Markets have entered a period of volatility, with US technology stocks struggling and concern growing about US economic growth and trade policies.
It’s business as usual for us as UK equity income investors, however. We are doing what we have always done, investing in good companies that generate cash and are willing to share it with investors in the form of progressive dividends and, in many cases, adding share buybacks to the mix.
Our strategy pays a dividend above 5%, which is higher than its historic average, from a portfolio of stocks that trades on a valuation of around nine-times earnings, well below average. We are hoping that amid the noise in other markets, global investors will look to the UK, which, in our view, offers rich opportunities for dividend income and returns.
It’s interesting that the FTSE 100 and FTSE All-Share have outperformed the main US equity indices so far this year. For the last several years, the US market has done so incredibly well that the UK may be seen as boring and lowly valued, but we would argue that boring isn’t a bad place to be in financial markets, especially right now.
We see the supportive backdrop for UK equities continuing, in particular the favourable interest rate environment. The UK as a cyclical value market tends to outperform in an easing interest rate environment. The Bank of England after two cuts last year lowered rates to 4.5% in February, and we think the direction of travel is lower.
While gilt yields have fluctuated in recent months, the pound, an important arbiter of the economy’s outlook, has been steady.
We are expecting dividend growth in the UK this year. In fact, dividends from FTSE 100 companies may exceed the record reached in 2018, though this will depend in part on the strength of the dollar because some large UK multinationals pay dividends in dollars. Either way, the level of payouts has returned to pre-Covid levels.
We see the robust level of share buybacks in our market continuing at the £50 billion annual pace for a fourth consecutive year, with more midcap companies joining large companies. Rotork (£50 million), Prudential ($2 billion) and Standard Chartered ($1.5 billion) are among the companies that have announced buybacks recently.
Businesses acquire their shares if they consider them to be undervalued, and reducing the number of shares in circulation boosts earnings on a per-share basis. We view a buyback programme as positive also because it indicates the dividend is well supported and can potentially be progressive.
Private equity firms have taken notice of UK listed assets, with takeover deal size and volumes increasing. Real estate has been a favourite, with the KKR-Stonepeak bid of £1.6 billion for Assura, a health care real estate specialist, one example.
Britain’s economy is ticking along at a steady but low- to no-growth pace. Consumer and business finances are solid, but confidence in growth for both is soft. The businesses we meet regularly have strong balance sheets, and yet they are cautious. They tell us that customers are holding off on orders.
We would like the UK government to articulate a message more clearly that’s positive about the economic outlook and to tone down the narrative that things will get worse before they get better. It’s a relief that the UK is at least for now more insulated from trade war risk than China or Europe. We aren’t hearing undue concern about trade issues from the companies we speak to.
Looking at our strategy on a sector basis, we have recycled some recent gains from banking stocks into sectors such as construction, life insurance and utilities, where we see companies on low valuations that would potentially benefit from a lower rate environment.
We believe that a UK equity income strategy belongs in any diversified investment portfolio and that the compounding effect of reinvested dividends is a powerful source of returns over time. Our strategy delivers a dividend yield higher than that of the market, and we expect dividend growth from the companies we invest in, with the potential for capital returns. It’s business as usual for us – a bit boring perhaps but that’s fine.
Robust Dividends
The case for UK equity income
Strategy risks:
- Interest Rate Risk - The strategy can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates, e.g. the value of a bond tends to decrease when interest rates rise 1
- Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Market Concentration Risk (Geographical Region/Country) - Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
- Derivative risk - the strategy may use derivatives to reduce costs and/or the overall risk of the Fund (this is also known as Efficient Portfolio Management or "EPM"). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the strategy’s assets.
- Smaller Companies - The strategy invests in smaller companies, which can be less liquid than investments in larger companies and can have fewer resources than larger companies to cope with unexpected adverse events. In less favourable market conditions these companies may therefore under-perform larger companies and the strategy may under-perform funds that invest predominantly in larger companies.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI.