks for 2018. Some of the stocks in Power’s portfolio have On that note, I’d like to wish everyone the best already seen significant gains since investment, of luck with their investing this year and hope yet he still sees potential for even more value you continue to find Shares a valuable source of appreciation in many cases. news and opinion to support your investment For example, he reckons patent translation journey. (DC)

11 January 2018 | SHARES | 3 VIEWING Contents SHARES AS A PDF? CLICK ON PAGE NUMBERS TO JUMP 11 January 2018 TO THE RELEVANT STORY

EDITOR’S VIEW 03  Plenty of opportunities despite INCOME SPECIAL markets rallying GREAT IDEAS 12 Gr ab a 9% dividend yield from property expert BIG NEWS 06 Is Mothercare a MAIN FEATURE takeover target after 16 Give yourself an income boost with stocks and share price slump? funds yielding more than 5%

BIG NEWS SMALLER COMPANIES 07 Whi ch UK-listed 24 Small caps with generous dividend yields stocks are affected by US tax reform? TALKING POINT 26 Th e dangers associated with special dividends

INVESTMENT TRUSTS 31 Wh y Asia Pacific may appeal to income investors

STORY IN NUMBERS BIG NEWS 10 10 Debenhams’ alarming 08 Dialight banking on rent bill and other new leadership stories in numbers

BIG NEWS GREAT IDEAS 09 Wh ere to invest 11 W ey Education is your Worldpay primed for rapid takeover proceeds profit growth

securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor DISCLAIMER agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, IMPORTANT self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. 2. Reporters will inform the editor on any occasion that they transact shares, Comments published in Shares must not be relied upon by readers when they derivatives or spread betting positions. This will overcome situations when the make their investment decisions. Investors who require advice should consult a interests they are considering might conflict with reports by other writers in the properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited magazine. This notification should be confirmed by e-mail. do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it 4. A reporter should not have made a transaction of shares, derivatives or spread will be disclosed. Shares adheres to a strict code of conduct for reporters, as betting positions for seven working days before the publication of an article that set out below. mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within seven working days after the 1. In keeping with the existing practice, reporters who intend to write about any on-sale date of the magazine.

4 | SHARES | 11 January 2018 SHARES Contents 16

40

INVESTMENT TRUSTS FUNDS MONEY MATTERS 34 New investment 36 Fr ee Spirit toasts 39 Makin g changes to trust factsheets fantastic first year auto-enrolment could be ‘misleading’ as a fund MONEY MATTERS 40 H ow to invest ethically

31 WEEK AHEAD 42 Finan cial results and ex-dividends over the coming week

INDEX 44 In dex of companies and funds in this issue

WHO WE ARE BROKER RATINGS EXPLAINED: EDITOR: DEPUTY NEWS Daniel EDITOR: EDITOR: We use traffic light symbols in the magazine to illustrate Coatsworth Tom Sieber Steven Frazer broker views on stocks. @SharesMagDan @SharesMagTom @SharesMagSteve FUNDS AND REPORTER: REPORTER: CONTRIBUTORS Green means buy, Orange means hold, Red means sell. INVESTMENT TRUSTS David Stevenson Lisa-Marie Janes Emily Perryman EDITOR: @SharesMagDavid @SharesMagLisaMJ Tom Selby James Crux The numbers refer to how many different brokers have @SharesMagJames that rating.

PRODUCTION ADVERTISING MANAGING DIRECTOR Eg: 4 2 1 means four brokers have buy ratings, Head of Design Sales Executive Mike Boydell two brokers have hold ratings and one broker has a sell Rebecca Bodi Nick Frankland 020 7378 4592 rating. Designer [email protected] Darren Rapley The traffic light system gives an illustration of market views Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, but isn’t always a fully comprehensive list of ratings as some 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852. banks/stockbrokers don’t publicly release this information. All Shares material is copyright. Reproduction­ in whole or part is not permitted without written permission from the editor.

11 January 2018 | SHARES | 5 BIG NEWS Is Mothercare a takeover target after share price slump? The stock is down by 64% since June 2017

s Shares goes to press, the flurry of festive gearing in the domestic business causes its full year updates from retailers is arriving and proving 2018 profit before tax expectations to fall further Asomething of a mixed bag. to a range of between £1m and £5m,’ says Numis Set against low expectations, particularly for analyst Matthew Taylor, whose previous estimate non-food categories, high street bellwether Next was £10m. (NXT) fared better than feared over the Christmas period and WM Morrisons Supermarkets (MRW) EARNINGS COLLAPSE also beat expectations and maintained positive Taylor now forecasts a year-on-year pre-tax profit like-for-like sales momentum. On the flip-side, slump from £19.7m to £2.5m for earnings per share department store Debenhams (DEB) reported dire of 1.2p (2017: 9.2p), leaving Mothercare looking trading and issued a full year profit warning. expensive relative to depressed earnings on a 38 The one company that really caught our attention times price-to-earnings mulitple. was ailing maternity brand Mothercare (MTC), Though Mothercare’s heritage brand name whose shares collapsed to 46p following a worrying continues to resonate overseas, uncertainty over festive update (8 Jan) and full year profit alert. trading trends and the absence of a dividend would Supermarkets and cheaper online rivals are perhaps deter financial or trade buyers. evidently eating into Mothercare’s business and We see merit in the view of Canaccord Genuity’s value investors should be wary of viewing this Sanjay Vidyarthi, a seller with a downgraded price sell-off as a buying opportunity. target of just 29p. The Canaccord number cruncher The self-styled global retailer for parents and believes ‘there is a place for Mothercare in the UK, young children saw UK like-for-like sales slump 7.2% but the right-sizing of the store portfolio needs to in the 12 weeks to 30 December. Mothercare paid happen faster’ and also flags liabilities potentially for its ‘conscious decision’ to avoid discounting topping £400m. before Christmas, then discounted more heavily in ‘This makes Mothercare a difficult take-out the end of season sale. candidate, despite the potential strategic value of In the third quarter, ‘international trade was the business,’ explains Vidyarthi. ‘The reality is, in challenging’, albeit with a return to growth seen in our view, that the UK business would already have the Middle East and Russia in more recent weeks. gone through administration (and potentially come ‘Although there are welcome signs of stabilisation out a stronger, right-sized business) were it not for in the International division, the acute operational the cash flows of International keeping it afloat.’ (JC)

6 | SHARES | 11 January 2018 BIGBIG NEWSNEWS Which UK-listed stocks are affected by US tax reform? We look at some of the firms affected by changes on the other side of the Atlantic

he green light for US tax reform is a potential boost for several UK-listed businesses with Tsignificant US operations. Some are taking hefty charges as they recalculate deferred tax assets. However, these one-off charges will have no cash impact and a cut in corporation tax from 35% to 21% is expected to provide a long-term boost. 4imprint (FOUR) – The 97% US-based promotional products firm sees no 2017 impact but its tax rate is expected to fall from 30% to low 20s going forward. Barclays (BARC) – The bank faces a £1bn hit in its Melrose (MRO) – The industrial buy-out specialist 2017 financial year. sees no impact in 2017. A reduction in 2018 BP (BP.) – The oil major flags a $1.5bn one-off charge effective tax rate to 24% would be beneficial to asset in its fourth quarter 2017 results but there should be valuations, as well as potentially cutting any tax a future positive impact. liability should it sell part of its Nortek business. CRH (CRH) – Stockbroker Davy sees 5% earnings Royal Dutch Shell (RDSB) – The Anglo-Dutch oil firm boost to building materials firm CRH. highlights $2bn to $2.5bn charge in Q4. Keller (KLR) – It expects to have a one-off $10m Somero (SOM:AIM) – FinnCap has upgraded 2018 credit, plus a reduction in future effective tax rate by earnings at construction equipment group by 19.7% 5% to high 20s. as a result of the US tax reform.

Eco Atlantic gets Christmas boost Coal hits Exxon discovery for grocers one-year high boost BOOSTED BY significant inflation, POWER-GENERATING thermal coal OIL EXPLORATION firm Eco Atlantic overall supermarket sales shot up has reached its highest levels Oil & Gas (ECO:AIM) has enjoyed by 3.8% in value over the 12 weeks since late 2016 above $100 per a storming start to 2018 with its to 31 December, an additional £1bn tonne as strong manufacturing share price up 90% year-to-date ringing through the tills versus the activity in Asia and China supports to 33.4p. The rally is thanks to US 2016 Christmas period. So says prices. oil major ExxonMobil announcing a Kantar Worldpanel, whose latest A lack of new projects amid sixth big discovery on the Stabroek grocery market share figures (9 environmental concerns means block, Guyana. Jan) reveal the average household supply is tight. Most observers This asset neighbours Eco’s shrugged off economic worries to expect any strength in coal to be 40%-owned Orinduik block. French spend a record £1,054 on groceries in short-lived as emerging markets energy giant Total is currently the three month period. Tesco (TSCO) eventually follow Europe in working through seismic data with was the fastest growing of the big phasing out the fossil fuel. (TS) an option to acquire a 25% stake in four supermarkets, with sales up Orinduik for $13.5m. (TS) 3.1%. (JC)

11 January 2018 | SHARES | 7 ”

BIG NEWS Dialight The week in banking a minute A snapshot of good and bad corporate on new news leadership GOOD NEWS Execution is key to operational and share • Plus500 (PLUS:AIM): Trading is yet price recovery again ahead of market expectations, prompting analysts to upgrade hareholders in LED lighting systems designer forecasts. Dialight (DIA) are pinning their hopes on new • Johnson Service (JSG:AIM): Expects leadership drawing a line under manufacturing full year results to be ahead of S management expectations. execution problems. The £195m company is at the cutting edge of • H&T (HAT:AIM): Says full year pre- LED technology, specialising in lighting solutions for tax profit will be ahead of market hazardous and challenging industrial applications, such expectations. as mobile masts, power plants and oil rigs. Struggles to meet output led to the decision last year • Carr’s (CARR): Positive trading update to outsource manufacturing to Silicon Valley-based leads Investec to say Carr’s is on track Sanmina. That move has been beset with problems, to grow profit this financial year including product launch and production delays. This led following a setback in 2017. to two profit warnings during 2017. • Craneware (CRW:AIM): Significant The problems cost former chief executive Michael contract win with a major US Sutsko his job, but analysts believe his successor, healthcare provider, plus positive Marty Rapp, has the engineering and manufacturing trading update. background to turn things around. Rapp is a former executive at electronics designer Laird (LRD). He also held engineering positions at Monsanto, the Fortune 500 agriculture giant. BAD NEWS ‘His main priority is to accelerate the recovery after the relationship with contract manufacturer Sanmina • Shire (SHP): The drugs firm said it began so poorly,’ say analysts at Investec. They believe wouldn’t hit a $20bn sales target for 2020 and added that a break there could be 60% share price upside from the current up of the business won’t happen 600p if he gets it right. near-term as some had previously However, Berenberg believes there may have been speculated. large market share declines during months of upheaval. In our view there is scope for recovery but evidence • Be Heard (BHRD:AIM): Profit warning of better execution is needed. (SF) after reduced activity in part of its business and deferral of some existing and new contracts. • Elegant Hotels (EHG:AIM): Cuts dividend, says revenue per available room fell 4.6% in its 2017 financial year.

8 | SHARES | 11 January 2018 BIGBIG NEWSNEWS Where to invest your Worldpay takeover proceeds Shareholders are about to get a mixture of cash and shares as acquisition by Vantiv is approved

hareholders in payment processing group DECISION TIME FOR INVESTORS Worldpay (WPG) will receive a mixture Worldpay shareholders have a choice with what to do Sof cash and shares later this month in with the proceeds of the Vantiv deal: relation to the FTSE 100 member’s takeover by US peer Vantiv. 1. Keep the new 2. Keep the new Worldpay They will get shares in the enlarged business Worldpay shares and shares and use the cash which will be renamed Worldpay Inc and be use the cash component component to invest in listed on both the London and New York stock to buy more Worldpay something else exchanges. stock

WHAT ARE THE TERMS OF THE DEAL? Worldpay shareholders will receive 55p in cash, 0.0672 new shares and additional 4.2p cash as a special dividend for each Worldpay share they own. The cash component represents approximately 13% of Worldpay’s market value. Worldpay’s current shares will be suspended from trading on 15 January. The cancellation 3. Sell all the new 4. Sell some of the new of the old shares and admission to trading of Worldpay shares and use Worldpay shares and the new shares will happen on 16 January. The the proceeds, along with invest the proceeds along cash payments are scheduled to be made on the cash component, to with the cash component 30 January. invest in something else in something else

WHAT WILL THE ENLARGED Shareholders wishing to use the cash component, and BUSINESS DO? potentially sell some or all of their new Worldpay shares Vantiv and Worldpay look like they will fit well to generate additional cash to make other investments, together. Vantiv is the number one merchant may wish to look at alternative ways of playing growth acquirer in the US, specialising in the retail, in the e-commerce sector. restaurant, grocery and drug sectors, and For example, the rise in people returning items business-to-business markets. Worldpay ordered online plays into the strengths of Clipper specialises in digital services, the travel sector Logistics (CLG) which helps the likes of ASOS (ASC:AIM) and online retail, and is the number one and Superdry (SDRY) with their e-fulfilment and returns merchant acquirer in the UK. management. The combined business will be the number Polar Capital Technology Trust (PCT) may interest one global acquirer, according to a presentation someone looking for diversified exposure to some by the two companies. of the biggest names in digital industries including They cite ‘significant opportunity’ to e-commerce. cross-sell business-to-business services The investment trust’s top holdings include retail into the combined customer base, plus giant Amazon, Google’s parent company Alphabet, e x p a n d i n t e g r a t e d p a y m e n t s i n t o t h e U K a n d Apple, Microsoft and Chinese e-commerce, retail and across Europe. technology conglomerate Alibaba. (DC)

11 January 2018 | SHARES | 9 STORY IN NUMBERS

HOW SERIOUS IS WRESSLE SETBACK FOR EDGON RESOURCES? Company’s appeal over key project is rejected by planning authority ON 5 JANUARY it emerged that Gas (EOG:AIM) all suffered big concerned about the loss of the Planning Inspectorate had share price falls. In particular, projected production of 120 unexpectedly upheld a decision Egdon fell 1.44p to 6.7p in the barrels of oil equivalent (boepd) to block the development of the immediate aftermath of the and the cash flow associated Wressle oil discovery in North news. with this output. Lincolnshire. Stockbroker VSA Capital The operator of the field, noted Wressle contributed just Egdon Resources (EDR:AIM) 1.2p to its target valuation of and its partners Union Jack 48.8p for Egdon’s share price, Oil (UJO:AIM) and Europa Oil & yet the market may be more

1.2P

DEBENHAMS’ ALARMING RENT BILL FUTURE AGGREGATE minimum payments under ‘non-cancellable’ operating leases amount to more than £4.5bn at Debenhams (DEB), according to the ailing department store operator’s 2017 annual report and OPPORTUNITY FOR PROPERTY FUND accounts. The fact the hard-pressed British brand is locked into very long-term ON MACAU GROWTH SURGE leases will hinder CEO Sergio Bucher’s Macau Property Opportunities Fund (MPO) has laid attempts to turn out several reasons in its fourth quarter update as round Debenhams. to why it could enjoy a prosperous year in 2018. Disappointing Average rentals have grown by 6.4% quarter- £4.5BN Christmas sales and on-quarter to HK$19.95 per square foot per month a return to heavy at The Waterside, one of the few waterfront living discounts lay behind a residential developments in Macau. severe profit warning Occupancy for the property stood at 59%. The (4 Jan), which has fund is hopeful that Macau’s VIP gaming segment prompted brokerage will continue to recover and boost rental values and Liberum Capital to occupancy rates. downgrade its full Last October, the International Monetary Fund year pre-tax profit revised the GDP growth rate for Macau from 2.8% to estimate by 35% to a whopping 13.4% for 2017. £52.1m.

10 | SHARES | 11 January 2018 GREAT IDEAS Wey Education is primed for rapid profit growth Online education provider has the cash to help build scale

new injection of cash in the classroom and will initially could help online WEY EDUCATION use AI to establish the knowledge A education provider Wey  BUY levels of students, to help apply Education (WEY:AIM)to build (WEY:AIM) 38.5p appropriate teaching resources. scale, which is key to sustaining Stop loss: 27p ‘We believe education momentum in the share price. businesses can derive high Some of the £5m raised in late Market value: £49m returns for shareholders,’ says 2017 have already been used to WH Ireland. ‘After factoring in acquire Academy21, a company the effects of (Wey’s) recent that should bolster Wey’s placing and acquisition, we see ecademy business-to-business near-term fair value to be closer division. to 50p. However, after an initial Its services are primarily aimed investment phase to August at schools and local authorities 2018, revenue and profit have who need to provide alternative the potential to increase rapidly.’ education services to children WH Ireland forecasts revenue who find attending mainstream will double to £4.8m in the school difficult. year to August 2018 – and The new cash should also then effectively double again help Wey Education gain to £10.3m in 2019. It forecasts more students for its online cash returns, despite being £0.16m pre-tax profit this year school, InterHigh, among other in its infancy. It believes Wey and £2.16m next year. endeavours by adding firepower should be able to grow much Don’t be troubled by the to its marketing and advertising more rapidly than a traditional current year’s price-to-earnings efforts. education establishment and ratio which is a sky-high 98.7 Executive chairman David potentially start paying dividends times. The rating dramatically Massie says the primary method from 2020. falls over the next few years as of gaining customers is via Money will be deployed to earnings shoot up. This looks like promotions on Google, Twitter beef up the company’s overseas a classic fast-growth business and Facebook, costing between presence, especially in the with the right ingredients to £50 and £100 to recruit a student. Middle East and parts of the excite investors. (DS) The company is also using Commonwealth where there is billboard and display advertising a history of teaching the British BROKER SAYS: n/a at London’s Waterloo station. curriculum. WEY EDUCATION FTSE ALL SHARE InterHigh is a non-selective The overseas marketing will 45 fee paying secondary school mainly benefit Wey’s online 40 providing live, interactive language school, Quoralexis, and 35 30 teaching of GCSEs, A Levels and Infinity Education which is Wey’s 25 some vocational courses. selective, premium fee-paying 20 Stockbroker WH Ireland says online school. 15 10 InterHigh has already proved Wey wants to be a leader in 5

0 Source: Thomson Reuters Datastream its ability to generate significant the use of artificial intelligence 2018

11 January 2018 | SHARES | 11 GREAT IDEAS Grab a 9% dividend yield from property expert Regeneration specialist U and I looks an absolute bargain at current levels

roperty regeneration group U and I (UAI) is one of the U AND I  BUY most compelling value (UAI) 200p P Stop loss: 160p opportunities in the property sector and investors should snap Market value: £250m up the shares before the wider market cottons on. U and I trades at a 33% discount to net asset value per share of 300p, according to stockbroker Peel Hunt. Yet it is on track to deliver one of the most substantial total returns in the sector if management guidance is met. deliver guidance for trading gains performance from this The company hopes to of £65m to £70m in the financial investment portfolio has been deliver a post-tax return of year ending 28 February 2018. disappointing and this, along 12% a year in the next three with historic cost issues, helps years, underpinned by annual PPP FOCUS WILL PAY OFF account for the discounted development and trading gains The company has secured a lot equity valuation. upwards of £50m. This helps of public private partnership By more closely aligning the support a prospective yield of (PPP) work since its relaunch portfolio with regeneration it is nearly 9% based on forecast (£1.2bn worth over the last hoped this underperformance ordinary and special dividends. 18 months) where it teams up can be addressed. Over a three-year period, the with local authorities to unlock Combined with the yield is expected to average public land for development. development of trading gains in 7.5%. Peel Hunt reckons this focus line with management guidance The business, formerly known will deliver several benefits for and growing confidence in the as Development Securities, the business. ‘We believe that a recurring nature of supplemental changed its name and strategy focus on larger, increasingly PPP dividends, we think the share in October 2015 following led schemes, should not only price will do well in 2018. (TS) the £27.4m acquisition of improve profitability but also regeneration specialist Cathedral leverage on the core strengths BROKER SAYS: 001

Group. It is now focused on large and skills of the business.’ U AND I GROUP regeneration projects in London, U and I books profit from FTSE ALL SHARE 205 Dublin and Manchester. trading assets in the short- 200 Following the completion of term and from a portfolio of 195 190 the £34m sale of its Blackhorse assets which includes its own 185 Road site in north east London completed developments and 180 to Telford Homes (TEF:AIM) at other projects with regeneration 175 170 a price which topped guidance potential. 165

160 Source: Thomson Reuters Datastream (20 Dec), U and I is on track to Admittedly, previous 2018

12 | SHARES | 11 January 2018 GREAT IDEAS UPDATES

G4S the first time in over a decade. That in turn could lead to higher dividend payments. (GFS) 285.9p An alternative could to be sell its Cash business or even demerge it as a separately-listed entity, Gain to date: 11.6% G4S says UBS. FTSE ALL SHARE Original entry point: 360 G4S will Buy at 256.2p, 16 November 2017 340 next update 320 on trading FTSE 100 SUPPORT services company G4S (GFS) 300 when it looks to be back on track after a torrid time last 280 reports full year when the company flagged issues that hurt 260 year results its share price. 240 on 8 March. 220 Source: Thomson Reuters Datastream Investment bank UBS says now is the time to 2018 buy the shares, echoing our bullish view which we SHARES SAYS:  published two months ago. While G4S has had some well publicised problems in UBS suggests G4S could undergo a period of the past, we believe sentiment is improving and the selling assets and potentially undertake a radical business is good value trading on 14.5 times forecast strategic shift for its Cash business. earnings for 2018. It suggests G4S could raise up to £480m of cash from disposal proceeds and use that to reduce its BROKER SAYS: 159 net debt to EBITDA ratio to below 1.5-times for

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SOPHEON DECHRA (SPE:AIM) 450p PHARMACEUTICALS (DPH) £20.58 Gain to date: 36.4% Original entry point: Gain to date: 19% Buy at 330p, 22 June 2017 Original entry point: A VERY STRONG end to 2017 means Sopheon Buy at £17.29, 27 July 2017 (SPE:AIM) will beat forecasts for 31 December 2017 on both revenue and profit. That’s behind VETERINARY PRODUCTS DEVELOPER Dechra an impressive near 30% jump in the share price Pharmaceuticals (DPH)continues to deliver strong on 4 January, putting our Great Idea firmly in trading with a 10.5% jump in sales in the second the money. half of 2017. What’s more, the company is confidently talking The upbeat performance was driven by a 20% up its software-as-a-service model, bolstering increase in North American sales and a return to recurring revenues that provide increasingly visible growth in Europe of 5.5%. performance into 2018. Dechra has registered poultry vaccine Avishield Sopheon is the innovation management IB H120 and released all dosage sizes of dog solutions supplier we first flagged back in antibiotic Amoxi-Clav tablets in the US. June. It helps enterprises manage all aspects of It also launched Vetoryl to treat excess hormone new product development lifecycles, allowing production in dogs and Osphos to help lameness customers to make smarter decisions about which in horses in Mexico. This should drive growth and products to develop and how to bring them to margins according to stockbroker Cantor Fitzgerald. market faster. There is also a potentially positive impact from Details of the scale of the beat were not given sweeping US tax reforms, which cut the corporate but the firm’s broker, FinnCap, felt it prudent to tax rate from 35% to 21%. suspend 2017 and 2018 estimates until more Dechra expects the reform to be beneficial and information is available. That suggests to us that provide a material one-off non-cash credit. Analysts the outperformance is substantial. Sopheon will anticipate earnings upgrades, but await more report full year results on 22 March 2018. details when Dechra reports its results (26 Feb). Interestingly, FinnCap now says that its previous Cantor Fitzgerald’s Brian White says the US 620p target price is a ‘minimum’ expectation, performance is ‘noteworthy’ and believes 2016’s implying Putney SOPHEON DECHRA PHARMACEUTICALS FTSE ALL SHARE FTSE ALL SHARE 520 close on acquisition is 40% further 2300 proving to be 480 upside 2100 a good fit as it 440 remains on 1900 delivers scale

400 the table. 1700 and a pipeline

360 of companion 1500 animal

320 Source: Thomson Reuters Datastream 2018 1300 Source: Thomson Reuters Datastream 2018 generics.

SHARES SAYS:  SHARES SAYS:  We’ll resist the temptation to talk valuation until new We remain bullish on Dechra’s prospects as it forecasts are published. But the backcloth is highly continues to roll-out its product pipeline. (LMJ) positive and the shares are still a buy. (SF) BROKER SAYS: 034 BROKER SAYS: n/a

14 | SHARES | 11 January 2018 You invest Invest monthly in a low-cost DIY pension You choose Choose from a wide range of investment options You benefit Low-cost dealing from as little as £1.50

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THE INVESTMENTS WHERE YOU CAN SIT BACK AND LET THE CASH ROLL IN

enerating an income from In this article we look at the 40-plus investments is one of the key THE AMOUNT OF shares in the FTSE 350 index which reasons why people put MONEY PAID IN DIVIDENDS offer a prospective yield of 5% or G money into the markets. BY FTSE 100 COMPANIES more, as well as a range of The average yield on FTSE 100 IS EXPECTED TO INCREASE funds, investment trusts and stocks at present is 3.8% which BY 7% IN 2018, ACCORDING exchange-traded funds doing is significantly higher than both TO AJ BELL’S LATEST DIVIDEND the same. the current rate of inflation (3.1%) We also examine in more detail and the top rate of interest on DASHBOARD REPORT. how you can find, protect and grow cash savings accounts (1.3%). IT SAYS THAT EQUATES the income from your investments As Alex Crooke, head of global TO A 4.3% YIELD. over time. equity income at asset manager Janus Elsewhere in this week’s issue Henderson, observes: ‘The absolute level of of Shares, we look at small cap companies dividend yields remains very attractive to investors which also have 5%+ dividend yields and discuss when compared to other asset classes.’ the pros and cons of special dividends.

16 | SHARES | 11 January 2018 your cash for several years. HOW TO FIND INCOME You also need to beat the current rate of UK inflation which is 3.1%. For a dividend yield The income from shares and funds comes in to be truly generous it should be higher than the form of a dividend. This payment is typically approximate 4% average for the FTSE All-Share made in cash twice a year, although sometimes index. more frequently. Just watch out for overly-generous yields, such For individual company shares, dividends are as anything above 7%. Occasionally a company’s paid from the cash flow left over after the business business model can support this level of dividend has met all its other financial obligations. Funds return. However, in most cases a high yield is the pay dividends generated by the income from their result of a falling share price – the market’s way of underlying holdings (which is likely to contain saying that it doesn’t believe current earnings (and dividend-paying companies). therefore dividend) forecasts. Not all shares and funds pay a dividend, unlike other asset classes such as bonds. Individual companies can cut or cancel a dividend entirely at DIVIDENDS – THE KEY POINTS TO CONSIDER their management’s discretion. Some companies have never paid a dividend as they may prefer Think about these points when you’re to recycle all their cash generation back in to the considering a stock as an income investment: business to fund growth – or they have negative cash flow, such as some early stage miners, drug • Ar e the company’s earnings per share firms or tech companies. comfortably greater than its dividend per The decision to start or resume paying a dividend share? can often act as a positive catalyst for a share price. Paying a dividend puts a stock on the radar of fund • Look at current earnings strength – if trading managers and other investors who ignore non- is poor, this increases the risk of there being dividend payers, for example. insufficient cash generated to fund the Companies who restart dividends after a period dividend. of not paying out cash to investors can be viewed as businesses who have fixed a problem which • A prospective dividend yield above 7% is previously led to the payout’s suspension. rarely sustainable unless there are significant A company considering a maiden dividend levels of cash generation and the money isn’t suggests it has reached a point in its development needed elsewhere. Even then, check to see where it is financially comfortable and capable of if the company is reinvesting cash to sustain sustaining dividend payments. and grow its business. It if isn’t, then why Income is usually measured by way of yield. For not? It should be. equities, this is calculated by dividing either the forecast or historic annual dividend per share by the share price and multiplying by 100. For example, oil major Royal Dutch Shell (RDSB) trades at £25.63 and is forecast to pay 138.5p per share in 2018. This translates into a dividend yield of 5.4%.

HOW TO BENCHMARK YOUR INCOME Measuring the generosity of yield offered by a prospective investment requires benchmarks. There are several you can employ. Investing in shares is riskier than holding cash on deposit so you want to generate a higher return than the best rates available on cash savings which are around 1.3%, unless you are prepared to tie up

11 January 2018 | SHARES | 17 TOP YIELDING FTSE 350 STOCKS

FORECAST DIVIDEND COMPANY EPIC YIELD (%) Centrica CNA 8.2 Card Factory CARD 8.2 Bovis Homes BVS 7.9 Galliford Try GFRD 7.5 Direct Line Insurance DLG 7.4 RDI REIT RDI 7.4 SSE SSE 7.3 Taylor Wimpey TW. 7.3 Capita CPI 7.3 Stagecoach SGC 7.1 Saga SAGA 7.1 Marston’s MARS 6.8 Lloyds Banking LLOY 6.7 Barratt Developments BDEV 6.6 Crest Nicholson CRST 6.6 Inmarsat ISAT 6.6 Kier KIE 6.6 Go-Ahead GOG 6.6 NewRiver REIT NRR 6.5 Phoenix PHNX 6.5 Stobart STOB 6.3 GlaxoSmithKline GSK 6.0 Admiral ADM 6.0 Legal & General LGEN 6.0 Imperial Brands IMB 6.0 Greene King GNK 5.9 Marks & Spencer MKS 5.8 BT BT.A 5.8 Aviva AV. 5.7 BP BP. 5.6 Intu Properties INTU 5.6 AA AA. 5.6 Vodafone VOD 5.5 Esure ESUR 5.5 Standard Life Aberdeen SLA 5.4 Royal Dutch Shell RDSB 5.4 National Grid NG. 5.3 ITV ITV 5.3 Drax DRX 5.3 Royal Mail RMG 5.2 Jupiter Fund Management JUP 5.2 Dixons Carphone DC. 5.2 TalkTalk Telecom TALK 5.1 Source: Shares, various analyst notes, SharePad

18 | SHARES | 11 January 2018 TOP YIELDING FTSE 350 STOCKS – BEHIND THE NUMBERS

THE ACCOMPANYING TABLE shows 43 companies 5%+ yielders without proper research. in the FTSE 350 index which have a prospective ‘Over the last 18-24 months, there has definitely dividend yield in excess of 5%. This is based on the been a theme of dividend cuts from some very share price at the time of writing and the dividend high-profile companies,’ says David Goldman, payout forecast by analysts for the latest financial co-manager of BlackRock Income and Growth year still to be reported. Investment Trust (BRIG). Some of these names could represent genuine ‘When you look at the FTSE 350 by number, opportunities for income-hungry investors. the vast majority are still growing their dividends. UK bank Lloyds (LLOY) used to pay very generous You’ve still got 75-80% of FTSE 350 companies dividends until the financial crisis hit. It stopped growing their dividends with the balance being split paying for a while and resumed dividends in 2015. between those that are keeping the dividend flat The payments are forecast to keep rising for the and the odd cut.’ foreseeable future and the stock now trades on a So which companies look vulnerable to a cut? A 6.7% prospective yield. profit warning from Centrica (CNA) in November Over-50s financial services and travel specialist 2017, which saw 2017 earnings per share guidance Saga (SAGA) trades on a 7.1% yield. Historically cut to 12.5p (from consensus of 15p), makes us far it has been a 4.5%-5% yield stock; the yield has less confident that its dividend will be maintained. recently shot up as a result of the share price falling The business is being hit by competition on a profit warning. alongside the threat of price caps and increased Analyst forecasts still imply progressive dividend regulation. Analysts are already pencilling in lower growth for the company, yet investors may wish to dividends, so don’t go chasing this stock expecting tread carefully until more information is released to make 8%+ yields a year. from Saga as to why its broking business has Other stocks potentially in line for a dividend cut recently disappointed. include satellites network operator Inmarsat (ISAT) Pub companies Marston’s (MARS) and and telecoms business TalkTalk (TALK). Greene King (GNK) offer 6.8% and 5.9% The former has a stretched balance sheet after prospective dividends respectively. Our preference spending heavily on infrastructure with net debt as an investment is Marston’s. It has been selling upwards of $2bn. bad pubs and building good ones. It refuses to TalkTalk faces a highly competitive environment discount food and drink which is helping to protect and suffered significant brand damage after a profit margins – the opposite of many other cyber-attack in October 2015. Despite already companies in the leisure sector. cutting the dividend by 50% in May 2017, some The business’s property estate is 94% freehold analysts think further cuts are necessary. and it has a net asset value of 147p per share – versus a 114.8p current trading price. Construction business Galliford Try (GFRD) HIGH DIVIDEND YIELDS CAN trades on a heavily discounted valuation thanks to problems on legacy construction contracts. OFTEN BE A WARNING SIGN THAT However, underpinned by its housebuilding THE MARKET LACKS FAITH IN and regeneration arms, it has a credible-looking plan to boost profit more than 60% out to 2021. EARNINGS FORECASTS This should support the dividend which has a 7.5% prospective yield.

WARNING SIGNS High dividend yields can often be a warning sign that the market lacks faith in earnings forecasts – so don’t rush to buy any company off our list of

11 January 2018 | SHARES | 19 HOW TO PROTECT YOUR INCOME

DIVIDENDS ARE NEVER guaranteed to be As a rule of thumb, dividend cover of two times paid. If a company endures poor performance, or more is generally seen as safe. However, it is a big financial shock or spends all its cash on a important to stress that dividends are paid out of big acquisition the dividend could be trimmed, cash rather than earnings which can be massaged suspended or even cancelled outright. In these by clever accounting. circumstances investors can face a double Free cash flow can be a better way to test a whammy as they lose the income and suffer a company’s ability to pay dividends than earning fall in the value of their investment as negative per share. Free cash flow is the amount of news on the dividend affects the share price. cash generated from operations minus capital Anyone owning a fund should benefit from expenditure. It is excess cash used to expand diversification in this situation. A setback with one production, develop new products, make portfolio holding in a fund wouldn’t have as much acquisitions, reduce debt and pay dividends. of an impact as compared to an individual stock. ‘When we think about dividend cover, we feel it is We’ll talk about income funds later in this article. very important to differentiate between companies with a high payout ratio because they are capital SAFETY CHECKS light and can afford to have a high payout ratio, and For investors owning individual stocks, it is fairly those with high payout ratios which operate in very easy to carry out safety checks on a dividend. The capital-intensive industries (mining, oil and gas), most straightforward is to see how many times it is and those make us more nervous,’ says Goldman at covered by earnings. This is known as dividend cover. BlackRock Income and Growth Investment Trust. Dividend cover of less than one suggests the In the next table we highlight companies whose dividend is being paid out of debt or cash savings generous dividends are comfortably covered by which is unsustainable in the long-term or perhaps free cash flow. All the names included in our table through shares in the form of a scrip dividend have yields above 5% and forecast dividends which can dilute existing shareholders over time. covered at least 1.75 times by cash flow.

CASH-BACKED DIVIDENDS

FORECAST FORECAST FORECAST FORECAST FREE CASH FREE CASH COMPANY EPIC DIVIDEND DIVIDEND FLOW PER FLOW YIELD (%) PER SHARE SHARE DIVIDEND (P) (P) COVER AA AA. 5.6 9.3 34.0 3.66 Maintel MAI 5.9 37.3 112.8 3.02 Greene King GNK 5.9 33.2 97.0 2.92 Phoenix PHNX 6.5 50.2 131.1 2.61 STM STM 5.3 2.0 5.1 2.55 Ashley (Laura) ALY 6.8 0.5 1.2 2.40 Drax DRX 5.3 14.4 32.3 2.24 Lakehouse LAKE 7.0 2.5 4.9 1.96 Redde REDD 6.7 11.6 22.7 1.96 DFS Furniture DFS 5.2 10.6 20.2 1.91 Royal Mail RMG 5.2 24.0 45.3 1.89 SCS SCS 6.7 15.0 28.0 1.87 Marks & Spencer MKS 5.8 18.5 34.2 1.85 Crest Nicholson CRST 6.6 36.5 64.0 1.75 Source: SharePad, 4 January 2018

20 | SHARES | 11 January 2018 Among the names on the list, Redde (REDD:AIM) with a 6.7% prospective yield provides a range FORECAST PERCENTAGE of accident management and legal services to CONTRIBUTION TO FTSE motorists and insurers. It is well known for having a 100 CASH DIVIDEND generous dividend policy. PAYMENTS IN 2018 ‘Redde’s model releases significant operational Royal Dutch Shell 14% and financial resource for insurer partners and HSBC 9% allows them to focus on optimising underwriting BP 7% returns whilst maximising the propensity for British American policyholders to renew through an efficient Tobacco 5% and simple service offering delivered well,’ said GlaxoSmithKline stockbroker N+1 Singer in September 2017. 4% ‘New contracts with new insurer partners have Vodafone 4% been secured and existing partners are working Lloyds 4% more closely with Redde. Key competitors have AstraZeneca 3% fallen away or are seeking other strategic goals. Rio Tinto 3% ‘We feel that it is fair to assume that there are Glencore clear opportunities for Redde to outperform our 2% forecasts, even if new opportunities do not reach Source: AJ Bell, 8 Dec 2017 the same scale as existing relationships.’ Elsewhere, Phoenix (PHNX) has a prospective overall income is not too heavily impacted. Given yield of 6.5%. This highly cash-generative company the cost and practicalities involved in running a is Britain’s largest owner of life assurance funds large portfolio yourself it can make sense to use closed to new customers. income funds to achieve this diversification. Phoenix says this business model enables it to If you want genuine diversification, make sure you focus all of its energy and expertise on improving check the holdings of a UK-focused equity income the performance of funds without being distracted fund to ensure the product isn’t overly reliant on a by the need to win new customers. handful of sectors to generate that income. Financial stocks and oil and gas companies account THE BENEFITS OF INCOME DIVERSIFICATION for 43% of the total forecast cash dividend payments Because it is impossible to eliminate the risk from the FTSE 100 in 2018 according to AJ Bell. of a dividend cut entirely it is better to run a And just two companies account for a quarter diversified portfolio of dividend-paying stocks of all FTSE 100 cash dividend payments in the (or invest in a fund). year, being Royal Dutch Shell (14%) and HSBC This way if one company cuts its dividend your (HSBA) at 9%.

11 January 2018 | SHARES | 21 AJ Bell’s data shows the average forecast dividend cover for the FTSE 100 in 2018 is 1.63 DIVIDEND COVER 2018* which is lower than at the height of the financial Centrica 1.24 crisis 10 years ago. Hammerson 1.22 The highest yielding stocks in the FTSE 100 Hargreaves Lansdown 1.22 have even lower dividend cover at just 1.37 times British Land 1.19 on average. The 10 companies with the lowest dividend Direct Line 1.12 cover in the blue chip index include three of Royal Dutch Shell 1.07 the highest dividend yields: Centrica, Direct Line St. James’s Place 1.05 (DLG) and BP (BP.). Admiral Group 1.03 All but two of them – Hargreaves Lansdown HSBC 1.00 (HL.) and St James’s Place (STJ) – are forecast to BP 0.99 yield significantly more than the FTSE 100 as a Vodafone 0.70 whole. Source: AJ Bell, 8 Dec 2017. *Ratio of earnings per share to dividend

HIGH YIELDING FUNDS emerging market government debt and companies which are based in, or have significant operations GLOBAL EQUITY INCOME funds are likely to in, an emerging market. fall short of the 5%+ yield target we’ve set in this Fidelity Enhanced Income (GB00B87HPZ94) article. For example, most investment trusts in this has a 7.1% yield and is not your typical equity category have a 3% to 4% yield. income fund. It invests in a range of higher One exception is Liontrust Global Income yielding UK shares to form a portfolio similar to (GB00B56S8Y21), a unit trust which yields 5.4%. It a traditional equity income fund and it also uses only invests in high-yielding stocks with ‘unusually’ derivatives. That latter involves selling some of strong cash flows where investors have low profit the potential future capital gains in exchange for a expectations. higher income today. It says: ‘Strong company cash flows (after L&G Dynamic Bond Trust (GB00B1TWMY10) investment spending) are a good indicator of strong yields 6.6%. This strategic bond can invest in a wide growth in future reported profits.’ Some of its holdings range of fixed income assets, from government include Russian steel group Severstal and South bonds to high yield, and make use of derivatives to African mobile communications group Vodacom. enhance returns. In general, you may have to look at more specialist Among investment trusts, there are numerous funds such as one investing in infrastructure assets funds invested in debt which offer yields typically or emerging markets, or one with ‘enhanced’ in the range of 9% to 14%. For example Carador income, in order to hit the 5%+ yield goal. Income Fund (CIFU) yields 13% and invests in For example, Threadneedle Emerging Market secured loan portfolio through CLO (collateralised Local (GB00B88S8291) yields 7.5%. It invests in loan obligation) transactions.

INVESTMENT TRUSTS AND ETFS FOR HIGH INCOME Lower down the yield spectrum, there are some property-related investment trusts with yields in excess of 5% such as Impact Healthcare REIT (IHR). It yields 5.9% and invests in properties linked to the UK care home market. Additional value is expected to be generated through refurbishments and

22 | SHARES | 11 January 2018 and Stockopedia, as well as on Shares’ website. HOW TO GROW YOUR INCOME Some larger companies may even publish this information on their own websites, as is the case CONSISTENT DIVIDEND GROWTH is typically a for HSBC among others. hallmark of a high-quality company with the ability And if you are in a position to reinvest the to generate plenty of cash flow. This may well be income from your holdings in dividend growth rewarded by a higher share price as investors rush stocks, rather than taking the cash straight away, to gain access to this cash flow. you can in theory benefit by steadily increasing You can review historical dividend growth your exposure to an income stream which itself is by looking at dividend payments over previous already growing. years on financial data websites like SharePad AJ Bell’s Dividend Dashboard report shows the positive impact dividend growth can have on the total return from a stock. Of the 26 current members of the FTSE 100 which have grown their dividend every year for the last decade, only utility firm SSE (SSE) has not comfortably outperformed the index on a total return basis.

INVESTMENT TRUSTS WITH A HISTORY OF DIVIDEND GROWTH The Association of Investment Companies (AIC) extensions. publishes a list on its website of ‘dividend hero’ Exchange-traded funds can also be used as investment trusts which have increased their investments to obtain income, although you must dividends each year for 20 years or more. consider that products tracking the highest yields Most of these trusts yield less than 5%, although may be higher risk than you think. you’ll find plenty of good examples of funds that They may provide exposure to companies deliver returns in excess of 5% when also factoring whose yields are high as a result of their share in capital growth. price being low – which, as we discussed earlier in Just look at Bankers Investment Trust (BNKR): this article, can be a warning sign which may lead it yields 2.1% and has managed to give investors to a dividend cut. more dividends every year for the past 50 years. iShares UK Dividend ETF (IUKD) is a relevant Over the past 12 months it has delivered 30% example and has a 5.19% yield. ‘We do not believe total return. that this fund has the potential to outperform its Simply looking for the highest yield isn’t always category peers over the long term,’ says Hortense the best route to finding a good investment, as Bioy, an analyst at Morningstar. we’ve explained earlier in this article. ‘The iShares UK Dividend ETF is part of a For example, investment trust British & shrinking cohort of passive offerings that focus American (BAF) yields 13.5% and has increased on the highest-yielding stocks with no dividend its dividend every year for the past 21 years, thus sustainability screens. The ETF offers exposure to it is classified by the AIC as a dividend hero. It 50 UK stocks with the highest one-year forecast invests mainly in investment trusts and UK quoted dividend yield. companies. While its yield sounds appealing, this ‘This strategy may suit investors seeking high and trust provides a good lesson in also checking the regular income, but it may come at the expense of share price performance and being comfortable long-term capital appreciation as companies that with the underlying assets. pay large dividends may do so at the expense of British & American’s shares have been fairly their growth or overall financial health. weak since summer 2017. Its net asset value has ‘Also, simply selecting the highest-yielding stocks fallen by a third over the past year, according to can be risky as some high-yielding stocks may be Morningstar. Add back the dividend income and companies with poor fundamentals whose stocks you’re still nursing a loss for the 12 month period. are trading at low prices, reflecting the fact that the On a share price total return basis, you would have company may be in trouble,’ adds Bioy. lost 15.8%. (TS/DC/JC)

11 January 2018 | SHARES | 23 SMALLER COMPANIES Small caps with more than 5% dividend yields

Income investors often focus on large established companies but some smaller names also offer generous yields

ou may be surprised at the number of smaller companies which pay dividends. YMany investors may assume that dividends are only the domain of mid and large caps, yet we demonstrate in this article that you can find plenty of opportunities further down the market cap spectrum. We’ve analysed the market using data from SharePad and found more than 330 companies valued at less than £500m which are forecast to pay dividends over the next year. Within this group, more than 50 have prospective dividend yields in excess of 5% and we’ll now focus on that segment. Just remember that dividends aren’t guaranteed to be paid and analyst forecasts aren’t always correct.

PROPERTY AND MORE Property regeneration group U&I (UAI) has a 9.1% prospective yield, boosted by forecasts for a generous special dividend. We explain the MedicX’s properties are used as medical centres investment case for U&I in more detail in the and cost ratios,’ said Canaccord on 13 December Great Ideas section of this week’s digital magazine. 2017. Since then, Medicx has spent €7.8m on an MedicX Fund (MXF) is a specialist primary Irish medical centre. healthcare infrastructure investor and yields 7% APQ Global (APQ:AIM) floated in August 2016 based on a forecast 6p per share dividend for the with an objective to invest in companies, currencies year to September 2018. Its portfolio contains and corporate/government bonds linked to 153 modern purpose-built assets such as doctors’ emerging markets and achieve 6% dividend yield. It surgeries. has so far paid 4.5p for the 2017 financial year and At the moment MedicX’s dividends per share far said in October that it was on track to meet its 6p exceed its earnings per share which is normally a full year dividend target. warning sign that the dividend is unsustainable. Investment bank Canaccord Genuity says there is a SERVICE BUSINESSES strategy in place to improve the dividend cover. Connect (CNCT) has been popular among investors ‘The investment pipeline is £175m with £90m over the years for its generous dividend payments, in Ireland offering relatively attractive yields. The even if the share price performance hasn’t exactly successful conversion of this pipeline into portfolio been great. It operates in the highly competitive investments will be an important development world of logistics, distributing newspapers, for MedicX, and should lead to welcome magazines as well as parcels through its Tuffnells improvements in both dividend coverage levels and Pass My Parcel operations.

24 | SHARES | 11 January 2018 SMALLER COMPANIES

The business recently sold its books division for A SELECTION OF SMALL CAPS £11.6m to focus on its early morning and mixed WITH HIGH DIVIDEND YIELDS freight distribution. While an 8.8% prospective dividend yield seems enticing, just consider that PROSPECTIVE COMPANY parcels distribution is a highly competitive business YIELD and Connect has very thin operating margins so little Debenhams 10.2% room for error if profits come under pressure. Personal injury marketing specialist NAHL U and I 9.1% (NAH:AIM) currently has an 8.7% prospective Connect 8.8% yield based on 2017’s dividend forecast of 15.9p. Dividends are expected to fall in line with profit as NAHL 8.7% the company adapts to changes to the regulatory set Epwin 7.9% up for personal injury claims due to be introduced in Gattaca 7.7% October 2018. However, the company’s policy of paying a Trinity Mirror 7.4% dividend covered 1.5 times by earnings is unchanged M Winkworth 7.2% and, based on SharePad’s data, this still implies a generous looking yield of 7.3% based on the 13.2p Moss Bros 7.1% forecast dividend payment for 2018. Laura Ashley 7.1% AND A FEW MORE MedicX Fund 7.0% The meat of KCOM’s (KCOM) business is running GBGI 6.9% a copper and fibre optic network in Hull and East Yorkshire, but the company also provides its Belvoir Lettings 6.8% corporate clients with other communications and SCS 6.7% cloud services. This is low-growth, cash generative stuff although SafeStyle UK 6.7% there’s a pension deficit to manage. Operational own UP Global Sourcing 6.7% goals have not helped recent performance but its home network is a cash cow capable of underpinning Capital & Regional 6.6% the dividend for the time being. Analysts forecast Shoe Zone 6.6% 6.1p dividend per share for the year to March 2018 Low & Bonar 6.4% and the same for the following year, implying a 6% prospective yield based on the latest share price. City of London Investment 6.4% Investors shouldn’t expect dividend growth until Quarto 6.4% more of KCOM’s customers are on its fibre network, potentially creating cost savings by switching off the Centaur Media 6.3% copper connections. International Personal Finance 6.3% Even with a recent share price chart that flows upwards from left to right, Sunderland-based Manx Telecom 6.1% sofas-to-flooring seller ScS (SCS) offers investors an KCOM 6.0% attractive dividend yield of 6.7%. Shore Capital forecasts dividend improvement Property Franchise 6.0% from 14.7p to 15p for the year to July 2018, ahead Global Ports 6.0% of 15.3p in 2019 and 15.5p in 2020. Flagging ScS’ strong free cash generation, net cash pile and APQ Global 5.9% committed debt facilities, as well as competitively Maintel 5.9% priced products and variable costs that breed resilience, the broker believes the dividend is Pan African Resources 5.8% sustainable. (DC/TS/JC/DS/SF) Source: Shares, SharePad, Analyst notes

11 January 2018 SHARES | 25 TALKING POINT Our views on topical issues The dangers associated with special dividends We look at the stocks handing out the cash and the key points to consider when looking at attractive headline yields

pecial dividends can put a smile on the faces Sof investors. They are typically generous cash gifts which are sometimes greater in value than normal dividends paid by a company. We calculate that 120 companies currently in the FTSE 350 index have paid one or more special dividends over the past 25 years, with a noticeable increase in companies making payments over the past five years. Unfortunately the growing number of companies paying special dividends on a regular basis can also create false hope with regards to future income levels. The payments can also be unwelcome to some investors from a tax perspective, as we passed on to shareholders normal dividends. For example, explain later in the article. on a periodic basis, typically Admiral (ADM) has paid a special twice a year. dividend every single year since WHAT IS A SPECIAL The increasing number of it floated on the London Stock DIVIDEND? stocks paying special dividends Exchange in 2004. Special dividends are typically in recent years has led many declared when a company investors to believe they will DON’T DEPEND ON SPECIAL has excess cash to its own always be recurring payments. DIVIDENDS investment needs, or when it Special dividends inflate the Many investors have got used to is sitting on a one-off lump of overall cash return to an investor receiving special dividends from cash as a result of an asset or and so the total dividend yield their investments and assume business disposal. Some or all of can look quite high on many they will keep getting them in this excess cash is subsequently occasions, potentially 7% or 8%. the future, and as such yields will returned to shareholders. Numerous companies, stay high. Special dividends are different particularly those in the In reality, special dividends to normal (also known as insurance sector, have developed should only ever be viewed as a ‘ordinary’) dividends which are a habit of paying special pleasant surprise, rather than a a share of a company’s profits dividends every year on top of sure thing.

26 | SHARES | 11 January 2018 TALKING POINT

DIRECT LINE INSURANCE: SPECIAL DIVIDENDS SUDDENLY STOPPED

35p 27.50p

30p

25p

20p 8.80p 10.91p 10.00p 15p 4.00p 4.36p

9.70p 10p 8.73p 9.16p 9.60p 9.20p 6.80p 5p 4.58p 4.36p 4.80p 4.60p 4.90p

0p Q4 Q2 Q3 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 2012 2013 2014 2015 2016 2017

Q2 dividends Q4 dividends Special dividends

Insurer Direct Line (DLG) and total payment for 2016 was half investment platform provider the level of the previous year Hargreaves Lansdown (HL.) are (24.6p versus 50.1p), when there two examples where investors were two special dividends. were caught out with special Hargreaves Lansdown said in dividends. Both companies had August 2017 that it wouldn’t pay a long history of paying special a full year special dividend for dividends yet they both recently the first time since joining the stopped paying due to issues SPECIAL DIVIDENDS stock market 10 years earlier. facing their businesses. It said the business had Direct Line has historically SHOULD ONLY EVER BE to retain an additional declared a special dividend at VIEWED AS A PLEASANT £50m of capital after the its full year results each March Financial Conduct Authority, a but no payment was announced SURPRISE, RATHER THAN regulator, announced plans to when its 2016 numbers were A SURE THING ‘reassess’ Hargreaves’ capital published on 7 March 2017. “ requirements. The business was derailed by ‘The revised assessment would changes to the rules governing mean the group’s regulatory compensation for serious injuries capital surplus during 2018 is called the Ogden rate. insufficient to meet our risk The company did increase its appetite levels if we paid a normal dividend by 5.6% and it special dividend for the year did pay a 10p special dividend in ended 30 June 2017 in line with September 2016. However, the ” market expectations,’ it added.

11 January 2018 | SHARES | 27 TALKING POINT Our views on topical issues

TURNING OFF THE SPECIAL CARD FACTORY DIVIDEND TAP

20p Beazley said in November the frequency and severity of 15.00p 15.00p 15.00p natural catastrophes in 2017 would affect its results. The insurer has paid a special 15p dividend every year between 2011 and 2016 bar one, which may have led some investors to expect ‘specials’ permanently 10p going forward. However, analysts don’t believe Beazley 6.80p 6.30p will pay one when it reports 6.00p 2017’s full year results. 5p Indeed, comments at the analyst meeting after the 2016 2.80p 2.90p 2.50p financial results were published in February 2017 ‘strongly 0p Q4 Q2 Q4 Q2 Q4 Q2 suggest’ special dividends are FY 2015 FY 2016 FY 2017 FY 2018 coming to an end for Beazley, barring abnormally quiet loss Q2 dividends Q4 dividends Special dividends years, said Stockdale analyst Joanna Parsons at the time. Chemicals group Elementis SPECIAL DIVIDENDS drop in pre-tax profit as it (ELM) may follow suit, judging CAN MAKE UP A LARGE struggled with the wider retail by a recent shift in strategy. PROPORTION OF OVERALL sector challenges. Yet its chief The FTSE 250 business has INCOME executive Karen Hubbard said paid special dividends every The proportion of overall special dividends were still on year for the past five years, dividend payments that comes the menu thanks to a highly the latest referring to its 2016 from special dividends can cash generative business model. financial year. be quite high. For example, 62% of all dividends paid by EXAMPLES OF PROLIFIC SPECIAL DIVIDEND PAYERS retailer Card Factory (CARD) in its financial year ending 31 Company Frequency of special payments January 2017 came from special 888 5 since 2013 dividends. Antofagasta 12 between 2005 and 2013 And nearly half of insurer 7 between 2005 and 2012, Beazley’s (BEZ) dividends in its British Empire Trust 2016 financial year came from plus one more in 2016 special dividends. Ferrexpo 5 since 2013 A high weighting towards Fidessa 8 since 2010 special dividends means 3 between 2004 and 2007, InterContinental Hotels investors could be in for a shock 5 between 2012 and 2017 if something goes wrong with Lancashire 11 since 2009 such businesses. Card Factory saw its share Next 7 since 2014 price hammered in September Savills 7 since 2011 2017 after revealing a 14% Source: Shares, SharePad

28 | SHARES | 11 January 2018 TALKING POINT

ELEMENTIS: SPECIAL DIVIDENDS COMING TO AN END?

12p 6.68p

5.73p 10p

4.50p 8p

3.14p 3.51p

6p

4.60p 4p 4.12p 3.73p 2.96p 3.48p 3.30p 2.05p 2.05p 2p 1.67p 1.73p 1.50p 1.60p 1.43p 1.56p 1.59p

0p Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 2010 2011 2012 2013 2014 2015 2016 2017

Q2 dividends Q4 dividends Special dividends

Stockbroker N+1 Singer expressed a clear willingness to of an ISA or SIPP (self-invested forecasts the total dividend for deploy cash to grow the business personal pension) wrapper. 2017 to nearly halve to 8.5c rather than keep handing it back From April 2018 the personal (2016: 16.8c). That essentially to shareholders. Elementis has allowance rises to £11,850 means the business is going already done one such deal, being but the dividend allowance from being an approximate 4.5% the acquisition of SummitReheis falls to just £2,000. That could yielding stock to one that only in February 2017, and further potentially result in some yields circa 2.3%. We’ll find out for acquisitions look likely. investors having to pay tax on certain when Elementis reports their dividends for the first time. its full year numbers, expected to THE DOWNSIDES OF As such, there are a growing happen in early March. RECEIVING SPECIAL number of investors who don’t A new management team was DIVIDENDS want special dividends, preferring installed in 2016 and they’ve The other issue to consider with a company with surplus cash special dividends is that not to find other ways to return everyone wants them due to tax money such as share buybacks or reasons. conducting a tender offer. In the UK you get a £11,500 National Grid’s (NG.) £4bn NOT EVERYONE WANTS personal allowance which is the disposal of the majority of its SPECIAL DIVIDENDS DUE TO amount of income you don’t UK gas distribution business in have to pay tax on. On top, 2017 attracted criticism from TAX REASONS everyone is allowed to receive some investors as £3.1bn of the up to £5,000 in dividend income proceeds were paid as a special before you have to start paying dividend and thus triggered a tax “ tax on investments held outside bill for many shareholders. (DC) ” 11 January 2018 | SHARES | 29 Growth and Innovation

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In partnership with Associate sponsors INVESTMENT TRUSTS Why Asia Pacific may appeal to income investors Henderson Far East Income fund manager explains how he is able to find investment opportunities

lobal economic power PERFORMANCE OVER PAST distribution fully covered by has moved decidedly FINANCIAL YEAR the company’s revenue and Geastward to the world’s For the financial year to August increased ahead of UK inflation most populous region over the 2017, the investment trust once again, indicative of fund past few decades, China and delivered an impressive net asset manager Mike Kerley’s confidence India in particular. Growth and value (NAV) total return of 17.7% in the growth and sustainability income hungry investors should and a share price total return of of Asian dividends. therefore take a good look at 17.3% in sterling terms. In a year dominated by political, the Asia Pacific region to see Although past performance geopolitical and economic if it fits their risk profile, also isn’t a guide to how the uncertainty, Henderson Far factoring in investment time investment trust will perform East Income’s positive returns horizon. in the future, it is worth noting reflected an improvement in the Far East earnings are seeing that the past financial year’s underlying fundamentals of the their best trend in seven capital returns were all the Asia Pacific region. years. Equity valuations are more encouraging for not being For the first time since 2009, attractive versus world markets boosted by weak sterling, as Asian earnings have been and relative to the region’s was the case in the strong upgraded since the start of 2017 own history, and dividend previous year. rather than the previous trend of payments are growing at a Investors were treated to a downgrades, thereby helping the rapid clip. 4% improvement in the total Asia ex-Japan region outperform Asian companies have dividend to 20.8p (2016: 20p), a its developed market peers. undergone a change; while growth in many instances has moderated, cash flow is strengthening and, in many cases, is being returned to shareholders in a rising tide of dividend payments that continues to boost regional returns. This is positive news for Henderson Far East Income (HFEL), a Janus Henderson Investors-managed investment trust whose objective is to provide shareholders with a growing total annual dividend, as well as capital appreciation, from a diversified portfolio of companies from the Asia Pacific region.

11 January 2018 | SHARES | 31 INVESTMENT TRUSTS

POSITIVE OUTLOOK FOR THE REGION HENDERSON FAR EAST INCOME Kerley is cautiously optimistic ANNUAL PERFORMANCE (WITH INCOME) (%) on the medium-to-long term YEAR PRICE CHANGE NAV CHANGE outlook for Asia Pacific ex-Japan. Speaking to Shares, he explains 2017 +12.6 +11.1% that while Asian markets have 2016 +36% +36.2% risen, valuations on a price-to- 2015 -12% -8.6% earnings basis have not changed markedly, because earnings 2014 +6.3% +4.7% growth has kept up with share 2013 +13.3% +9.6% price movements. Annual performance runs to 30 September, apart from 2017 which runs to 29 September; and 2013 which runs Kerley notes this is not the case from 28 September 2012 to 30 September 2013. Past performance is not a guide to future performance. with developed markets which Source: Janus Henderson, Morningstar. are trading at, or close to, all- time highs, yet look fully valued areas which are exposed to the LOOKING FOR DIVIDEND since they lack the same kind of improving spending power of the OPPORTUNITIES earnings support. consumer across the region. Kerley is able to put money to Price-to-earnings is a popular ‘The outlook for dividends in work across the region, but he valuation metric and is calculated Asia Pacific is still a compelling isn’t expecting too much growth by dividing the share price by story. Asian companies have from more mature markets in earnings per share. low levels of debt, a pragmatic his investable universe, such Despite the strong view on capital expenditure and as Australia and New Zealand, performance in some of the strong cash flow generation markets which already have expensive new economy sectors, which should allow dividend pretty high dividend payout the portfolio manager insists he’ll payout ratios to continue to ratios. stick to his discipline of focusing rise in the years ahead.’ ‘The real opportunity lies on well-managed companies The dividend payout ratio is outside of those in terms of with attractive valuations which the amount of dividends paid dividend growth,’ he says, citing have the potential to sustain to shareholders relative to the a 30-35% payout ratio for the and grow their dividends in the total net income of a company. rest of the Asia Pacific region, a years ahead. Investors should note that ratio which has plenty of room As Kerley outlined at the dividends aren’t guaranteed to to expand. company’s annual financial be paid on a regular basis and ‘My view is that dividend results (3 Nov): ‘Our focus dividend payments can go down growth outstrips earnings growth remains on domestic orientated as well as up. in Asia on a five year view, because I think payout ratios will rise,’ says Kerley, whose portfolio offers investors a compelling combination of dividend yield and growth. Stocks in the portfolio offering a high yield today include the likes of Macquarie Korea Infrastructure, Digital Telecommunications, Mapletree Greater China Commercial Trust and National Australia Bank. Dividend growth stocks in his portfolio, typically names where

32 | SHARES | 11 January 2018 INVESTMENT TRUSTS strong earnings growth is being quite small and implying HENDERSON FAR EAST translated into progressively significant scope for growth. rising dividends, include INCOME’S GEOGRAPHICAL Samsung Electronics, the South BOOSTING EXPOSURE BREAKDOWN (AS AT 31 OCTOBER 2017) Korean technology conglomerate TO CHINA which historically hasn’t paid The investment trust increased CHINA 25.7% dividends. its exposure to China in 2017, The smartphones, memory saying the country has the best AUSTRALIA 18.5% chips and televisions maker is combination of value, growth SOUTH KOREA 16.3% becoming more shareholder- and dividend growth in the friendly and could double the Far East. TAIWAN 15.9% level of its dividends in the next ‘We own banks, property, three years, according to Kerley. and consumer staples, as well HONG KONG 6.6% Other dividend growth stocks as electric bus manufacturers THAILAND 6.0% in the portfolio include Dali and the owner of the hydro dam Foods, a Chinese producer of on the river Yangtze,’ he adds, SINGAPORE 5.8% snacks, energy drinks and soya referring to hydro-electric power milk based products, which producer China Yangtze Power. NEW ZEALAND 1.8% boasts growing brand recognition Besides biggest position UK 1.8% backed by strong earnings, cash Samsung, Henderson Far East flow and dividends. Income’s top 10 holdings include INDONESIA 1.6%

Another compelling dividend names such as China Construction Source: Janus Henderson Investors growth play part owned by Bank. It also has a stake in Bank of Henderson Far East Income is China, the corporate-to-personal to the cash flows of another Chinasoft. Kerley says the Hong banking services provider which market leader, namely Taiwan Kong-listed software developer is now the world’s largest bank by Semiconductor, the globe’s is moving into cloud services, market capitalisation. largest dedicated independent adding that penetration of cloud Shareholders in the investment semiconductor foundry whose computing in China remains trust are also gaining exposure customers include tech titans Apple and Qualcomm. ‘The internet and tech sector globally have been driving markets,’ explains Kerley, who refuses to overpay for market darlings whose shares are priced for perfection. Yet he makes the point that amid synchronised global economic recovery, investors may still be able to access growth without paying high earnings multiples for fast growth tech names. The fund manager suspects 2018 will see investors start to look at value rather than growth stocks. ‘A switch to value would help us, because we do have a value bias in Henderson Far East Income,’ he remarks. (JC)

11 January 2018 | SHARES | 33 INVESTMENT TRUSTS New investment trust factsheets could be ‘misleading’

Industry experts worry that scenarios for potential returns in the future are too optimistic

new document required to be published by all A investment trusts could be misleading to investors, according to experts. Called the Key Information Document (KID), it is meant to help prospective investors understand the nature of a fund, the target investor base, its Who are you KIDding? expected risks/returns and costs. Introduced on 1 January 2018, the KID has actually left experts wondering if it will do more harm than good. ‘To assume the market is WHY IS THE NEW DOCUMENT going in the same direction as CONTROVERSIAL? the previous five years is not Typical fund factsheets contain guaranteed as no one knows the historic returns. That’s not future’. This suggests that the allowed in the new investment future scenarios in the document trust KID. Instead, there is an might not be of much use, if any. illustration of the potential return under four performance EXAMPLES OF FUTURE scenarios: stress, unfavourable, SCENARIOS moderate and favourable; over THE SCENARIOS IN THE KIDs Stockbroker Numis believes there one, three and five years. are a number of flaws with KIDS These scenarios are ultimately OFTEN APPEAR ‘HIGHLY that make them ‘misleading’ for based on share price returns OPTIMISTIC’ investors. In particular, it says over the past five years. There the scenarios in the KIDs often has been a bull market for the appear ‘highly optimistic’. It says: five years since 1 January 2013, ‘For instance, Scottish Mortgage so a strong chance that many “ (SMT) shows five year (annual) investment trusts will have done returns of 23.1% under the very well. moderate scenario and 10.7% Florence Buron, a director at per year under the unfavourable consultancy Deloitte, comments: ” scenario.’ 34 | SHARES | 11 January 2018 INVESTMENT TRUSTS

Scottish Mortgage has made 25.7% annualised total return over the past five years, according to Morningstar, but ‘only’ 15.3% on a 10-year basis. HarbourVest Global Private Equity’s (HVPE) KID features data implying you could make 14.5% per year over five years under the unfavourable scenario. Baillie Companies is not happy with the opposed to an open-ended fund Gifford Japan Trust (BGFD) has future scenario set-up among manager who has to buy/sell 13.1% potential annual return other complaints. He goes as investments as investors move over the same period in its far to say that he finds himself in/out of the fund. unfavourable scenario. in the odd position of being Therefore it is likely that The scenarios are created by head of a trade organisation transaction costs are probably the European Securities and which has been ‘inundated by lower in an investment trust than Markets Authority and not by complaints from his members a typical unit trust or OEIC, but the investment trusts. that a regulator is forcing them if you are only shown the costs to overstate their performance of one type of investment it is MANY UNFAVOURABLE and understate their risks.’ hardly transparent. CONDITIONS STILL IMPLY YOU CAN MAKE A PROFIT WHAT ELSE IS WRONG WITH WILL INVESTORS IGNORE All the data we’ve seen for the THE DOCUMENT? THE DOCUMENT? stress scenario has a negative Other criticisms of KIDs include a ‘The real question is to what return, yet we believe investors lack of consistency in how costs degree the data in the KID will may struggle to differentiate are calculated across the sector. influence investors when buying between the words ‘stress’ and For instance, some funds include investment trusts,’ comments ‘unfavourable’, as they both stamp duty as a cost but most Numis. ‘We believe the return imply bad market conditions. do not (in line with the latest scenarios in the KID are likely to As such, they may focus on the AIC guidance). Some seem to be ignored by most investors, unfavourable scenarios with have excluded finance costs and although we expect investors to the hope that the worst case performance fees, and a few continue to rely heavily on past situation could still be profitable. show absolute figures rather performance (which ends up Indeed, we’ve seen a list than annualised, and others with similar results). containing nearly 30 investment seem to include errors. ‘We certainly discourage trusts analysed by Numis which Also under the new regulation, anyone from interpreting the have a positive annual return investment trusts must disclose moderate scenario as the likely under the unfavourable scenario transaction costs whereas typical outcome over the next five over five years. unit trust or OEIC funds don’t years,’ it adds. ‘The stress scenario provides have to. Numis believes there is a an indication that investors can Some fear that by showing strong argument for the KID lose money, but we believe it is transaction costs for one type of document to be ignored by hard for investors to gauge the product and not another, it may investors. It believes many likelihood of this happening, sway the decision to invest. investment trust managers share particularly for funds where This may be even more galling this view, given the difficulty the returns are high even under for investment trusts due to in finding the KID on many the unfavourable scenario,’ their closed-end structure. Trust individual trust websites. (DS) adds Numis. fund managers do not have to DISCLAIMER: Editor Daniel Coatsworth has a personal Ian Sayers, chief executive of trade the portfolio when people investment in Scottish Mortgage mentioned in this the Association of Investment buy and sell their shares, as article

11 January 2018 | SHARES | 35 FUNDS Free Spirit toasts fantastic first year as a fund Experienced investor Rosemary Banyard on the hunt for quality stocks

post-launch while Banyard set for shareholders, not the stock about deploying funds. market,’ explains Banyard, The highly experienced when quizzed on points of fund manager, best known differentiation between Free in investment circles for her Spirit and Ashworth-Lord’s previous stewardship of various Buffettology fund. small and mid cap funds at ‘We’re agreed on the basic Schroders, joined Manchester- principles,’ she says, referring based Sanford DeLand (SDL) in to Ashworth-Lord, ‘so the 2016 to launch and manage the differences are in the details Free Spirit fund. and the individual shares that This followed a late 2015 we buy.’ introduction to Keith Ashworth- The pair has different circles Lord, who has garnered a of competence and sector t has been a good year, healthy investor following preferences. ‘My largest exposure but it is still early days,’ as manager of SDL’s flagship is to IT software and services,’ ‘Isays Rosemary Banyard, CFP SDL UK Buffettology says Banyard, contrasting this manager of the CFP SDL (GB00B3QQFJ66) fund. with Ashworth-Lord’s ‘greater Free Spirit (GB00BYYQC271) The introduction proved to be comfort’ in leisure roll-outs such fund, a £7.2m OEIC which has a veritable meeting of minds. as Domino’s Pizza (DOM) and just celebrated its one-year The pair found they shared a Restaurant Group (RTN). anniversary (3 Jan 2018). passion for fundamental analysis, ‘Another difference is that I The investment objective long-term thinking and so-called will entertain IPOs, but Keith of this concentrated fund is to ‘Business Perspective Investing’. doesn’t,’ adds Banyard, whose achieve real growth in capital The latter is Ashworth-Lord’s fund is invested in relative stock and income over the long term, guiding principle and a successful market newcomer Alfa Financial through investments mainly in philosophy and strategy Software (ALFA), the fast UK equities listed on the LSE, AIM associated with Warren Buffett growing, strongly cash generative or NEX Exchange. For Banyard, and other disciples of Benjamin enterprise software supplier ‘real growth’ means growth in Graham. Buffett apprentice to the asset and consumer excess of CPI inflation and ‘long- Ashworth-Lord likes to quote the finance industry. term’ means over a minimum sorcerer himself in this regard: Banyard looks for ‘identifiable investment horizon of five years. ‘Only an excellent business barriers to entry’ in the According to FE Trustnet, the bought at an excellent price businesses she backs. ‘Usually, fund has made a strong debut, makes an excellent investment.’ you find evidence for barriers returning 18.5% on a 1 year to entry in the return on equity, cumulative basis, ahead of the IA IDENTIFIABLE ENTRY return on capital or the return on UK All Companies sector’s 13.4% BARRIERS operating assets.’ haul and leaving the fund with a ‘Both of us start from the top quartile ranking. This comes perspective that we are looking MANAGEMENT NEED TO despite running with high cash at the business first. It is the HAVE SKIN IN THE GAME balances in the early months business that generates wealth Firms that currently meet

36 | SHARES | 11 January 2018 FUNDS

Banyard’s investment criteria ABOUT FREE SPIRIT ‚ include retailer Superdry (SDRY). ‘I’ve been tracking the company OEIC 3 JAN 17 30-35 £7.2M for some years,’ recalls Banyard. FUND LAUNCH NUMBER OF FUND SIZE ‘Superdry has been in transition TYPE DATE HOLDINGS (03/11/2017) from something of a cottage industry into a very successful TOP TEN HOLDINGS international branded business (AS AT 30/11/2017) and we are now getting to a point where it is starting to fire Superdry 4.00% on all cylinders.’ Flagging the leading Craneware 3.72% portfolio position’s rapid retail, VP 3.38% e-commerce and wholesale growth, Banyard explains: Fidessa 3.36% ‘Superdry generates a 20% A.G.Barr 3.35% return on equity, has a serious Alfa Financial Software 3.16% international business, a net cash position and quite large Hargreaves Lansdown 2.99% ownership by the founders and Relx 2.97% board of 37.6%. That is a comfort which I like.’ Park Group 2.95% Other portfolio examples MJ Gleeson 2.94% with significant management Source: Trustnet/Sanford DeLand Asset Management ownership include Craneware (CRW:AIM), the Edinburgh- headquartered healthcare at over £4bn,’ says Banyard. S&U (SUS) and VP (VP.), the software play whose ‘It is one of only two or three equipment rental specialist management holds sway over companies in the world that whose shares rose on the 12.6% of the equity. ‘The have software that is used by announcement of the purchase weighted average management oil and petrochemical giants of Brandon Hire, a deal offering ownership of the whole portfolio to design their plants. And the opportunities for geographical is 14%,’ explains Banyard. switching costs are very high for expansion and cost savings. In the software and services the customer, which gives AVEVA Amid a seemingly never- sector, she likes Cambridge- resilience.’ ending bull market that is based AVEVA (AVV), the Another beneficiary of high pushing valuations higher across engineering software company switching costs is Fidessa (FDSA), the board, Banyard concedes it ‘in the process of quite a complex the Woking-based fintech is currently tough for her to find reverse takeover’ with long-run company and global leader in suitable excellent businesses suitor Schneider Electric. trading software systems and at excellent prices: ‘Any new Banyard believes the deal, data to financial institutions. purchase has got to replace which will create one of Britain’s Banyard argues Fidessa will something that is already in the biggest software businesses, will become ever more important to fund and it is challenging to find yield material cost and revenue traders under new market rules good buys.’ synergies for an enlarged group called MiFID II. New investments have that will remain listed on the however included Mortgage London stock market. STRONG PERFORMERS Advice Bureau (MAB1:AIM), ‘When it re-lists’, early in the Among the strong portfolio which is building a technology- opening few months of 2018, performers have been the likes based platform in the UK ‘it will be a business valued of motor finance specialist mortgage broking market. (JC)

11 January 2018 | SHARES | 37 VIDEOS WATCH THE LATEST SHARES VIDEOS

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www.sharesmagazine.co.uk/videos MONEY MATTERS Making changes to auto-enrolment We outline the Government’s plans to improve part of the pensions system

he UK is in the midst of a quiet savings revolution. TAfter years of declining private sector pension saving rates, the automatic enrolment programme first introduced in 2012 has the potential to transform the retirement prospects of millions of people. According to the latest Office for National Statistics (ONS) data, the number of people actively saving in defined contribution (DC) plans – where you build up a pot of money of your own which you can convert people’s pensions through auto- to qualify for auto-enrolment. into an income in retirement – enrolment. Under existing plans Finally, the Government was 6.4m in 2016, up by 62.5% from 2019 all companies will pay has pledged to test a number from 3.9m in 2015. In fact as in 3% of an employee’s earnings of ‘targeted interventions’ recently as 2012 this figure was and the employee will pay in 4%. to encourage self-employed as low as 1m. In addition, the employee will people to save for retirement The Government wants to automatically get an extra 1% – although it seems unlikely a go further in its efforts to turn through pension tax relief. mechanism will be introduced the UK into a nation of savers At the moment the minimum so they can get a ‘matched’ and just before Christmas, it contribution is based on a contribution in the same way announced a series of planned portion of your salary, referred to employed workers do. changes to auto-enrolment. in the rules as ‘banded earnings’, rather than the whole lot. This WHEN WILL ALL THIS SO WHAT’S CHANGING? means that your contributions HAPPEN? While auto-enrolment has are calculated on earnings While change is coming, we clearly been successful in between £5,876 and £45,000. So don’t know exactly when this boosting the number of people if you earn £27,000, for example, will happen. The Government saving for retirement, not and your total contribution has only pledged to make the everyone benefits. (including tax relief) is 8%, that’s changes in the ‘mid-2020s’, At the moment you have to 8% of £21,124 (or £1,670 a year). by which time policymakers be aged 22 or older in order This is set to change, with the should also have reviewed – to qualify for auto-enrolment. Government planning to alter and potentially increased – the However, the Government wants the rules so that every pound minimum contributions under to extend the reforms to workers of salary qualifies for your auto- auto-enrolment. aged 18 and over. enrolment contribution. That Policymakers also plan to said you will still need to be Tom Selby, increase the amount going into earning at least £10,000 in order Senior Analyst, AJ Bell

11 January 2018 | SHARES | 39 MONEY MATTERS Helping you with personal finance issues How to invest ethically We analyse the investment case for ESG and reveal the experts’ top fund picks

thical and sustainable Some ethical funds have to have programmed its diesel investing used to be underperformed their engines to activate certain E thought of as a charitable benchmarks over certain time emissions controls only during endeavour that places principles periods. But Simon Howard, chief laboratory emissions testing, before profits, but there is executive of the UK Sustainable its share price went into steep growing evidence to suggest Investment and Finance decline. There were many funds it can lead to better long-term Association, says investors need that suffered an immediate loss as returns. to take a long-term view. a result of holding Volkswagen. There are now around 200 ‘The investment case is ‘Another example of where funds in the UK that claim that over time returns from there can be substantial risks to invest sustainably, putting unsustainable activities will tend in not taking an ESG-focused much more choice at investors’ to be very poor,’ he explains. ‘So approach is climate change,’ fingertips. fossil fuel stocks will see declines says Pein. You need to dig deep to as tax and regulation bites, whilst ‘The valuation and dividend ensure the fund meets your some agricultural practices are risks in the traditional oil and criteria because managers have clearly unsustainable and that gas sector continue to increase yet to reach an agreement on will damage values in various sharply as governments and what ethical and sustainable food supply chains.’ businesses commit to reducing really means. Tanya Pein, an independent oil consumption and carbon financial adviser at In2 Planning, emissions, in line with the CAN ETHICAL INVESTMENTS a specialist in responsible legally binding commitments OUTPERFORM? investment, warns that investors made in the Paris Agreement The biggest argument against run the risk of losses or lower two years ago. investing ethically is that if performance if they don’t ‘This leaves the FTSE 100, with excluded sectors like oil, mining, take environmental, social and its predominance of oil and gas tobacco, alcohol and armaments governance (ESG) factors into companies, a high-risk option – perform well, your portfolio account. on a financial returns basis alone, could lag the overall market. When Volkswagen was found why take that risk?’

40 | SHARES | 11 January 2018 MONEY MATTERS

IS ETHICAL INVESTING in their name despite investing in LESS DIVERSE? There is some companies that most people would Another argument against ethical or evidence to regard as unethical. ESG investing is that it reduces the Castlefield Advisory Partners diversity of a portfolio. suggest ethical says these ‘spinners’ include This argument has become slightly and sustainable Vanguard SRI European Stock Fund less convincing in recent years as investments can (IE00B76VTL96), which invests in numerous ESG funds covering all of outperform, British American Tobacco (BATS) the main asset classes have been and Royal Dutch Shell (RDSB); and introduced. but because Aberdeen Ethical World Equity Matthew Coppin, manager, financial the industry is (GB0006833932), whose third-biggest advice at Castlefield Advisory Partners, relatively new it holding is EOG Resources, a firm says it is sometimes possible to seek isn’t conclusive. accused of illegally burying waste and exposure to excluded ‘unethical’ open-air burning of natural gas. sectors in a forward-looking way. An analysis by For example, you could have mining Morgan Stanley’s PICKING THE ETHICAL WINNERS exposure through a business that Institute for AJ Bell’s Ryan Hughes suggests mines landfills for sought-after Sustainable Kames Ethical Cautious Managed materials like plastics, computer (GB00B1N9DX45) is a good starting components or precious metals. Investing found point for investors. The fund is a mix ‘Obviously the more restrictive that over a period of equities and bonds and it screens [the client is] on what they want to of seven years, out stocks that don’t meet its strict exclude and include, the more difficult sustainable ethical criteria, such as gambling, it becomes to find viable assets in the tobacco and alcohol companies. investment universe,’ he adds. investments Other well-regarded ethical usually met and funds include Liontrust UK Ethical HOW DO I INVEST? often exceeded (GB00B8HCSD36) and Rathbone Before searching for a fund it’s helpful the performance Ethical Bond (GB0030957137). to think about your definition of ethical of traditional If you want a fund that specifically and what types of companies you want invests in the environment, Hughes to include and exclude. investments. recommends Impax Environmental There is a big difference between Four FTSE Markets (IEM). The trust has funds that have an ESG focus and those Russell indices, exposure to themes such as energy that are ethical. which select efficiency, water technology and Ryan Hughes, head of fund selection pollution control. at AJ Bell, says many investment companies An alternative is FP WHEB houses include an element of ESG in involved in energy Sustainability (GB00B8HPRW47), their process, but very few let this be a efficiency, water which focuses on environmental and determining factor in their investment technology and social challenges such as sustainable decisions. transport, cleaner energy, health and ‘Ethical investing takes this to a other green education. new level, with the majority actively applications, have The passive ethical investment screening out stocks that do not meet all outperformed space is much smaller, but one to set criteria. Even then, some funds their benchmark, consider is iShares Global Water employ a much stricter screening UCITS ETF (IH20). The exchange- approach than others, taking a so- the FTSE Global traded fund tracks an index called “dark green” approach,’ he All Cap Index, comprising 50 of the largest global explains. since the financial companies engaged in water-related Some funds use terms like ethical, crisis. businesses, such as American Water socially responsible or stewardship Works and Severn Trent (SVT). (EP)

11 January 2018 | SHARES | 41 WEEK AHEAD

FRIDAY 12 JANUARY TRADING STATEMENTS Tarsus TRS XP Power XPP AGMS JPMorgan Elect Managed Growth JPE JPMorgan Elect Managed Cash JPEC Student accommodation builder Multi-price discounter B&M’s JPMorgan Elect Managed Income JPEI Watkin Jones (WJG:AIM) is (BME) third quarter and Christmas Nanoco NANO expected to report satisfactory trading update (12 Jan) will reveal MONDAY 15 JANUARY full year results on 15 January, if momentum has continued with FINALS given it has already hinted at the multi-price value retailer, a Watkin Jones WJG good progress in a trading update beneficiary of the cash-strapped INTERIMS on 31 October 2017. Last week shopper’s quest for value. New 1pm OPM it said it had secured planning customers have been driving TRADING STATEMENTS permissions on six new sites. strong growth at B&M. Building Rio Tinto RIO The market is likely to focus on this it is opening new stores ECONOMICS on margin performance and in the UK and Germany and is a UK guidance to see if the company recent entrant into the attractive Rightmove HPI is facing cost pressures convenience shopping space TUESDAY 16 JANUARY seen in parts of the broader following last year’s acquisition of INTERIMS construction industry. Heron Foods. K3 Capital K3C NCC NCC Greggs GRG Consort Medical CSRT 7.44p TRADING STATEMENTS JD Sports Fashion JD. CYBG CYBG 1p Ashmore ASHM Johnson Matthey JMAT Dewhurst DWHT 8.5p Dunelm DNLM AGMS EasyHotel EZJ 0.22p Baring Emerging Europe BEE Ramsdens RFX 2.2p Plus500 PLUS Shaftesbury SHB 8.1p ECONOMICS SSE SSE 28.4p UK Titon TON 2.7p HPI, PPI, CPI, RPI Click here for complete diary WEDNESDAY 17 JANUARY www.sharesmagazine.co.uk/market-diary TRADING STATEMENTS Emerging market specialist BHP Billiton BLT asset manager Ashmore (ASHM) Burberry BRB releases a trading update on AGMS 16 January and investors will Majedie Investments MAJE be hoping it reflects the upward trend in the regions in which the THURSDAY 18 JANUARY company invests. TRADING STATEMENTS The MSCI Emerging Market Associated British Foods ABF index has had a great start to the Experian EXPN year, following on from a superb Headlam HEAD A strong run in iron ore price since 2017. However, the index is a Halfords HFD the fourth quarter of 2017 bodes measure of emerging market Royal Mail RMG well for Rio Tinto (RIO) which equities and although Ashmore Ten Entertainment TEG publishes a trading update on 15 do provide equity funds, the William Hill WMH January. Iron ore is the dominant company is really more of debt Whitbread WTB commodity for the group in terms specialist. AGMS of contribution to earnings. Therefore, despite a recent Avacta AVCT However, it is worth noting the rally in Ashmore’s share price, if Keystone Investment Trust KIT Australian government predicts US interest rate hikes have hurt Equatorial Palm Oil PAL a 20% drop in iron ore prices in emerging market borrowers, Standard Life Equity Income Trust SLET 2018 because of rising global both sovereign and corporate, EX-DIVIDEND supply and moderating demand the news might not be as rosy as Ashtead AHT 5.5p from China which is a major investors might expect. Autins AUTG 0.8p importer. Compass CPG 22.3p

42 | SHARES | 11 January 2018 INVESTMENT FACTS. WHO CAN YOU TRUST?

In uncertain times, when the economy is buffeted by change, it can be hard to know who to trust when investing.

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KEY • Main Market • AIM • Fund CFP SDL Free Spirit 36 Hargreaves Lansdown 22, 27 Plus500 (PLUS:AIM) 8 (GB00BYYQC271) (HL.) • Investment Trust Polar Capital Technology 9 CFP SDL UK Buffettology 36 Henderson Far East 31 Trust (PCT) • Exchange-Traded (GB00B3QQFJ66) Income (HFEL) Fund Rathbone Ethical Bond 41 Clinigen (CLIN:AIM) 3 HSBC (HSBA) 21 (GB0030957137) Clipper Logistics (CLG) 9 Impact Healthcare REIT 22 Redde (REDD:AIM) 21 (IHR) 4imprint (FOUR) 7 Connect Group (CNCT) 24 Restaurant Group (RTN) 36 Impax Environmental 41 Aberdeen Ethical World 41 Craneware (CRW:AIM) 8, 37 Rio Tinto (RIO) 42 Equity (GB0006833932) Markets (IEM) CRH (CRH) 7 Inmarsat (ISAT) 19 Royal Dutch Shell (RDSB) 7, 17, Admiral (ADM) 26 41 Debenhams (DEB) 6, 10 iShares Global Water 41 Alfa Financial Software 36 RWS (RWS:AIM) 3 (ALFA) Dechra Pharmaceuticals 14 UCITS ETF (IH20) (DPH) S&U (SUS) 37 Angling Direct (ANG:AIM) 3 iShares UK Dividend ETF 23 Dialight (DIA) 8 (IUKD) Saga (SAGA) 19 APQ Global (APQ:AIM) 24 Direct Line (DLG) 22, 27 Johnson Service 8 Scottish Mortgage (SMT) 34 Ashmore (ASHM) 42 (JSG:AIM) Domino’s Pizza (DOM) 36 ScS (SCS) 25 ASOS (ASC:AIM) 9 Kames Ethical 41 Eco Atlantic Oil & Gas 7 Cautious Managed Severn Trent (SVT) 41 AVEVA (AVV) 37 (ECO:AIM) (GB00B1N9DX45) Shire (SHP) 8 B&M (BME) 42 Egdon Resources 10 KCOM (KCOM) 25 (EDR:AIM) Somero (SOM:AIM) 7 Baillie Gifford Japan 35 Keller (KLR) 7 Trust (BGFD) Elegant Hotels (EHG:AIM) 8 Sopheon (SPE:AIM) 14 L&G Dynamic Bond Trust 22 Bankers Investment 23 Elementis (ELM) 28, 29 (GB00B1TWMY10) SSE (SSE) 23 Trust (BNKR) Europa Oil & Gas 10 Laird (LRD) 8 St James’s Place (STJ) 22 Barclays (BARC) 7 (EOG:AIM) Liontrust Global Income 22 Sumo (SUMO:AIM) 3 Be Heard (BHRD:AIM) 8 Fevertree Drinks 3 (GB00B56S8Y21) Superdry (SDRY) 9, 37 Beazley (BEZ) 28 (FEVR:AIM) Liontrust UK Ethical 41 TalkTalk (TALK) 19 (GB00B8HCSD36) Best of the Best 3 Fidelity Enhanced 22 (BOTB:AIM) Income Telford Homes (TEF:AIM) 12 (GB00B87HPZ94) Lloyds (LLOY) 19 BlackRock Income and 19 Tesco (TSCO) 7 Fidessa (FDSA) 37 Macau Property 10 Growth Investment Trust Opportunities Fund Threadneedle 22 (BRIG) FP Octopus UK Micro Cap 3 (MPO) Emerging Market Local BP (BP.) 7, 22 Growth Fund (GB00B88S8291) (GB00BYQ7HN43) Marston’s (MARS) 19 Breedon (BREE:AIM) 3 U and I (UAI) 12, 24 FP WHEB Sustainability 41 MedicX Fund (MXF) 24 Union Jack Oil (UJO:AIM) 10 British & American (BAF) 23 (GB00B8HPRW47) Melrose (MRO) 7 Vanguard SRI European 41 British American 41 Future (FUTR) 3 Mortgage Advice Bureau 37 Tobacco (BATS) Stock Fund G4S (GFS) 13 (MAB1:AIM) (IE00B76VTL96) Carador Income Fund 22 Mothercare (MTC) 6 (CIFU) Galliford Try (GFRD) 19 VP (VP.) 37 NAHL (NAH:AIM) 25 Card Factory (CARD) 28 Greene King (GNK) 19 Watkin Jones (WJG:AIM) 42 National Grid (NG.) 29 Carr’s (CARR) 8 H&T (HAT:AIM) 8 Wey Education (WEY:AIM) 11 Next (NXT) 6 Centrica (CNA) 19 HarbourVest Global 35 WM Morrison 6 Private Equity (HVPE) Phoenix (PHNX) 21 Supermarkets (MRW) Worldpay (WPG) 9

44 | SHARES | 11 January 2018