The trouble is, that’s where the good news ends. Indeed, for the first half of the year, that’s where the dividend income ends. In 2020’s first half, I would have expected the portfolio to receive (and distribute) about £8,000, but just shy of £5,000 is almost certainly all it will get, a drop of 37 per cent on 2019’s first half.
Granted, timing is an issue. The regulator-sanctioned delay in announcing full-year results means a £700 payout from insurance services provider Randall & Quilter (RQIH) will be pushed into the second half. But, obviously, the chief factor is that dividends have been canned. Speciality chemicals supplier Elementis (ELM) and foundry consumables supplier Vesuvius (VSVS) both cancelled payouts that had been declared. Meanwhile, other companies in the portfolio have turned off dividends until further notice.
So the second half is likely to be worse. At its most miserable, dividends received will scrape to £3,200, compared with £8,700 in last year’s second half; even a sensible mid-range figure will only be around £4,000. That means for all of 2020, the Bearbull portfolio is likely to suffer an income drop approaching 50 per cent and any dividend income for the year of over £8,750 – compared with 2019’s £16,600 – would be a bonus.
Most equity income investors are in the same boat. So what’s to be done? The first thing is to grasp that the uncertainties facing investors today are no more than is always the case; they just seem greater because they come with such drama. But coping with uncertainty is a way of life in financial markets; it’s always there and it has to be dealt with in the same steady manner.
Another background factor is that – rightly or wrongly – equity investors are likely to be helped by central banks’ ultra-easy monetary policies. Schemes to add liquidity and credit, mostly through buying government debt, spill over into other financial assets. That can hardly harm equities and, I would guess, is a major reason why equity markets seem so relaxed in the face of crumpling economic output and the mainstream media’s staple menu of fear and sentimentality.
Linked to that, the chief threat to economic recovery is not the path of the pandemic, which – hindsight increasingly tells us – has been fairly consistent wherever it has gone and however it has been tackled, but the response of governments. By and large, those developed world governments judged to have had a good pandemic are likely to push ahead with easing lockdown, thus helping share prices. Those judged to have messed up will be unnecessarily cautious, if only to feed the illusion that, really, they are responsible and in control.
That may not augur well for UK-orientated companies tapping consumers’ discretionary spending, such as Topps Tiles (TPT) or Hollywood Bowl (BOWL) in the Bearbull portfolio. However, for a broad-brush assessment of any income portfolio’s holdings, how about grading them ‘good’ or ‘bad’ under each of three topical headings:
● Quality of the business – what a company does and how well it does it (ie, does it offer goods and services that are likely to stay in demand and do that via an effective operating model?); in addition, for some companies, the pandemic may bring life-changing effects, good or bad.
● Quality of the financial wrapper – this is not a time to carry a heavy burden of debt; what was once efficient for balance sheets, is – in more ways than one – a liability.
● Short-term trading prospects – companies orientated towards must-have consumer goods and services, ‘good’; those tilted to discretionary spending and the capital-goods cycle, ‘bad’.
Obviously, this is a simple, almost intuitive, approach, but that’s the point – start simple, categorise holdings, then investigate those that look weak. Thus holdings getting two ‘good’ ratings should be worth perseverance. So, within my income portfolio, the operational and financial merits of Topps Tiles and Hollywood Bowl overcome immediate trading problems. Ditto GlaxoSmithKline (GSK), suddenly a star, even though its finances remain less than ideal. However, two ‘good’ ratings might not be enough to spare Elementis. Its finances are out of tune with the times and its bosses’ track record is patchy enough to raise questions about operational effectiveness.
But those lumbered with three ‘bad’ ratings are most in need of attention. One such in the Bearbull portfolio is student accommodation provider Empiric Student Property (ESP). This is not a time for a fixed-cost provider to be dependent on overseas students. That both undermines its short-term trading prospects and – perhaps – its business model. Meanwhile, debt coming in at about half the value of its equity requires further investigation. Another is long-time Bearbull favourite Air Partner (AIR). This week's trading update was encouraging, but will Air Partner’s specialised travel services – it charters aircraft, mostly on short-term deals – be a strength when approximate normality gathers momentum, or will the group suffer in line with conventional airline operators?
Work through each holding on this short-hand basis. Then crunch the detailed numbers and finish by tackling as many questions as possible about each company’s merits. Sure, there will be more questions than answers. That’s always how it is. But better to ask them than not.
