The concept of investing in growth companies with sustainable dividend policies is not original.
It is pretty much the investment philosophy of Gervais Williams, who manages a number of funds at Miton Group PLC (LON:MGR).
It is appropriate, therefore, that our “Aim stocks paying sustainable dividends” filter has popped up with Miton as a suggested addition to the portfolio.
READ Dividend payers on Aim: not as rare as you might think
It’s one of only three stocks currently meeting our investment criteria – the other two are already in the portfolio – so it is worth looking at it in a bit more detail.
Miton Group – attracting funds and investing them wisely
The asset manager put out a trading statement last week in which it revealed assets under management (AuM) at the end of June had risen to £3,354mln from £2,905mln at the start of 2017.
Snapshots can be deceiving so it is encouraging to note that average AuM in the first half of the year rose to £3,157mln from £2,783mln throughout the whole of 2016.
The company described this as a solid start, so it is not getting carried away with itself.
The first 26 weeks of 2017 saw positive net flows – more money coming into the funds from punters than was going out – in all but two weeks, while eight out of 11 of its open-ended funds (i.e. open to new cash inflow from investors) saw net inflows during the first half of the year.
So, the firm is getting the thumbs up from savers and investors; how are the investments doing?
The equity funds had £2,028mln of AuM at the end of June, up £314mln on the situation at the beginning of the year. Of that, £150mln was down to net inflows, and £164mln was due to investment performance.
Multi-asset funds rose £78mln over the same period to a value of £750mln, and here the split was again about 50/50 but with a slight bias to inflows (+£41mln) this time, versus investment performance (+£37mln).
How committed is it to paying dividends?
A dividend of 1.00p per share was paid to shareholders on 4 May 2017, an increase of 49.2% on the prior year, reflecting the board's continued confidence in the growth prospects of the group.
Based on broker forecasts of its full-year dividend, the forecast dividend yield is 2.6%, which is bang in line with inflation.
Using projected earnings per share, dividend cover (earnings per share/dividend per share) is a very comfortable 2.3.
According to our filter, free cash flow last year was able to cover the dividend five times over.
The free cash flow margin, described as the percentage of revenue left for shareholders that is discretionary cash flow, has averaged 15.7% over the last five years, which is well above our lower limit of 10%.
So, all the numbers look kushty, and the only misgiving I would have about adding it to the virtual portfolio would be the unpredictable nature of asset management.
Yes, all of that pensions and savings money has to go somewhere, and Miton’s track record suggests it is a good destination for it, but it is a bit of a hostage to fortune so far as market movements are concerned.
Then again, if markets go belly-up, the Aim sustainable dividends portfolio probably goes belly-up with them, so Miton goes into the portfolio, if only as a proxy for all the other companies it should be invested in; after all, Gervais Williams and his colleagues are paid to research them whereas I just run a stock screen every couple of months.
The virtual portfolio has a pot of cash to invest but thus far has only invested £1,000 at a time on prospective candidates, so with the offer price of 44p for Miton, a buy order for 2,240 shares has been placed.
Farewell to Somero Enterprises
As Miton comes in through one door, Somero Enterprises exits by another.
The manufacturer of laser-guided equipment used in levelling concrete has been a stock market star over the last five years, rising 1,570%.
A trading update at the beginning of June raised a few warning signs, with flat trading in North America, where poor weather and political uncertainty have combined to depress activity, and a slow start to the year in China.
Brokers responded by trimming earnings forecasts, with the result that forecast dividend cover fell to 1.1, which is below our 1.25 cut-off point.
I was originally intending to write this article two weeks ago, and that’s when I ejected the stock from the portfolio, swallowing an £86 loss (including £15 assumed dealing costs), offset somewhat by £27.84 in (virtual) dividend payments.
As it happens, the company put out a trading statement yesterday and the shares rallied 3.8%, as the company reported trading in June was stronger than in May and strong than in June 2016.
So, maybe those earnings forecasts will edge back up and we’ll see the return of Somero, but seeing as the company has indicated that the outcome for the full-year will only be “in line” with market expectations, I’ll not be holding my breath.
Performance so far is not as good as Miton’s
The performance of the portfolio so far has been disappointing, but not disastrous.
At the risk of sounding like I am making excuses, this really is a long-term portfolio; those rising dividends need to do their stuff.
Even so, having started with £10,000 in virtual cash on 30 March, the current portfolio valuation of £9,930 probably means the call for me to join the fund management team at Miton is not about to come forth.
Zytronic PLC (LON:ZYT), the touch screen sensor firm, has been a success, rising 18%, and it has wiped the floor with our other pick, James Halstead PLC (LON:JHD), the floor coverings specialist, which is down 8.9%.
Neither company has had any news flow, but in Halstead’s case the housing market has not been helpful.
Still, onwards and hopefully upwards.
Current state of play
Company
Number of shares
Total cost
Average price per share
Current bid price
Current value
Profit/loss (£)
Profit/loss (%)
James Halstead
195
£998
511.69p
485.5p
£947
-£51
-5.1%
Miton Group
2,240
£1,000
44.67p
41.5p
£930
-£71
-7.1%
Zytronic
229
£1,000
436.55p
515p
£1,179
£180
+18%
- Cash: £6,932
- Market value of current holdings: £3,056
- Market value (including cash): £9,930
- Unrealised profit on current positions: +£58
- Dividends received: £35
- Profit/loss from closed positions: -£105
- Total realised profit/loss: -£70