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THE EXTRAORDINARY DIVIDEND
Neil Woodford, 24 March 2017
The views expressed in this article are those
of the author at the date of publication and
not necessarily those of Woodford
Investment Management Ltd. The contents
of this article are not intended as investment
advice and will not be updated after
publication unless otherwise stated.
The dividend is often called the ordinary dividend, but there is nothing ordinary about it.
There is no other piece of information that a company can give to investors, which could
more accurately reflect what that business really thinks about its current state of health.
Principally, this is because companies find it very hard to cut their dividends. It is the walk of
shame for any board and executive management to cut the dividend – it is a last resort, and
rightly so. By contrast, companies that choose to sustain and grow their dividends, are doing
so in the knowledge that they are creating a bigger burden for the future – they need to be
confident in the sustainability of the business and its future growth prospects, in order to do
so.
This does introduce a problem too, however. The difficulty that boards and management
teams have with dividend cuts, can lead to some ambiguous behaviour. Sometimes
companies will go to great lengths to avoid a dividend cut and this simply stores up trouble
for the future. This is where judgement comes into my investment process – I have to make
judgements about the sustainability of a company’s dividend which may be at odds with
what a management team is saying.
Within the UK stock market, examples of this can currently be found in the oil & gas sector. I
believe that both BP and Royal Dutch Shell have unsustainable dividends that are being
financed by a combination of debt and asset disposal. In effect, these companies are
liquidating themselves rather than facing up to the need for a dividend cut. The only thing
that can save them from that eventuality, in my opinion, is a return to sustainably higher oil
prices – something that I think is very unlikely to happen. In short therefore, although I know
this is a contrarian view because these are widely held shares, particularly by income funds,
the oil majors are an unattractive investment proposition while the threat of a dividend cut
hangs over them.
Instead, my focus (for the Equity Income Fund and the new Income Focus Fund) is on
identifying businesses that are attractively valued and capable of delivering sustainable
dividend growth in the years ahead.
There is a simple reason for that focus, which is clearly evident in the chart below.
Reinvested dividends have formed a very significant part of the long-term return delivered by
equities.
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Reinvested dividends provide a powerful boost to long-term equity total returns
With dividends reinvested, £1,000 in 1926 would have grown to £7.8m by 2017
THE EXTRAORDINARY DIVIDEND
Neil Woodford, 24 March 2017
Source: Morgan Stanley, Woodford. Past performance cannot be relied upon as a guide to
future performance.
Here we can see the performance of the FTSE All Share index since 1926, in capital terms
and in total return terms. Over nine decades, an investor’s capital has appreciated at a
compound annual growth rate of 5.4% – this is an attractive growth rate in itself but, with
dividends reinvested, the total return from UK equities compounds at an annual growth rate
of 10.4%.
This is a product of what Einstein observed to be the 8th wonder of the world – compound
interest!
Of course, part of this return can be explained by inflation and, at times, over the last 90
years there’s been a lot of inflation around. But that also highlights one of the other
important things that makes equities, and the dividend in particular, special. Equities are real
assets – they are stakes in real companies, operating in the real economy, which generate
revenues, profits and cash flows that can rise with inflation. With those cash flows,
companies pay their dividends which also tend to rise with inflation. Investing in equities
therefore comes with an in-built inflation advantage which very few other asset classes can
match. Cash and fixed-interest investments are nominal asset classes – they cannot protect
an investor from the erosive impact of inflation.
The dividend has always been important to me as an investor and it always will be. The
dividend isn’t ordinary – if anything it is extraordinary. And by selecting the most attractive
and sustainable dividends, I aim to deliver extraordinary long-term returns to investors.
Find out more about the new CF Woodford Income Focus Fund
What are the risks?
The value of investments and any income from them may go down as well as up, so you may
get back less than you invested
Past performance cannot be relied upon as a guide to future performance
The annual management charge applicable to the funds is charged to capital, so the income
of the funds may be higher but capital growth may be restricted or capital may be eroded
The funds may invest in other transferable securities, money market instruments, warrants,
collective investment schemes and deposits
The funds may invest in overseas securities and be exposed to currencies other than pound
sterling.
The CF Woodford Income Focus Fund will be invested in a concentrated portfolio of
securities – the fund is not restricted by reference to any geographical region, sector or
market capitalisation
The CF Woodford Equity Income Fund may invest in unquoted securities, which may be less
liquid and more difficult to realise than publicly traded securities
Important information
Before investing, you should read the Key Investor Information Document (KIID) for the fund,
and the Prospectus which, along with our terms and conditions, can be obtained from the
downloads page or from our registered office. If you have a financial adviser, you should
seek their advice before investing. Woodford Investment Management Ltd is not authorised
to provide investment advice.
THE EXTRAORDINARY DIVIDEND
Neil Woodford, 24 March 2017
You should note that capital is at risk with these investments and you may get back less than
you invested. The value of the fund or trust as well as any income paid will fluctuate which
may partly be the result of exchange rate changes.
The price of shares in the Woodford Patient Capital Trust is determined by market supply
and demand, and this may be different to the net asset value of the trust.
The Woodford Patient Capital Trust currently intends to conduct its affairs so that its
securities can be recommended by IFAs to ordinary retail investors in accordance with the
FCA’s rules in relation to non-mainstream investment products and intends to continue to
do so for the foreseeable future. The securities are excluded from the FCA’s restrictions
which apply to non-mainstream investment products because they are shares in an
investment trust.
Young businesses have a different risk profile to mature blue-chip companies – risks are
much more stock-specific, which implies a lower correlation with equity markets and the
wider economy. Long-term outcomes are more binary – extremely attractive rewards for
success but some businesses will inevitably fail to fulfil their potential and this may expose
Woodford Patient Capital Trust investors to the risk of capital losses. As it can take years for
young businesses to fulfil their potential, this investment requires patience.
Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct
Authority.