Having mentioned the dividend flows in the market and for the Compound Income Scores Portfolio in the September / Q3 update, I thought I'd provide an update having read the latest Link Asset Service Dividend monitor recently.
For the portfolio it looks like things are looking up on the dividend front this month with 9 holdings having gone or are due to go Ex Dividend, which is two times more than last year and the totals received are also over double. So as I said in the last update the large fall in year to date income, whilst no doubt reflecting the trends in the market, also reflects some stock and timing differences this year too.
As for the Link Asset Services I'll not try and regurgitate too much of the detail here but offer a few key takeaways and observations plus a link to the full document if you missed it and should wish to download a copy and read it for yourself. Below is their Executive summary with my thoughts thereafter.
Thoughts and Observations
Personally I find it somewhat surprising that Mid and Small Caps have cut more both in number and in quantum as these indices have gone onto outperform the FTSE. Then again perhaps I shouldn't be as Mid and Smaller Companies may be more vulnerable to effects of the virus / shut downs etc. and dividends are not really driving returns this year or any other year for that matter.
In terms of the outlook they seem to think we are through the worst of the battle on the dividend front as we have seen some Companies starting to reinstate or make up for missed dividends in some cases. As a result they see the underlying dividends falling by around 39% for the year and by about 45% if one includes specials. So this is not far off the 30 to 50% falls that were talked about earlier in the year.
While for next year they are expecting some modest bounce back in dividends and tentatively suggest growth of 6% to 15% on a worst case to best case scenario. On this basis they see the current prospective yield being between 3.3% and 3.6% which they suggest leaves UK Equities looking fair value.
Thinking about that and the Ready Reckoner I presented back in the Spring that would be at the bottom end of the yield range of roughly 3.5% to 4.5% that we have seen for FTSE in recent years. With dividend having been cut back to more sustainable(?) levels then may be it makes sense for the market to trade towards the bottom of the range on a yield basis, perhaps. This is especially so given the fall in interest rates, bond yields, property rents and talk of negative rates by the Bank of England.
For what it is worth I present an updated version of the FTSE Ready Reckoner with two new rows reflecting Links latest thinking versus my original 33% to 50% cuts estimates and the original 3.5% to 4.5% range. Thus far the market seems to have operated on the basis of a 30 to 40% cut priced off of 3.5% or 5800 - 6400 roughly speaking.
Summary & Conclusion
So hopefully the worst is over on the dividend front for the UK market with a fall of 40 to 45% or thereabouts in dividends still foreseen, although this may have been discounted if investors are prepared to price those dividends off of a 3.5% yield. If not or if dividends were to fall a bit more then a re-test of the March 5200-5,000 lows on FTSE still can't be ruled out.
Indeed that leaves it looking pretty bedraggled and war torn with the chart trending down below its moving averages. Not great, as we head towards BREXIT but hopefully some resolution or last minute deal there and better news on the Virus front if a Vaccine should become available in the not too distant future might help sentiment. Failing that it seems we are in for a long hard winter as greater lock downs seem to be creeping around the Country and spreading South and Eastwards from the North and Wales!
Having said that it is a market of Stocks and there are always opportunities out there for individual stock pickers as demonstrated by some who have still managed to show decent positive returns despite all the problems. in addition UK Equities look pretty unloved and a bit cheap in a global context. So I wouldn't get too bearish and in the long run quality dividend paying equities still seem like a decent way to find a growing yield with potential for capital gains in a low yield environment. If you need help finding these don't forget that's exactly the type of stocks the Compound Income Scores try to identify.
Failing that if you would rather go down the pooled fund route & go active then I'd still recommend Investment Trusts which benefit from their closed end structure, independent boards and the ability to gear which can help to enhance or detract from returns depending on market conditions. They also tend to have revenue reserves and the ability to pay dividends from Capital which can make their dividends more reliable.
Given the bombed out nature of UK Equities it might be worth investigating a few UK Funds like Law Debenture (LWDB) which has solid reserves and benefits from an operating subsidiary which helps fund a fair chunk of its dividend and trades at a 4 to 5% discount with an experienced management team from Janus Henderson and offers a 5% yield.
Or there are a couple on wider discounts of around 10% which are either under new management in the case of Edinburgh Investment Trust (EDIN) or about to be in the case of Temple Bar (TMPL). Of these Edinburgh has increased it dividend and has decent reserves while Temple Bar has had to cut and will use reserves to pay its suggested dividend. But both might be interesting as a source of decent income from diversified portfolios, although you'd have to satisfy yourself that you are happy with the portfolio strategy of their new mangers.
Any way I'll leave it there as this note has already taken me longer than I thought and ended up longer too. So I'll leave you with a picture of the dividend history and outlook to sum up as I continue play some of my old favourites in the Stock market and on Spotify too.
So we are three quarters of the way through what is turning out to be a terrible year all round, as it has been about six months since the dreaded Covid-19 struck and interrupted and end some lives. We still seem to be living with the consequences and struggling to make sense of it in our every day lives.
Monthly Timing Indicators.
Meanwhile in the investment world, after the initial shock, there has been generally an ongoing recovery fuelled by Central Bank & Government support operations. This paused in September as the UK market fell back with the FTSE All Share delivering -1.7% total return.
This leaves it and the other main indices like the FTSE 100 & FTSE 350 around 5% below their trends. While the Mid 250 and Small Cap indices have, somewhat surprisingly, held up slightly better and are as a result only 3% and 0.5% below their moving average trends as a result. This suggests that based on this and the other economic indicators that I use in conjunction with these, that one should still be cautious / hedged or even out of the market if you want to attempt market timing.
This has been the case since the start of the pandemic back in March, although as observed above this has been offset by the authorities efforts and thus far we have not seen the usual second down leg of the bear market. Indeed having said that the US has recovered so far and so rapidly that their sell of could be classified as a correction rather than a bear market. In the UK though, given the make up of our indices and a lack of Technology giants which have led the US rally has meant that our indices have lagged the recovery in the US headline indices badly, although US stocks ex the tech giants are still down a bit.
Compound Income Portfolio
Longer term readers will know that despite the above suggestion from the timing indicators, this has remained fully invested to see how it fares through this more difficult period for markets and economies and also to see how effective the market timing turns out to be.
So six months on since then the CI Portfolio is up 22.5% and the market has recovered by 6.95% helped by the exceptional support measures mentioned in the introduction. So, thanks to the timely support operations, market timing has not been that helpful so far in this GVC crisis, unlike the GFC in 2008 when the support measures were slower in coming to the rescue.
In September the CIP did actually mange a positive total return of 0.5% versus the -1.7% from the FTSE All Share which I use as a benchmark. So with the recovery in the last six months this leaves the portfolio still down by a disappointing 10.4% year to date, although this is still a lot less than the -19.9% for the FTSE All Share. The full history and total returns over the last 5 and a half years are available in a table here if that's of any interest to you and these and comparisons with various UK indices are summarised in the graph at the end of this piece.
This months screening brought up two obvious sale candidates where their Scores had fallen so far that I really had no excuse not to sell them. The first of these was a long term winner for the portfolio, Avon Rubber (AVON) which was first purchased in 2017 at under £10 per share. Thus although I'd given it the benefit of the doubt in recent months, I felt the rating had got too rich at around 35x with a sub 1% yield and earnings yield, and with the poor resulting Score of 44 it had to go - so I reluctantly finally sold out. Not that there is anything wrong with them and they should still grow strongly and their recent deals may improve the picture so I wouldn't put you off holding them if you do, but that's the process for this portfolio.
The second sale, with an even lower score of 32 was a more recent lower quality value purchase Finsbury Foods (FIF). This had singularly failed to respond to the recent market rally and the shares had generally flat lined since purchase earlier this year. The Score had come down on their recent results which were a bit underwhelming, led to downgrades and failed to include a dividend this year too. So given that, despite the value on offer I let the process ditch them, although again they may be fine in the longer term although with less certainty than Avon perhaps.
To replace these I added a couple of high quality classic compounding shares which are both paying dividends and are both cheaper than Avon but more expensive than Finsbury, you pay your money and take your choice. One is a more cyclical business that seems to have handled the pandemic reasonably well and now seems to be getting back into expansion mode again. While the other one is more of a steady Eddie with lots of recurring revenue but seems to have performed well despite its SME customer base and the pandemic effects as it transitions to more of a Software as a service business. Subscribers will have seen all the details of these in their file at the start of the month.
This does represent something of a relaxation of my historic value tendencies as I'm now trying to focus the portfolio more on quality compounders at a reasonable price with a focus on the earnings yield that they offer rather than getting too hung up on PE' s and yields. I guess it will remain to be seen how this goes as there is an on going debate about whether Value is overdue a comeback. It may not help in the short term as at the moment as we are going though the inflection point & crappy bombed out stocks seem to have been doing better alongside high tech giants but i think quality will out in the long run.
As for dividends these are in much shorter supply this year as has been widely publicised. Talking of which on a quick tot up I see that the dividends in the CI Portfolio are down by around 45% year to date compared to what was received last year in the first three quarters, although this will represent some different holdings as well as fewer specials and dividend cuts this year. This I would think is likely to broadly similar to the 50% or so fall that analysts are now projecting for the FTSE 100 this year.
My own more broadly diversified portfolios are in aggregate also down by about 10% year to date. As for the income side of things, as I'm more diversified and use quite a few investment trusts, which have been able to maintain or increase their pay outs, our income has only taken about a 20% hit year to date, again not great but not too bad in the circumstances and in the context of what we'd achieved in the previous ten years. I can live with that.
Now I know there are plenty of more nimble investors / traders out there who are now up and in some cases substantially - so hats off again to them. In reality it is horses for courses and not worth beating yourself up about how others are doing as long as it works for you and your objectives / temperament etc. Personally I'm in this for the long run and seeking to preserve and grow my Net worth and income in real terms in the long term which is what I continue to focus on. So I'll sign off there wish you all well in these current difficult times for everyone and hope that you have every success in achieving your goals in life and investing - whatever they may be.
As August is traditionally a holiday month I hope you managed to have a Happy holiday & commiserations if you have to quarantine on your return. Personally I couldn't be doing with all the restrictions and uncertainty so we didn't bother to book anything after our Easter trip was cancelled earlier in the year.
As mentioned last month I did treat it as a holiday month, by largely taking a break from looking at markets too much and tweeting on Twitter (apart from replying to a few tweets) and using the Eat Out to Help Out Scheme to help some of our local pubs and restaurants. In the UK today is a Bank Holiday so apologies in advance if this post is a little light as I'm not feeling that motivated to spend a lot of time on it - still in holiday mode I guess?
Monthly Timing Indicators.
With UK markets seeing positive return this month these continued their recovery but all still remain below trends suggesting that one should still remain cautious / out of the market if you want to follow a market timing approach to the UK market. With Mid and Small Caps producing better returns this month these indices are closest to getting back into a positive signal but both remain below their trends by 2.3% and 0.2% respectively. As FTSE lagged again this month the headline indices such as the FTSE 350 and All Share, which it makes up a large part of, both remain further below their trends by just over 5% and 6% in the case of FTSE.
Compound Income Portfolio
Not much to report here this month as remarkably the total return was pretty much in line with the FTSE All Share return with +2.49% v +2.42%. This leaves it down 10.8% YTD versus -18.5% for the FTSE All Share, so good relative performance but you can't spend relative performance! If you want to see the full details of the performance history you can see the table of returns (opens in a new window) by clicking here.
In terms of the Screening there was potentially more activity as more companies have updated and there has been more changes to forecasts as a result. So I'm planning to make three changes to the portfolio as a result when the market re-opens in the UK tomorrow. Subscribers will be able to see the changes in their sheet when it updates after the close. If you are not a subscriber and are interested in finding out more about the portfolio and how it has produced the performance shown below then please click on the Portfolio tab in the site navigation or click here for more details.
July proved to be a bit more difficult in UK markets compared to the relatively plain sailing that we have seen so far in the recovery since the lows in March. This was probably caused by some signs of the virus making an unwelcome return with a pick up in cases in some locations around the world, thereby perhaps sowing some seeds of doubt about the V-shaped recovery that investors seem to have been anticipating.
Market timing Indicators
With the main indices such as FTSE 100 & FTSE 350 producing negative total returns of -4.2% & -3.7% respectively this has kept them below their trend by just over 9%. While the Smaller and Mid Cap indices produced lower losses this month of around -1% and therefore are both less negative versus their trend than the main indices being around 4% and 8% below their trends. As such these and the on going economic difficulties as a result of the virus would suggest that one should remain cautiously positioned / out of equities if you are trying to time the market and ride trends.
So far since the March lows this has not paid off given the recovery that has been seen since then, but perhaps a resurgence of the virus and as the economic effects become clearer maybe a second sell off could materialise? As ever I guess time will tell on that, but in my experience that is the normal pattern that you see in a bear market, which we still seem to be in here in the UK, if not in Unicorn land.
Compound Income Portfolio.
This has remained fully invested despite the above and therefore benefited thus far from the recovery. Having lagged the market last month after outperforming in the initial recovery the Compound Income Portfolio this month was able to produce a positive total return of +2.6% compared to the -3.6% from the FTSE All Share that I use as a benchmark.
This was helped by the portfolios overweight in Mid & Small Cap areas of the market and four positions which produced double digit positive returns.
Thus the 6.2% out performance this month more than made up for the -3.5% last month. As a result in the year to date the portfolio is now -13% compared to -20.5% from the FTSE All Share. Not too bad for a monthly screened / traded portfolio, although I've seen others who have been more active / aggressive in their trading getting back to positive territory for the year - so hats off to them / you if you are one of them. Since inception in March 2015 the CI Portfolio is +76.2% compared to +8.3% from the index. That equates to 11.2% per annum versus 1.5% per annum from the the FTSE All Share index.
In terms of this months screening there were probably half a dozen or so stocks that were in or close to a Score at which I normally consider their place in the portfolio and of those two that were sufficiently low to seriously consider a sale. Of these I decided to give one quality play the benefit of the doubt as it is still trading reasonably well in the main (apart from one division which is about 20% of the business) & it is still paying its dividends. In addition it also looks oversold on the over bought / over sold indicator that I have on the Scores sheet so it also seemed that now might not be an ideal time to sell it. The one I did decide to sell had a poor trading update recently and is still not paying a dividend & although it is a reasonable quality play, the outlook remains uncertain as to how the effects of the virus & the governments response might hinder or help it.
This was replaced with a better scoring & better value stock that had a much more positive update recently and even reinstated its previously suspended final dividend and announced an interim dividend together with a profits forecast for the full year in the absence of further virus issues. Any way I'll leave it there but subscribers will have been able to see the stocks concerned and the other portfolio holdings in their file in the Portfolio and Transactions tabs yesterday. If you are not a subscriber then please see the Portfolio tab in the menu and the Scores tab in the menu for more details about them and how you can gain access or click the highlighted text above. Finally you can see a table of the full 5 year+ performance history here and this is presented in the graph below at the end of this post.
In the meantime enjoy the rest of what remains of the summer if you can and enjoy a break if you do manage to get away here or oversea. I'm going to be enjoying a staycation in what is traditionally a holiday month & I'm intending on doing my bit for the economy & the hospitality sector by eating out to help out to support my local pubs & restaurants at this difficult time by treating it like a holiday even though most of those & other things have been cancelled by Covid-19 and the current cancel culture. Take care, relax and have fun if you can.
Another positive month for equity markets around the world as investors seem keen to look over the valley of the Covid-19 lock downs and towards the sunny lit uplands of the re-opening of economies. Consequently there continues to be something of a dichotomy between this performance and the numbers coming out of the economy in the short term, although as we all know the markets tend to look ahead and are a discounting mechanism.
Aside from that there have been a few signs of further outbreaks which could bring on further localised shut downs and the threat of second waves etc. but again investors seem quite relaxed about that too. As ever all the liquidity provided by Central Banks around the world is no doubt helping to keep markets / investors afloat despite the on going virus / economic storm.
Market Timing Indicators
Regular readers will know that I have been producing these moving average based indicators for the UK Market for a while now and that they triggered as a sell at the end of March, since when the UK equity market and other equity markets around the world have staged recoveries to varying degrees with some such as the tech heavy Nasdaq Index actually achieving new all time highs. No such tech excitement in the UK and as a result the recovery in the Indices here has lagged that seen in the US in particular.
As a result all the UK indices remain below their moving average trends by around 4% to 8% with the Small Cap index being the strongest and the Mid 250 the weakest or furthest below its trend. So these together with rising unemployment claims in the US still suggest that one should be out of / cautious on the markets based on these technical timing indicators, although thus far it would only have cost you from missing out on the subsequent rally that we have seen since they triggered aided and abetted by the Central Banks largess as mentioned above.
Compound Income Portfolio
Again regular readers may re-call that I decided to ignore the market timing indicators as I'm more of a fan of time in the market that trying to time the market. See also Terry Smith in the FT today. I also felt that it would be more useful for subscribers to see how the Scores performed over this challenging period and what stocks the portfolio ended up trading.
Thus the portfolio was able to participate in and indeed enjoy a decent recovery in April and May when it recouped about 80% of its losses from March and outperformed the FTSE All Share, which I use as a benchmark, by 9.4% in the process. This recovery however came to an end in June as the portfolio returned -2% versus the +1.5% total return for the Index. This leaves the portfolio with a negative total return of 15.2% for the year to date which is some 2.3% ahead of the -17.5% total return from the FTSE All Share.
This was largely explained by only a handful of stock managing a positive return and despite last months value pick, City of London Investment Group (CLIG) soaring by 20% on the back of their deal. Against this the rest of the portfolio fell and a handful of stocks by a double digit percentage. Most of this was on little or no news and therefore probably reflects a bit of selling in not so liquid stocks in the main and perhaps a dash for trash as investors try to anticipate a recovery from re-opening perhaps?
In terms of this months screening there were five stocks, three expensive winners and a couple of more neglected value rated stocks which came up with Scores in or around the zone where I normally think about selling. On this occasion, given the market conditions, I decided to give most of them the benefit of the doubt for now. However, given the recovery we have seen, I did let one position go which had seen downgrades and some uncertainty to the effects of the virus on its operations. Despite this it had recovered to trade on around 30x and had a fairly low yield as they had also passed on paying their latest interim dividend. They have also been quite reliant on acquisitions to boost their growth in the past and I guess it remains to be seen if the fall out from the virus / recession makes that harder or easier for them to achieve going forwards.
In place of this I added what might still be described as a relatively expensive quality play which trades on a little of 20x, but does offer a yield of over 3% which is nearly twice that of the stock it was replacing. They have recently paid an increased dividend and seem likely to again in the current year as they benefit from 78% recurring revenues and operate in a fairly defensive area which is probably benefiting from the virus in terms of new business opportunities going forwards.
Any way I'll leave it there but subscribers will be able to see the stocks concerned and the other portfolio holdings in their file in the Portfolio and Transactions tabs. If you are not a subscriber then please see the Portfolio tab in the menu and the Scores tab in the menu for more details about them and how you can gain access or click the highlighted text above. Finally you can see a table of the full 5 year+ performance history here and this is presented in the graph below at the end of this post.
In the meantime have a great summer where ever you are able to enjoy it if you can and good luck with the return to the new normal and whatever that turns out to be - cheers.