The last month saw a number of companies start to make dividend decisions on a more ‘informed’ basis with respect to their business prospects. Since the start of the crisis, many Boards have understandably assumed the worst and, at the time of most uncertainty, made decisions based on extremely bearish ‘what if’ scenarios. The old stock market adage of ‘under promise and over deliver’ was never more prevalent, as economically sensitive ‘value’ stocks removed earnings guidance ‘en masse’ and analysts ‘low-balled’ estimates. As economies have opened up and trading has resumed, a number of management teams have had the confidence to reinstate profit guidance. We believe that the gradual reintroduction of guidance will highlight a wide range of attractive valuations in our investible universe and will play a key part in addressing the recent performance imbalance between ‘value’ and ‘growth’ stocks. We recognise however that it will still be some time before a lot of domestic cyclicals can do this. Whilst interim dividends for December year end companies are still thin on the ground, an increasing number of stocks have indicated that they will look to pay a final next year if there is no further deterioration in outlook. The question then is at what level dividends will resume and this is something that we are currently focussed upon.
Pleasingly, a number of stocks have just announced ‘catch up’ dividends that were not generally expected. Severfield had deferred their final dividend in mid-June but reinstated it at the end of July as confidence in their outlook had improved sufficiently to do so. IMI also paid a deferred final dividend alongside their interim dividend at the same time as reinstating earnings guidance and was amongst our best performers in the month. Other strong performers were Ultra Electronics, that did the same, XP Power, who also returned to the dividend list, and Strix. Bloomsbury announced a good set of results and a scrip rather than cash dividend. There was no discernible trend amongst our poorer performers which included Go Ahead, Senior and Morgan Advanced Materials. We sold our holding in Weir into share price strength and started a holding in another industrial, Bodycote, that had announced a ‘catch up’ dividend. Another new addition to the portfolio was Paypoint and we continue to look for new investments that can immediately add to our income account, whilst having attractive capital upside.