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Beagles: All is not doom and gloom for UK dividends

JO Hambro Capital Management UK Equity Income fund manager Clive Beagles says he remains confident on the outlook for dividends in certain sectors despite the gloomy expectations for the UK economy.

Beagles, who runs the £1.2bn JOHCM UK Equity Income fund with James Lowen, says he is more positive on the UK economy than the GDP growth figures have suggested.

He says: “We believe from our conversation with companies that the economy is stronger than the alleged official statistics. Balance sheets are in the best shape they have been in for five years in the UK.”

Beagles says he is aiming for a dividend of around 7 to 9 per cent this year and expects next year to be similar but warns that some industries, such as pharmaceuticals, utilities and banks, will face difficulties.

Beagles believes that pharmaceuticals are correctly valued at present despite trading on the lowest valuations for 20 years.

He says: “Companies dependent on public sector spending are not going to have an easy time, like pharmaceuticals. The sector has less new drugs to exploit and most of them are dependent on public sector funding. So it is going to get more difficult for them.”

Other companies he believes are “dangerous” to own include highly leveraged utilities and tobacco companies.

He says: “There are highly leveraged companies like Imperial Tobacco in a structurally declining industry. This means they are dangerous for people to own and for the companies themselves. It looks inevitable that revenue lines start to disappoint and earnings could unravel quite quickly. Over time, it will affect dividends.”

The fund is overweight in financials but not in banks, with HSBC the only bank in the portfolio.

Beagles says: “Banks may be cheap but you are at the whim of politicians and regulators, which is hard to predict and not always rational.”

Beagles says one example of a bank undergoing change is Barclays, which could see its dividend under pressure.

He says: “There has been a radical reshaping of Barclays in terms of its potential shrinkage of the investment bank at the expense of the rest. It could affect its ability to pay dividends.”

He warns dividend pressure is an issue that could face all banks in the future.

He says he is investing in companies that are “benefitting from the demise of banks and their inability to get back on the front foot in terms of lending”.

He says these are stocks like Close Brothers, which focuses on lending to small and medium-sized enterprises, and Intermediate Capital Group.

Beagles says he is wary of companies that are exposed to emerging markets, like mining companies.

He says: “Miners are very operationally geared to the price of their end product, so I would have thought outlooks for dividends will be flat at best and may be worse than that.”

He is drawn more to domestically-focused companies as valuations are lower due to pessimism about these companies.

“If a company is gaining market share in moribund circumstances, it follows that if the market improves, they will do much better,” he says.

Beagles says one example of a domestically focused stock is car retailer Lookers, which he bought this year. He has a 1 per cent position in the company.

Beagles was formerly sole manager on the fund until he took a sabbatical from the asset manager in 2007. He returned to the firm to co-manage the fund with Lowen in 2008. The fund has returned 36.3 per cent in the past three years compared with an Investment Management Association sector average of 31.8 per cent.

The fund is now above the £1bn capacity previously set by the team, as it stands at nearly £1.2bn, but he says there is currently no risk of soft-closure.

He says: “We are comfortable running money at this level. We have had net inflows this year but they have not been dramatic. Small to mid cap company exposure is at around 45 per cent which is consistent with where it has been. We have 57 holdings, which fits our range of between 50 and 60.”



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