Murray International looking to beat dividend drought via diversity

“Some companies can’t pay [dividends] because of stretched balance sheets and the need to service debt,” says Bruce Stout, manager of Murray International Trust. “Those tend to be low-quality businesses, whereas we look for higher-quality businesses. [There have been] high dividend cuts in Japan, just like in 2008-09, which is disappointing because Japanese companies were meant to be embracing the dividend spirit. However, we’ve only got about 1 per cent of our assets in Japan, so we’ve not really been affected. And elsewhere regulators, politicians and governments are stepping in, particularly in the banking and insurance industries in the UK and Europe” – also areas to which the trust has little exposure.

However, Murray International Trust does hold Grupo Aeroportuario del Sureste, which operates airports in Mexico, and Auckland International Airport (AIA:NZC) in New Zealand, both of which handled a lot of tourism prior to the coronavirus outbreak.

“Both these companies have cut their dividends this year, but their balance sheets are strong, so we haven’t sold them,” says Mr Stout. “We’ll hold onto them because I think that tourism will come back to those airports, and Grupo Aeroportuario del Sureste has dealt with huge interruptions before, such as hurricanes and swine flu.”

The trust also has holdings in oil companies Total (FP:PAR) and Royal Dutch Shell (RDSB). “Total (FR:TOTF) hasn’t cut its dividend yet, but I say ‘yet’ because the outlook is still pretty uncertain,” says Mr Stout. “Royal Dutch Shell, in which we have a position, has cut its dividend, which was disappointing, but really to be expected. Total is in a slightly stronger position than Shell. But I think the key in an environment like this is to have as much diversification as you can.”

Despite these cuts, the trust’s board commented in March that it “intends to maintain its progressive dividend policy given the investment objective”. And Murray International had revenue reserves of £75.7m at the end of its last financial year, enough to cover over a year’s worth of the level of dividends paid in the current financial year. At the end of the trust’s last financial year the income from its investments more than covered its dividend payment of 53.5p a share, and £0.6m was transferred into its revenue reserves. The trust had a yield of5.5 per cent as of 28 July.

However, Murray International has not done so well in terms of total returns recently, having underperformed broad global indices such as its benchmark FTSE World and MSCI World in 2018, 2019 and over the first half of this year. The trust also underperformed in 2013, 2014 and 2015, although has historically typically outperformed these indices.

Mr Stout says that the recent period of underperformance is in part due to lack of exposure to certain tech and growth-focused stocks. “The world index is dominated by tech stocks that have performed well and what we’ve seen, particularly in the past six months, is a huge concentration of performance into tech,” explains Mr Stout. “But we’ve gone in the opposite direction – we’re much more diverse now than the market. We can’t buy these businesses because they don’t have any dividends, whereas we’re delivering income for our shareholders. We have 55 per cent to60 per cent of the portfolio in Asia and emerging markets, and many of these strong companies with good dividend growth and very good balance sheets have been left behind on a relative basis. So if we get some sort of rotation into Asia and emerging markets that would help relative performance.

“There are many good, solid businesses around the world that have been totally left behind in the past six months because they’re deemed to be economically sensitive and/orare not the place to be. But they offer very attractive long-term growth prospects. Even if we just consider what is going on in Asia as a region, it’s moving towards [being] a massive regional economy with trade liberalisation and about two-thirds of the world’s population [live] there. But in the developed world we’re going in the opposite direction. So we’ve got to focus on where we’re going to get a tailwind in the next five to 10 years.”

Mr Stout says that examples of such good businesses include Taiwan Semiconductor Manufacturing (2330:TAI) and Samsung Electronics (SMSD). He also feels that the trust’s China holdings have potential with, for example, China likely to experience some gross domestic product (GDP) growth this year while other parts of the world go through deep recessions. Examples of these include recent additions Ping An Insurance (2318:HKG) and China Resources Land (1109:HKG), which are listed in Hong Kong and Mr Stout says were on “very attractive valuations”.

Other recent additions include US-listed semiconductor company Broadcom (US:AVGO) and pharmaceutical company AbbVie (US:ABBV), which at the time had yields above 6 per cent and have been experiencing double-digit dividend growth.

But Mr Stout is ultimately more focused on total return rather than just yield. “Investment is all about total return,” he says. “The best way to grow income is to buy a company that’s growing, because a company that grows will also grow its dividend if it has a dividend philosophy. We don’t look for stocks with [just] high yields because often they are about to cut their dividends. [Rather] we look for companies with really strong balance sheets that embrace the total return philosophy for shareholders and do not buy back stock at ridiculously high prices, wasting shareholders’ capital.”

He likes companies that, for example, use some free cash flow to invest in the business and some to make payouts to shareholders.