Dividends back on track
Dividends back on track. When I last wrote three months ago I had two main concerns. One was about the continuing press and political verbal assaults on the utility companies, two of my core holdings.
The other related to the decision by the financial regulator to dig back far deeper in the past than hitherto to examine whether a large number of longstanding investment-linked life-assurance policies might have been missold, which might have impacted two other holdings. I ended my last article by saying I would address these subjects this time.
But as so often with stockmarket scares, it is difficult now to see what all the fuss was about. The Labour mantra about the cost of living crisis seems to be losing appeal both through its unchanging repetition and by rising consumer confidence and the sharply falling unemployment figures, even if real wages still have some catching up to do.
SSE cleverly led the industry in announcing its own price freeze, so simultaneously taking the wind out of the sails of both Mr Miliband’s pledges for a price freeze if he becomes Prime Minister, and the existing incumbent’s strident insistence that such a freeze would be impossible for the utility companies to survive.
But from my viewpoint, the only relevant fact is that of the five companies shown in blue in the table which have announced dividend increases since the last issue, two are my utility companies, SSE and United Utilities, raising their latest payouts by an average of 3.9%. Of the others, the recent strength of the pound sabotaged BP’s 2.6% rise in its dollar payout, turning it into only a 1.7% sterling increase; despite this, the average of the five increases exceeds 3.1%, still well ahead of inflation. So dividends are back on track.
Battered Beatty’s strategy in question
Similarly the life assurance sector has shrugged off what now seems to have been a much over-egged portrayal of what the FCA will in fact be probing.
But I was presented with a real wake-up call one morning at the start of May by the Editor asking if I had “seen Balfour Beatty”. I hadn’t, because one major advantage of my approach to investing is that I feel no need to monitor my shares daily, as I am in for the long term and the dividend stream. But when I saw my construction sector pick was starring as the day’s fastest mover, down over 20% from 286p to 225p, this made even me curious to see what had frightened the horses.
It seems I have managed to have chosen almost the only construction company which is failing to cash in from the economic recovery. The announcement prepared shareholders for a significant shortfall in profit expectations, largely due to delivery failures by the company. Even more worrying was the likelihood of the disposal of the big US acquisition they had made in 2009, which was funded by a rights issue to which we subscribed.
Although they say this has delivered higher profits, it has failed to produce the wider group synergies which had been the main reason for its purchase. So it smacks of a fire sale. The CEO duly fell on his sword, and the interim executive chairman talks of a recovery programme which will take “12-18” months.
There was a useful silver lining to all this: there was no announcement about the final dividend which had been declared in March and which went xd at the end of April, before these announcements, so I decided to take no precipitate action in the belief that it is now far too late for the company to rescind the scheduled July payment.
However, history suggests that any new boss charged with cleaning up is likely to suspend future payouts while he sets the house in order, and this has forced my nose to the grindstone. I was already starting to doubt if mere dividend growth elsewhere in the portfolio would more than compensate for the ravages of RSA’s dividend suspension, but the BB fiasco has forced me to act.
When I reworked the table factoring in no further dividends from BB for this year, all hopes of achieving inflation-busting dividend growth between now and February seemed impossible. It is true that some of this is due to my hairshirt way of accounting for Vodafone’s massive repayment of capital to shareholders, and my decision to repay this year my “borrowing” last year from those anticipated gains to make up last year’s income shortfall.
But because the whole of my strategy is about living from my investments’ income, I can’t reverse that accounting decision now just because it is inconvenient.
However, this short-term blip must be set in context: on a long-term basis since the fund was started the dividends have grown by nearly twice the rate of inflation. I make life difficult for myself by trying to deliver inflation-beating performance on a year-on-year basis as well.
So I am applying drastic surgery to ensure – subject to no further dividend shocks – that this year’s dividend income again comfortably outpaces any likely rate of inflation.
On the assumption BB will produce no more income this year, I have decided to take a few hundred pounds loss on my £7,000 investment by selling the lot cum div, so retaining the right to the July dividend.
And I am also pruning my (currently) non-income producing investment in RSA by selling one-seventh of my £7,000 investment in that company. If I am proved wrong and BB maintains the dividend I shall still have no regrets – another of the keystones of my investment philosophy is to act and move on.
These two transactions generate £7,029 for reinvestment, but I shall treat the cost of my reinvestments as £8,000, the book value amount of my original capital invested. I am sorry that this way of treating my capital transactions will have accountants reaching straight for the valium or other drug of choice, but I have applied this approach consistently since launch and will continue to do so because it lets me sleep easy at night and ignore the capital gyrations of the stockmarket.
The fact that my £100,000 investment is currently worth some £140,000 is just random noise for me, as is the fact that my accounting foible artificially increases the apparent purchase cost of my new shares: this only matters if I have to sell them, which is never my intention, even if events do occasionally force me to do so.
Energy buy has good credentials and divi
I am reinvesting £5,000 of the BB proceeds into another of my personal holdings, like all the others in the RIRP, one which will pay out a dividend next year representing over 7% of its current market capitalisation, and with a commitment to raise it in future by at least the rate of inflation.
The company is renewable energy electricity producer Infinis, which came to the market at the end of last year but is still some way below the offer price, since it immediately ran into the government’s emergency retreat from its green commitments prompted by a desire to mitigate the rise in voters’ energy bills.
The short-term attraction for me is that Infinis has just announced its maiden results, above market expectations, reaffirmed its dividend policy, and will pay a first dividend in August with an xd date at the end of July. So by switching the bulk of the BB money now we pick up a payment in August which will nearly equal what I had previously been assuming BB would pay as an interim in December, helping to get dividends back on track.
And – as Chancellors of the Exchequers say as they pull their final rabbit out of the Budget hat – “I propose to go further.”
I shall invest the remainder of the proceeds in more shares in high-yielding GLI Finance, from which we have already received our first quarterly dividend, and from which a further investment now will yield us over 4% between now and January.
These two measures bring the total projected rise in income this year to a respectable 4%, still leaving me some ground to make up to equal the 5.5% rise generated so far this year by the Editor’s control stock, Bankers Investment Trust. But after these exertions I am hoping to settle back in my semi-retirement and anticipate reporting a steady further stream of inflation-busting dividend increases for the remainder of the year.
Those with long memories will recall eras in which beating inflation was a far more challenging target than it is today – in fact it was impossible with equity dividends for many years in the 1970s. I do not rule out the possibility of an inflationary surge at some point, but for the forseeable future with the dividends back on track I am confident the RIRP will continue to do “what it says on the tin”.
First published in The IRS Report on 5th July 2014.