Henderson: UK Market Dip is Good for Income Investors

UK stocks have fallen from favour as concerns build about Brexit. But James Henderson welcomes the dip as it has provided opportunity for him to pick up income stocks cheap

Emma Wall 14 May, 2018 | 7:45AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by James Henderson, Manager of the Lowland Investment Company.

Hello, James.

James Henderson: Hello.

Wall: So, income is the name of the game. You upped the dividend in December, much to shareholders' delight. But income is one of those things that I imagine at this stage in the cycle is becoming a little more difficult to find?

Henderson: Well, in some senses, it is, because the favourite income stocks have been favourites for a while. And for me, it isn't at the moment. Quite a lot of the U.K. has fallen out of favour and this is throwing up reasonably high-yielding shares that will pay the dividend. They aren't shares that are – they've probably got some problems around them or some perceived problems around them, but they are the higher-yielding shares.

So, I'm slowly buying into some of those and I've increased the gearing at Lowland. And the thing about increasing the gearing is that it increases the earnings, because we are borrowing this money at 1.25% and I'm buying shares like Severn Trent that are yielding more than 6%.

So, actually, this is slight embarrassment of earnings and income at the moment coming through. We'll have to keep calm and say, no, we shouldn't – 8% increase will be plenty. Actually, the earnings could come through more than that because as we move the gearing up towards 15% from 6% or 7% borrowing at 1.25%, buying things yielding 6%, your revenue account improves quite a lot.

Wall: I think that's a really important point to make about the U.K. being out of favour. We've had several Bank of Merrill Lynch et cetera studies showing that for foreign investors the U.K. is incredibly unloved. They are very nervous about Brexit and even a Corbyn government. What makes you think that perhaps those fears are unfounded, and this still remains a compelling place to be?

Henderson: You are right. The foreign investor, the market he hates the most, the U.K. consumer, is having a really difficult time. But these things have – we left – Brexit happened 18 months ago. The foreign investor has been selling down in that time. The U.K. investor has been also selling down. And we've reached a point now where valuations are remarkably low in comparison to overseas valuations and sometimes people are overdoing the gloom.

Good quality companies with excellent products that are selling over some of their product overseas will get through whatever Brexit throws at them. Those companies have to have something exceptional about them. Or they need to have a position in their markets that allows them to go through a more difficult time and come through the other side. But there are those companies.

And at the moment, the ones that are doing that and growing their dividends I think will be very good investments in the long-term. I think you have to go slowly. There's no – I don't know the answer to why, how it all works, I don’t have a clue. So, I'm just trying to focus on the companies, companies that have got something their product that makes them truly competitive. And then whatever politicians do, they won't mess them up.

Wall: Does that mean that – you mentioned there you are looking for global leaders that happen to be here that are selling product overseas. Does that mean that you are more nervous about domestically-focused stocks? Or is it much more about the individual companies?

Henderson: It's not the individual companies. No, nothing like that. I think that international company hasn't come back in the same way. So, there are companies – certainly, what I've been buying? I've been buying Greene King, the pub company of late. It has been difficult, the area. But there are like-for-like  all right at the moment. Yet, the valuation is low.

Then there are companies that are perceived to have political concerns around them. So, I've been buying actually something like Severn Trent. It is controversial, but that's why it's when there's a bit of controversy around the company that they become really cheap and that is, I think, Severn Trent and National Grid are such companies.

Something like an infrastructure company like John Laing Infrastructure has also been very weak again on these worries, the political worries as much as Brexit. And now the valuation on that is very low and the yield is high. Do it slowly, nothing dramatic, but on really weak days add a bit and keep going like that. That's the strategy. I mean, you have to be careful about the consumer. The U.K. is under pressure. But again, if the format is right, they come through the other side.

Wall: James, thank you very much.

Henderson: 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
Lowland Ord1,405.00 GBX0.36Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar