Article by David Thorpe, writing for whatinvestment.co.uk
Thomas Moore, manager of the high-performing £700 million Standard Life Investments UK Equity Income Unconstrained fund, has revealed that he is ‘wary’ of investing more in FTSE 100 income stocks right now, but he feels that BT (LON:BT.A) represents a ‘rare’ opportunity for income investors.
Moore’s fund has a current yield of 4 per cent, and is the third best performing out of 75 funds in the IMA UK Equity income sector over the last five years under his management.
On a total return basis, the fund has delivered 105 per cent over that period, compared to 68 per cent for the average fund in the sector.
Moore remarked, ‘The FTSE 100 is good for the dividends, but the FTSE 250 is where the dividend growth comes from, and the growth is the important consideration for the future. If you look over the past decade, the average dividend growth in the FTSE 100 is 4 per cent, but outside the FTSE 100, in the smaller companies, it is 6 per cent.’
He added, ‘The valuations of a lot of the stocks at the top of the FTSE look stretched, but they don’t look stretched at all in the mid-cap area.’
Two FTSE 100 stocks on which he is keen are telecoms company BT and mobile phone business Vodafone, the latter being a recent investment.
On BT, Moore commented, ‘This company has been a strong performer for the fund. There are company-specific as well as sector-specific reasons for liking BT. The consolidation that now seems to be coming to the sector is a positive. And if you look at the numbers, the earnings per share (EPS) and price-to-earnings (p/e) ratio, those are getting better, while the fundamental performance of the company is also improving – it is rare to get that combination.’
He recently added a position in Vodafone, remarking that this was due to his ‘increased confidence that recent pricing trends for data bundles should be supportive both for the profitability of their European operations and the overall rationale for investing in 4G networks’.
One large-cap stock he has long avoided is pharmaceutical giant GlaxoSmithKline. ‘The dividend cover of this stock has fallen to 1.2 times. We feel that we would be taking a risk if we owned it due to the fall in the dividend cover, and the declining pipeline of new drugs, which is likely to put future earnings under pressure. In terms of valuation, the earnings per share and the price to earnings ratio have actually been moving in the wrong direction, even though the share has got more expensive.’
Moore has had a long-term aversion to investing in commodity and oil stocks. He remarked, ‘The problem with commodities is that the investment case is totally reliant on the price of the commodity, and the price is hard to predict, being dependent on demand from other countries like China, or supply factors which it is hard to have an expertise in.’
Moore also has no exposure to banks, commenting that ‘they are under regulatory pressure, and will be for years’.
Turning his thoughts to the mid-caps in which he is invested for dividend growth at the present time, he nominated engineering firm WS Atkins.
Moore remarked, ‘WS Atkins is in the early stage of its earnings recovery. There have been positive announcements from the company, and it is a stock which should benefit from the continuation of the economic recovery in the UK and the US, as well as the rest of the world.’
WS Atkins has a market cap of £1.3 billion, and currently yields 2.6 per cent. For the year to March 2014, the company recorded profits of £114 million on a turnover of £1.75 billion.
The second mid-cap stock cited by Moore is financial services company Close Brothers. Moore explained that, ‘Unlike the banks, Close Brothers is not faced with the [same] regulatory issues, and is growing earnings. This company has a market cap of £2.2 billion and a market cap of 3.9 per cent.’
He has also recently added a position in HellermannTyton, a company which makes cable ties. The business has a market cap of £650.5 million, and profits of £69 million are forecast for the 2014 calendar year on a turnover of £495 million.
Moore concluded his comments with the remark, ‘The rush into many large-cap stocks for their bond-like characteristics has stretched valuations for what are deteriorating fundamentals in many cases. This contrasts with the sell-off in many domestic mid-cap stocks despite their improving prospects.
‘This has provided an opportunity to add to favoured positions at lower valuations. We remain focused on those stocks offering the best dividend growth potential, which leads us again towards the better growth and balance sheets of small-cap and mid-cap stocks.’
Company website: www.directmarkettouch.com