Income Investors’ Results Review (17 Feb 2013)

Sunday, Feb 17 2013 by
11

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.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

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 / FreeDigitalPhotos.net


Filed Under: Value Investing,

About the Author's Blog

Miserly Investor Profile Image Promotional
Miserly Investor

Miserly Investor is a blog about long term investing in equities, in particular value and dividend investing strategies. ...read more or visit website »


Disclaimer:  

All articles and comments express my personal views and opinions and not those of any others including my employer, family and friends. I am an amateur private investor with a keen interest in investing but I am not a qualified or regulated financial adviser. As a result nothing in this website should be construed as legal, financial or investment advice regardless of any information, views, opinions, forecasts, commentaries, suggestions, stock picks or otherwise expressed herein. I strongly recommend that you always do your own research and if you are in any doubt about what action to take then you should seek advice from an appropriately qualified and regulated financial adviser. Remember that the value of your investments and the income from them may go down as well as up. In no event will I be liable for any loss or damage including without limitation, indirect or consequential loss or damage, arising from, or in connection with, the use of this website. Any action taken as a result of anything read on this website is entirely at your own risk. The information contained in this website is for general information and entertainment purposes only. I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk.


Do you like this Post?
Yes
No
11 thumbs up
0 thumbs down
Share this post with friends



    Unilever PLC (PLC) is a supplier of fast moving consumer goods. The two parent companies, Unilever N.V. (NV) and PLC, together with their group companies, operate as the Unilever Group (Unilever). The Company’s four product areas are Personal Care, Foods, Refreshment and Home Care. The Company's personal care, which includes sales of skincare and haircare products, deodorants and oral care products; foods, which includes sales of soups, bouillons, sauces, snacks, mayonnaise, salad dressings, margarines and spreads; refreshment, which includes sales of ice cream, tea-based beverages, weight-management products and nutritionally enhanced staples sold in developing markets and home care, which includes sales of home care products. Effective July 4, 2013, Unilever PLC raised its interest to 51.55% from 36.75%, by acquiring a 14.784% interest in Hindustan Unilever Ltd. In October 2013, Pinnacle Foods Inc completed the acquisition of the Wish-Bone salad dressings business from Unilever PLC. more »

    Share Price (Full)
    2634p
    Change
    25.0  1.0%
    P/E (fwd)
    19.2
    Yield (fwd)
    3.6
    Mkt Cap (£m)
    74,096

    GlaxoSmithKline plc (GSK) is global healthcare group, which is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products. GSK’s principal pharmaceutical products include medicines in therapeutic areas: respiratory, anti-virals, central nervous system, cardiovascular and urogenital, metabolic, antibacterials, oncology and emesis, dermatology, rare diseases, immuno-inflammation, vaccines and human immunodeficiency virus (HIV). The Company operates in three primary areas of business: Pharmaceuticals, Vaccines and Consumer Healthcare. On January 30, 2013, GSK acquired additional 29.3% interest in GlaxoSmithKline Consumer Healthcare Ltd. In May 2013, GlaxoSmithKline PLC acquired Okairos AG. In December 2013, Suntory Beverage & Food Ltd fully acquired Lucozade Ribena Suntory Limited from GlaxoSmithKline plc. more »

    Share Price (Full)
    1642.5p
    Change
    2.5  0.2%
    P/E (fwd)
    14.7
    Yield (fwd)
    5.0
    Mkt Cap (£m)
    79,692

    Beazley plc is a holding company engaged in global specialist risk insurance and reinsurance business. Its segment includes life, accident and death, underwrites life, health, personal accident, sports and income protection risks; marine , underwrites a broad spectrum of marine classes including hull, energy, cargo and specie, piracy, aviation, kidnap and ransom and war risks; political risk and contingency, underwrites terrorism, political violence, expropriation and credit risks; property, underwrites commercial, high-value homeowners and construction and engineering property insurance; reinsurance, specializes in writing property catastrophe, property per risk, casualty clash, aggregate excess of loss and pro-rata business, and specialty lines , underwrites professional liability, management liability and environmental liability, including architects and engineers, healthcare, lawyers, technology, media and business services, directors and officers and employment practices risks. more »

    Share Price (Full)
    248.9p
    Change
    1.0  0.4%
    P/E (fwd)
    9.5
    Yield (fwd)
    3.8
    Mkt Cap (£m)
    1,293



      Is Unilever fundamentally strong or weak? Find out More »


    2 Comments on this Article show/hide all

    tournesol 18th Feb '13 1 of 2
    3

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

    | Link | Share
    Miserly Investor 18th Feb '13 2 of 2
    2

    Hi Tournesol, thanks for the kind comments.
    Regards,
    MI

    | Link | Share

    What's your view on this article? to Comment Now

     
     
    You are feeling neutral

    Use the £ sign in front of a ticker to turn £VOD into Vodafone PLC

    You can track all @StockoChat comments via Twitter


About Miserly Investor

Miserly Investor

Follow

I am the author of the Miserly Investor blog at http://miserlyinvestor.com and a keen private investor, having developed an interest in the stock market from a young age. By profession I am a Finance Director and a qualified Chartered Accountant and so my approach to investing is very much based on a business perspective with a focus on company fundamentals. The Miserly Investor blog concentrates on equities, in particular value and dividend investing strategies, usually with a long term buy and hold approach. more »



Stock Picking Tutorial Centre


Related Content

Stock Picking Simplified

Stockopedia takes your stock picking to the next level with cutting edge Stock Reports & Screening tools.


Get started
or Take a Tour to find out more.