'Investors in Shell shares don't have to worry about the dividend,' despite the oil price fall
Income investors should not be concerned about the ability of oil giant Royal Dutch Shell (LON:RDSA) to continue to pay a dividend amid the carnage of the tumbling oil price, according to Chris White, head of equities at Premier Asset Management.
He told What Investment, ‘The fall in the oil price means that the company will have to pay the dividend from its balance sheet, but it has the cash flow to do that. Shell will certainly reduce its capital expenditure, but it can do that. I would also point out that Shell is not just an oil company; it is a gas company, including liquefied natural gas, and has a renewables business.’
White also believes that BP will be able to maintain the dividend, but it will be a closer-run thing. He remarked, ‘By some measures of cash generation BP will be more able to pay the dividend than Shell, and it should be OK. But with BP you would have to be concerned about the level of gearing in the business and the impact which that could have on the business.'
White manages the Premier Monthly Income fund, which has a current dividend yield of 4.7 per cent, and he disclosed to What Investment that he has responded to the recent doubtful dividend status of some of the traditional big income payers in the FTSE 100 by moving down the market cap scale.
Read more: Franklin Templeton: The best stocks for UK income investors in 2015
He said, ‘In the current climate, the supermarkets look challenged, the consumer staple companies such as Diageo and Unilever look expensive and I would be worried about the prospects of the other traditional recourse for investors in a volatile climate, utility stocks, with a general election coming.’
As he moved down the market cap scale, the area of the FTSE 250 that he has found appealing is the consumer stocks.
He remarked, ‘With an interest rate rise now looking a bit further away, the consumer stocks look appealing. My most recent purchase was brewer Greene King. It was a poor performer last year, but Greene King is about to complete the purchase of Spirit, a pub company, which should lead to earnings upgrades, while the yield is already above 4 per cent.’
Greene King has a market cap of £1.7 billion and is a constituent of the FTSE 250. For the year to 4 May 2014, it recorded profits of £105 million, on a turnover of £1.3 billion. The earnings per share growth was 10 per cent, and earnings per share have grown by 5 per cent or more in each of the past four years.
He feels that falling inflation in the UK will put more cash into consumers' pockets, so he has bought into Greene King as a way of investing in that extra consumer spending.
The theme of investing in the fact that Britain has an increasingly ageing, but wealthy, population is behind his decision to invest in transport company National Express Group. He remarked, ‘Pensioners who are quite well off, and consumers who are becoming wealthier will want to travel more, which helps National Express. In addition, the company has a big school bus business in the US, and the strength of the dollar relative to sterling will make those earnings worth more when National Express translates those earnings back to sterling. The company has a yield of more than 4 per cent.’
National Express Group is a £1.4 billion market cap company, and a constituent of the FTSE 250 index.
The Premier Monthly Income fund has returned 64 per cent over the past five years, compared with 60 per cent for the average fund in the IA UK Equity Income sector during the same period.
- What Investment
- Published on:
- January 15, 2015
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