Siddarth Chand Lall, manager of the Marlborough Multi Cap Income fund, talks about how, despite the economic impact of the pandemic, robust and well-managed companies are continuing to pay attractive dividends and explains where he is finding opportunities across the market cap spectrum.
What has been your response when companies have cut dividends?
When companies cut their dividends we do normally sell out. However, in the current environment a more pragmatic approach is required, especially as the market sell-off has created anomalies.
If the stock is at anobvious discount to its intrinsic worth and backed by a strong management team then we may not sell simply because it has cut its dividend.
PPHE Hotel Group, which operates the Park Plaza chain, is an example, and this has rallied about 70% off its March lows so it would appear we were correct to hold on.
WH Smith is a company where we have bought more despite a dividend cut. We took advantage of price weakness to add to our position in the retailer when the share price was below that offered in the recent placing. The shares are now comfortably above the placing price.
The lockdown and travel restrictions hit WH Smith hard, with an 85% fall in company-wide sales in April, so the decision to put the dividend on hold was understandable.
We continue to like the company's story and believe its airport and railway station shops will reap the benefits as more people begin travelling again, but it is a gradual process.
In contrast, we sold our position in Softcat, a provider of IT infrastructure and services, after it cut its dividends, despite having net cash and previously having paid special dividends.
The latest trading update showed that the business is in better health than management seemed to think, so perhaps they should have paid a dividend after all.
Have some company management teams been too quick to cancel dividends?
It's definitely the case that a bit of a herd mentality kicked in. When companies saw other businesses cancelling their dividends, many followed suit and went straight to zero, without giving much consideration to a reduction in the level of dividends or looking at other options such as scrip dividends, where investors receive a small amount of new shares in place of the cash dividend.
We also think it was slightly awkward for some of the brokers advising companies. When they were recommending that companies raise cash through a placing, they may have seen it as difficult to advise the management the business was strong enough to pay dividends at the same time.
When do you think it is acceptable to cancel dividends?
For those companies with high gearing that are in genuine need of government funds and are resorting to bailout schemes then, yes, cut the dividends.
The same is true when companies have been furloughing staff or closing all stores or sites, meaning they have no earnings to pay dividends from. Then we totally understand and are sympathetic.