UK dividends look in great shape going into 2018, says Old Mutual chief executive Richard Buxton. Silver Rated fund manager Buxton, who runs the Old Mutual UK Alpha fund, is confident that the UK market is through the worst of the cuts to pay-outs, with a few notable exceptions.
“I do not think BT’s (BT.A) dividend is sustainable, but we would probably buy the stock if it cut the pay-out,” he said.
“UK dividends look healthy, but I am slightly concerned that the pay-out ratio is too high, and companies should rebuild cover.”
Buxton was bullish on UK stocks, despite significant returns over the past eight years, expecting high single digit returns in 2018. While other investors are growing wary of what they see as an ageing bull market, Buxton believes we are only mid-cycle, and there are significant more gains to be had over the next five years.
“This has been the most hate rally. People do not trust stock markets. I can see why you could point to a couple of sectors and think that they are experiencing a price bubble – bitcoin is one example – but do I think this means equities as a whole are overvalued? No,” he says.
“There have been outflows from the UK All Companies fund sector all year. There is no euphoria in equity markets. Yes, a normal market cycle is seven to eight years, but economic history shows us that after a global financial crisis there are 15 to 20 years of recovery. The run will probably end as I retire. We’re only mid-cycle.”
Buxton conceded that there were “certain growth stocks” that were currently trading at “extreme valuations” but said that would change as there was rotation within the market. The fund manager also pointed to pessimism among some stocks which had been proven wrong.
“In July last year many people were saying that HSBC (HSBA) was paying to high a dividend and that they had to cut it. We didn’t think so, and were proved right,” he said. “Similarly, many people now think that Shell (RDSB) is on too high a yield and that it should cut. We do not.”
Buxton said he liked retailer Next (NXT) and Lloyds bank (LLOY): “They are both a very good price. I will be adding to my holding.” He also likes stocks which will benefit from a lower pound – roughly 70% of the earnings of the FTSE 100 come from overseas – as he is a long-term bear of sterling.
Equities Unpopularity is “Insane”
Buxton says that the biggest threat to markets is inflation, but that he expects it to stay low – and for interest rates to remain low too. This will prolong the investor clamour for yield, which can be met by UK equities.
“A pretty dodgy company can issue a bond paying 0.001% and it is four times oversubscribed, but UK equities offer a real rate of return above inflation and UK equity funds are seeing outflows. It’s insane,” he marvelled.
