In a note out on Wednesday, Thomas, manager of the Axa Framlington UK Select Opportunities Fund, said the fund continues to look for good companies that can convert a great deal of their profits into cash in order to continue paying dividends.
“Although cyclical companies will have their day in the sun, we believe it is the growing companies that will increase their shareholder returns over the long term,” he said.
Pointing to the trend toward dividend cuts already seen, Thomas said that in the UK market, worries over Brexit are compounding fears of slower growth globally.
“If deflation gets stronger and investment decisions are delayed, negative rates could slow growth further by way of increased savings.”
However, he adds, the negative interest rate policy underway in various jurisdictions begs the question: “if quantitative easing and monetary policy has gone as far as it can in the developed economies, then surely fiscal stimulus should now be the major policy tool?”
While he doesn’t necessarily expect ‘Marshall Plan’ levels of infrastructure build out, especially given Chancellor of the Exchequer, George Osborne’s attitude toward government spending, Thomas says the fund’s investment thesis should not ignore the possibility of such an undertaking, especially if it is looking for cash generative companies.
As a result, the fund currently holds over 8% of Breedon Aggregates, which he describes as the largest independent aggregates business in the UK.
“UK aggregate volumes peaked in 2007 at 170 million tonnes. Today it is only back to 130 million tonnes. Ready mix concrete volumes peaked the same year at 22 million cubic metres2, today back to 16 million cubic metres,” he explained.
According to Thomas not only does the firm currently supply 8.7m tonnes of the 130m total, but it also agreed in November 2015 to acquire Hope Construction Materials, which when the deal completes will create the UK’s largest independent building materials group.
Thomas’s second example of strong cash generation is the fund’s holding in ITV.
Currently on a 5.9% dividend yield Thomas pointed out that this was in part the result of a weak first quarter of 2016 for national advertising revenues which lowered the firm’s share price.
But, he added while some observers have been questioning the long-term viability of free-to-air TV, he does not expect this to be the case.
“Given the proliferation of the devices to watch content and with advertising growing strongly online, in competition. The number one channel to building brands is TV. Facebook does not feature in the top ten. The majority of this ‘other half’ of what people watch on tablets and iPhone is not accurately measured. There is only one way to ‘reach’ nine million eyeballs at once.”
