The coronavirus crisis has presented UK companies with an opportunity to put less emphasis on dividend payments in order to target growth, according to star fund manager Nick Train.
In his latest report on the Lindsell Train UK Equity fund, Mr Train said UK companies were “now being presented with an opportunity to have a big think” and get the balance between their dividend payments and growth “more right”.
His comments come after James Anderson, the Baillie Gifford manager of the Scottish Mortgage Investment Trust, pointed out in his trust’s report that Amazon and Apple combined were worth more than the entire UK stock market.
Commenting on this, Mr Train said: “Just two companies! As a career-long investor in the UK, I scratch my head and wonder how this could have happened.
“Perhaps part of the answer is investors have encouraged UK companies to be overly generous with their dividend policies and not reinvest enough of their earnings for growth?
“What is certain is that UK companies are now being presented with an opportunity to have a big think and get that balance more right.”
The UK has long been known as a ‘dividend haven’ for investors, as oil companies, banks and insurers — which appear prominently in the FTSE 100 and 250 — have until recently consistently paid high dividends.
Dividend cuts have hit income investors in the UK to the tune of £30bn over the past few months however, as companies cancelled payments in order to maintain a cash buffer through the pandemic.
Big dividend payers, such as banks and insurers, have been forced to suspend their dividend payouts by the Bank of England.
But Mr Train shrugged off the dividend cuts that have hit his portfolio. In May, Burberry cancelled its final dividend, a move Mr Train said was the “most significant hit yet” for the Lindsell Train UK Equity fund.
He said: “We regard the decision as prudent, given the uncertainties. Yes, Burberry has £600m of its own cash on its balance sheet but paying out £120m of that might be unwise.”
Mr Train said it was “heartening” to see the rationality of UK investors in response, as Burberry’s shares were up some 25 per cent from the day before the dividend cut.
Burberry could use that held back dividend to grow the company and make it more valuable, according to Mr Train.
He said: “Probably the £120m of cash retained within the company can be used to enhance Burberry’s exposure to Asia-driven recovery and to further improve its digital marketing capabilities – ultimately making the company more valuable than before the crisis hit. We hope so.”
Mr Train also said many of the companies held in the portfolio had told Lindsell Train the crisis meant they could “harness” the power of digital products and services and likely “grow faster with higher profitability in years to come”.
He told investors to “be optimistic” as “underneath, businesses are improving”.
Over the past three months, the Lindsell Train Equity fund has returned 4.1 per cent. By comparison, the FTSE All Share has lost 7.8 per cent.
imogen.tew@ft.com
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