My inflation-beaters stock screen feels distinctly in need of a re-branding. While inflation fears were very much the order of the day when I came up with the screen in 2012, deflation is now firmly established as the key economic concern. But you could argue this screen is also a good fit with a deflationary environment.
The reason I feel this screen remains relevant is that in essence it focuses on finding stocks delivering sustainable dividend growth – a perennial attraction for many investors. Originally I looked to dividend growth as a gauge of companies that may be able to keep pace if prices rose quickly making inflation adjusted growth harder to achieve. However, companies capable of generating sustained dividend growth should arguably also look attractive at a time when the wider economy is experiencing deflationary pressures making any growth harder to achieve.
While there is a basis for my re-banding argument here, the performance of the screen over the past two years – the period during which deflation fears have really been the order of the day – offers little support. Indeed, following a poor run in 2014, last year the three stocks that passed all of the screen's tests (WS Atkins, Rotork and Prudential) delivered a negative total return of 6 per cent compared with a negative 5.3 per cent from the market. Due to the scant results from last year's screen, I also included 20 stocks that passed all but one of the screen's tests. Taking the performance of these shares into account the results looks more encouraging with the screen producing a 4.4 per cent total return compared with the poor showing from the FTSE 350.
| Company | TIDM | Total Return (2 Feb 2015 - 1 Feb 2016) |
|---|---|---|
| WS Atkins | ATK | 19.1% |
| Prudential | PRU | -13.1% |
| Rotork | RTRK | -24.0% |
| Cranswick | CWK | 62.8% |
| Domino's Pizza Group | DOM | 48.7% |
| WH Smith | SMWH | 44.2% |
| Sage | SGE | 33.5% |
| Computacenter | CCC | 32.6% |
| Ted Baker | TED | 30.5% |
| Intertek | ITRK | 26.6% |
| Halma | HLMA | 23.7% |
| Spirax-Sarco | SPRX | 5.0% |
| Aveva | AVV | 1.1% |
| James Fisher | FSHR | 0.4% |
| PayPoint | PAY | -0.7% |
| Schroders | SDR | -4.0% |
| Diploma | DPLM | -11.8% |
| AG Barr | BRAG | -14.2% |
| Spectris | SXS | -22.6% |
| Victrex | VCTA | -22.7% |
| Restaurant Group | RTN | -23.8% |
| Aberdeen Asset Management | ADN | -40.3% |
| Weir Group | WEIR | -48.8% |
| FTSE 350 | - | -5.3% |
| Top 3 | - | -6.0% |
| Inflation-Beaters | - | 4.4% |
Source: Thomson Datastream
What's more, the longer-term performance of the screen looks decent. Since I started running it at the start of 2012, the screen has delivered a cumulative total return (based from switching between stock picks on the date of publication) of 42.4 per cent compared with 27.5 per cent from the FTSE 350. If a 1 per cent charge is factored in for dealing costs the return drops to 36.8 per cent. If the superior performance of last year's 23-stock screen (not reflected in the graph below) is used in the calculation, the cumulative total return rises to 58.2 per cent or 52.0 per cent including the 1 per cent charge.
The screen itself looks for a modest but useful dividend yield of 2 per cent or more along with a strong and consistent track record of dividend growth and indications that growth can be sustained based on dividend cover, earnings growth expectations and return on equity. The full criteria are:
■ A rising dividend in each of the past 10 years. ■ 10-year and five-year compound average dividend growth of 5 per cent or more and growth in the past year of 5 per cent or more. ■ Dividend cover of two times or more. ■ Net debt of less than 2.5 times cash profits. ■ A return on equity of 15 per cent or more. ■ A dividend yield of 2 per cent or more. ■ Forecast earnings growth both this year and next. |
Once again, the results from the screen have been scant with only three shares meeting all the criteria all of which are currently rated a buy by the Investors Chronicle's companies team. I've provided write ups of these shares below and fundamentals relating to the stocks in the accompanying table along with details of 18 shares that passed all but one of the tests – all had to pass the dividend yield test.
THREE BUYS FOR SUSTAINABLE DIVIDEND GROWTH
