3 UK Income Stock Picks for Dividend Growth

THE INCOME INVESTOR: Beware high yielding stocks - they may not be sustainable sources of income. Instead stick to companies with lots of cash and a stable outlook

Emma Wall 12 February, 2016 | 11:17AM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Ben Peters, Co-Fund Manager of the Evenlode Income Fund, to give his three stock picks.

Hi, Ben.

Ben Peters: Good morning.

Wall: So, what's the first stock you'd like to highlight?

Peters: The first stock is business-to-business media company called Informa (INF). So, they operate through a number of segments. Their academic publishing business Taylor & Francis is very well known, has a number of great academic publishing names such as The Journal of Psychology. It also has a business-to-business information company and also an exhibitions and events firm as well.

We really like it because it's a very cash-generative business model. So, it's subscription-led. They have very high renewal rates on their subscriptions and they can use some of that cash flow obviously to pay their dividend, which is attractive for an income investor, but also to reinvest in the business to drive future growth.

Historically, it suffered a little bit from being a collection of businesses without perhaps a coherent back burn to it but the relatively new chief executive, Stephen Carter is doing a good job of putting that right, reinvesting in the business to drive that future growth.

Wall: It sounds a little bit like Pearson which has not exactly had the best run of it recently. I mean, nobody can really identify what went wrong with Pearson, so I suppose the risk is with this stock, is it you lose out to digital or do you just have a bad run like Pearson.

Peters: It's good question. Informa is a largely digital business. Already it's gone through that transformation particularly in its business information segment. It also addresses different market. The publishing business looks at really the academic market whereas Pearson is in more sort of college and higher education as well. So it's a slightly different kettle of fish from that perspective.

Wall: What's the second stock you'd like to highlight today?

Peters: The second stock is Diageo (DGE), which will be familiar to many as the multinational drinks company focusing on spirits and beer. It's got a portfolio of brands, which everyone will recognise from Smirnoff, John Walker, and to beer in Guinness as well. It is really the brand strength that drives the investment case there. They did get into a bit of bother a couple of years ago overselling into the distribution channel which meant that ate a bit of their cash flow and they also have been investing in their distribution and production, which has meant that their CapEx has been a bit high. But that's really feeding through the system now. They are focusing on selling out to the consumer much more and their cash flow has recovered. That's a very healthy cover on the dividend and we think that there is very good scope for dividend growth.

Wall: There has been a lot of M&A in the drinks sector, hasn't there? I mean, how much is that something you consider when investing in a stock like this?

Peters: It's obviously a factor and we're looking for really companies that can leverage their existing portfolio of brands and perhaps have some bolt-on acquisitions and Diageo has not been alone in doing that. It's also been divesting some of its less core operations like its wine business which they have recently disposed of.

Wall: Great. What's the third stock?

Peters: The third stock is a smaller company called PayPoint, which the name might be familiar, it's seen in convenient stores around the country and traditionally its business was allowing people on prepaid electricity and gas supplies to pay in cash for that supply and it developed that in the late 90s. Since then it's now got an amazing network around the country which is now layering other services on top of for consumers and for the retailers as well. So, for example, people may have used the CollectPlus service which is delivered through the same network.

Wall: The thing with PayPoint (PAY) is, as you say, it has a heritage, it has a history and it has developed and evolved over that time. But when you think of the new ways that people are paying Apple Pay, everything, Barclays Ping, all the ways that you can pay without having to move from your own home. The idea of having to go to a convenient store to do these things raises questions about the future of the company.

Peters: Yes, but I think there are two points there. One is that there is resilient consumer who will want to pay in cash. These consumers tend to not be able to get credit and so they will need to be part of the cash economy even as we move to more digital services. The second point is that PayPoint are also developing that service as well. So they have recently put together a multi-channel payments offering, which they can sell to the utilities companies, which will mean that they can accept payment through mobile, through online, but also through the store, if that's what the consumer wants.

Wall: Ben, thank you very much.

Peters: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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
Diageo PLC2,566.00 GBX-0.37Rating
Informa PLC860.00 GBX2.02
PayPoint PLC632.00 GBX-1.25

About Author

Emma Wall  is former Senior International Editor for Morningstar

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