Insight, news and updates from the OLIM team

Patrick Harrington on UK Income – Investment Week 29 October 2018

Bull Points:
Low relative valuation of UK stockmarket.
The UK market provides a high yield with dividends growing strongly.

Bear Points:
Brexit uncertainty may continue to depress share prices.
Potential impact of Labour Party policies if elected.

Investors should be looking hard at UK equities – in particular, the high-yielding end of the market. According to the widely followed Bank of America Merrill Lynch Global Fund Manager Survey, UK equities remain one of the least-favoured asset classes across the full investment spectrum, the mere fact of which should have contrarians pricking up their ears.
The UK market is also valued at a significant discount to its international rivals on virtually any measure and offers an attractive near-4% yield. Clearly, the uncertainty surrounding the type of Brexit is depressing UK share prices and there has also been substantial weakness in those areas, such as utilities, that would be detrimentally affected by a far-left Labour government.
But UK dividends are growing strongly in real terms, with dividend growth in 2018 looking at roughly 7% after being comfortably in double figures in 2017, underlining the income attractions of the UK stockmarket. Not only are companies growing their shareholder payments, but they are also dramatically improving the conventional earnings and cashflow coverage.
Cashflow coverage is crucial to the sustainability of dividend payments and the improvements bode well for future dividend growth. This is partially as a result of the strong run in the oil price and other commodity prices, but also because some income stalwarts such as Vodafone have improved their free cashflow generation over the last year. That is not say there have not been issues in the high-yielding arena; the travails of SSE amply demonstrate the perils of trying to invest your way out of a hole and sacrificing your balance sheet as a result.
Although the impact of a Jeremy Corbyn-led administration cannot be ignored, the positive performance of the UK stockmarket since the EU referendum suggests a difficult Brexit may not be negative for UK share prices overall. As the lion’s share of UK companies, earnings and revenues are earned overseas, quoted UK plc would be a major beneficiary of potential sterling weakness. Any clarity on the shape of Brexit could well be a trigger for a re-rating of UK shares.
Patrick Harrington is an Investment Manager at OLIM