BWD UK Equity income manager colin morton believes uk businesses should hand over excess cash to investors, not corporate financiers
UK companies must learn to ignore the demands of the investment industry if they are to thrive.
That is the view of Colin Morton, manager of the BWD UK Equity Income Trust, who believes management all too often ends up destroying value rather than concentrating on the business and distributing excess profits to shareholders via dividends.
He said: 'This industry makes money out of persuading companies to do things they probably shouldn't do, for instance look at the activity of corporate financiers. You hope companies have learned their lessons.
'But companies still have this ridiculous idea this industry knows what it is doing. They cannot understand that the share price often has little to do with the business but a lot more to do with, say, what a hedge fund is up to. Managers have to get on and run a business successfully.'
In particular, Morton sees mergers and acquisitions as an area in which companies can waste money on corporate activity that does not pay off in the long term. Morton is critical of BAT's recent purchase bid for Italian tobacco manufacturer and distributor, Ente Tabacchi Italiana, as he feels it is paying over the odds. The only consolation is that the tobacco giant has a lot of cash on its balance sheet, he said.
The UK Equity Income Trust has a blue-chip focus and Morton is confident dividend is going to be an increasingly important part of overall return for investors. He expects the UK to produce an overall return of around 8% per year going forward, with 2% from GDP growth, 2.5% from inflation and 3.5% from dividends.
He said: 'There are lots of good quality, cash-generative companies in the UK market but there are not many fast-growing companies. If you do buy them, you have to pay for that level of growth. There are plenty of companies that can grow their dividends by 3%-4% per year.
'The yield on the All-Share is level with short-term interest rates while equity income funds are yielding 0.5% more than base rates. A couple of years ago, the yield on the index was nearer 2% and base rates were nearer 6%.'
Morton sees the weakness of the US currency as one threat to dividend growth because some 25% of FTSE 100 companies, among them Shell and BP, pay out in dollars. He added: 'Currencies tend to sort themselves out. If the US economy wakes up, the dollar will rise.'
While the fund has the ability to put up to 15% in fixed interest, this is an asset class Morton is not looking to hold in his portfolio. In part, this is because he can get sufficient yield from equities but it is also because BWD does not see much upside in the bond market.
The renewed emphasis on dividend is part of a general change in attitude by the investment industry in the wake of the stock market crash, Morton believes.
He said: 'A lot of the recent rally has been in industrial companies; high-yield businesses that have good cash generation. The market wants more up-front than ever before. People don't want to wait five years for their return.'
While the market is becoming more realistic, Morton does not believe investors are likely to come back to equities until the asset class has produced two or three years of gains.
He said: 'We are now back to the environment of 40-50 years ago. The only difference is that back then there was no expectation from equities. The 1970s-90s has been the 25-year exception to the norm.
'Equities now look fair value to cheap. A return of 8%-9% per year doesn't look great in comparison to the immediate past but there is a price to pay for low inflation and interest rates. You don't have the same earnings growth or pricing power.'
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