Rensburg manager highlights yield strength among longer term players
Current large-cap yields are comparable to those from fixed-income products an the stocks will also offer growing dividends over the next decade, according to Rensburg's Colin Morton.
He said "You can get a similar yield from equities as in fixed income. However, once you are locked into a fixed-income product all you will get is 4.5% a year for 20 years, for example, whereas there is the potential for dividends to grow with equities."
Morton also highlighted that, while blue-chip companies have done well in absolute terms, their performance has not been great relative to other markets. He suggested this is because the companies are too large to take part in the ongoing flood of M&A activity in the market.
"Large caps have not done as well because they are pretty bid-proof," he said.
"The rally in the market has been led by private equity, and mid-cap companies have done the best. Small caps stocks have performed in much the same way as large caps because private equity does not want to buy a company that is not well established or does not yet have a good cashflow."
To prove that large caps are still a good investment, Morton looked at the top 20 stocks in his portfolio, accounting for 64% of the fund, including names such as GlaxoSmithKline, BP, RBS, Vodafone, HSBC, Barclays, Lloyds TSB, BT and Shell, to work out that the average forecast actual yield is 4.13%.
The average forecast free cashflow yield, which is the amount the company has left after tax, interest on debt and any capital expenditure, is 6.34%. This figure does not include banks.
"The companies are yielding just over 4% on average but if they decided to give back all of the free cashflow, the level yields would be over 6%," he said.
"They are obviously not going to do that but it is comforting that the current yield is well covered. No dividends are under threat."
He also found the forecast earnings per share dividend cover averaged out at 2.10%. Morton said this indicates that companies are in good financial shape as anything above 2% is considered reasonable.
Morton added: "This acceleration in dividend growth proves beyond doubt that large-cap companies are strong businesses that are paying very attractive yields at the moment.
"The compound dividend growth of my fund as a whole is 9%, making fixed income look overvalued in comparison."