Holly Black: Welcome to Morningstar. I’m Holly Black. With me is Carl Stick, he’s manager of the Rathbone Income Fund. Hello.
Carl Stick: Hello, Holly.
Black: So, you’ve got three stocks for us today from the portfolio. Where should we start?
Stick: Well, I think the first place to begin right now, this summer has been a summer of massive dividend increases. And the major example of that in our fund is Rio Tinto (RIO), the miner. It’s benefited from sky high iron ore prices, that’s fed through into quite extraordinary profit growth, which has meant that the dividend and the special that’s been paid up this summer is 260% ahead of last year, 260% that is quite extraordinary. I don’t think we’re going to see that repeated. In fact, I know we won’t see that repeated. It’s a massive bonus for investors in the fund this year. It does get us thinking though, we get this return this year, what are they doing to invest in the future? There’s always this balance between the money we get this year in dividends, 260% increase terrific. But what are they going to invest in to give us the earnings for next year to give us the dividend for next year? That’s what exercises our mind, but I think Rio Tinto is probably the poster child of dividend increases this summer.
Black: And it’s a really interesting point, actually. Because in terms of dividend sustainability, a lot of firms have used the pandemic to rebase their dividends to a more sustainable level. Is that something you’ve seen in the stocks in the portfolio?
Stick: Absolutely. We saw that especially within the commodity space, especially with oil companies, for example. That wasn’t a problem. We were glad they did that if a company is over distributing, that is always an issue. So if this was the opportunity to rebase towards more sensible level and (in a way) we had to rebase our distribution as well. It means the starting from now we have a far greater, stronger foundation for future dividend sustainability. And that is really important.
Black: Okay, stock number two.
Stick: Stock number two is slightly different. We like U.K. financials. We like the banks. Our largest position within the banking sector is actually Lloyds Bank (LLOY). Last year, again, banks were not being encouraged to pay out dividends, they weren’t allowed to, they were in a position to pay out dividends. But they most certainly were not allowed to by the regulator. But these entities are not the same businesses, they were back in the global financial crisis, their balance sheets are far stronger. And they do actually have capital they can return whilst maintaining that financial strength. Lloyds, we started seeing the dividend come back through this year. We think that’s going to be sustainable, we think that’s going to be progressive, they’ve certainly said that. They’re benefiting from a very robust mortgage market. We think if inflation starts to come through into the system, they’ll start to benefit from the interest rate margin they get there. And also, it’s a key player into the U.K. consumer. If and when we do get out of the COVID environment and people start spending that will feed through into Lloyds profits. So we think Lloyds Bank is a really good way of playing dividend recovery, but also economic growth in the U.K.
Black: What did you think about the regulators stepping in and banning dividends in that sector?
Stick: Totally understandable. You know why they did it. I think the banks were probably frustrated, but it was going to happen last summer. As I say it hasn’t been that long for them to resume and to get back paying those dividends. And as I said we are looking forward to actually receiving that income in the years to come.
Black: Okay, what is our final stock?
Stick: Our final stock is slightly different. It’s PageGroup (PAGE), which is the staffing agency. Another way of playing economic recovery, we think the employment market will remain robust. We’re not sure how convinced analysts are we actually think it’s stronger than is maybe being priced in the market. PageGroup has a way of playing that not just within the U.K. but across Europe. It’s got a very strong brand. We are seeing already stresses in the employment market. We know that, people do need to find work, there is work available trying to match skills with jobs is a key skill.
PageGroup when they came out with their results, a couple of weeks ago, we did feel that management were enthusiastic about the future without trying to overplay it. We saw a big increase in distribution. We saw a special dividend come back these companies generate a lot of cash off their businesses. And they’re starting to use technology as well to place the right people in the right jobs. So PageGroup is a smaller business for us. It is cash generative, big increase in distribution, but also it’s a way of playing U.K. and European Economic Recovery.
Black: Fantastic. Carl, thank you so much for your time. For Morningstar I’m Holly Black.