The hunt for income continued in 2015. Equity income investors who were drawn to the energy and materials sectors faced the headwind of commodity price declines. Recent dividend cuts from companies such as Anglo American highlight the risk of a singular focus on yield. The Cerno UK Equity Income Strategy had no direct exposure to these sectors during 2015 having sold a position in Royal Dutch Shell at the end of 2014. The proceeds of this sale were invested in Vodafone. Other than this purchase, portfolio activity for the year was restricted to rebalancing.
Our strategy identifies London Stock Exchange listed businesses which demonstrate a history of dividend progression along with growth, profitability and balance sheet characteristics which suggest the progression of dividends can be maintained. The strategy is concentrated in a small number of positions which are equally weighted and rebalanced routinely.
The performance of the strategy is captioned below:-
Since Inception ^
|Cerno UK Equity Income Strategy|
|FTSE 350 Index|
|FTSE 100 Index|
|FTSE 250 Index|
^ Inception date was 12th April 2013
Note; performance represents the UK Equity Income Strategy which is run as part of a Cerno Capital client portfolio.
Index Data Source; Bloomberg
The largest contributors to performance for 2015 were Greggs and RPC Group. Both companies have been held since inception. Greggs is a UK baker with a strong position in the food-on-the-go market. When the shares were purchased, the market was concerned by the strategy for growth given a large number of retail units in existence. This was not helped by the company exploring ideas which moved away from its core competency of selling competitively priced, freshly made sausage rolls, sandwiches and apple turnovers. The company has subsequently refocused on core values and been proactive in moving retail units closer to customers, which means an increase in transport hub locations relative to high street locations. Capex was also routed to revamping outlets which had become somewhat dated. The board of Greggs has delivered a solid history of dividend growth stretching back to 1991. A period of maintenance rather than growth of dividend while the corporate strategy was reworked provided the opportunity to make our initial purchases on a yield in excess of 4%. The subsequent performance from the company has enabled the board return to growth in the dividend and this was supplemented with a special dividend of 20p per share midway through 2015 – for comparison, interim and final dividend payments for 2015 totalled 22p.
RPC Group is a manufacturer of rigid plastic packaging. The company sells various plastic packaging products to consumer goods manufacturers worldwide. The company is emerging as a consolidator in this sector and has made a number of acquisitions, the most recent of which is the purchase of Global Closure Systems (GCS). The board has delivered a growing dividend stream with average dividend growth of 7% over the last five years.
These two holdings contributed 14% to the strategy return for the year.
The strategy’s holdings in mid cap companies represent 40% of the portfolio and therefore the outperformance of the FTSE 250 versus the FTSE 100 can be viewed as a tailwind over the whole period since inception.
The strategy contains four companies which are more typically considered as income stalwarts of the large cap universe such as British American Tobacco and Vodafone. In aggregate, these have contributed 3% to the 2015 performance.
The large detractor for the year was Pearson which delivered a negative contribution of -3.8%. The company has a long history of dividend progression and this has continued. Pearson is undergoing significant corporate change as it exits from print media businesses and focuses on delivering education to children and adults via digital delivery. The challenges of monetising Pearson’s intellectual capital are increasingly evident and this resulted in significant weakness in the shares.
The portfolio received ordinary dividend receipts in 2015 that were 5.5% higher than 2014. This excludes special dividends.
The yield on the portfolio of 3.4% is currently lower than that offered by the FTSE 350 Index which is 4.1%. This lower yield is a result of the portfolio holding no exposure to the materials and energy sector where optical yields are high; however the risk of dividend cuts is also high.