It’s been a decent year for the FTSE Aim All-Share index, which makes the performance of the “Aim sustainable dividends” portfolio all the more disappointing.
The index is up from 844.41 at the end of 2016 to 1,023.92, largely on the back of the rally by resource stocks.
During the period in which the “Aim sustainable dividends” virtual portfolio has been in operation, the index has risen just over 10%.
Now, whatever else Aim’s resource stocks are, they are not noted for their ability to churn out regular dividends, so it is possible to argue that our virtual portfolio should not be benchmarking itself against the Aim All Share.
That being said, a 5.2% decline in the value of the portfolio over eight months is not going to have the fund management giants beating a path to my door to offer me a job, so I am hoping that a couple of additions to the portfolio this month will spread the load a bit.
Before we review the portfolio additions, let’s have a quick look at some recent news flow from one of our existing portfolio constituents: Miton Group PLC (LON:MGR).
The fund management group released a trading update last week in which it revealed assets under management (AUM) stood at £3.64bn and the average AUM for the first 10 months of 2017 was £3.29bn.
I am no statistician, but that indicates to me AUM are on a rising trend.
“The board remains optimistic about the prospects for the group and profits for the full year are expected to exceed current market expectations,” the company said.
Picking a company before it raises profit guidance is always a nice feeling, and the shares did receive a lift from the trading update.
Unfortunately, despite having evidently picked a solid stock in Miton, our stake is currently almost 13% underwater, despite the recent rally.
More worryingly, Miton’s investment philosophy is very similar to the one behind the “Aim sustainable dividends” portfolio (they thought of it first).
On the plus side, this is very definitely a long-term strategy, designed to identify stocks worth buying and keeping, so it is too early to start panicking.
New additions to the portfolio: something old; something new
I fired up the trusty old stock screen to identify Aim stocks that paid dividends and which showed every sign of growing those dividends over time.
I was somewhat surprised to see a stock we had sold (at 297p a share) back in early July reappear on the radar at 270p.
Somero Enterprises Inc (LON:SOM), a manufacturer of laser-guided equipment used in levelling concrete has been a stock market star over the last five years, rising 750%.
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 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 for inclusion in the portfolio.
A trading update in July was more upbeat, and the interims in September revealed a 15% increase in pre-tax profits and a 10% hike in the interim dividend, with the company reporting significant growth, particularly in Europe and Latin America.
Words like “strong cash generation” were music to the ears of dividend hunters, as was a net cash position of US$18.3mln as at the end of June, which enabled the company to lob out a special dividend to shareholders at the cost of US$7.5mln.
The brokers obviously updated their valuation models and forecasts and, hey presto, the forecast dividend cover is now up to 1.5 and the stock is back in the portfolio.
Free cash flow covers the dividend payment 2.3 times so I am hopeful that this time the stock is back for good, but with the company being somewhat dependent on the non-residential construction market there is always the possibility of the company experiencing a few bumps in the road. A concrete levelling machine will soon sort those out.
I have more trepidation about the other stock joining the portfolio this month: Plus500 Ltd (LON:PLUS).
Given the stock is up 150% year-to-date, perhaps I should not be; the Israeli firm develops and operates an online trading platform for retail customers to trade contracts for difference (CFDs) – highly-geared instruments that essentially allow punters to gamble on underlying movements of other financial instruments.
It’s a field that is increasingly coming under the watchful eye of regulators, but there is no arguing with Plus500’s trading performance; its metrics are almost unbelievable.
A month ago it raised full-year guidance after a storming third quarter in which revenues rose 50% year-on-year.
The number of new customers added in the third quarter shot up 69% to 42,492 compared to 25,083 in the same quarter of 2016, and the number of active customers was up 35% to 94,610 from 69,989 the year before.
Average revenue per user rose 11% to US$1,232 – you might want to think about that should you ever be tempted to open up a CFD trading account.
Average user acquisition cost virtually halved to US$689 from US$1,300, which means it is costing the company significantly less to attract new customers.
Underlying earnings (EBITDA) more than doubled to around US$70mln from roughly US$33mln the year before.
The most heartening thing from the perspective of this portfolio is the cash balance, which increased from US$117mln at 30 September 2016 to US$203.9mln at 30 September 2017.
The shares trade on a multiple of 13.9 times free cash flow, which is quite a bit above the three-year average of 9.2.
The forecast dividend yield is a thumping 5.2% and the forecast dividend cover is 2.2, a tad below the three-year average of 2.4.
I know some readers will be a bit sceptical of Israeli technology firms, some of which have been hungry for cash from shareholders and arguably a bit opaque with their accounting methods, but Plus500 has been more inclined to buy back shares than issue them over the last couple of years, which bodes well.
So, let’s pull the trigger (twice): 365 shares in Somero at a total cost of £1,000; 102 shares in Plus500 at a total cost of £998.
Here is where we currently stand
Company
Number of shares
Total cost
Average price per share
Current bid price
Current value
Profit/loss (£)
Profit/loss (%)
Brooks Macdonald
48
£1,003
2090.25p
1,861p
£893
-£110
-11%
James Halstead
195
£998
511.69p
447.25p
£872
-£126
-13%
Miton Group
2,240
£1,000
44.67p
39p
£874
-£127
-13%
Plus500
102
£998
978.21p
961p
£980
-£18
-1.5%
Somero Enterprises
365
£1,001
274.11p
265p
£967
-£33
-3.3%
229
£1,000
436.55p
480p
£1,099
£99
+10%
- Cash: £3,939
- Market value of current holdings: £5,685
- Market value (including cash): £9,625
- Unrealised profit on current positions: -£314
- Dividends received: £44
- Profit/loss from closed positions: -£105
- Total realised profit/loss + dividends: -£375