what’s inside · what’s inside inside this edition of the uk dividend letter, you’ll find:...

WHAT’S INSIDE Inside this edition of the UK Dividend Letter, you’ll find:

ISSUE 38 - JANUARY 2018 WWW.HINDESIGHTLETTERS.COM

‘The day of the Mifids’ was the headline in the London City A.M. newspaper on January 3rd 2018, making reference to the 1951 novel by John Wyndham. In this bestselling book, ‘triffids’ are a tall, venomous and carnivorous plant species that rages around the world after a meteor strike renders much of the human population blind.

OVERVIEW

OUR MAIN INVESTMENT IDEA GlaxoSmithKline plc (Revisited)

INVESTMENT INSIGHTS

APPENDIX I THE WAY WE THINK

WHAT HAPPENED? Market & Sector Analysis

HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (JANUARY 2018)

APPENDIX II HOW WE THINK

© HindeSight Publishing. All Rights Reserved.

2 HINDESIGHT Dividend UK Letter

The Directive, MIFID II, is the second Markets in Financial Instruments

Directive to be introduced in the UK and Europe. It’s reported to be a long-awaited regulatory shake-up, the biggest to hit the financial markets since the 1986 ‘big bang’, which is a poor comparison by any measure. ‘The big bang’ was part of Margaret Thatcher’s reform policies to open up the UK financial markets, stop restrictive practices, such as foreign entity exclusion, and generate huge new market activity in London, which was rapidly falling behind other financial centres. It worked. Coupled with a fair tax regime, London has held its own and thrived, above any European city competitor. It has also, in terms of volumes in multiple financial markets, been better than New York and Tokyo in the 30 years since then.

MIFID II is quite the reverse in terms of business development. At 20,000 pages and almost 2 million paragraphs, it would take a person most of a year to read it. In fact, bearing in mind this is not an exciting novel but the most turgid and mundane scribe you will ever encounter, a year is far too optimistic. Unfortunately, it is just another step in the endless quest for increased regulation and policing of the financial industry in the light of the 2008 crisis, where the need for scapegoats continues under the guise of ‘transparency and benefits to the investors’.

But let us not forget where the seeds were planted for the housing and banking crisis of 2008, most prominently in the US.

In the mid-1990s, the President of the United States, Bill Clinton, and his ‘co-president’, Hilary Clinton, turned the 1977 Community Reinvestment Act into a programme to ‘help’ poor communities by forcing banks to lend money to these low-income households. It was believed that many Hispanic and black communities had been ‘underserved’, and they could participate in the American dream, enjoy more equality and benefit from a reduction in racial tensions if they owned their homes. The Department of Housing and Development began to pressurise the two largest mortgage providers, Fannie Mae and Freddie Mac, into targets for affordable housing. At one time, Freddie Mac was instructed to make at least 50% of their loans to low and moderate-income borrowers, mainly minorities.

By 2007, there were over 25 million subprime and Alt-A mortgages in the US financial system. This accounted for half of all mortgages outstanding and was worth almost $5 trillion. At the onset of the crisis in 2008, these mortgages – which had been sliced and diced, repackaged and sold on – or variants of the same, were everywhere in the global system.

Of course, we know what we always knew, that a household with $10,000 income will eventually default on a $500,000 mortgage, it's just a matter of time as interest rates rise. You can’t make wealth for all out of nothing for long. It's a bit like crypto-currencies, harsh reality wins out in the end.

THE COMPANY

Mark Mahaffey

Ben Davies

Aalok Sathe

HindeSight Publishing which runs HindeSight Letters is a unique blend of financial market professionals – investment managers, analysts and a financial editorial team of notable pedigree. The co-founders of Hinde Capital, Ben Davies and Mark Mahaffey, a successful alternative investment management company joined forces with the financial journalist David Stevenson best known for his regular columns in the FT Weekend, Money Week and numerous other global media titles to deliver something different in the financial newsletters segment – simply put it’s a reliable newsletter version of a managed fund.

Our writers actually run money, not just write about it, so they are the right mix of book smarts and street smarts. Truly a team of individuals that make up a formidable pool of knowledge, wherever the investing landscape shifts to.

CONTRIBUTORS

CO-FOUNDER & CFO OF HINDE CAPITAL

CO-FOUNDER & CEO OF HINDE CAPITAL

FUND MANAGER

OVERVIEW

ISSUE 38 - JAN 2018 3

Every bank and financial institution potentially had unquantifiable risk as the curtain came down. The governments had to step in ‘to save the system’ and once the dust settled, those governments started to establish inquiries and commissions to ‘understand’ how it could have happened and pin the blame on suitable scapegoats. In this case, the financial industry.

Human nature seems flawed as we regularly encounter crises, from boom to bust. Whether it is capitalism or the urge to ‘help’ the lower income workers, these imbalances continue. The wealth inequality is arguably worse than ever, the price/multiples of many asset classes are far higher than history suggests is healthy, and yet we go on blindly regardless. In the novel, I wonder if the meteor that induced human blindness represents the typical human trait. Does that make the ‘triffid’ monsters the lunacy of high valuations or the rage of regulation madness?

It is estimated that the financial industry has already spent over $2 billion on preparations for MIFID II, and the ongoing costs will no doubt continue and only rise. There will naturally be many more losers than winners. The ten-fold increase in compliance personnel has helped many people to remain employed. Most compliance people are drawn from failed city traders or salespeople and hired for their ‘expertise’. Like probation officers or HR, compliance is not something that a child (or anyone else) wants to

do when they grow up, but a job’s a job in the growth market and you require very little common sense or brain power. Just the ability to vaguely interpret even vaguer directives from government policy makers in concise and brief 20,000 page documents.

The small asset managers are being squeezed to the wall as the costs bite and only the big entities will survive, leading to large oligopolies where competition will be greatly reduced. In recent months, two of our clients have relayed stories to us. One had been a private wealth client from a major UK bank for 20 years but was told that his account was under £500,000 and he was no longer welcome due to increased costs. The other, who I recommended to use my favoured private wealth manager with her £250,000 SIPP pension pot, was told that DUE to MIFID specifically, their costs for administering a pension plan for her were going from £500 a year to almost £2000!

So tragically, the smaller investor who is meant to benefit the most from the increased transparency and improved policing of the financial markets is not going to do so. All the recent fabulous technological developments in the financial markets, which should have led to much reduced costs and brilliant efficiency, have been more than eaten up in the name of better regulation to ‘protect’ the investor. Hmmm, c’est la vie.


Our original recommendation was sent out as the pharmaceutical giant’s share price slumped due to:

• 2014 sales slumping 3%, falling 25% in China alone • Ongoing bribery scandals in China and Libya • Patent cliff concerns as cheaper generic drugs

competed

As GlaxoSmithKline plc overcame fears generated by the hype that surrounded the bribery allegations and worries over the impending patent cliff, the company saw its share price surged from 1417p to over 1700p in 18 months. Over this period, it caught up and sped ahead of its peer group, outperforming the likes of AstraZeneca. With GlaxoSmithKline plc being a very mature business, it exhibits very cyclical movements and has regularly oscillated between 1250 and 1750 over the past five years.

Since June 2017, GlaxoSmithKline plc has fallen over 23% and 26.9% on an absolute and relative basis. GSK seems to once again be the dog across all the mega-cap

INVESTMENT IDEA #1GLAXOSMITHKLINE PLC (REVISITED)

AALOK SATHE

We initially recommended GlaxoSmithKline plc (GSK: LSE) on the 2nd of October 2014 at a price of 1417.5p when the FTSE100 was trading at 6,536.29. Eventually, we took profit in April 2016, over which time the stock was up 17.76% and 20.38% in absolute and relative terms respectively.

FUND MANAGER AT HINDE CAPITAL

Price (£)Turnover (£mm)Net Income (£mm)Market Cap (£mm)Fwd P/E RatioDividend Yield (%)Payout Ratio (%)Total Debt to Total Equity (%)FCF to Market Cap (%)ROIC (%)

1,315.027,889..0912.066,515.812.36.00%-394.2%-15.7%

MERLIN ENTERTAINMENTS GROUP PLC

ISSUE 38 - JAN 2018 5

pharmaceutical stocks. Over the years, the company has had an impressive portfolio of drugs with an emphasis on diseases of the lungs and infections, including HIV and shingles. Unfortunately, it has come under pressure once again, facing competition from high-grade generics that are directly competing with its blockbuster asthma inhaler. Along with this pressure, a large group of high profile investors have questioned the firm’s returns and their ability to deliver in the future. Despite its HIV franchise being a success story, this area is also facing stiff competition. Competition seems to be the buzzword within the pharmaceutical industry. Furthermore, GSK have found it difficult to refresh its drug pipeline as the firm’s 6% dividend yield consumes 75% of the free cash flow generated by the firm. Since we last recommended GSK, the company has gone through a cycle of uncertainty and management changes.

In 2017, Emma Walmsley took over as CEO, having joined GSK in 2010 from L’Oreal. Upon her appointment, she became the first women to run a major pharmaceutical company and has hit the ground running, grabbing headlines with some significant changes at management level. In the lead up to her appointment, there was pressure on the firm’s share price, suppressing its movements. The company is so out of favour that not even the new tax laws in the U.S. have managed to lift the firm's share price out of the doldrums in comparison to its peer group. This pharma giant is hugging the bottom of its trading range and starting to trigger signals on technical models, such as the 18-month RSI, which happens very rarely.

Clearly, with the company trading at such low levels and offering a forward P/E ratio of 12.3, it is evident that a lot of negativity is now priced into the firm’s current value. With several changes bringing this slow giant into the 21st century, time’s up for GlaxoSmithKline’s old ways, as Emma Walmsley looks to release value for shareholders. GlaxoSmithKline’s poor performance has seen the firm’s market capitalisation trend down towards its recent lows. The stock is also trading on a trough relative to the market on an oscillation basis and trailing its peer group.

The firm’s share price has once again come under pressure due to:

• Fears over GlaxoSmithKline’s size and potential inefficiencies

• Dividend size – misallocation of cash• Poor drug discovery results

Too Big, Too Diversified

Several investors believe that GSK has become too big and that one of the solutions would be to break the company down into more focused units controlled by dedicated management teams. However, following Emma Walmsley’s appointment, the likelihood of a break-up has quickly dissipated, as it is well known that she is a staunch supporter of continuity. This saw one of GSK’s largest and well-known shareholders divest their position.

We strongly believe that Walmsley’s approach will provide the pharma giant with a stable platform to build its future on. Rather than separating the company into smaller groups, she will look to create independent units within GSK and focus on talent acquisition, specifically honing in on those who are leading each department. Since taking charge, 50 top managers (which account for approximately 40% of company management) have been replaced. Walmsley has shown her intent to reorganise this mammoth organisation. Her efficiency programme is well under way as she has culled or sold more than 30 drug development units on top of the personnel changes.

With a leaner organisation that focuses on respiratory, HIV, infectious and immune-inflammatory diseases, the company will be able to reallocate its funding across each individual business unit. This will help to support the firm’s voyage and their aim to develop new blockbuster drugs and ultimately force a positive rerating of the company’s valuation. Further to this, Walmsley has suggested that excess cash could be used in M&A activity to help ensure success going forwards.

Dividend Yield Reversion

With GSK quickly losing its market valuation over the past six months, its dividend yield has naturally risen to 6%. Since the dividends paid by GSK account for 75% of the


free cash flow generated by the company on a yearly basis, this is stifling the management team’s ability to allocate extra resources to its numerous units to help with its drug discovery and development process.

The company has an enviable ability to generate free cash flow. Even if the management team were to cut the annual dividend, investors would still have a significant return. They would also be investing in the future growth of the company, as well as Walmsley’s ability to allocate capital correctly, given her success over the past 25 years. We strong believe that redistributing the firm’s cash would enable GSK to produce an outsized performance in the long run (on a total return basis), which would reinstate it to its former glory.

Turnaround Year for Drugs

Like most things in life, there is an element of cyclicality attached and it is no different in the drug discovery progress within the pharmaceutical industry. In recent times, Glaxo and some of its peers have suffered disheartening results. However, GSK has never given up, investing more into their R&D with the hope of unearthing yet another blockbuster drug. The company is focusing itself and betting on the inverted demographics that a large proportion of the world’s population is currently suffering from. Under the guidance of Walmsley, the company is returning to its roots, looking at asthma and emphysema (COPD). Its Nucala drug, which is an antibody injectable treatment, has gained momentum and is leading the market in treating those with severe asthma.

After Walmsley took control, it quickly became evident that she would also try to focus a significant part of the pharma group’s attention around the oncology sector. GSK have started to release information about the latest drugs, specifically concentrating on its myeloma drug (GSK2857916), which has been making significant inroads within Europe and is heading for FDA approval.

Oncology specialists have suggested that GSK’s initial results have been more than promising and are expecting further good news. As this news filters through over the course of 2018 and the firm’s newly approved shingles

vaccine comes online, we are certain that it will have a significant impact on the their financials and, ultimately, its market valuation.

Rock Bottom Valuation

It is easy to see that GSK’s market valuation has fallen significantly over the past six months. However, it is important to realise that it has reached a very supportive level. Other than 2008, GSK’s current valuation is one of the lowest levels it has ever reached in the past 18 years. With all the negativity priced into the stocks valuations, this is an unusual opportunity to invest in a mega-cap international company that generates an incredible level of free cash flow.

When we compare GSK relative to the index, with all corporate actions accounted for, the company is currently trading at its lowest level in 18 years and is now placed as the highest ranked large cap stock in our quantitative model (below), crystallising its status as one of the ‘dogs’ in the FTSE350. We can see from the charts underneath its proportion within the FTSE100 has been diminishing over several years. At one point the company was nearly 10% of the large cap market and this number has dwindled down to the lonely 3% however it is important to understand that this a secular change as opposed to something related to GSK in particular.

Analysts' Corner

GSK is a mature pharmaceutical giant with a global presence that is observed by the entire research community. The company is attributed with an average target price of 1550p, representing an upside lift of 17%.

“GSK2857916 is a humanised anti BCMA monoclonal antibody conjugated to the cytotoxic agent monomethyl auristatin-F, via non-cleavable linker (drug linker technology in-licensed from Seattle Genetics). GSK2857916 is currently in phase 1 clinical development (NCT02064387) in patients with relapsed/refractory multiple myeloma and other advanced haematologic malignancies expressing BCMA. GSK2857916 is not approved for use anywhere in the world.”

ISSUE 38 - JAN 2018 7

Summary

GlaxoSmithKline is a mammoth pharmaceutical brand that is trading at a significant discount, offering a rare investment opportunity. The stock has fallen due to fears over the fact that management could cut its dividend payout. Investors have become cautious, as they believe the company has become too big and diversified, potentially creating a level of inefficiency. With several changes taking place across the company since Emma Walmsley’s appointment, we believe it is time for change, as the determined CEO is driving the company with a more focused approach. Her efficiency and reorganisational drive will reward investors over the long term.


Today’s conversation was with one such colleague and his complete disbelief that UK interest (mortgage) rates could EVER return to 5-6%. He has recently made his first house purchase, of course, and I presume would be up the creek without much of a paddle if that happened. But it’s hardly an impossibility for God’s sake, bearing in mind they were up there only ten years ago, and 5% would have been considered low for most of my career. But hey ho.

Cycles and mean reversion play a major factor in financial markets, with fear and greed being a major part of human behaviour. 2017 has ended very much like it started with low interest rates fuelling free money into a system that doesn’t need it, as financial conditions are far too loose for the strong economies despite their continued debt build-ups.

The ‘Everything Bubble’, as one chartist has labelled the Federal Reserve’s Financial Stress Index.

In the US, house prices have returned to 2006 levels, before the great housing crash. Hopefully, it will turn out better this time around.

Another year goes by, my 35th in the city of London, where I am employed (some would say loosely) in the financial markets. Dementia has not set in just quite yet, so I am able to remember most of the ups and downs over that time in different asset classes, and I regularly bore younger colleagues with my anecdotes and predictions that what happened in the past might well happen again.

INVESTMENT INSIGHTS

US 20 City composite housing index

ISSUE 38 - JAN 2018 9

Investors have continued to re-value their equity holdings across the world significantly higher. With the weakness in the dollar seen over the year, the comparative performance in USD terms has only added to many countries’ performance.

Despite oil and gold rising 10% on the year, the average performance of the many commodity indices was close to a scratch, making the commodity indices relative to general stock indices at record low ratios.

According to John Hussman of Hussman Funds, US stock values have never been historically higher by many measures, but this doesn’t seem to have worried retail clients at Charles Schwab, one of the leading stockbrokers in the US who currently maintain record low cash holdings.

All in all, the party goes on. Wealth ON PAPER is still growing, backed up by cycle highs in economies as seen by strong Purchasing Managers Indices almost everywhere.

Typically, all peak stock values will be accompanied by some extreme speculation, whether its tulips, railroad or


internet stocks. And it doesn’t come any more extreme that the current speculation in crypto-currencies. The level of believers is still very high that crypto-currencies are here to stay, and their values can only go to infinity. My sceptical concerns were not helped when a 26-year old insisted that crypto-currencies couldn’t be printed like fiat money because they had protocol amount restrictions in their code. Firstly, let’s remember its only computer code and secondly, there are new currencies being launched and marketed every week. If this isn’t printing in extremis, I don’t know what is. Lastly, if we are printing fiat currency and crypto-currencies, seemingly without restriction, who would you rather have printing – computer coders, largely in Russia, or world government and bankers?

While the mania continues for now, do not be surprised to see the world and asset values change abruptly at some point. As the old saying goes, ‘If it can’t last forever, one day it has to stop…’ and it’s unlikely to be a smooth plateau when that end comes. With these extremes, we would advise retail investors to hold more cash than the typical client at Schwab, and consider a reasonable re-balancing out of general equities into more commodity focussed investments.

ISSUE 38 - JAN 2018 11

UK MARKET VALUATIONS

PORTFOLIO UPDATE - WHAT HAPPENED?MARKET & SECTOR ANALYSIS

UK INDICES PRICE/EARNINGS RATIO PRICE/BOOK RATIO DIVIDEND YIELD(%)

FTSE 100 INDEXFTSE 250 INDEX

22.9526.22

1.992.20

4.02%2.75%


HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (JANUARY 2018)PORTFOLIO UPDATE AND CONSTRUCTION

Mitchells & Butlers plc On the 14th of December 2017,

Mitchells & Butlers plc paid a dividend of 5p.

BT Group plc On the 28th of December 2017,

BT Group plc paid a dividend of 4.85p.

PORT

FOLI

O

UPD

ATE

ISSUE 38 - JAN 2018 13

We passionately believe that dividends really,really matter. William Thorndike in his fascinating book

'The Outsiders - Eight Unconventional CEOs and Their Radically Rational Blueprint for Success' examined one of the most impor tant aspects of running a business a CEO must undertake: Capital Allocation. He summarised how a CEO deploys capitalin order to best utilise cash flow generated from his or her business operations. Essentially,CEOs have 5 ways of deploying capital:

• Investing in existing operations• Acquiring other businesses• Repaying debt• Repurchasing their own stock (buybacks)• Paying dividends

Dividend payments are a crucial operation in creating stakeholder wealth. It is this aspect of a business that we are so fixated by - the propensity for a company to produce and continue to grow dividends so that we may accrue wealth over a generation. But as readers will know we can't just grab stocks with the highest yield for fear that this signals some cash flow or even solvency issues for the firm. So it is with this very real threat in mind we explore only well-capitalised FTSE 350 companies.

This letter's purpose is to help inform readers on dividend investing so that they can construct a portfolio of sound UK dividend stocks based on our recommendations. Our prerequisite is that any stocks selected for this let ter

must be liquid, well-capitalised with a strong free cash flow and a progressive dividend policy.

APPENDIX I

THE WAY WE THINK

Our System

• Every month we will provide a write up of 3 to 4 stocks until we create a portfolio of 25 UK dividend stocks. This will be the HindeSight UK Dividend Portfolio #1

• You wiII be alerted by subscriber email intra-month when these stocks become a buy. Timing is critical to the strategy, not only buying quality stocks but buying them at the right time

• The entry points will then be recorded in the next month ly in the HindeSight UK Dividend Portfolio section and the stock(s) written up in full

• We will run our winners but tend to rotate every 6 months depending on specific criteria which would elevate cheaper companies into the portfolio relative to stocks that had performed

• The basis for stock and portfolio selection is derived from our quantitative systematic methodology which screens these companies using the Hinde Dividend Value Matrix, (HDVM), a proprietary stock-rating system

• In the section on ETPs we will highlight our investment philosophy and the investment process behind our stock selections. This is the basis of our dynamic risk and money management in our portfolio construction for you. You can also read the stand-alone Hinde Dividend Value Strategy document to see the methodology behind our stock selection.


“We have met the enemy, and he is us.” Walt Kelly

Our key to long-term performance investing is premised on the following:

• Systematic rule-based strategy• Systematic risk and money management• Occam’s razor, aka ‘K.I.S.S.’, Keep It Simple Stupid• Consistency• Discipline

All our investment ideas are rule-based methodologies driven by systematic and quantitative models.

Hinde Dividend Value Strategy

Hinde Dividend Value Strategy seeks to generate a total return from an actively managed basket of UK dividend-paying stocks. The strategy selects 20 highly liquid, mid-to-large capitalised stocks on an equally-weighted basis, which offer the highest total return potential. The 50%

Hedge version of the strategy would then be subject to a strategic Beta Hedge*, which is designed to cover 50% of the value of the UK stock basket at all times.

The 50% hedge is maintained using UK equity benchmark indices to reduce exposure to overall market volatility, but without reducing overall total returns to the market over the long run. The Hinde Dividend Value Strategy (100% Hedge) would deploy a full beta hedge at all times.

Hinde Dividend Value Matrix ®

The strategy employs a quantitative, systematic methodology, whereby FTSE 100 and FTSE 250 constituent stocks are screened using the Hinde Dividend Value Matrix®, a proprietary stock-rating system. We use the same system to select stocks for any of our strategies, long-only, 50% Hedge or 100% Hedge. The only difference is clearly the extent of the hedge on the exposure to the overall market.

APPENDIX II

HOW WE THINK

ISSUE 38 - JAN 2018 15

The basic premise of the strategy is to accelerate returns by selecting relatively high yielding stocks that offer the highest potential for capital revaluation. The dynamic rotation of stocks each quarter enables us to sell stocks where the capital revaluation and dividend has been captured, and use this additional capital to invest in more undervalued quality companies. If successful, this cycle of capture and re-investment offers the chance to significantly improve the total return generated by the Dynamic Portfolio.

The basis of the stock selection process is the Hinde Dividend Value Matrix®, which is a derived process that looks at 3 crucial variables:

* Beta is the stock’s sensitivity to market movements, e.g. if a share has a beta of 1.5 its price tends to move by 1.5% for each 1% move in the index

1. Dividend Screen

The top ranking stocks will be those offering a relatively high dividend. A composite of the following criteria comprises the Dividend Rank:

• Relative Dividend Yield• Dividend Capture• Payout ratios

The Relative Dividend Yield assesses if a company pays a higher dividend than the Index it derives from (the FTSE 100 or FTSE 250). The Dividend Capture criteria explain how quickly and how much of the dividend is paid at any point in time. The Payout Ratio gives a snapshot of whether a company will be able to maintain and grow its dividend. It helps us to assess how much of a company’s revenue, profit or cash flow is paid out in dividends.

The lower the amount of dividends paid out as a percentage of profits, the healthier future dividend potential will be. History is for once a good guide as to whether companies will continue to pay and grow their dividends. A stock with an excessively high yield relative to its sector or the overall market is invariably showing signs of heightened risk to its dividend sustainability and often the viability of the company itself. The screen incorporates a limit on yield dispersions from the overall market.

The strategy is emphatically not a yield chaser. It is the Performance and Value screens that are used to assess the total return potential of a stock by analysis of how undervalued it is relative to its fundamentals, sector and overall market index.

2. Performance Screen

The top ranking stocks have the poorest relative

performance to their index over multiple time horizons.

A composite rank of the following criteria provides the Performance Rank:

• Stock relative performance ranked over multiple time periods

• Average of time periods taken to select rank of stocks

3. Value Screen

The top ranking stocks by key fundamental criteria show stable fundamentals and exhibit upside momentum growth potential. The following are some of the criteria that provide the Value Rank:

• Value - Price to Book (intangible book adjustment), Free Cash Flow metrics

• Quality - Return on Investment and Earnings metrics

• Financial Stability - Debt levels, Coverage and Payout ratios

• Volatility - Stock variance, Dividend variance

• Momentum - Sales Growth, Cash flow metrics

• Liquidity - Minimum market capitalisation relative to index, Shares outstanding

Implementing the Hinde Dividend Value Matrix ®

The FTSE 100 and FTSE 250 stocks are ranked using the Dividend, Performance and Value screens. An equally-weighted composite rank is then taken of these 3 ranks, which provides a final ranking from which a selection of 20 stocks is made for the portfolio.

The stocks with the highest ranking are compiled for the FTSE 100 and the FTSE 250. The top 10 from each index are then taken, subject to diversification rules, which entail that normally only 1 stock per sector per index can be invested in. For example, if the top 10 stocks are all mining companies, the selection process would take the first of these and then move on to select the next top stock from another sector. As long as a stock has the highest score in its sector, the fact that it has appeared in the final ranking means it is already eligible for investment. In exceptional circumstances, it may be that more than one stock has to be selected from an individual sector.


DISCLAIMER

This newsletter is intended to give general advice only on the importance of dividends within the equity space. The investments mentioned are not necessarily suitable for any individual, and you should use this information in conjunction with other advice and research to determine its suitability for your own circumstances and risk preferences. The value of all securities and investments, and the income from them, can fall as well as rise. Your investments may be subject to sudden and large falls in value and you may get back nothing at all. You should not buy any of the securities or other investments mentioned with money you cannot afford to lose. In some cases there may be significant charges which may reduce the value of your investment. You run an extra risk of losing money when you buy shares in certain securities where there is a big difference between the buying price and the selling price. If you have to sell them immediately, you may get back much less than you paid for them. The price may change quickly, particularly if the securities have an element of gearing. In the case of investment trusts and certain other funds, they may use or propose to use the borrowing of money to increase holdings of investments or invest in other securities with a similar strategy and as a result movements in the price of the securities may be more volatile than the movements in the price of underlying investments. Some investments may involve a high degree of ‘gearing’ or ‘leverage’. This means that a small movement in the price of the underlying asset may have a disproportionately dramatic effect on your investment. A relatively small adverse movement in the price of the underlying asset can result in the loss of the whole of your original investment. Changes in rates of exchange may have an adverse effect on the value or price of the investment in sterling terms, and you should be aware they may be additional dealing, transaction and custody charges for certain instruments traded in a currency other than sterling. Some investments may not be quoted on a recognised investment exchange and as a result you may find them to be ‘illiquid’. You may not be able to trade your illiquid investments, and in certain circumstances it may be difficult or impossible to sell or realise the investment. Investment in any of the assets mentioned may have tax consequences and on these you should consult your tax adviser. The opinions of the authors and/or interviewees of/in each article are their own, and are not necessarily those of the publisher. We have taken all reasonable care to ensure that all statements of fact and opinion contained in this publication are fair and accurate in all material respects. All data is from sources we consider reliable but its accuracy cannot be guaranteed. Investors should seek appropriate professional advice if any points are unclear. Ben Davies and Mark Mahaffey the editors of this newsletter, are responsible for the research ideas contained within. They or any of the contributors or other associates of the publisher may have a beneficial interest in any of the investments mentioned in this newsletter.

Disclosures of holdings: None relevant to any content discussed within this issue of the newsletter

This score is derived from 3 inputs that have been obtained from all the external analysts at leading institutions who are covering the stock:

1. The 12 month target price in relation to current price

2. The number of analysts covering the stock

3. The recommendation analysis, e.g. STRONG SELL, SELL, UNDERPERFORM or HOLD

This score is used to observe the other analysts’ view of the stock and is helpful when understanding the methodology that other analysts use to determine their 12-month target price. We ultimately get a blend of price targets that is based on different valuation metrics.

EAS Score Output:

1. The combined score will vary from 30-702. A stock with a lowest score of 30 shows the majority

of analysts not only have a full sell/underweight recommendation, but also a low 12-month target

price in relation to current price.3. A stock with the highest score of 70 shows the majority

of analysts not only have a full buy/overweight recommendation, but also a high 12-month target price in relation to current price.

Note:

On a standalone basis, the EAS score must be viewed in the following context:

• Equity analysts issue far more positive recommendations than negative

• If all analysts are overwhelmingly bearish or bullish, then this can signal a contrarian position be held, but this is determinate on the where the stock is valued.

However, in conjunction with the HDVM ®, we have found the score to be useful when it is high or momentum is turning higher, as this suggests that the stock offers deep value.

EXTERNAL ANALYST SCORE (EAS)

what’s inside · what’s inside inside this edition of the uk dividend letter, you’ll find:...

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