2020 has been a tough year for income investors. A plethora of businesses have been forced to cut their dividends, as a nationwide lockdown hit their profits and made future forecasts uncertain.
That's an issue for people like Job Curtis, manager of the Gold-Rated City of London (CTY) investment trust, which has built a reputation as a "dividend hero", having increased its pay out every year for more than 50 years.
Curtis has made significant changes to his portfolio since the emergence of Covid-19 at the start of the year. “Everything changed quickly,” he says. “Before, we were overweight travel and leisure, a sector which was particularly badly affected by the virus and struggles to recover with social distancing.”
Leisure names that Curtis has cut include food service group Compass (CPG), cinema operator Cineworld (CINE), Premier Inn-owner Whitbread (WTB), bookmaker William Hill (WMH) and travel agency TUI Group (TUI).
One name which recently left the portfolio is the UK's largest pub retailer and brewer Greene King (GNK), which was acquired by a Hong Kong real estate firm last year. “At the time I was sad to lose this company, but it was the right thing to do," says Curtis of the deal. The company ihas recently reported on the difficulties on trading through the pandemic, cutting up to 800 jobs and closing 79 pubs and restaurants. It blames the introduction of the 10pm curfew and the end of the government’s furlough scheme.
Buying Opportunities
But he's not just been hitting the sell button in recent months, Curtis has invested in French national lottery operator La Francaise des Jeux (FDJ). “It has run the lottery since 1983 when it was privatised and has the licence to run for the next 25 years,” he says. “It has had very good performance and is cash generative.”
Elsewhere, the portfolio's weight to banks has been reduced and Curtis has sold his stake in five-star rated Natwest (NWG), which he bought in 2019, and reduced positions in HSBC (HSBA) and Lloyds (LLOY), both of which feature in our 10 undervalued stocks list. He has also sold five-star rated insurer Aviva (AV.), and instead invested in Legal & General (LGEN) in April after it confirmed its dividend.
In the oil sector he reduced his position in five-star rated Royal Dutch Shell, which cut its dividend for the first time since World War Two, and bought into French company Total (TTA). “It has lower cost of production and a strong balance sheet,” he says.
Not owing one-star rated Ocado (OCDO) has hurt the trust's performance, says Curtis. The food retailer's share price has more than doubled since January. “This sector has benefitted from lockdown as people could not go to pubs and restaurants anymore and that money went into supermarkets," he adds.
Not all supermarkets have enjoyed such gains however; Sainsbury (SBRY), for example, had to cut its dividend due to extra costs. Curtis says: “I sold it and initiated a position in [three-star rated] Tesco (TSCO), instead, which is the market leader.”
Striking a Balance
Meanwhile, Fran Radano, manager of the two-star rated North American Income Trust (NAIT), likes companies which prioritise preserving cash and reinvesting in their business, and only then returning surplus monies back to shareholders.
“This does not mean we will avoid all dividend cuts or suspensions, but we can seek to minimise the impact of these exogenous events while making sure management is not ‘burning the furniture’ to make these payments,” he explains.
For example, he is betting on healthcare companies, which he believes are well-positioned for an ageing demographic. He likes four-star rated Bristol Myers Squibb (BMY) and three-star rated AbbVie (ABBV,) and elsewhere home improvement industry leaders, such as one-star rated Home Depot (HD).
“Home Depot is well positioned for an environment where we expect people to spending more time at home, not to mention an acceleration of those leaving more-dense urban areas for homes in suburban and even rural communities," he says.
Radano has also recently initiated a holding in data centre-focused real estate company, Digital Realty Trust (DLR), because “it is obviously important with increased numbers of people working from home”.
This article has been updated to reflect the acquisition of Greene King in 2019
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