Dividends


Dear Friend

DIVIDEND AND INTEREST PAYMENTS

WISE WORDS

NORMAL WORK

LIGHT RELIEF

PRACTICAL THOUGHTS

RISK WARNING

As I wrote this latest missive, I wonder how things will have changed by the time it is remitted.  Last week saw the greatest weekly volatility, upwards and downwards, since WW2 and with the biggest percentage gain on Tuesday for the Dow Jones since 1933, only for the end of the week to have renewed pessimism again though still leaving things much higher than they started.  Instead of advisers having to send more letters to clients advising them their strategies had dropped 10% (an inane EU rule), perhaps it is time to have a rule demanding letters go to tell them things are better by much more than 10%.  All that said, have we hit the point of maximum pessimism?  No-one knows but if not, it is nearer than it was and indeed, the underlying markets may just be reflecting the fact that those who were forced to sell-out to meet margin calls on speculative positions or hedges may have ‘happened’ (and indeed some companies have gone under as a consequence – and ABN Amro Bank lost $200million on one such customer’s default alone last week). 

My next eshot hopes to remove the present volatility from the facts and share whether we perceive the market situation represents an opportunity or a constraint.  I have not seen the same type of analysis which I plan done elsewhere so I hope that you find it helpful.

There is a sense that may be the case though I cannot afford to be blindly optimistic as human emotional panic can continue to drive people to do irrational things – such as create big losses to grab cash despite the cost to them.  Remember you do not experience a loss unless you sell and then despite your perceived rational beliefs, you would never re-enter the stock again – other than when it may be far higher than when you actually sold because you adjudge conditions to be so much better.  I have recounted before that the Chinese use two brush strokes to write the word ‘crisis.’ One stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger but as hard as it is, recognise the opportunity and no, I do not say that glibly either as I know how painful this situation is and in so many ways.  That may resonate with you in your personal and work life too – however hard it might appear to be at the moment.

Whatever happens and when (and there are likely to be other central government/bank involvements too), things will be different and we all have to pull together to try to make the best of things through the other side.  Our societies have endured far, far worse (and that is not being unsympathetic to anyone who has lost a dear one through this virus) and recovered and gone-on to do even better than its past.  That will be the case again.  All that said, we may well look back and recognise that the artificial ‘austerity’ years which really enjoyed the biggest ever spending on welfare and public services and simply slowed-down the rate of our annual overspend (but which doubled our National Debt in that ten year period) may soon look like a golden era of opulence for all instead.  Indeed, the other artificial figures of ‘those in poverty’ in our society will soon shrink because the statistics are based on ‘average incomes’ and not ‘real’ poverty, so as average incomes plummet because of the Virus and those at the bottom are being better supported temporarily so their incomes are rising, then there will be fewer ‘under-average’.  However, that will not make any of them, or us, feel any better-off whatsoever – so perhaps this will be a time to start looking at the numbers in absolute poverty going forwards instead – and remembering those across the world who still survive on less than $1.50 a day – and count our blessings for what we have and shall still have through the other side, including all our great free public services.

Remember too, we are there for our clients.  We can’t change anything but we are trying our hardest to communicate our sentiments to them as much as we can and reassure with facts if that is the right thing to do – and that includes using this medium.  Sadly we are hearing more and more that many advisers have ‘gone AWOL’ – no contact whatsoever with the very clients who have paid them well over the last many years and that is just not good enough.  If they are still in employment through the other side (and already some advisory firms are cutting back on staff and salaries, let alone consolidation and recruitment programmes), I hope their clients will remember that.

DIVIDEND AND INTEREST PAYMENTS

The FTSE100 has struck a yield of over 7%, the highest for some forty years (what does that mean…) and this without ‘any’ inflation so historically much more significant now.  However, the unprecedented times have been encouraging prudence with companies and funds and many have been stopping or reviewing their dividend payments to conserve cash and in fact the market has almost been rewarding companies which do that.  Whilst oils, banks and miners count for a big chunk of the market’s income, if they cut their payments the knock-on reverberations could be very damaging to investors needing the income from their holdings.  The worst prediction I have seen is for a 30% of dividends to be cut, though so far the two oil majors have not and intend to continue rewarding their income investors.  Other high-paying sectors should also be better insulated, from tobaccos to supermarkets, food producers and pharmaceuticals and yesterday, one life insurance company even announced an increase in its final payment so there is not a universal view. 

I hope that companies that can still afford to pay something do not just follow the herd as investors need the income too – the same goes for their rental payments to landlords and interest payments on their debts. They should not panic themselves into cutting payments altogether and shall we say that we hope that through the other side there will be a catch-up opportunity as deferred payments can be paid then.  Some sectors are hit harder than others too – for example property companies are suffering from rent payments being missed – Hammerson only received 37% of its quarter’s due payments last week and Intu only a quarter – are these enough to pay the debt servicing needs of these landlords?  Of course, the bigger fear for them is what happens if their tenants do not emerge through the other side at all and so lots of empty properties are there, costing money to keep safe and with capital values shot too.  Even a student accommodation company like Unite has severed its payment as it is offering conditional refunds for students’ last terms where they cannot be at university and everyone thought that investment idea was rock solid.  Hammerson notes it has £1.2billlion of cash and undrawn lending facilities as well as the £395million due from the sale of one of its assets and for which a deposit has been received.  Today in theory you can buy all its shares for only £550million – that is how ridiculous it is – and brokers Peel Hunt has today revised its share price target to £2.70 – £2 higher than the current market value.  If you think the company is going bust it is a bad buy.  If you think it is not, then its value in say two years could be four times higher and dividends on top.  I suppose you could say that a small investment is low risk versus a good prospective return opportunity – and there are loads of similar such examples at the moment.

Where do we stand?  Yes, we have companies and funds which have cancelled their payments.  This will affect us but we have some advantages which will better protect our investors.  We have a vast range of components and whilst the hit from any one is unwelcome, it is not as if we have a big proportion of any investor’s account in that one situation.  Secondly, as we use Investment Trusts rather than open-ended vehicles, they have different tax rules and also often hold income reserves so even if some of their components cease payments, it should mean that they can continue payments for longer and hopefully till things ‘normalise’ through the other side.  Open-ended funds don’t have that benefit – they can effectively only pay what they receive.

Investors must take care and ensure that their income is confined to what is being produced and that they do not inadvertently start to spend capital by taking more than they could or should without realising it.  Of course, there are degrees – a small excess for a limited time is not a problem but if an investor is taking far too much then the capital hit can be very detrimental.  This is the time to review, if you have not done so already – do you have cash reserves upon which you could manage for a period so you stop taking as much income from market investments?  It may only be very temporary – who knows but it is wisdom that is all.  Whoever holds/manages your investments, do have a look at that and act if you can.  We have always endeavoured to retain a reserve of several months’ payments regardless and there is then always something we can sell to top-up the pot but clearly present conditions do not encourage that.  Please don’t ‘just’ carry-on regardless but have a look and see (as well as seeing if you have surplus cash reserves, National Savings, Premium Bonds or whatever you could use instead for a while) and recognise even that maybe your weekly costs are far lower at the moment as you cannot spend on things you used to be able to enjoy.

WISE WORDS

This is a very good and candid video interview with extremely experienced Aberdeen Standard’s Keith Skeoch:- https://citywire.co.uk/wealth-manager/news/keith-skeoch-the-point-of-maximum-panic-reached/a1340551?re=72881&ea=517077&utm_source=BulkEmail_WM_Daily_Single_EAM&utm_medium=BulkEmail_WM_Daily_Single_EAM&utm_campaign=BulkEmail_WM_Daily_Single_EAM

How do funds value their assets – eg property, private companies – large holdings which are unsaleable so the price only reflects the market listed price for a small trade?  Loan covenants, reductions in the value of a quoted company or fund’s value so the double effect of that (and the double benefit on a rebound) – can be insurance companies, banks etc as well as funds – quote RM and SQN?  Gearing and the effect?  Downside and then the bounce back.

NORMAL WORK

Showing the need for efficient diligence by all staff everywhere, at all times because failure can create exponential loss if it happens at the ‘wrong’ time, recently we had submitted a market ISA transfer for a High Street Bank.  The original forms were acknowledged to us to have arrived on 23 February and the Bank’s Investment Unit received copies to execute the instructions on 24 February.

The Investment Unit failed to act and demanded the originals – the branch, by then, had lost them (probably shredded)… it tried to demand new forms to start again but we insisted that it had confirmed it had had the originals and was obligated to act at that time.  We have now received payment for £74, 013.67 including compensation of £18,306.09 because the Bank did not act at the time when it should have done.  It acknowledged the failure in its processes immediately upon the subject being raised.

This client is very fortunate because that money is now available to buy investments which are much cheaper than they would have been too.  It shows, however, how crucial it is to have a system and procedures which are robust and which crystallise what action is needed and when by the participants.  We demand clarity from a client when issuing an instruction and remember, a client can also be an agent, an executor of an estate or whatever.  Second-guessing is not an acceptable outcome and when volatility is so extreme, the consequences of acting – or failing to act – in an appropriate way can be extremely costly.  We have always tried our hardest too to act appropriately – for example, with an Estate account for a deceased client we bar purchases as soon as a death is advised and then try to secure a sense of ‘likely’ instructions from the executors/beneficiaries of what their requirements may be so we can informally manage the account accordingly.  It is the same with clients who may want a capital sum (eg from a pension) sometime down the road – we try to manage the account over a lengthy period of time so that we are not facing a market collapse the few days in front of when the funds may be required and having to sell investments at depressed prices.  This also means we are gradually accessing funds on the account, selling things when the good opportunity for them arises and doing so over an extended period of time.  No one will ever hit the top to sell nor  the bottom to buy but having so many components help us in that objective.  Yes, that might mean we are holding more cash and in buoyant times the investments we have sold may have carried-on rising but the flip side is that we have lots of accounts for deceased clients (sadly) in different states of completion and ‘long-future cash demand’ clients where they have significantly elevated cash balances which have been totally protected from the recently savage market conditions, ensuring the outcomes for them are smoothed.  (Whilst an unpleasant subject in many regards but experience shows that most executors (especially lawyers it has to be said) take no market action whatsoever when a client dies – despite being trustees who are meant to act in the best interests of the Estate from the date of death and as if the assets were theirs personally to manage, they wait for Probate (which can sometimes be years!) before they can or do act and then it is all or nothing with such investments as opposed to endeavouring to ensure the beneficiaries extract the best value from the deceased’s market assets (eg transferring them as opposed to a blanket sale can save/enhance up to 10% (or more) in costs and market makers’ spreads for example).  How many beneficiaries of those who have died over the last year or so may have been expecting a big legacy and could now be looking at say a third less because their executor took no action at all with the investments?  Anyway, that is for another day but you know what we do and try to do and it is times like these which really show the care and value – and no, we are not paid any more to do what we believe is the right thing to do.

Indeed, for any investors thinking of switching from one market investment strategy to another during such heightened volatility, be very, very careful because you could find very much that you fall between the stools.  Your sale could be enacted on the worst possible day and then the money arrives at your destination two weeks later and when the market has rebounded by a third.  Yes, such extreme moves really can happen.  Just wait and review things during a time of better normality – which will return.

LIGHT RELIEF

A recent article of advisers and their pets features our very own Felix Milton.  If you’d like to see him and his unusual beasties, then here is the article! https://citywire.co.uk/new-model-adviser/news/woofing-from-home-meet-14-advisers-new-office-pets/a1340633?re=72905&ea=517077&utm_source=BulkEmail_NMA_Daily_Single_EAM&utm_medium=BulkEmail_NMA_Daily_Single_EAM&utm_campaign=BulkEmail_NMA_Daily_Single_EAM#i=1

PRACTICAL THOUGHTS

Just a couple of comments that may help.  First, don’t keep watching the ‘news’ – you can’t change anything and if it is depressing, it won’t help your own health and capacity of coping with the negative events which we are facing.  Limit the times you watch perhaps.  Remember that all media sensationalises things to sell stories – media is doing very well at the moment – if it has the advertising flows to fund them of course but even newsprint is surging.  Watching the news is like watching the storm.  If you see instead how you can plan to come through the storm, it will pass and indeed you will be uplifted by concentrating on constructive and positive things as certainly you cannot influence the storm’s outcome.  If you have a faith in which you can trust as you have before – or all your life – hold onto that too.

Take each day one at a time.  Stop trying to predict the unpredictable (or believing others who think they can) but cope with what you have to do for that day.  Yes, be prudent about the future but there is no point trying to bridge build for things that may not happen.  However it may seem, it is not all doom and gloom – there are bright spots and especially in the simple things.  And quoting from ‘Ask Ten’ (something to which you may wish to subscribe for the weekly round-up – it is very good and free), take baby steps with issues you perceive are big problems to resolve.  https://askten.com/newsletter Baby steps can lead to big change too – a bit like ‘eating elephants’ – eat them in small pieces and don’t try to tackle them all in one go.

RISK WARNING

Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!

If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.

Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.

My best wishes

Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB

Chartered Wealth Manager

Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers