By Duncan Burden, 11 June 2013
With a seemingly endless torrent of adverse news in Europe, it will come as no surprise that the FTSE 100 has posted consecutive gains for the past 11 months, marking its longest ever winning streak on record.
The era of financial repression continues to penalise cash savers, while borrowing rates are at record low levels for governments and businesses alike.
Against this backdrop, at SPI UK, we see the greatest long-term value in dividend growth; indeed over half of the names in our global equity income portfolios have managed to increase their dividends by upwards of 10% per annum over the past nine years.
While our core strategy seeks to capture sustainable growth in shareholder returns at a reasonable price, short-term trading opportunities present themselves to add an event-driven overlay to portfolios. One example is that of Vodafone, which we sold recently following an excellent rally since the turn of the year. The market had grown increasingly fearful of the admittedly fragile economic health and competitive landscape in its core continental European market.
In doing so the market had placed a punitive discount on the stock and the shares yielded in excess of 6%, fundamentally undervaluing its Verizon Wireless stake in our view. Over the ensuing period market chatter surrounding a potential deal in the pipeline pushed Vodafone up over 25%, presenting the perfect opportunity to exit the position and reinvest the proceeds in a company with greater clarity of future-dividend growth.
Our attention has since turned to Anheuser-Busch InBev (ABI), which yields just above 3% on a forward-looking basis. Whilst in the context of an income strategy this switch from high to low yield may appear counterintuitive, the move sits perfectly aligned with the portfolio objective of producing a sustainable and growing income. The chart below illustrates the speed at which the returns on genuine dividend growth supersede ostensibly generous short-term dividend returns, such as that of AstraZeneca – a business priced for decline. Extrapolating over a longer period means that investors with a truly long-term investment horizon are well positioned to capitalise on the phenomenon of compounding.
ABI’s dominant market positioning and entrenched portfolio of beer brands is underpinned by the potential for structural margin uplift in Latin American business. The company generates prodigious free cash flow, sufficient to fund capital expenditure and accretive acquisitions, while maintaining a sustainable and progressive policy of shareholder returns.