We think it’s a good time to be a UK equity income investor. Markets returns have been decent, valuations are attractive versus history, the economic environment is supportive, and we see some interesting market catalysts.
The UK market has a long tradition of payouts to investors, and we believe that compounding dividend income over time is a powerful contributor to long-term returns for investors.
When we are considering an investment part of the analysis we do includes a deep dive review of a company’s cash generation, balance sheet, management and sector. We are looking for stable cash generative companies with strong balance sheets capable of paying dividends while continuing to reinvest in the business to ensure both profitability and distributions to shareholders can grow.
Energy, life assurance
We are finding good potential opportunities, across the market-cap spectrum where we invest. For example, we have added to energy company holdings during 3Q when oil prices were trading below $70/ barrel, and have increased holdings in life assurance companies.
We view the current economic backdrop as supportive, with the UK growth rate modest but steady and inflation normalising from post-Covid peak levels. We saw the first rate cut in over four years from the Bank of England in August and from the US Federal Reserve in September. UK mid cap stocks tend to respond positively to rate cuts, in particular those companies that are reliant on domestic sales.
Sterling, which acts as a kind of barometer of the health of the UK economy, hit a two-year high against the dollar in September. A pound sterling is worth around $1.30 as we write; it was worth as little as $1.07 at the time of the Liz Truss government’s mini budget in September 2022.
More clarity
It’s true that the prolonged wait for the upcoming budget from the new Labour government has impacted business and consumer confidence. Clarity on fiscal measures and growth initiatives, particularly around planning, will be helpful, and we will analyse these closely.
Another significant and supportive factor for investors that is well known is valuation: UK stocks are cheaper than their historic average and are undervalued versus other markets. The UK price- to-earnings ratio of 11.2 compares to the US market P/E of 21.2.¹ As value investors and contrarians, we view UK equities, in part due to their unpopularity, as offering very good long-term possibilities.
Companies have done the maths and have been buying back their own shares at a robust pace — BP has a two-year, $14bln buyback program, and Barclays plans to return at least £10bln to shareholders between 2024 and 2026 with buybacks and dividends. Prudential announced a plan to buy back $2 billion in shares by mid-2026.
Buyback plans
FTSE 100 companies acquire £10bln-£20bln of their own shares in a typical year. This surged to £58bln in 2022 and £55bln in 2023, according to AJ Bell data, and we expect a similar figure this year. We see this as a positive trend and supportive of company valuations.
We also think that the magnitude of share buybacks may soon exceed the amount of share selling by UK pension funds and insurance companies, a longtime feature of this market, and this may may act as an inflection point for domestic stocks.
The lowly company valuations have been supportive of takeover activity. We saw around 60 deals in the UK last year, in many cases with overseas businesses doing the buying and the targets generally small and mid-cap companies. This year, there has notable activity in large caps. These include BHP’s unsuccessful 39-billion-pound bid for Anglo American, the takeover of Hargreaves Lansdown by private equity buyers and the bid for Rightmove by Australia’s REA.
We see pockets of dynamism in the UK market, though we would like to see more momentum and more interest from global investors. We believe that a UK equity income strategy has an important role to play in a diversified investment portfolio. We aim for our strategy to deliver an income in excess of the market’s and an income that grows above inflation. In addition, there is the prospect of meaningful capital returns as the companies we invest in prosper, and we feel confident that UK stocks offer an excellent entry point for investors.
¹ Source: Datastream, Worldscope, Goldman Sachs Investment Research as at 19.9.24
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.