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Message: The stocks I’m buying for dividend growth

19 February 2013

The Old Mutual manager believes the best income opportunities in the UK market lie outside the traditional FTSE 100 dividend-payers.

By Joshua Ausden,

News Editor, FE Trustnet

The UK mid cap market offers far superior growth potential than its large cap counterpart, according to Old Mutual’s Stephen Message, who is backing names such as EasyJet, Greene King and DS Smith to shine in the medium- to long-term.

ALT_TAG Many of the funds in IMA UK Equity Income derive much of their yield from the largest blue chip dividend-payers in the FTSE 100, but Message believes there are more compelling opportunities elsewhere.

"If you look at the UK’s biggest 20 companies, they generate around two-thirds of the yield on the market. We get around 38 per cent from these companies," he said.

"Roughly a third comes from companies in the FTSE 250. At the moment, we believe the dividend situation in this area of the market is more attractive – especially from a dividend-growth point of view."

Message (pictured) runs the Old Mutual Equity Income fund, which targets a yield of between 10 and 20 per cent higher than the All Share, as well as a reasonable level of capital growth.

In the "core income" basket of the portfolio, he targets companies with a higher prospective yield than the market and good prospects for dividend growth.

He is currently underweight tobacco and pharmaceuticals and has no exposure whatsoever to Imperial Tobacco or AstraZeneca.

Here are three mid cap companies he thinks are well placed to grow their dividend:

Greene King

Message thinks the FTSE 250 brewery is benefitting from changes on a company and industry basis.

"This is a very well-run company, which we believe is undervalued given its quality and sustainability," he said. "It has a good track record for dividend growth and it is an underrated sector."

"A lot of people are cautious on domestic areas such as pubs, but it’s during times of poor economic growth that better businesses are highlighted. Many smaller pubs are going bust, but this is rolling out its franchise and new pubs are being opened."

Greene King is currently yielding 4 per cent. The stock has recovered well since the depths of the financial crisis, up almost 100 per cent over a three-year period.

Performance of stock vs index over 3yrs


Source: FE Analytics

It is currently Message’s 13th-largest holding in his portfolio. Four other funds currently hold Greene King in their top-10, including Threadneedle UK Mid 250.


"There has been a lot of change in the budget airline industry in recent years and EasyJet has been a beneficiary," Message continued.

"A lot of its competitors have been pulling away from this area, because it’s so hard to make money, but EasyJet is very, very good at it."

"The amount of aircraft is also reducing, so the company is also benefitting from supply growth. In our view, better cash-flow will result in its dividend being revised upward."

EasyJet is currently yielding 2.8 per cent. On a total return basis, the stock is up more than 100 per cent over one-, three- and five-year periods and by more than 300 per cent over 10 years.

Twelve funds currently hold EasyJet in their top-10, including Standard Life UK Equity Income Unconstrained.


"This plastics company has massively improved its rate of sales," said Message. "It’s got a good starting yield and is in a good position to grow this."

The FTSE 250 company, which is currently yielding around 2 per cent, has returned 251.37 per cent over three years. Old Mutual Equity Income is one of six funds that hold Filtrona in their top-10.

DS Smith

DS Smith is one of the most popular FTSE 250 stocks with fund managers, appearing in the top-10 holdings of 26 funds in the IMA unit trust and OEIC universe. Among its biggest admirers are James Lowen and Clive Beagles, who have 2.8 per cent of their JOHCM UK Equity Income fund in it.

The stock is Message’s ninth-biggest holding. He says the packaging company is "consolidating its business very efficiently" and looks set for steady dividend growth in the next few years.

It is currently yielding around 3 per cent and has returned more than 40 per cent over the last 12 months alone. DS Smith is also a strong long-term performer – up 192.17 per cent over 10 years.

Message has headed up the £47.4m portfolio since December 2009. Over this period, the fund has delivered 44.66 per cent, beating its IMA UK Equity Income sector and FTSE All Share benchmark by 6.4 and 8.1 percentage points, respectively.

Performance of fund vs sector and index since Dec 2009


Source: FE Analytics

Old Mutual Equity Income has been more volatile however and performed worse during the 2011 summer sell-off.

In an article that lamented the "shortage of decent funds", Hargreaves Lansdown’s Mark Dampier said Stephen Message was a potential star of the future.

In terms of his outlook for the market, Message says he is optimistic and believes valuations are at very reasonable levels.

He points to the slowdown in China, the eurozone crisis and the fiscal deficit in developed nations as the biggest threats to equity markets, but believes these are beginning to ease.

"It seems to me that the biggest risks to the recovery have become that little bit less pronounced," he said. "Many of these risks are now tail-risks and are no longer taking centre-stage."

"Policy action from the Fed and the ECB has been much improved and Chinese data is getting better as well."

"This confidence is starting to feed into the real world. Consumers are starting to say: 'I've got a bit more money in my pocket and I’m a bit more optimistic about my job prospects.'"

Message says this renewed confidence should result in businesses increasing their expenditure, which would "drive us in to the next stage of the cycle".

"The UK market is currently yielding between 3.5 and 3.75 per cent and trading at 11.5-times earnings. I think that’s a pretty good starting point," he added.

Old Mutual Equity Income requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.24 per cent.

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