Equity income funds need to understand the importance of firms balancing dividend payments with business investment, a Rathbones fund manager has said.
Carl Stick, co-manager of the Rathbone Income Fund said the key to successful equity income investing was to focus on trying to understand the investment decisions firms are making.
“We're trying to understand why [firms] choose to return some money to us. We like that money coming back to us. But every pound they give to us they're not investing in the business.”
Stick co-manages the fund alongside Alan Dobbie, and has done so since January 2000. The fund currently manages £825m, and its biggest holdings are a 3.65 per cent exposure to BHP and a 3.52 per cent stake in L&G.
He added his team regularly probes firms to ensure that even though they’re paying a dividend, they have built a foundation for future earnings.
“So what is the balance between the decisions they're making about reinvestment back into business?” he said.
UK dividends crashed across the board as a result of the pandemic, as firms tightened their belts.
The shareholder payouts dropped by £22bn, a fall of 57 per cent year-on-year, in the second quarter of the year, and a further £14.5bn in the third quarter, according to Link Group’s dividend monitor.
Throughout the coronavirus crisis, some firms voluntarily reduced their dividends in an attempt to form a cash buffer against the economic impact of the pandemic, while others were forced to hold back on payouts to shareholders.
However, despite global dividends rising to within 7 percent of pre-pandemic levels in Q2 this year, UK dividends still lag behind the global trend.
UK dividends rose 61 per cent in the second quarter of the year, but are still 27 per cent below their pre-pandemic level in Q2 2019, according to Janus Henderson’s latest global dividend index.
Outlining the sectors he has seen improvement in, Stick said the oil sector has surprised the market by rebounding well, but there are concerns over the long-term performance of the sector due to sustainability agendas.
“Last year the oil sector was not on people’s buy list for many reasons, the oil price plummeting, supply issues and a massive tail-off in demand,” he said.
“Remarkably, the oil price has recovered in the past twelve months, which has fed straight through into [oil firms’] profits.
“So that’s the surprise, and we’re grateful for that bonus payment, but the other side of the coin is what investments are they making to lay the foundation for next year’s earnings, and earnings for two, three, four years out?”
“Then on top of that you’ve got people thinking, why do we want to own an oil company when we’re thinking of moving to net zero,” he said.
He added his stance was that the energy sector needs to be part of the solution to carbon emissions.