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A long-term view of income

INTERVIEW: Carl Stick tells Leonora Walters how long-term dividend growth continues to drive equity income
A long-term view of income

UK equity income funds have come in for some criticism over 'clustering' - holding similar portfolios concentrated in a small number of shares - but outside his top 10 holdings Rathbone's Carl Stick takes his own approach to generating income.

"It is a concern that equity income managers tend to hold the same stocks in their top 10, because if any of these stocks cut their dividends it will have a wide impact, but we have to do this," admits Mr Stick, who is celebrating ten years as manager of the Rathbone Income Fund. "I am happy to have large chunks in companies such as Diageo and Unilever which pay dividends over the long term - it is not surprising so many equity income funds hold these."

Mr Stick's focus is very much on companies that deliver over the long term. Diageo, for example, has consistently grown its dividend over the past 10 years, and British American Tobacco has benefited long-term holders. He also looks at companies that buy back shares as this generates long-term returns.

"Beyond this it really comes down to stock-picking," says Mr Stick. "The stocks we look to may not necessarily be stellar performers in 21 months, but they should have a strong position - for example, niche businesses with a very specific market.

"There is a need to get away from the average six-month hold and the short term that broker recommendations focus on. Does it matter if a company does not sell so much over one quarter? Yes, obviously, if this is a long-term trend, and we will sell if necessary. But rather than speculating on what will do well in the next six months, we look to companies that will pay out more in 20 years' time."

Mr Stick's belief in looking at longer-term potential is partly driven by the value he places on the compounding of dividend income, which over the long term generates strong returns. "They multiply for you, year in, year out," he says.

But growth might not be regular or even. Mr Stick admits that Rathbone Income, like a number of its peers, had to cut its dividend in 2009. However, over 10 years the Rathbone Income Fund returned a 106.37 per cent total return against 52.01 per cent for the Investment Management Association UK Equity Income sector, placing it fourth out of 49 funds. In terms of current yield, the fund offers 4.71 per cent, placing it thirty-sixth out of 88 funds.

Carl Stick


Stocks that Mr Stick believes have potential include retailer Halfords. "There is nothing quite like this; it has around 90 per cent of the car parts market and is good at managing its product base," he says. "Its products are also counter-cyclical, because if people are not buying new cars then they have to service their old ones."

He says the shares are trading on a price-earnings ratio of about 10 times while they yield about 5 per cent, which he says is cheap. "This will do well in absolute terms and make a good return over the long term," says Mr Stick. "This is generally the case with the other mid-caps in the portfolio - they may not be stellar outperformers in 12 months but they have a very strong market position and niche business interests."

This is also the case with some of Rathbone Income's smaller stocks. Conference and media company Tarsus, which has a market capitalisation of around £73m, has a good earnings stream and repeat business from its label printing and conference businesses, with most of its earnings generated overseas. Mr Stick also believes it has the potential to be a takeover target. Currently, Tarsus yields around 6 per cent.

Small-cap Severfield-Rowen, which fabricates steel, is building up its business in India and abroad, and has little debt. Its competitors, says Mr Stick, are very highly geared and could become insolvent and, although Severfield-Rowen cut its dividend by 50 per cent, he believes that going forward it could offer an earnings surprise.

Size doesn't matter

While Mr Stick acknowledges that it can be easier to understand the market and pricing power of a smaller stock, he does not specifically target this end of the market. "It is not a case of large versus small, but value, market position, dividend and yield," he says. "If our allocation to small and mid-caps increases, that is fine. However, it has been around the 40 per cent mark for some time and I do not expect this to change massively.

"I currently hold 45 stocks and would not want many more."

Although Mr Stick seeks good yields, value is also important. For example, Standard Chartered and HSBC, which have significant Asian businesses, have good prospects, but Mr Stick has reduced these on the grounds they are too expensive. "We remain wary of the banks and are maintaining a serious underweight position until valuations are, once again, justifiable," he says.

But he will add HSBC again if it cheapens. Conversely, he has been reducing Reed Elsevier which is cheap but could increase capital expenditure which risks a rights issue or dividend cut.

Mr Stick also avoids investments with no prospect of capital growth. "Capital growth is the corollary of the ability to grow a dividend," says Mr Stick. "Although in the current environment we have no flexibility to look for growth and want a 5 to 6 per cent yield, as markets recover we may consider lower yields."

Carl Stick's CV

Carl Stick has managed the Rathbone Income Fund since January 2000. Since 2001 he has also been a board director of Rathbone Unit Trust Management and involved with the development of its investment process and business strategy. He joined Rathbone in 1996 as a discretionary fund manager and after two years became an assistant fund manager. Mr Stick graduated from the University of Southampton in 1991 with a degree in English Literature.