Using the words 'low risk' in association with equities seems like something of an oxymoron at the moment, and even more so when talking about equities that offer 'high yield'.
As a result of the coronavirus outbreak, shares are tanking and dividends are being cut left, right and centre. However, the payouts from some shares should prove more resilient than others during the crisis. Meanwhile, falling share prices means historical dividend yields are rising. The ambition of my high-yield, low-risk screen is to identify some of the more reliable dividend payers.
That said, this screen certainly does not offer a silver bullet for investors wanting secure income. As the performance of last year’s picks illustrates, there will always be duds even if the screen outperforms the market by a decent margin overall.
Last year's performance
|Name||TIDM||Capital return (9 Apr 2019 - 30 Mar 2020)||Div adj return (9 Apr 2019 - 30 Mar 2020)|
|SL Private Equity||LSE:SLPE||-30%||-27%|
|High Yld Low Risk||-||-9.0%||-4.1%|
|FTSE All Share||-||-25%||NA|
Source: S&P CapitalIQ
The screen tries to identify low-risk shares by looking for a low beta. A beta measures how sensitive a share has historically been to wider market movements. 'High yield' is defined as a payout equivalent to 3.5 per cent or more, excluding any special dividend payments. The screen also looks for several other criteria to assess companies’ track records and other signs of dividend security, such as dividend cover. The full criteria are:
■ A dividend yield of 3.5 per cent or more (the 'high yield' test).
■ A one-year beta of 0.75 or less (the 'low risk' test).
■ Ten years of unbroken dividend payments.
■ Ten years of positive underlying earnings.
■ Underlying EPS higher than five years ago.
■ Underlying dividend higher than five years ago.
■ A return on equity of 12.5 per cent or more.
■ A current ratio of one or more.
■ Market capitalisation of more than £100m.
■ Dividend payments covered 1.5 times or more by earnings.
The results of this year’s screen need to be seen in the context of a long-running bull market, which has only recently crumbled, and spectacularly so. The supportive conditions over the past decade have allowed economically-sensitive companies to generate track records that would normally be associated with very reliable and defensive businesses. Indeed, a number of the shares highlighted by this year’s screens are in companies and sectors that look very vulnerable to economic weakness. These include the recruiters in the list – Page (PAGE) and SThree (STEM) – equipment hire business VP (VP.), car dealer Inchcape (INCH) and sub-prime car finance specialist S&U (SUS). It would not be surprising to see dividends cut by several companies on the list and special dividends pulled.
Details of the 11 companies passing all of the screen’s tests are listed in the table below. It is worth bearing in mind that a lot of the information in the tables reflects historical performance and the future could prove very different. Even the forecast information in the table is well detached from recent events with only a minimal level of forecast downgrades currently showing up for most companies. Investors should expect to see substantial forecast downgrades in the months ahead.
I’ve taken a closer look at three of the shares in the table that I think may offer some of the more secure dividend prospects. To my mind, out of the three, Moneysupermarket (MONY) looks the most interesting.
|Name||TIDM||Mkt Cap||P||Fwd NTM PE||DY||DY inc spec divi||Divi Cover||Net Cash/Debt(-)||Net Debt/EBITDA||Interest Cover||5yr DPS CAGR||5yr EPS CAGR||Fwd EPS grth FY+1||Fwd EPS grth FY+2||Fwd EPS 3mth Change||3-mth Momentum||EBIT Margin||RoE|
|Morgan Advanced Materials plc||LSE:MGAM||£0.5bn||188p||8||5.9%||NA||2.3||-£221m||1.3||8.6||0.2%||56.1%||-11.0%||6.4%||-10%||-43.6%||12%||15%|
|Johnson Matthey Plc||LSE:JMAT||£3.4bn||1,759p||8||4.9%||NA||2.3||-£1.5bn||2.1||4.2||5.1%||2.6%||-4.2%||6.2%||-2.8%||-39.9%||4%||51%|
|Admiral Group plc||LSE:ADM||£6.5bn||2,244p||17||4.4%||6.2%||1.7||-£390m||0.7||26||16.3%||7.6%||-8.7%||-4.4%||5.6%||-5.1%||40%||15%|
|Moneysupermarket.com Group PLC||LSE:MONY||£1.4bn||268p||14||4.4%||7.1%||1.6||-£10m||0.1||57||7.9%||13.0%||5.1%||7.9%||-1.9%||-16.7%||31%||27%|
|A.G. BARR p.l.c.||LSE:BAG||£502m||452p||17||3.7%||NA||1.7||-£4m||0.1||138||8.2%||1.2%||-17.4%||-1.3%||-2.8%||-25.2%||16%||38%|
Source: S&P CapitalIQ
Lockdown is likely to leave lots of people with more time to devote to easy-to-put-off personal finance admin: finding cheaper insurance; switching to a better value utility provider; hunting out a superior credit card deal. Helping with such tasks is the mainstay for price comparison site Moneysupermarket (MONY). What’s more, with a lockdown-induced recession on the cards, encouragement can be taken from the fact that the price-comparison sub sector is generally considered to have counter-cyclical characteristics – when times are tough, people are more likely to try to save money on bills.
True, some aspects of Moneysupermarket’s business may feel chill winds from lockdown. For example, travel insurance is unlikely to be high on many people’s agenda. However, such revenue streams are relatively small for the company. Broker Liberum puts the company’s Travelsupermarket business at about 5 per cent of sales.
There are good reasons therefore to think demand will hold up relatively well. The company’s technology and the automated nature of the fees it receives means the disruption caused by home-working for its own staff should also prove relatively minimal.
The balance sheet looks encouraging, too. Excluding lease liabilities, Moneysupermarket had net cash of £24m at the end of last year and access to up to £100m of borrowing. Meanwhile, even before Covid-19 became the central issue for business, management was pointing to falling capital spending. And the company has historically paid frequent special dividends, which provides a buffer for the basic payout on which it has qualified as one of this screen’s picks. There is also some flexibility in the company’s cost base, given £152m of its £266m operating costs represent marketing, although effective marketing is key in this competitive sector.
All in all, while the online price comparison sub-sector is not home to the highest quality companies, it is cash-generative and could well prove resilient during the current crisis. As such, recent price weakness makes Moneysupermarket, and the yield offered by its shares, enticing.
Bunzl (BNZL) boasts a track record of having grown its dividend for 27 years. That’s a record that no management team would want to give up lightly. However, these are exceptional times.
The company provides day-to-day essentials – such as toilet roll, rubber gloves and floor cleaner – to private and public sector customers around the world. Many of Bunzl’s customers will have been forced to down tools as a result of the coronavirus. This includes many of the caterers that are key clients to its largest division, food services (29 per cent of sales). Other end markets should still be busy, though. This includes Bunzl’s second-largest division, grocery (26 per cent of sales), and healthcare (7 per cent).
Broker Berenberg has amended its forecast to take account of these strengths and vulnerabilities and cut sales expectations by 18 per cent for the current year and 10 per cent next year. After-tax profit forecasts, meanwhile, have been cut by 28 per cent and 27 per cent.
The balance sheet was in relatively sturdy shape at the end of 2019. Having paid out £167 in dividends and spent £124m on acquisitions, the group finished the year with net debt £140m lower (including a £40m benefit from currency movements) at £1.25bn. The financial position has been helped by a slowdown in acquisition activity over the past two years. Acquisitions have historically been a key driver of growth and deal-making picked up in early 2020.
Comfort can be taken from Bunzl’s banking facilities and debt maturity dates, as well as the fact it has about £600m cash on hand. At its year-end, Bunzl had £999m available to draw on from its £1.06bn of banking facilities, with facilities due to mature between 2021 and 2024. Meanwhile, repayment of a £300m senior bond is not due until 2025.
Rising stock levels, slower payment by customers and rising bad debts could be an issue as the recession hits. Given Bunzl is a high turnover and relatively low-margin business, working capital strain could prove a real pinch on cash flow, although, this should be temporary.
The company does not manufacture products, which means it does not have big factory overheads that would otherwise make it more vulnerable to reduced demand. The flipside of this is that it has less direct control over supply.
It seems possible things could get bad enough to force Bunzl to break its enviable dividend record, but the payout looks safer than that of many other business services companies, especially given the cash in the bank. And demand should kick back in fast as lockdowns are lifted, given the products Bunzl distributes are required for the basic functioning of its customers' operations. So, while Bunzl’s is not the safest of dividends, it is safer than many.
In normal times, fast-moving consumer goods with strong brands are considered relatively resilient to economic vicissitudes. AG Barr (BAG), owner of soft drink brands including Irn Bru and Rubicon, is a company that would fall into this camp. However, these are not normal times. The 10 per cent of the Barr’s sales that are made to the hospitality industry have effectively stopped. Meanwhile, impulse purchases, which account for about 45 per cent of sales, are being hit badly by social distancing; behaviour that in many ways is the antithesis to acts of impulse.
However, it’s not all bad news. The company’s two factories remain operational and its popular brands offer some protection. Broker Numis has cut its earnings per share (EPS) forecast for the financial year to the end of January 2021 by 23 per cent to 21.4p. This is based on three months of expected disruption. Once lockdown restrictions are lifted, there are grounds to think sales could spring back, but it is impossible to forecast exactly how long current restrictions will need to last.
Numis has hacked back its dividend forecast in line with earnings to 12.4p, which is equivalent to a 2.7 per cent forecast yield. The final dividend for the company’s last financial year is yet to be announced due to reporting delays imposed on all companies by the Financial Conduct Authority (FCA).
Encouragingly, at the end of January Barr had £10.4m net cash. It has also decided to draw down its full £60m loan facility to be ready for what Covid-19 may throw at it.
In all, while the dividend could suffer, the longer-term prospects for income remain relatively good. That said, the shares do not look all that cheap considering the uncertain outlook. Based on Numis’s downgraded 2021 numbers, the forward price/earnings (PE) ratio is 21 times. The forward PE in the accompanying table does not reflect significant downgrades yet, but will in time.