Manager sees little interest to be earned from cash, believing buybacks would be more beneficial to investors
Rathbone Unit Trust Management’s Income fund manager Carl Stick is urging UK companies that hold cash to repurchase their shares.
Stick, who has run his £521m fund for 10 years, says firms will earn little interest from cash, but buybacks would benefit investors.
He says: “The trend is to do buybacks when shares are expensive. We like firms with cash on their balance sheet, but the returns they are getting for that from the bank now is de minimus.
“We ask firms: ‘Do you have to sit on that cash?’ Dividends are a nice way to return cash to shareholders, but not the only way.”
UK buybacks could help repair some of a £10bn fall in dividends in 2009, when yields also dropped, from 5.1% to 3.5%.
Stick says BAE Systems, which has begun returning up to £500m to shareholders by way of buybacks in 2010, is a good example of a company “buying while their shares are cheap.”
He criticised GlaxoSmithKline, however, for “buying back shares all the way from £21 down”.
Stick says he will sell companies he feels might not use cash wisely.
In the past, Stick says he could buy lower-yielding stocks and wait for dividends to grow.
“But last year, you had big cuts, so you look for companies that pay a 5% to 6% yield. When growth comes back, we can buy companies yielding less,” he says.
He is buying events company Tarsus, yielding 5.6% with a “safe earnings stream”, at the expense of reducing Reed Elsevier, which he says could cut dividends to upgrade IT.
He advocates breaking up banks if it allows their retail units a smoother income stream for dividends, “but we will not go back to their historic levels of yield or payouts”.
On other specific holdings, he says dividends of BP and Royal Dutch Shell are safe “with oil at or above $60”.
He believes Vodafone remains attractive as long as network expansion is not too expensive and he likes GlaxoSmithKline’s change of tack to focus more on generics and over-the-counter products.
He also likes Halfords, part of the 40% assets he has outside the FTSE 100.
From January 2000 to the start of 2010 Stick’s fund made a total return of 106% while the FTSE All Share fell by 12%.
