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.
Have you learned lessons during the crisis?
We recently added to Bloomsbury Publishing in a placing, despite it having put its cash dividend on hold.
Our reasoning was that the company is investing in its digital division, which is likely to benefit from the crisis accelerating the adoption of digital forms of entertainment, and also because it considered a scrip dividend, where investors would receive new shares in place of the cash dividend.
Usually a scrip dividend is treated as capital so it is not something we would ordinarily opt for. However, when it is paid in place of a cash dividend it can be distributed as income. According to fund auditors, there is an income equalisation mechanism to make allowance for this.
So, we have learned that in the current climate a degree of flexibility around scrip dividends is helpful and it can contribute towards the income paid out by a fund.
Do investors still demand a yield in the current environment?
Perhaps not as much as we might have expected. In our conversations with wealth managers and financial advisers there has been a clear understanding that these are exceptional times.
The Investment Association's decision to drop the yield test for 12 months has enabled a focus on capital recovery, rather than chasing yield at any cost. I think our underlying investors support this sensible approach.
With the Bank of England base rate at 0.1%, a yield of approximately 4.8% from the fund (annualised with the most recent payment from March), is relatively attractive despite the well-publicised dividend cuts.
Have you seen any companies raise dividends? If so, could you share some examples?
Yes, despite the challenging economic backdrop, there are companies that have still been able to increase their dividends.
Examples are Chesnara, which is a life and pensions consolidator; HomeServe, the insurance and home repairs group; Severn Trent, the water company; Anpario, which provides agricultural feed additives; and Sirius Real Estate, which invests in German business parks.
As you can see, they are from a range of different sectors and spread across the market cap spectrum.
Is the dividend still a business confidence signal?
It is truer now than ever. Only the strongest companies can continue to pay a dividend after the economic shock of this crisis.
It usually indicates that they have good visibility over their earnings and/or they have enough liquidity to reinvest in their businesses without compromising growth options.
These robust, well-managed companies operate in a broad range of sectors and are spread across the market cap spectrum, so our multi-cap approach is a strength for the fund.
These companies are continuing to pay attractive dividends and, over time, they are likely to be appreciated even more and to continue to build a loyal following among investors.