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War, dogs and dividends

Do these three stocks offer dividend security and scope for income growth?
March 10, 2022

 

  • The total returns investment case is crucial
  • Inflation means  a need to assess the ability to grow, not just sustain, pay-outs

In turbulent times many investors will look more closely at the dividend, seeking security, scope for steady growth and as close to a real return as possible as inflation climbs. None of the companies analysed this week has a serious threat to paying a dividend, but yields are not high, may not rise and poor total returns often counteract income.

BAE Systems (BA)  – there are few real winners in war, but defence contractor BAE System has seen its share price rise more than a quarter since Ukraine was invaded. The gains are not likely due to increased spending (it will happen away from BAE’s core markets), but rather a revision of whether defence stocks are still pariah through the lens of ESG. However, not all investors agree and the extent of a fair re-rating is contentious. If trading is less affected, pressure on BAE’s resources to fund interest, capital spending, expansion and dividends may only marginally improve. The dividend may become more affordable, but the yield has dropped from c. 5 per cent  to nearer 3 per cent, losing a key reason for considering this stock.

Pets at Home (PETS) – some businesses have performed really well in the pandemic and PETS has benefited from a large increase in pet ownership as large numbers continue to work from home. The risk the business faces is from the squeeze on household incomes with no useful precedent on how close pet spending sits to the tip of discretionary spending. While few are expected to abandon their pets outright, premium products and treats are at risk of being side-lined, potentially denting retail profits and dividends. Earnings from vet services feels more secure and of higher quality than the retail arm, but PETS does not fully own or control this side of the business. 

Hargreaves Lansdown (HL) – HL sits as market leader in the large and growing UK wealth management market, but its shares have returned a negative total return over three years of 36 per cent. A series of shocks have beaten the shares down, most recently a ‘redefining’ strategy that seeks to accelerate growth, add material advice fees to revenue, materially upgrade the online/mobile/technology backbone, push harder on own-label funds and contain costs. Investors appear unconvinced that all the objectives will be achieved in only four years and deliver the promised uplifts. Although lower rated than its smaller, more nimble peers there are a lot of question marks and a chequered history. A modest yield and sub-inflationary dividend growth offer little comfort. 

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