The JPM UK Equity Income fund adopts an unconstrained approach to income investing, seeking companies across the market cap and dividend yield spectrum to offer capital growth alongside an attractive dividend yield. Companies held in the portfolio typically fall under three categories – More mature companies with a high dividend yield, long-term compounders with an average yield, and high growth companies with a low yield.
Since the arrival of positive vaccine news we have seen a strong rebound in the share prices of companies that could benefit from the re-opening of economies and a return to some sort of normality across the globe. I wanted to highlight three long-standing positions in the UK Equity Income fund that we believe have a positive outlook and characterize our approach to stock selection:
- High yield – OSB Group – UK focused buy-to-let lender and Kent Reliance building society operating largely online/over the phone allowing efficient turnaround and strong customer satisfaction. A controlled and low cost base has led to a high margin, high returns business through the cycle. In addition, OSB is very well capitalized – last reported figures indicated a Core Equity Tier 1 ratio north of 18%. Given the strength of the balance sheet and high returns, once the regulator eases restrictions, I expect OSB to become a high yielding stock, whilst still generating attractive earnings growth.
- Middle yield/compounder – Computacenter – Value added IT reseller with a large presence in Europe and North America – sourcing, implementing and assisting companies and governments with their technology requirements, be that moving into the cloud or stepping up cyber security, for example. I expect this increased channeling of capex spend towards technology to continue for a number of years to come and drive further growth for the company. Computacenter has seen significant earnings upgrades throughout 2020 and into 2021. The company has a net cash balance sheet which may be used for acquisitions or provide special dividends to shareholders on top of the 2% normal dividend.
- High Growth – Future Plc – Content led platform for specialist media brands – e.g. Future operates websites such as Techradar, PCgamer, FourFourTwo, and Decanter, to name but a few. By attracting consumers to their sites who value their specialist content, Future monetize their web pages through advertising space and click-through income. Under the current management team the company has gone through a multi-year transformation into a global outfit with continued organic and inorganic growth opportunities ahead. They have a long history of consistently beating market expectations and strong cash flow generation. The current yield is minimal, however, in time once the business matures, the underlying strong cash generation of the company could allow for an attractive dividend. In the meantime, I expect strong earnings growth from the company.
2020 saw unprecedented cuts to dividends across the UK market and forecasts still only assume half of the 2020 cuts are recouped by the end of 2022 – this is partly a function of companies over-distributing prior to the pandemic and using the crisis to reset their pay-out ratios. However, since September 2020, dividend estimate momentum in the UK market has turned from negative to positive suggesting that the risk now lies to the upside for dividend payments as the difficult decisions have now been taken and visibility on the re-opening of the economy has significantly improved. This has also translated into positive earnings momentum in the market, and the fund has benefitted from strong results from a number of our large holdings leading to outperformance relative to the benchmark.
Since its inception (31 May 2017) to the end of April 2021, JPM UK Equity Income C Inc has delivered a net of fees return of 3.93%* vs the FTSE All-Share return of 2.80% resulting in it being in the top 5 percent of funds, in the IA UK Equity Income peer group, over that period. Whilst at the same time delivering a yield of 2.91% over the last 12 months. Not bad for a relatively new kid on the block.
*Past performance is not a reliable indicator of current and future results.
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