I have been cautiously buying and am now fully invested again, encouraged by the apparent resilience of world markets which think six months ahead, so values now reflect where investors believe we will be at year end.
I have been further spurred on by the performance of our recruitment and employment agency with its branches across the industrial north of England, always a useful barometer of the confidence felt by local industries and professions.
Our contract employment numbers are close to their previous highs of early 2020, pre-Covid, while permanent job placements indicate renewed growth ambitions.
We are having to pay more, indicative of wage inflation ahead, but are still unable to locate good people. Leisure and hospitality job vacancies are at record levels after the Europeans, previously 24% of that labour force, departed for home and are not coming back.
With the unpredictable shock of Covid, and subsequent furloughing, companies made too many redundancies and now, with the unprecedented bounceback, they’re desperately short of people.
We really welcome the government’s new Skills Bill which will allow all adults access to four years of student loans for training at any time in their lives. This is an essential aspect of the ‘levelling up’ agenda. Bring it on quickly please as an independent Britain, now with difficult recourse to European skilled labour, desperately needs a bigger, better, skilled workforce, while unemployment numbers remain high for the unskilled.
The world of work has changed for ever and we have adjusted to suit this emerging new world. To quote Simon Kuper in the Financial Times, the scary new mantra: ‘If you can do your job anywhere, someone anywhere can do your job’. Strangely, Covid has accelerated global work practices while at the same time increasing the onshoring of quality manufacturers.
From growth to value
As a ‘growth’ investor, I have enjoyed the last year of strong gains, from the March lows, of stocks with exciting, sometimes even disruptive, technologies. The game has now changed though and I have recently built a separate portfolio of dividend-paying ‘value’ shares, which are actually making real profits now and paying useful dividends.
Additionally, safe dividends can give some protection on the downside – a value share that falls too far would throw up a very high yield which would be rapidly bought, thereby forcing up the share price. No such price security applies to non-dividend growth stocks.
So I have bought the following value and dividend-paying shares, avoiding companies that borrow money to maintain their dividends.
Energy sector powering strong dividends
Gresham House Energy Storage (GRID ) is an investment trust on a 7% premium with a 6% long-term dividend yield. The trust manages assets of £372m, comprising 30% of the UK’s current battery storage capacity, with 17 units and 12 more planned, to give 1,200 MW capacity.
The current strong expansion of renewable energy sources, where the UK’s intermittent wind and solar power sources require essential battery storage, is now expected to increase to 3,000 MW in two years. The electricity grid battery storage sector is a growth industry and an essential player in the power mix. See also Gore Street Energy Storage (GSF ), an investment trust on a 10% premium, yielding 6.4%.
Of the two funds, GRID is the more advanced with better and bigger storage plant, but the developing GSF could benefit more from the continual improvements in battery technology.
Both these trusts are a safe growing income play. There may be little capital appreciation, but each can gear up to enhance returns in an exciting developing sector.
National Grid (NG) operates the electricity and gas transmission systems in England and Wales, but 64% of its revenue is actually derived from serving seven million customers in three US states.
NG plays a significant role in supporting intermittent renewable energy by ramping up gas fired turbines when needed – such surges in demand can be avoided by more battery storage capacity. Over the next 10 years they will be critical in the use of clean energy, which already produces 40% of power supply, supporting the nationwide rollout of charge points for the projected 9 million electric vehicles on our roads by 2030.
The company is an essential part of the power mix and having now effectively passed its five-year review, it is worth holding for its exciting future, meanwhile enjoying the 5%+ dividend.
Two alternative income-payers
I’d not heard of the Digital 9 Infrastructure (DGI9 ) investment trust until it was described in David Stevenson’s Citywire piece, soon after it first listed in March, but it operates in a rapidly growing sector.
It’s a closed-ended company investing in a range of digital infrastructure assets, including data centres, cell towers and fibre optic networks. Online traffic has soared tenfold in recent years and is expected to double again by the end of 2022, straining the capacity of the world’s existing transmission cables which carry 98% of all internet traffic.
Run by an experienced board and with many of the world’s major internet users taking 20-year leases, thereby giving an assured long-term income and a platform for strong growth, it looks an attractive growth prospect with a yield of nearly 6%.
Duke Royalty (DUKE) is an investment company providing alternative royalty finance to a diverse range of companies in exchange for a share of future revenue. A recent exit from a portfolio company saw a realisation 17% above the carrying value, although some investee companies have struggled through the last Covid months.
The recent strong bounceback has already encouraged analysts to expect a full recovery in royalty investment income, which can always be enhanced by a realisation of the invested equity. The current 7%+ yield looks attractive for a well-run company in this sector.
Blue chip buys
I have bought some GlaxoSmithKline (GSK) on the basis that whatever happens there in the next few weeks it will enhance value, but if it doesn’t (unlikely) I will enjoy the 5.7% dividend which should be maintained.
If the activist investor Elliott Management, already with a significant stake, has its way, we should see this undervalued group increase to the sum-of-the-parts value Goldman Sachs said was £18.90, compared with the current £14.03 share price.
CEO Emma Walmsley, who is currently under shareholder pressure, will outline her future plans on 23 June, which will either be closer integration of the vaccines and pharma businesses or a breakup into two divisions - biopharma and a standalone consumer health division which may even be separately listed.
I have bought more Aviva (AV), where Sweden’s Cevian Capital has built a 5% stake and is pressing the asset manager and insurance company to make deep cost cuts and return £5bn to shareholders.
It was poorly managed previously, with some high quality businesses held back by poor strategies, but the current CEO Amanda Blanc seems to be doing an excellent job, having disposed of non-core operations in Singapore, Vietnam, France, Turkey, Poland and Italy. This has enabled Aviva to reduce debt and fully focus on its profitable UK business. On a price to earnings (P/E) of 9x with a 0.7 price/earnings to growth (PEG) ratio, yielding 6, coupled with possible activist action, the shares still look a useful buy at this level.
I have also bought more Legal & General (LGEN), where the projected P/E of 9.3x, 0.9 PEG and yield of 6.8% looks good value in these markets for a well-run company in a strong sector.
Consider also Phoenix Group (PHNX) on a P/E of 8.9x, yielding 6.6%.
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