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Job Curtis: Why I still have faith in the FTSE’s highest yielding stocks

26 September 2016

The manager, who runs the City of London investment trust, explains why he holds high-yielding stocks in his portfolio while still maintaining a relatively cautious stance to investing.

By Lauren Mason,

Reporter, FE Trustnet

High-yielding stocks such as Shell, HSBC and BP can provide investors with attractive levels of income despite fears that their dividends could be cut, according to Job Curtis (pictured).

The manager, who heads up the £1.3bn City of London investment trust at Henderson, adopts a relatively cautious approach to investing and holds a mixture of so-called ‘bond proxies’ alongside stocks that could be seen as higher risk given the current market environment.

Over the last 18 months, a total of 14 UK companies have either cut or scrapped their dividends including the likes of Rolls Royce, Glencore, Rio Tinto and Centrica.

This comes amid a global hunt for yield, given that ultra-loose monetary policy has led to historically low interest rates and, as investors have crowded into the fixed income market, unusually low yields on bonds. 

While 10-year gilt yields are at 0.86 per cent and 30-year gilt yields are at just 1.57 per cent, many investors have turned to the equity market to generate income for their portfolios.

However, given that market valuations seem stretched and a number of blue-chip stocks are offering high dividend pay-outs while harbouring tenuous balance sheets, many investors have been unsure which areas of the market to buy into.

Performance of indices in 2016

 

Source: FE Analytics

“The equity market is yielding around 3.5 per cent and that is highly attractive, particularly given the growth we’re getting in our portfolio – around 4 per cent in terms of dividend growth – so I give the equity market a big tick in the box in terms of yield,” Curtis said.

“But, on other measures it’s not so attractive and, on a price earnings basis, the market is not cheap in the way it was from 2008 to 2011.”

The manager says that the market needs more profit growth to reduce today’s elevated ratings down to more attractive levels.

He also points out that low bond yields are propping up the market and, as such, stock selection has become particularly important over recent months.

For instance, the manager has reduced his exposure to pharma giant GlaxoSmithKline due to concerns that its dividend (which currently stands at 4.91 per cent) isn’t sufficiently covered as its debt level has been increasing.

However, he holds both Shell and BP in his list of top 10 holdings, which yield 7 and 7.2 per cent respectively.


“The market is quite efficient and you can work out where the yields are more vulnerable,” Curtis continued.

“In the case of [Shell and BP] – what it really is, is a cost-cutting story. During the oil upswing, the oil companies spent madly on capex and they gave a lot of the benefit away to the oil services companies and the companies that provide goods.”

“Two years ago, Shell spent $42bn in capex which is a huge sum of money and this year, it’s gone down to $30bn which is quite a big drop. That includes BG as well, which they bought.”

“It’s an old adage that, in an oil bear market, instead of drilling in the North Sea you drill on Wall Street and Shell has almost literally done that because it bought BG and it bought some very high quality assets in Brazil. At the same time it stopped drilling in some areas such as the Arctic and it’s been saving a lot of money.”

The manager also points out that Shell hasn’t cut its dividend since WWII and as such, it has navigated numerous oil bear markets in the past.

That said, he believes there is a 50/50 chance that Shell and BP will cut their dividends given that it depends on the oil price. Overall though, he remains sanguine on the oil price and is confident that the dividends of both companies will be held for the remainder of 2016.

Another stock in the manager’s portfolio that has been a cause for concern among many investors is HSBC, which currently yields 6.8 per cent.

“There has been a lot of doubt on the dividend there and it’s not particularly well-covered, but actually their capital ratios are strong, their tier 1 is above 12 per cent and they had very reassuring interim results in July,” Curtis said.

“I think the shares have been performing very well since then. They sold a bank in Brazil and that can help support the dividend. In fact, they’re having a share buyback as well as paying the dividend and also they have a [subsidiary] bank in America which was a disaster.”

Performance of stock vs index in 2016

 

Source: FE Analytics

“They’ve unwound this over the last few years and they’ve basically built up a lot of capital in America which they haven’t been allowed to bring back to the UK. But, America will be allowing them to repatriate some of that capital so that was taken well.”

The manager has more confidence that HSBC will retain its dividend than the likes of Shell of BP – he believes there is around a 25 per cent likelihood of the firm cutting its dividend.

He also holds Vodafone as one of his 10 largest weightings which yields 5.7 per cent. However, he says that now the network has finished investing in Project Spring – which was employed to improve their networks - the dividend should be better covered by cash flow over the medium term.


Generally speaking, Curtis will not automatically remove a holding from his portfolio if it cuts its dividend. For instance, he points out that even if Shell were to halve its dividend, it would still be yielding 3.5 per cent.

“Sometimes it’s right to hold your nerve but other times you just have to say ‘I bought this stock on these set of assumptions’. Sometimes that’s the hardest thing for a fund manager is to admit you’re wrong,” he said.

“The point I would make about the top 10 holdings of City of London is it’s not a concentrated portfolio. If you look at those top 10 holdings, together they make around 31 per cent of the portfolio.”

“You’ll see a lot of funds that have a much more concentrated top 10 list. I’m not one to have all of one’s egg in one basket.”

“Another point to make is that this is a very global list. The only company with more than half of its sales in the UK from the list is National Grid. The rest of them are all genuinely global companies.”

“Even the National Grid has got a third of its business in the US so I think people can take comfort from that.”

 

Over Curtis’s 25-year tenure, the trust has returned 415.58 per cent compared to its sector average and benchmark’s returns of 309.41 and 310.77 per cent respectively.

Performance of trust vs sector and benchmark under Curtis

 

Source: FE Analytics

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.