Safe yields seem an increasingly elusive quarry for equity investors. According to recent research by Share Centre and Capita, FTSE 350 dividend payments in 2015 were collectively not fully covered by profits, and for many income stocks the earnings outlook is not encouraging, especially in the wake of the uncertainty caused by Brexit. What's more, income hunters have experienced a number of big dividend disappointments over the past 12 months. This is partly reflected in the 10.5 per cent negative total return from the Safe Yields screen over the last year compared with a negative 2.5 per cent from the FTSE All-Share, which is the first time in the five years I've run the screen that it has underperformed the market.
There is arguably another factor at work in the disappointing 12 months experienced by the screen. Last year I speculated that some of the screen's very strong outperformance in the year to July 2015 may have come down to the fact that reliable dividend-paying equities had become very popular given the fall in bond yields, which had pushed up share prices and valuations. As some perceived safe income stocks have disappointed, a reassessment of such inflated valuations has added to the pain.
That said, while last year's selection of Safe Yield shares has not looked all that impressive during most of the last 12 months, the portfolio was a decent way ahead of the index before the Brexit vote, showing a positive 2.1 per cent total return compared with a negative 2.3 per cent from the All-Share (see table). So, all of the considerable underperformance and then some, has occurred since the referendum result. In fact, the portfolio can be viewed as being somewhat unlucky in having selected a number of stocks particularly exposed to the domestic economy.
BREXIT WRECKS IT: 2015 PERFORMANCE
Name | TIDM | Pre-Brexit total return (20 Jul 2015 - 23 Jun 2016) | Total return (20 Jul 2015 - 6 Jul 2016) |
---|---|---|---|
Bank of Georgia | BGEO | 32% | 24% |
Novae | NVA | 24% | 10% |
BBA Aviation | BBA | 4.5% | 0.1% |
Telecom Plus | TEP | 1.0% | -5.0% |
Fidessa | FDSA | -2.1% | -8.5% |
Close Brothers | CBG | -8.3% | -33% |
Legal & General | LGEN | -8.3% | -35% |
Next | NXT | -26% | -36% |
Safe Yields | - | 2.1% | -10.5% |
FTSE All-Share | - | -2.3% | -2.5% |
Source: Thomson Datastream
Last year's underperformance needs to be seen in the round, not least because this screen now has a five-year record. Screens should not be expected to deliver unwavering outperformance, and on a cumulative basis the numbers racked up by the Safe Yield screen continue to look extremely impressive. Based on switching from one portfolio to another each year at the time of publication, the total return stands at 95.2 per cent compared with 35.7 per cent from the FTSE All-Share. Adding in a 1.5 per cent annual charge to account for dealing costs, the total return drops to 81.0 per cent. To put that in perspective, that compares with a total return from the top-performing UK equity income fund out of the 65 monitored by Morningstar over the same period of 71.2 per cent, and a 39.9 per cent median total return (see buy-and-hold performance table).
Safe Yield versus FTSE All-Share index
I regard the Safe Yield screen as more of a buy-and-hold strategy than some of the other flightier screens I monitor. It is therefore encouraging that on a longer-term view each of the portfolios selected by this screen look good, too, and the original 2011 portfolio is a real belter.
BUY-AND-HOLD PERFORMANCE
From Jul | FTSE All-Share | Total return |
---|---|---|
Safe Yields 2011* | 35.7% | 149.5% |
Safe Yields 2012 | 36.1% | 61.2% |
Safe Yields 2013 | 10.5% | 82.8% |
Safe Yields 2014 | 3.1% | 24.1% |
Safe Yields 2015 | -2.5% | -10.5% |
Safe Yields 5-yr cumulative* | 35.7% | 95.2% |
Safe Yields 5-yr cumulative with 1.5% pa charge* | 35.7% | 81.0% |
Top 3 IA UK Equity Income Funds | ||
Ardevora UK Income A* | 35.7% | 71.2% |
Troy Trojan Income O Acc* | 35.7% | 69.9% |
Royal London UK Equity Income A* | 35.7% | 65.1% |
Median IA Equity Income Fund* | 35.7% | 39.9% |
*5-yr total return 20 Jul 2011 - 6 Jul 2016
Source: Thomson Datastream & Morningstar
The screen itself looks for FTSE All-Share stocks promising a decent yield of 3 per cent or more and also showing a number of other characteristics that suggest the yield may prove sustainable and could grow. The screen also looks for low-beta stocks, which is a measure of how sensitive shares are to wider market movements. While a low beta is often regarded as a rough-and-ready measure of how defensive a company is, as is evident from this year's screen results, highly volatile shares can still have low betas. The full screening criteria are:
■ Dividend yield of at least 3 per cent. ■ Dividend cover of at least two times. ■ Interest cover of at least five times. ■ Dividend growth in each of the past three years. ■ Forecast earnings growth in each of the next two financial years. ■ An average return on equity over the past three years of at least 12.5 per cent. ■ Cash conversion (measured as cash from operations as a percentage of operating profit) of over 100 per cent. ■ A market capitalisation of at least £250m. ■ Beta of 0.75 or less. |
For a third year, the screen has struggled to find stocks that pass all of its tests. I've therefore once again had to resort to allowing stocks to fail one of the tests - any except the dividend yield test - to generate an acceptable number of results. In fact, the number of results is quite impressive, which can perhaps be seen as a reflection of a general retreat in valuations, especially in Brexit-sensitive sectors.
The one stock that does pass all the screen tests actually only qualifies on the key dividend-yield test thanks to its regular special dividend payments. Given the current economic uncertainty, there is particular reason to feel cautious about the outlook for special dividends even when they have been regular features for several years or represent part of a long-term commitment to return capital. I've therefore included two separate tables of Safe Yield stocks (below) based on those shares that pay special dividends and those passing the tests based only on regular dividend payout. I've also taken a closer look at three of the stocks, all of which currently boast IC buy recommendations.
SAFE YIELDS
Special cases
Name | TIDM | Mkt cap | Price | Fwd NTM PE | DY | DY inc. spec. div | PEG | 3-yr DPS CAGR | EPS grth FY+1 | EPS grth FY+2 | 3-mth mom | Net cash/ debt (-) |
---|---|---|---|---|---|---|---|---|---|---|---|---|
ITV | ITV | £6,822m | 170p | 10 | 3.5% | 9.4% | 3.4 | 32% | 3.8% | 4.2% | -27% | -£325m |
Taylor Wimpey | TW. | £3,779m | 116p | 7 | 1.4% | 9.4% | 0.9 | 39% | 16% | 2.0% | -33% | £223m |
Dunelm | DNLM | £1,526m | 756p | 15 | 2.9% | 7.1% | - | 15% | - | - | -20% | -£29m |
Novae | NVA | £466m | 749p | 9 | 3.6% | 6.6% | 2.9 | 11% | 8.2% | -1.6% | -14% | £24m |
Photo-Me Int'l | PHTM | £497m | 132p | 17 | 4.4% | 5.0% | 3.5 | 25% | 2.6% | 7.1% | -21% | £60m |
Savills | SVS | £743m | 549p | 9 | 2.2% | 4.7% | 3.0 | 6.3% | 1.1% | 6.8% | -27% | £151m |
Regular Joes
Name | TIDM | Mkt cap | Price | Fwd NTM PE | DY | PEG | 3-yr DPS CAGR | EPS grth FY+1 | EPS grth FY+2 | 3-mth mom | Net cash/ debt (-) |
---|---|---|---|---|---|---|---|---|---|---|---|
Restaurant Group | RTN | £514m | 257p | 9 | 6.8% | - | 14% | -13% | 1.7% | -28% | -£32m |
Bovis Homes | BVS | £843m | 627p | 6 | 6.4% | 0.7 | 64% | 13% | 6.7% | -27% | £30m |
easyJet | EZJ | £4,028m | 1,018p | 7 | 5.4% | - | 37% | - | - | -29% | £296m |
Kcom | KCOM | £562m | 109p | 17 | 5.4% | - | 10% | -15% | -10% | 1.4% | £6m |
Headlam | HEAD | £357m | 423p | 12 | 4.9% | 4.6 | 12% | 0.5% | 4.9% | -16% | £44m |
PayPoint | PAY | £591m | 868p | 14 | 4.9% | - | 12% | 7.2% | 6.1% | 14% | £81m |
Dairy Crest | DCG | £779m | 554p | 14 | 4.0% | 2.3 | 2% | 12% | 4.5% | -7.8% | -£247m |
Moneysupermarket.com | MONY | £1,280m | 234p | 15 | 3.9% | 2.9 | 17% | 5.0% | 8.4% | -27% | £17m |
Big Yellow | BYG | £1,033m | 663p | 19 | 3.8% | 0.8 | 31% | 10% | 12% | -12% | -£315m |
BT | BT.A | £38,202m | 388p | 13 | 3.6% | - | 14% | -7.8% | 8.4% | -10% | -£10.9bn |
Polypipe | PLP | £441m | 222p | 9 | 3.5% | 0.8 | - | 22% | 9.4% | -29% | -£196m |
Marshalls | MSLH | £408m | 207p | 12 | 3.4% | 0.7 | 10% | 24% | 13% | -38% | -£14m |
Cineworld | CINE | £1,376m | 518p | 16 | 3.4% | 2.9 | 18% | 2.4% | 9.3% | 0.1% | -£245m |
Smurfit Kappa | SKG | £4,513m | 1,662p | - | 3.2% | - | 34% | 4.8% | 3.2% | -7.7% | -€3.0bn |
Lookers | LOOK | £385m | 97p | 6 | 3.2% | 1.3 | 9.9% | 6.9% | 4.5% | -36% | -£451m |
Computacenter | CCC | £855m | 708p | 13 | 3.0% | 3.0 | 3.1% | 0.1% | 5.7% | -14% | £121m |
Source: S&P Capital IQ