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Extreme medicine - Businesses that cut deepest after the crunch have bounced back strongest

26/03/2013

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

In position of strength, we considered the growing demand for businesses with robust balance sheets to return their excess cash to shareholders, whether through share buybacks, lump-sum payments or increased dividends. As an example of the last of these three, consider the following table, which comprises the dividend updates of UK companies that issued results on a single day picked at random from the March results season.

Company 

Sector

Dividend change

Aggreko

Professional & Support Services

+15%

Aviva

Banking & Finance

-44%

Belfour Beatty

Construction & Property

unchanged

Cineworld 

Leisure

+8%

Cobham 

Engineering

+10%

H&T group 

Retail

+15%

hunting 

Natural Resources

+27.3%

IMI

Engineering

+9%

Inmarsat

Telecoms

+10%

Nichols 

Consumer Goods

+13.6%

novae group 

Banking & Finance

+11.5%

Schroders

Banking & Finance

+15.4%

Spirax Engineering

Engineering

+8.2%

Standard Life

Banking & Finance 

+6.5%

 

Source: Shore Capital Stockbrokers

The uncertain economic environment of the last five years has only served to underline the importance of a strong corporate balance sheet. However, we have now reached the point where, even though the economic outlook remains uncertain, companies feel sufficiently prudently financed to be able to start hiking their dividend payments.

Furthermore, the businesses now able to grow their payouts the most are the ones that have bounced back strongest after cutting deepest in the downturn. By comparison, of the two companies in the above table that run counter to the trend, building contractor Belfour Beatty is operating in a sector that still faces a great degree of pressure while insurer Aviva can reasonably be said to have failed to take its medicine when it should have done. As many companies are learning, eventually that will find you out.

So there are distinct reasons why that pair have not been able to increase their dividend this time around and yet the broader trend is far more encouraging. At the same time, the overall picture is looking decidedly healthier in the UK than on the continent, with analysts at shore capital forecasting 12-month dividend growth of 7.74% for domestic stocks compared with 1.28% for the rest of Europe.

The UK stock market remains cheap compared with many around the world and dividend growth coming out of it remains robust as UK companies by and large are managed pretty well and did what they needed to when they needed to do it. In some cases, the medicine may have had to be extreme but presumably investors would rather have had that than the alternatives to be seen across the channel.

 

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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