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The great dividend build-back

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The great dividend build-back

Clearly, 2021 is marked down as the year of the great revival; the year of the start of ‘build back better’, or whatever vacuous slogan is pinned to it. Whether or not it will be – and to what extent – remains unclear. No matter. Revival is the aim of the game and we can already see that reflected in the dividends companies are declaring.

Recall that through British eyes the pandemic only got going as the first quarter of 2020 drew to a close. The UK’s lockdown began on 23 March, 10 days or more after most of the rest of Europe. So UK company dividends for that quarter were not pulverised. The total pay-out from London’s quoted companies was £17.4bn, just 13 per cent less than 2019’s first quarter and exactly the same as 2018’s, according to data from investors’ services provider Link Group. Yet pay-outs in 2021’s first quarter – helped by some specials, particularly from Tesco (TSCO) – have beaten 2020’s figure by 8 per cent at £18.8bn.

True, the second and third quarters are a bigger test because they are always the six months of peak distribution. However, Link’s estimates are comparatively optimistic. Last year’s second quarter was when company bosses took a slash-and-burn approach to dividends. As a result, pay-outs for that quarter were 55 per cent lower than 2019’s. Yet that means this year’s second quarter has undemanding comparatives to beat and Link expects aggregate dividends to be 16 per cent higher than Q2 2020 at £19.8bn. The third quarter should see a similar pattern, with pay-outs 13 per cent higher at almost £21bn.

Bring that together and Link reckons 2021’s dividends could stretch to £75bn, which would be 17 per cent higher than 2020’s, though 33 per cent lower than 2019’s £112bn. That – in nominal terms, anyway – is London’s peak distribution year and Link’s analysis indicates it will be 2025 before pay-outs match that amount.

Meanwhile, on a best-case scenario, distributions will generate a 3.1 per cent yield for 2021. That is some way short of the yield being produced by excessive distributions before the pandemic struck, yet it still looks good in relation to government bonds and – so far anyway – inflation.

Related to this, for income investors the important question is, how does their own portfolio compare with these figures? The Bearbull fund’s distribution in 2020 looked okay. Year on year, the fund distributed 34 per cent less in the first half while the market’s pay-outs dropped 40 per cent. In the second half, Bearbull dropped 39 per cent, while the market dropped 46 per cent. However, the market’s dividends are recovering quicker and – including special dividends – are likely to be 16 per cent higher this first half. With all dividends either received or declared, Bearbull’s first-half distribution will be just 2 per cent higher than 2020’s first half.

Granted, timing is a factor; in particular, specialist travel agent Air Partner (AIR), which passed its dividend in the first half of 2020, has declared a full payment this time around, but it won’t be paid until July. Add that back into the first-half mix, however, and the fund’s pay-out would have been 12 per cent higher than a year earlier.

Besides, the fund’s overall yield is just fine. Annualise the first-half pay-out and the yield is running at virtually 4 per cent with weighted average dividend cover of 2.1 times. That compares with the market’s likely 3.1 per cent and cover still well below two times. Arguably, that provides scope for some of the portfolio’s weaker links to be removed without threatening its high-yield status; one such might be insurance specialist Randall & Quilter (RQIH), which announced results for 2020 this week.

“We are a unique speciality insurance company,” boast the bosses of R&Q in their results presentation. Well, yes, in the sense that every insurance company is unique because it is uniquely difficult to say how profitable each one is, given current accounting standards for insurance operations. However, R&Q does have the advantage of nice niches. It runs legacy insurance operations for insurers who no longer want the regulatory bother or the capital intensity of underwriting risks. Simultaneously, it generates fee income from its ‘programme management’ operations, which are those of a sophisticated insurance broker.

These two operations should be neatly complimentary, yet Bearbull has been here before with a holding in Charles Taylor, whose business mix was similar to R&Q’s, whose appetite for new capital was similarly gargantuan and which consistently failed to deliver. I am not saying R&Q will do the same, and it is true that, where high returns on investment are available, then there should be both an appetite for capital and deferred cash returns to shareholders. But instinct says R&Q’s story will be better than the reality and a shareholding that has done very little since it was acquired three years ago should be dumped. More on that soon.

 

●  Meanwhile, rich Americans are just addicted to their private jets. They love them more than they love virtue signalling and now more than ever, what with the health risks – not to mention the inconvenience – of travel on regular commercial flights. Which is one reason why Air Partner had such a good pandemic and looks set to enjoy the bounce-back, too.

Americans did their damnest to sustain profit in the group’s private jets division. There was a “surge” of new US customers in the first half of 2020, says chief executive Mark Briffa. Their numbers rose 23 per cent on the year. But even they could not prevent the division’s gross profit dropping 20 per cent to £9.3m as locked-up and not-so-rich Europeans stayed put. Elsewhere, the Gatwick-based aircraft broker’s freight division was busy evacuating people and ferrying safety equipment; so much so that its profits almost quadrupled from £3.2m to £11.9m. Overall, group operating profit more than doubled from £4.8m to £12.0m. The outlook for 2021 is good too, says the boss. Demand for private jets and freight carriers remains strong, while a return to something like normality should help the conventional aircraft charter arm, usually the main breadwinner.

All of which prompts the question: why is the share price, at 82p, still little more than half its five-year high and the earnings multiple for 2020-21’s likely outcome firmly in single figures even before deducting the group’s £10m of net cash from its £52m market capitalisation?

Easier to ask than to answer; perhaps that’s not even necessary since capitalising weighted average operating profits for the past five years and doing something similar for free cash flow generates rough-and-ready per-share values of 134p and 167p respectively. Add to that the likelihood of a well-covered dividend for 2020-21, which could generate a 4.0 per cent yield, and it’s plain to see why this is a holding with which I am happy.

 

●  And in east Europe they remain keen on their booze, especially vodka, which partly explains why drinks distributor Stock Spirits (STCK) – also in the Bearbull fund – produced resilient figures in the first half of 2020-21. Stock Spirits is heavily focused on Poland (57 per cent of revenue) and the Czech Republic (25 per cent) and on ‘on-trade’ channels (ie, bars and restaurants) so, naturally, has been hit by Covid-19’s effects. Despite that, operating profits were barely changed at €37.9m (£32.7m) and underlying earnings remained similarly steady at 14.1ȼ. Poland was the better performer of the two countries, where Stock Spirits added to its already-dominant market share and edged forward its underlying cash operating profits to €29.1m (€28.5m) despite the impact of a new tax on smaller bottles of spirits. In the Czech Republic, however, equivalent profits dropped 24 per cent to €15.0m. Naturally, much depends on the pace at which lockdowns are eased, but the group’s bosses are confident enough to nudge up the interim dividend. True, at 278p, the share price looks up with events – capitalising both weighted-average operating profits and free cash flow produces indicative per-share value of somewhere between 240p and 290, but that’s sufficient to stick with the stock.

bearbull@ft.com