Equities have had a very strong run over the past 18 months, which has meant that dividend yields have come down across the UK market.While many experts have voiced concerns about high valuations, Henderson – whose £514m Henderson UK Equity Income & Growth fund has comfortably beaten the IMA UK All Companies sector and FTSE All Share since he took it over in January 2005 – says this shouldn’t put off dividend-seeking investors.
Performance of fund vs sector and index since Jan 2005
Source: FE Analytics
“Yes multiples are higher, dividend yields are lower because of appreciation of the share price, but cash generation is very strong and this spill-over of cash to shareholders means you have a piece of paper that is giving you this strongly growing dividend,” Henderson said.
“That is something other asset classes aren’t offering. For me, if the re-rating of shares continues for some time and if I were to ever get worried about it, I look at the cash generation.”
With this in mind, Henderson highlights three stocks that should deliver a fast growing dividend, despite their current high valuations.
Senior
This FTSE 250-listed manufacturing and engineering company is Henderson’s largest holding, making up 3.1 per cent of the fund.
The manager initially bought the stock this time five years ago, over which time it has returned 1,127 per cent. However, he says he has no issue with keeping a high weighting to the stock even though its yield is below 2 per cent.
“It has had a good run and valuations are higher than they were, but the real reason I keep holding it is the huge cash generation that is going on,” Henderson said.
“They are making 13 per cent margins at the moment and the speed debt is getting paid down is very great, and next year they will have paid all of it off, and that is in spite of making acquisitions and with a good level of capital spend in the business.”
“They have a controlled cost base with good top-line growth, which is leading to good cash generation,” he added.
The manager is bullish on industrials in general because he says there are many companies in the sector that are in control of their own destiny and don’t face regulatory or political headwinds.
He particularly likes Senior due to its exposure to aerospace. He says the sector is in a cyclical and structural upswing and that Senior, which makes various components for the Boeing 747, is one of the main beneficiaries.
“Senior has a million pound a set on these dreamliners and they are the long-haul planes we will be flying with for the rest of our lives. It’s taken Rolls Royce 25 years to develop that engine and that’s a very strong position because it means that you are not going to get an emerging market competitor developing an alternative,” Henderson (pictured) said.Our data shows that there are 18 other funds that count Senior as a top-10 holding, one of which is FE Alpha Manager Richard Plackett’s BlackRock UK Special Situations fund.
Elementis
Elementis is a specialist company that also sits in the FTSE 250. It makes up close to 2 per cent of Henderson’s Henderson UK Equity Income & Growth fund.
Like Senior, the stock has delivered very high returns over three and five years and has a dividend yield of less than 2 per cent. However, according to FE Analytics it has underperformed against the index over 12 months, with returns of 11.18 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
Henderson is a fan of Elementis because it is an example of a company with good capital discipline.
He says that while the company directors are investing for growth, they aren’t making wild acquisitions, which is good news for income investors.
“Elementis will have a special dividend this year and had a special dividend last year, on top of its ordinary dividend,” Henderson said.
“What it is doing is giving back half of its cash on its balance sheet as a special. So if it were to make an acquisition, then you wouldn’t get the special, but every year it doesn't, cash comes back out to shareholders.”
Our data shows that Artemis UK Growth and Invesco Perpetual UK Smaller Companies Equity are among the four funds in the IMA universe that count Elementis as a top-10 holding.
Hiscox
Henderson holds 2.4 per cent of his fund in Hiscox, making it his fourth largest holding.
The FTSE 250 insurance company is probably best known as being an underwriter of Lloyd's of London, but Hiscox also has more specialist operations such as property and causality insurance for businesses and high net-worth individuals.
The stock has performed roughly in line with the wider market recently, having returned 23 per cent over the past year. Its dividend yield is currently 3 per cent.
While Hiscox doesn’t fit into Henderson’s industrials exposure, the manager likes the stock because of its diversification potential.
“The attraction to Hiscox is partly due to diversification. There is this big weighting to capital goods manufacturing, which by nature in the long-term is cyclical; so it does depend on the global economy growing over time.”
“Hiscox, being an insurance company, is on a different cycle. It’s another one of my large overweight positions and one whose drivers are completely different than other economically sensitive companies,” Henderson said.
He also says that Hiscox is a great holding for investors who want a growing income stream, because the management team has a good history of delivering a progressive dividend.
“It is generating a lot of cash so again we are getting a special dividend from Hiscox this year and we got one last year. It’s because the success of the business and the management not wanting to grow the business too fast,” the manager said.
“It is an excellent company that will continue to grow its dividend and gives us specials, but is does add an aspect of diversification. If the big area is engineering for us, this is a different set of dynamics and so it is difficult to think up a scenario where they would both struggle.”
Aberdeen UK Mid Cap Equity and Baillie Gifford Global Income are the only other two funds that count Hiscox as a top-10 holding.
