Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Robin Geffen. He is manager of the Liontrust Income Fund. Hello.
Robin Geffen: Holly, good morning.
Black: So, I think the clue is in the name, but I shall ask anyway. Can you tell us briefly what the fund does?
Geffen: Absolutely, Holly. It is a UK equity income fund. It is very determinedly large and mega cap investing entirely in the FTSE 100 with a few US mega caps as well.
Black: Now, income and the FTSE 100 this year haven't been a great combination. What's been happening this year for you as an income investor?
Geffen: Yeah, sure. It's been a very challenging year, but actually what's been very interesting is, we've had over £40 billion worth of dividends cut, cancelled or postponed so far this year. And that's really been spread right across the market cap with 40 FTSE 100 stocks, 92 in the 250, 57 in SmallCap and 62 on AIM. But the key thing here has been that the FTSE 100 has outperformed the 250 and SmallCap and AIM, and we've continued to pay a good level of dividend this year. It's been a very demanding year, but I think the seeds of this whole issue about dividend cuts and cancellations were sowed right back in March 2017. And I know that sounds like going back a long time into ancient history. But actually, what was happening then was I coined a phrase called dividend risk, analyzing the amount of a fund's total income being derived from their top ten holdings. And what very clearly was happening in March 2017 onwards is that people were clustered in a very small group of high yielding stocks that were basically paying dividends they couldn't afford.
Black: So, you typically, as an income investor, you need dividend cover of at least one to show a company can afford its payout, but ideally two is a good number?
Geffen: Two is a very good number. And our historic number, if you look back at our historic cover on the fund, it's 2.03, but our forward cover is 2.27. And we have certainly one of the highest if not the highest levels of dividend cover. And we're also forensic about looking at leverage and cash, because a lot of companies that have basically hit the buffers in terms of liquidity have suddenly got their high leverage much of which they use. Because if you are basically paying a dividend in excess of your earnings, that was coming out of debt and that's no longer affordable. And the key here is sustainable dividends. And these are dividends that can repeat each year and grow. And there have been a lot – if you look at the composition of the FTSE 100 going back five years or so, there are a lot of companies in there, the banks, Barclays, NatWest Lloyds, Standard Chartered, HSBC and companies like Vodafone and BP which paid very high but unsustainably high dividends and they weren't reinvesting in their own future. One is had have a very clear view on where dividends are sustainable and going to grow. And I've got nearly 25% of the fund in technology stocks, three in the UK, four in the US And these are remarkable companies. They have virtually – many of them have virtually no debt, very, very low leverage, way, way below other companies and have incredibly high dividend cover. The average dividend cover on my US – for US tech stocks is 4 times and those dividends are growing. They grew…
Black: Does that not tell us that they could be paying out more if they can afford it 4 times over?
Geffen: Yeah, but what they are also doing – no, that's a very good point and I believe people like Amazon and Alphabet will start paying dividends because they're generating so much cash. But the key here is they're continuing to invest in their own future, and that's very important, making that investment in order to carry on growing at these astonishing rates. Companies like Microsoft, Apple, MasterCard and Visa, they are extraordinary and very, very high-quality companies with virtually no debt and extraordinarily good dividend cover.
Black: Robin, thank you so much for your time. For Morningstar, I'm Holly Black.
