Income Investors’ Results Review (17 Feb 2013)

Sunday, Feb 17 2013 by

I like to think of income investors as the Zen masters of investing. When the City is deafening us with noise and distraction, the income investor sits there with a quiet mind, only to wake briefly from their meditative state on results day to ask the question: “okay, so how much did my dividend go up by this time?“.

They know all of the short termism and macroeconomic navel gazing propounded by the financial pundits is of little relevance to them. They don’t care much for the “I’d better sell up, the FTSE’s a bit high now and I’ll get back in cheaper in the summer”, “Great my portfolio is up 1% today!”, “Damn my portfolio is down 1% today!”, “How is the Eurozone mess going to affect my shares?”, “What will happen to inflation and interest rates?”, “Will there be a triple dip recession?”. No, the income investor’s third eye is on the long term where everything will be just fine as long as their income keeps rising at a satisfactory rate.

Nearly 7 weeks into 2013 we have already seen a number of results announcements for the raft of 31st December financial year ends so I thought it would be a good time to have a quick review as to what’s been happening with some of the larger cap income stocks. As I jotted down a list of recent final results announcements I noticed that I had a pair in each of 4 “sectors” so I shall present them in that way below.

Consumer products (RB., ULVR)

It is generally well recognised that shares in well ran companies producing consumer products can prove to be excellent investments. Quality products and brand loyalty can create a powerful moat, enabling those companies to preserve higher margins and return on capital over the long term. Usually their global growth opportunities also offer the possibility of deploying additional capital at those high rates of return, creating long term earnings growth with, importantly, a high level of free cash flow generation at the same time. This gives the possibility to pay out dividends and invest in organic growth opportunities without the need for raising borrowings, albeit debt will often be increased as a result of acquisitions.

The world’s most famous investor, Warren Buffett, is a fan of such companies and has had great success over many years with his largest investment, Coca-Cola, along with other sizeable investments in Johnson & Johnson, Kraft Foods and Procter & Gamble to mention a few. Also, last week saw the big announcement that Buffett’s company Berkshire Hathaway is to go halves with 3G Capital in acquiring Heinz in a $28 billion transaction.

We do however have some equally high quality companies in this arena in the FTSE, arguably the finest examples being Reckitt Benckiser (LON:RB.) and Unilever (LON:ULVR) .

Reckitt Benckiser owns an impressive stable of household, health and personal care brands, I suspect at least one of which will find its way into almost every home in the UK: brands such as Nurofen, Finish, Calgon, Cillit Bang, Durex, Strepsils, Harpic and many more. They announced final results on 13th February in which it pleased income investors with an 11% increase in the final dividend, bringing the increase for the year to 7% at 134p. It appears to be a strong set of results with like for like revenues increasing by 5%, driven by further emerging market growth, and a 7% increase in underlying EPS to 264p which twice covers the dividend. Free cash flow was also very strong and the £0.6bn increase in net debt was largely as a result of the acquisition of Schiff Nutrition during the year which marked Reckitt’s entry into the vitamins, minerals and supplements markets. Reckitt has been doing the business for its shareholders for years now with an amazing 10 year dividend CAGR of 18%. Unfortunately though (well, for those looking to buy) the market has now given it the premium rating it deserves: after a 25% share price increase in the last 6 months it is now yielding only 3.0% which is 0.5% below the current FTSE 100 yield of 3.5%. That will no doubt cause some great debates between the value investors and the ‘quality’ investors, although personally I will be waiting patiently for a better opportunity to add.

Unilever similarly owns an impressive list of brands bound to feature in most homes. In addition to household and personal care products though, nearly one half of Unilever’s revenues come from food and drink, including brands such as Knorr, Flora, Hellman’s Mayonnaise and Magnum and Ben & Jerry’s ice creams. The company announced final results on 23rd January and reported an 8% increase in the fourth quarter dividend, bringing the increase for the year to 8% also. However, given that ULVR reports in Euros, the currency movement unfortunately meant that UK investors only saw a sterling increase of 1.6% to 78.89p for the year. The results overall were very strong with underlying sales growth of 7% and earnings growth of 11%, again driven by emerging markets growth which now accounts for some 55% of turnover. However, like RB., ULVR has also deserved its premium rating and a 25% price increase over the last year now places the shares on a yield of only 3.1%.

Pharmaceuticals (AZN, GSK)

AstraZeneca (LON:AZN) and GlaxoSmithKline (LON:GSK) are two pharmaceutical giants of the FTSE featuring commonly in many income portfolios, not least with the UK’s most well known income fund manager, Neil Woodford of Invesco, who is banking heavily on the success of both companies. In fact, AZN and GSK are the two largest holdings in the Invesco Perpetual High Income Fund, comprising together some 19% of the overall portfolio.

Pharmaceuticals usually carry the same favourable economics as the consumer product companies referred to above: high margins, high return on capital and good free cash flow generation. But the growth story is altogether more challenging at present due to the issue of patent expiries on their drugs which leads to sharp losses in revenues when the much cheaper generic drugs enter the market. Often referred to as the “patent cliff” it burdens the companies with the ongoing need to deliver new drugs from their research and development pipeline.

AstraZeneca announced final results on 31st January which reported a 2.5% decrease in the final dividend although taking into account the interim increase this represented an unchanged dividend for the year. AZN reports in US dollars so with currency fluctuations the sterling equivalent was an increase of 1.8% for the year to 178.60p. That came as no big surprise however given the results: revenues down 15%, core EPS down 9% and reported EPS down 29% (all at constant exchange rates). The loss of exclusivity on one drug alone – Seroquel IR, the treatment for schizophrenia and bipolar disorder – contributed $3 billion to the decline in sales, nearly 10% of total revenues. The new CEO, Pascal Soriot, certainly has his work cut out to steer the company back to growth. On his first day at work, 1st October 2012, the company immediately announced the suspension of the company’s share buy back programme, presumably to maintain full flexibility with cash flow whilst considering strategic options which are likely to be a mix of investment into R&D and acquisitions. But the company is still throwing off plenty of free cash flow and has very little debt, so it should have some ammunition to help achieve this. Unsurprisingly given the current performance and concern over future growth, the dividend yield is currently a hefty 6.1%, although it should be noted that the dividend has grown at an excellent CAGR of 17% over the last 9 years. If the dividend can be held whilst it restores its growth trajectory it could still prove to be a good long term hold from here, or certainly Woodford must think so.

GlaxoSmithKline announced final results on 6th February and reported a 4.8% increase in the fourth quarter dividend bringing the increase for the year to 5.7% at 74p (excluding last year’s 5p special dividend). GSK’s core sales and earnings were flat for the year as the “patent cliff” appears to be less threatening compared to AZN and it also has a more diversified product base; for example nearly a fifth of revenues are from its consumer healthcare division which contains some well known brands such as Lucozade, Ribena, Aquafresh and Beechams to name but a few. Reflecting the more robust trading position, GSK now yields 5.0% although that is still priced for very little real growth going forward. Its dividend growth has however been far slower than AZN’s prior to now at about a 6% CAGR over the last 10 years.

Oil (BP., RDSB)

Next come two more giants of the FTSE, the oil and gas exploration and production groups BP (LON:BP.) and Royal Dutch Shell (LON:RDSB) , the latter being the largest company in the FTSE and the former the third largest.

BP announced final results on 5th February declaring a 29% increase in the fourth quarter dividend bringing the year’s increase to 18% (based on the US dollar declarations). The increase sounds high but we should remember that the dividend is recovering from the 2010 oil spill when no dividend was paid for 3 quarters. The 2012 dividend is still approximately 40% lower than in 2009, the last full year prior to the spill. The company has been in disposal mode to try to pay for the vast clean up and legal bills involved and has now agreed total divestments of some $38 billion plus the sale of its 50% stake in TNK-BP to Rosneft. Now that BP appears to have steadied itself its shareholders will be looking for a return to growth from what appears to be a solid starting yield of 4.8%.

In respect of Royal Dutch Shell, I should add here for the uninitiated that the ticker reference above of ‘RDSB’ is for the ‘B’ shares as opposed to ‘RDSA’ which is for the ‘A’ shares. The two classes of share capital were created during the unification of Royal Dutch and Shell Transport and Trading in 2005, although the ‘A’ shares are subject to Dutch withholding tax whereas the ‘B’ shares currently have no withholding tax implications for UK investors; and it is therefore usually the ‘B’ shares that a UK investor would purchase. To get the total market capitalisation of Royal Dutch Shell however we need to add the market value of both classes of share so in this case £79bn + £56bn = £135bn, which puts it at the top of the FTSE, just ahead of HSBC.

Royal Dutch Shell announced final results on 31st January declaring an increase in the fourth quarter dividend of 2.4% bringing the increase for the year to 2.4% also. The company’s dividend growth has been very flat in recent years, with the 2010 and 2011 dividends being held at 2009 rates. It might be a token increase in 2012, but at least it has got the ball rolling again: in fact, the company took the rather unusual step of stating that the Q1 2013 dividend is expected to be declared at 45 cents, an increase of 4.7% on Q1 2012 which will be welcome news for income investors who are looking for their dividend growth to exceed inflation. That is starting from a solid looking yield of 5.1%.

Insurance (BEZ, CGL)

Insurance companies are usually split into the life and non-life sectors and Beazley (LON:BEZ) and Catlin (LON:CGL) belong to the latter. Whilst most good income investors learn to be ambivalent about share price volatility, it is almost impossible not to get a mild touch of the heebie-jeebies from the volatility that can be seen in the earnings of non-life insurers. Claims experience can be relatively benign in some years and in others the claims arising from a series of natural catastrophes can cause profits to take a tumble, such as in 2011 when they were faced with the Tohoku earthquake in Japan, floods in Thailand, US tornadoes and an earthquake in New Zealand. But volatile earnings doesn’t have to translate into volatile dividend payments and notwithstanding such ups and downs both of these companies have continued to pay steadily increasing dividends for years.

Beazley announced final results on 7th February which included a very nice bonus for investors. Firstly, there was an increase in the final dividend of 3.7% bringing the increase for the year to 5.1% at 8.3p. But the nice surprise was the additional special dividend declared of 8.4p i.e. slightly above the year’s regular dividend. Very nice. After the 2011 hit to earnings, EPS more than tripled to 26.7p to give a well covered dividend of more than 3 times and the statement was very positive about growth opportunities for the year ahead. I was lucky enough to purchase Beazley in 2010 when I considered it to be undervalued and it has since provided an almost 100% total return in less than two and a half years. After a strong share price rise it still however yields 3.9% (excluding the special) although that will be back well above 4% when it goes ex dividend at the end of the month. So despite the price rise, when some may be tempted to ‘bank the gain’, I have no intention of selling at present.

Catlin announced its finals the following day with a similar bounce back in earnings and a 5.3% increase in the final dividend bringing the year’s increase to 5.4% at 29.5p. A similar increase to Beazley, although there was no special for Catlin shareholders and the dividend cover is far lower at 1.9 times. The much higher yield of 5.7% reflects this however and it should be noted that the CAGR of the dividend for the last 8 years has been a very impressive 13%.

Well, that brings an end to this results review and overall it was a fairly mixed bag, but no dividend cuts. Although these 8 shares would not represent an income portfolio given the lack of diversification, by my calculations the average dividend increase for this lot in 2012 was 6%, so still well above inflation, and the average yield at present is 4.6%. I don’t know about you but I’d settle for that. Back to the meditation.

Disclosure: the author holds shares in ULVR, AZN, GSK, BP. and BEZ.

Image courtesy of Master isolated images /

Filed Under: Value Investing,


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Unilever PLC is engaged in the supply of food, home and personal care products. The Company's portfolio ranges from nutritionally balanced foods to indulgent ice creams, soaps, shampoos and household care products. The Company operates through four segments: Personal Care, Foods, Refreshment and Home Care. Its personal care segment products include skin care and hair care products, deodorants and oral care products. Its Foods segment includes products, such as soups, bouillons, sauces, snacks, mayonnaise, salad dressings, margarines and spreads. Its Refreshment segment's product includes ice cream, tea-based beverages and weight-management products. Its Homecare segment products include home care products, such as powders, liquids and capsules, soap bars and a range of cleaning products. The Company offers over 400 brands, including Lipton, Knorr, Dove, Axe, Hellmann's, Omo, Persil, Blue Band, Domestos, Wall's ice cream, Marmite, Magnum, Lnynx, Pureit and Suave. more »

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GlaxoSmithKline plc. (GSK) is a healthcare company that researches and develops pharmaceuticals, vaccines and consumer healthcare products. The Company operates in two segments: Pharmaceuticals and Vaccines, and Consumer Healthcare. The Pharmaceuticals segment develops and makes medicines to treat a range of acute and chronic diseases. Its human immunodeficiency virus (HIV) business is managed through ViiV Healthcare. GSK's Vaccines has a portfolio of over 30 paediatric, adolescent, adult travel vaccines. GSK's Established Products Portfolio includes over 50 off-patent products, as well as its branded generics business and other local products. The Consumer Healthcare business develops and markets products in four categories, such as wellness, oral health, nutrition and skin health. Its brands include Sensodyne, Panadol, Horlicks, Polident, Paradontax, Tums, ENO, NiQuitin/Nicorette, Abreva, Zovirax and Aquafresh. It operates in the United Kingdom, the United States, Belgium and China. more »

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Beazley plc is a holding company for the Beazley group, a global specialist risk insurance and reinsurance business. The Company's segments include Life, accident & health segment, which underwrites life, health, personal accident, sports and income protection risks; Marine segment, which underwrites a broad spectrum of marine classes including hull, energy, cargo and specie, piracy, aviation, kidnap & ransom and war risks; Political risks & contingency segment, which underwrites terrorism, political violence, expropriation and credit risks, as well as contingency and risks associated with contract frustration; Property segment, which underwrites commercial, homeowners', and construction and engineering property insurance; Reinsurance segment, specializes in writing property catastrophe, property per risk, casualty clash, aggregate excess of loss and pro-rata business, and Specialty lines segment underwrites professional liability, management liability and environmental liability. more »

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  Is Unilever fundamentally strong or weak? Find out More »

2 Comments on this Article show/hide all

tournesol 18th Feb '13 1 of 2

Excellent article and very interesting blog. I look forward to spending some quality time reading it in detail.

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Miserly Investor 18th Feb '13 2 of 2

Hi Tournesol, thanks for the kind comments.

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