While few banks are on the list of promising dividend payers, a number of income managers Portfolio Adviser has spoken to in the last few weeks have all pointed to the financials sector as increasingly fertile soil for returns.
Sarah Emly, co-manager of the JP Morgan Claverhouse Investment Trust is one manager that is positive on a number of financials stocks, but it careful to point out that one has to be selective.
One of Emly’s favoured stocks at the moment is Aviva, which she says has undergone significant restructuring in the last few years – especially following the acquisition of Friends Life, which completed earlier this week.
“Investors were forecasting single digit dividend returns from the stock, and were initially unimpressed by the merger. But, management’s explanation for the deal – in order to strengthen the combined group’s cash generation and raise its dividend helped alleiviate fears,” Emly said.
Emly added, when the firm put out results in March, it increased its dividend 30% to 12.25p per share and the prospect is for continued strong growth in dividends from the company.
Emly said the group also likes Prudential, which is expected to generate a dividend growth around 10%.
Asked about dividend cover among the life companies, Emly said: “It is not the highest cover, but it is improving and, across the financials sector, companies are focused on improving balance sheets and dividend cover, which is encouraging.”
Scott McKenzie, manager of the recently launched Saracen UK Income Fund, is also positive on financials. Currently, the fund has 31% invested in financials, but banks only make up 6% of the fund.
McKenzie also owns Aviva, as well as Jupiter Asset Management, another stock Emly likes, for similar reasons – strong balance sheets and good dividend growth – but also highlighted the prospects for emerging markets fund manager Ashmore.
“I don’t think many people fully understand the firm,” he said, adding, “a lot of people have been put off by the emerging market focus, but you are being paid to wait for things to improve.”
This is a point cited by Numis Securities in a note on the firm’s latest set of results, which were surprisingly bullish given fairly hefty outflows.
“We continue to see Ashmore as a long term sector winner and EM as a long term growth theme and thus would regard any price weakness from here as an opportunity to buy into a good company that has some short term issues, where you are paid well to wait for better times to return.”
Two other unloved stocks that both Emly and McKenzie site are Barclays and Lloyds, from which the prospect of decent dividend growth is enticing.
Close Brothers is another name McKenzie likes, pointing to expected dividend growth of between 6 and 10% as one of the reasons to like it.
“The UK market is forecast to produce 8% dividend growth in 2015,” Emly said, “But, many of the biggest players are likely to produce, at best, flat dividends, so strong growth is expected from other areas, and financials is one of them.”
