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AIM stocks - even the ones that pay dividends - have taken a battering

Stockpot's "AIM sustainable dividends" virtual portfolio was conceived as a way of screening out the "jam tomorrow" companies on AIM to focus on those companies capable of paying rising dividends. The last couple of months have seen almost 18 months of gains wiped out.

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What's the opposite of "green shoots of recovery"?

Markets have recently been through turbulent times so it’s a good time to revisit one of our virtual portfolios, AIM’s sustainable dividend payers.

The FTSE 100 is down 9.4% since the start of the year and with possible Brexit chaos looming there may be more losses to come.

READ Some more reliable dividend payers on AIM to consider as Plus500 moves on

Since the last update to the AIM portfolio on July 17, the value of the portfolio (before accounting for dividends) has fallen 10.9% to £10,102 from £11,344, which is worse than the FTSE 100’s fall of 8.7% over the same period.

Two of the three stocks added to the portfolio in July have performed disastrously: IT firm Sanderson Group PLC (LON:SND) is down 26%, despite raising full-year profits guidance earlier this month, and System 1 Group PLC (LON:SYS1), the marketing services group, is down 37%, after a downbeat trading update a couple of weeks back.

READ Sanderson shares jump as it expects full-year results to be ahead of expectations

All but two of the nine stocks in the portfolio are now in the red and of the two in the blue – Strix Group and Miton Group – the former has really come off the boil since July’s trading update. Strix is a kettle safety controls designer so coming off the boil is probably what it is meant to do …

Out with the old, in with the new

Two of the bigger disappointments in the portfolio, wealth management firm Brooks Macdonald Group plc (LON:BRK) and floor coverings specialist James Halstead PLC (LON:JHD), have failed to make the cut in the latest running of the stock screen we use to generate ideas for the virtual portfolio.

Brooks’s ratio of free cash flow to dividend cover has fallen to 0.7, which is below the minimum level of 1.0 required for inclusion in the portfolio. Debtors/turnover, which is a measure of how long a company is taking to get paid, has also risen to 48.3, which is well above our admittedly arbitrary upper limit of 25.

James Halstead also falls foul of the free cash flow to dividend ratio at 0.9, so it bites the dust.

Selling the two stocks raised £1,519.05, which added to the cash in hand gave us £3,716.43 to invest in new additions to the portfolio, of which, coincidentally, there are two: Polar Capital Holdings plc (LON:POLR) and ST|M Group PLC (LON:STM).

Polar Capital is a specialist asset management group, so it is almost a like-for-like replacement in the portfolio for investment management group Brooks Macdonald.

The year to the end of March 2018 was a record one for the group in terms of profit and net flows in assets under administration.

Polar’s shares are offering a forecast dividend yield of 6.3% and this looks to be reasonably well covered by free cash flow, which last year was 1.4 times the dividend.

After holding the dividend at 25p every year from 2014 to 2017, it cranked it up to 28p in fiscal 2018, which I take as a good sign.

Prior to the most recent fiscal year, the company’s dividend was not covered by earnings but chairman Tom Bartlam said in the annual reports that “the past confidence placed in its improving performance was well placed as if the dividend had been maintained at the level of the past two years it would have been covered 1.46 times by this year’s earnings”.

Henceforth, the company would expect in normal circumstances to pay an annual dividend within a range of 55% and 85% of adjusted total earnings, dependent on the scale of performance fees in the relevant year.

Financial stocks are very on-theme

STM is another stock from the financial sector; its stock-in-trade if offshore pensions administration.

The forecast yield on this one is not as enticing as it is for Polar, at 3.4% but it looks more secure, being covered 2.9 times by free cash flow.

The company only recommenced paying dividends in 2016 having ditched the divis in 2012 after a difficult 2011.

The pay-out is intended, in the jargon of company executives, to be “progressive”, which means the company will look to increase it each year.

Having said that, “the actual level of dividend each year will take into account the working capital requirements and planned investment in the business to enable us to deliver our stated growth aspirations”.

The shares currently trade at 58.5p, up from 38p at the end of the year so they have had a terrific year already. The shares have, however, fallen back from a peak of 73.3p in the last three months so we’re not buying at the top of the market.

The portfolio’s outstanding performer is asset manager Miton Group PLC (LON:MGR), so the fact that the two new arrivals are both from the financial sector gives some cause of optimism.

Here is the current state of play in the portfolio.

 

Ticker

Company

Shares owned

Cost of shares

Cost per share

Current bid price

Current value

Change

% change

JSG

Johnson Service Group

740

£1,004

135.63p

123.6p

£915

-£89

-8.9%

KETL

Strix Group

745

£998

134.01p

141.8p

£1,056

£58

5.8%

MGR

Miton Group

2,240

£1,001

44.67p

59.6p

£1,335

£334

33%

POLR

Polar Capital Holdings

183

£1,000

546.2p

528p

£966

-£33

-3.3%

SND

Sanderson Group

965

£999

103.55p

78p

£753

-£246

-25%

SOM

Somero Enterprises

243

£999

411.17p

320p

£778

-£222

-22%

STM

STM Group

1,640

£999

60.91p

57p

£935

-£64

-6.4%

SYS1

System1 Group

352

£1,001

284.26p

170p

£598

-£402

-40%

TPFG

Property Franchise

710

£1,002

141.11p

135p

£959

-43

-4.3%

 

  • Cash: £1,718
  • Value of portfolio (including cash): £10,012
  • Starting value of portfolio (March 2017): £10,000


As a point of interest, in just over 18 months the £10,000 portfolio has received just over £200 in dividends. It is not about the size of the dividends; more about the fact they are paying them and look like they can keep on paying them.

 

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