Stay Invested for the Dividends

THE WEEK: Morningstar columnist Rodney Hobson is staying fully invested in the market because of expectations for record dividend payments

Rodney Hobson 8 March, 2013 | 11:34AM
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The Bears are Floored

A global surge in stock markets has seen the FTSE 100 index hit its highest level for more than five years and the Dow Jones Industrial Average did even better, breaking its previous record close set before the financial crisis broke out. I am staying fully invested.

It was January 2008 when the Footsie was last at current levels and it is interesting to note that the Dow started falling from its peak three months earlier. I am always a bit sceptical about the notion that the world follows the Dow, since local conditions play a key role and indices do diverge. Nonetheless, there is reason to hope that where the Dow goes today, the Footsie will follow tomorrow or, to be more precise, over the next three months.

Regular readers will know that I turn very cautious when the Footsie tops 6,400 points, given the global economic uncertainties that have not gone away, but it does look as if 6,300 points is becoming the floor and that, for now, the upside potential outweighs the downside dangers.

The main reason for optimism is that the total amount of dividends paid hit a record last year and should be higher this year according to figures produced by Capita Registrars. Capita (CPI) calculates that total dividends paid by UK quoted companies hit £80.4 billion in 2012. Even after stripping out the early payment of a £1.1 billion interim dividend from HSBC, which would normally have fallen into 2013, that is still a big leap from £69.2 billion in 2011, which was itself a record.

Despite that early payment, which will depress figures for 2013, Capita still reckons that dividend payments will grow to £80.6 billion this year, having raised its forecast by £200 million this week.

Capita chief executive Justin Cooper points out that dividend payments have risen despite cutbacks in the banking sector. He says: ‘As recently as 2008, banks were the top sector, paying almost a fifth of all dividends in the UK.  Now it's only a tenth, and only three banks pay dividends at all compared to seven in 2007.’

Despite the rise in share prices, those rising dividends mean that the average yield on FTSE 100 stocks is around 3.5%. Where are you going to do better?

The Dial Spins

I’ve said it before in this column and I’ll say it again because it is worth repeating: international telecoms group Vodafone (VOD), one of the core holdings in my portfolio, has offered another demonstration of how choppy markets offer buying opportunities.

My view is that Vodafone is worth buying when it slips clearly below 170p per share but is overpriced above that level. Worries over its European markets pushed the shares down to 160p on 21 February but they bounced back to 180p this week on hopes that some sort of deal will be struck with US partner  Verizon Communications (VZ). Yet anything short of a full scale bid by Verizon for the whole of Vodafone is bad news for Vodafone shareholders. Anything less prices Vodafone out of what is currently its best market, so I would not chase the shares higher on these persistent rumours.

Long-term shareholders like myself should ride out the waves, buying on the dips if they wish to top up holdings. Short term punters can pocket another profit and wait for the next dip.

Cook a Soufflé

There was a sad juxtaposition of news stories this week concerning another old favourite, struggling travel group Thomas Cook (TCG). I have avoided the shares and I do not for one moment regret that decision because I felt, and still feel, that the risks are too high, especially after a surge in the share price from 15p to 95p over the past six months.

That surge has taken Cook up into the FTSE 250 midcap index following a reassessment of rankings that will take effect on 18 March. This joyful news accompanied a decision to close 195 outlets and sack 2,500 staff, a move that Cook hopes will restore profitability. Already 168 High Street outlets have gone in less than two years, a sacrifice that stopped Cook going bust.

I concede that, from an investment view, Thomas Cook is now moving in the right direction but this is a long haul and there will be no dividends for the foreseeable future. Cook shares are already starting to slide back and the stay in the FTSE 250 could be short lived. If that proves to be the case, the downward momentum will be considerable.

Good luck to those investors who, acting against my instincts, decided to take a risky punt and reaped the benefits. Just don’t push your luck too far.

Rights and Wrongs

Shares in Severfield-Rowen (SFR) have held up remarkably well since it announced a rescue rights issue but perhaps that is simply a reflection of how far the shares had already fallen after a spate of bad news.

It is pretty desperate stuff, with shareholders asked to buy seven new shares for every three held at a knockdown price of 23p each, which is less than a third of the market price of 71.5p when the rights issue was announced.

Shareholders have no choice but to vote through the rights issue, otherwise Severfield goes bust. New banking facilities depend on the £44.8 million raised after expenses being used mainly to reduce debt. The issue is, mercifully, fully underwritten but at a price that pushes the total cost of the issue to £3.1 million. When you’re down, your bargaining position is weak and everything costs more.

It’s always a nasty feeling to throw good money after bad but I shall take up the rights attached to my mercifully modest holding. Ignoring the issue is even worse. If you are also a shareholder and want to get out – and who can blame you if you do? – then either sell now while the going is good or take up your rights and sell afterwards. Whatever you do, don’t hang on and do nothing.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

Market Performance: March 4 - 8

FTSE 100 Index: +1.65%
FTSE 250 Index: +1.95%
FTSE All Share: +1.71%
FTSE Small Cap: +2.39%
FTSE AIM 100: +2.19%
FTSE Fledgling: +1.55%

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Capita PLC37.22 GBX-0.08
Severfield PLC67.71 GBX0.16
Verizon Communications Inc53.28 USD-0.45Rating
Vodafone Group PLC118.62 GBX0.29Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.