"Quality Firms Will Keep Paying Dividends"

VIDEO: The companies that went into the Covid-19 crisis strong will emerge even stronger, says Liontrust's Storm Uru

Holly Black 7 May, 2020 | 11:20AM
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Holly Black: Welcome to the Morningstar Series, “Why Should I Invest With You?” I'm Holly Black with me is Storm Uru, he's manager of the Liontrust Global Dividend Fund. Hello.

Storm Uru: Hi, Holly thanks for having me.

Black: A pleasure, lovely to see you. And so you're thinking about the D word at the moment dividend, which seems to be a really difficult place to be for an investor. Have you been surprised by the level of dividend cuts we've seen in the last few weeks?

Uru: In terms of dividend investing, something that I think is very important to frame this discussion is to look back three months ago, and really look at the sector and we did have a high range of companies with very low dividend cover, very weak balance sheets. So as we entered this crisis, unfortunately, it was unsurprising to see a number of companies cut their dividends. The concern – the real concern we have is around these companies is one of the main reasons why they cut their dividends, because they need more capital to finance the operations through this transitory environment. And what this means is that not only have they cut their dividend this year, but it also means there is a high probability they won't be reinitiating those dividends next year. It's the reason why we focus on companies with solid and robust balance sheets and high dividend cover, because not only can they continue to pay the dividends during these economic times, but they can also fund and grow their business as we emerge from this unknown crisis.

Black: And obviously, you've got a global remit which gives you a bigger pool at least to choose from, are there countries or sectors where everything looks a bit more solid than others, perhaps.?

Uru: At the moment it's too early to tell. We don't know the depth and the duration of this recession. It's really dependent on how quickly we're able to restart the economy, we do know is that some industries have been reshaped as we emerge from this economic crisis. And it's pretty easy to sort of touch on those particular industries airlines, brick and mortar retail, the list seems to be expanding every day. So we think it's really important to continue to upgrade the quality within our portfolios. But in terms of investment opportunities, I kind of see this as a divergence between the old economy and the new economy, those companies that came into this crisis in a really strong position we anticipate will emerge, when it may be we're not quite sure, but in a stronger position.

Black: So you mentioned earlier about dividend cover being low at the start of the year. Something I've heard said in recent weeks which is perhaps some companies have been over distributing and this has sort of forced them to rethink and set a new baseline and could in that respect, be a good thing in the long term, you thinking about it in that way at all?

Uru: Absolutely. You're absolutely right there. In some instances, some companies have been paying their dividends when they should be – maybe reinvesting in their business for growth, and have been caught, sort of hopping on one leg into this crisis. Because as you'll be aware, there's a lot of companies which don't have an online presence, don't have the digital capabilities in house to navigate this current issue. What we're seeing is that those companies which have been investing in their business actually allocating capital in an effective manner within their businesses are already reporting very strong numbers as they excel in this environment. So those companies which have been paying out too many – too much dividends over the past two to three years, they've got a very difficult period ahead of them.

Black: So a lot of investors are very reliant on income, particularly if they're in retirement, what would be some of the key things you would say to them to keep in mind if they are feeling concerned through this period?

Uru: I think that the recent cut by Shell was a watershed moment for income investors it really highlights the importance of not chasing yield. It's important that that we have sustainable income over time, we can grow that quicker than inflation. And that really means investing in better businesses. So maybe it's time to maybe lower the yield that we're requiring from income funds so that we are more sustainable and investing in businesses that are ready to excel in the next business cycle which will start at some point in the next six to 12 months dependent on how long it takes for us to restart economy.

Black: Storm, thank you so much for your time. For Morningstar I’m Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk