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HINDESIGHT DIVIDEND UK LETTER / JUN 16

Mark Mahaffey Ben Davies

1

Aalok Sathe

OVERVIEW

Roughly translated this means, “We (the Stasi) have an extraordinarily high level of contact with working people.” The

Stalinist perversion of socialism could not have been expressed more clearly.

By the time of the next issue of the HindeSight Dividend letter in July, the EU referendum will hopefully be a distant

memory. The IG index spread betting odds for OUT have been firmly between 3-1 and 5/2 against for the duration of

the campaign. In the last few years, we have seen these spread betting odds provide a more appropriate probability to

binary election outcomes rather than the media polls, which frequently show a much tighter contest. Like most of the

country, in the Hinde office there is a good split between REMAIN and LEAVE. Unfortunately, the main issue that we

can agree on is how pathetic both sides of the campaign have portrayed their stories, coupled with the belief that the

politicians have only one real aim – how to remain in power or how to ascend to power. You would have certainly

believed that it was David Cameron who was a LEAVE voter and Boris Johnson who was a true European and

REMAIN voter if you had read their writing and speeches pre-2015. Yet today, on every media outlet, the main

campaigners are arguing potentially against their true beliefs for their own political careers. Plus ca change! You might

say.

‘Project Fear’ is the main driving force behind the status quo, while the Brexiteers focus on the loss of sovereignty and

worries about immigration, concerned about meddling Brussels bureaucracy and a federalist superstate. As always,

there is a reasonable amount of grey between the black and white of the argument. I think we can agree that even the

generally pro-Europeans, such as myself, have been appalled at many of the developments of the European project. It

must be clear even to a power mad federalist that moving from 12 member states to 28 in short order was bound to

lead to problems. So why didn’t we wait 20 years and gradually increase? After all, top economists warned us long ago

that using a single currency and single interest rate tool would be liable to failure without true mobility of labour and

similar country tax rates at state and local levels, especially during a sustained downturn. In my opinion, despite the

ability to drive through frontiers unchecked in the Schengen area (for how long?), we have never achieved true mobility

of labour or capital across the Union.

The rise of right wing nationalism, fuelled by the latest wave of migrants and mass emigration from the Syrian and

Middle East conflict zones, is worrying. History seems to be repeating itself, no matter how distasteful this is. The

problem with immigration never seems to be accurately debated. The left wing is in blind support, while the right is

starting to order brown shirts and marching boots. We clearly need immigration in Western economies with ageing

demographics and poor fertility rates. If we are to maintain the upright pyramid, we urgently need the ratio of younger

tax paying workers of all skill sets to keep pace with the retirees. The problem is we need PLANNED immigration. It

doesn’t matter whether it is 330,000 net migration or 100,000, we need to know how many people are coming so that

we can build the schools and hospitals in time, otherwise it is like organising a Rolling Stones concert at your local pub

and then wondering why it’s so crowded that you can’t breathe, let alone see the band.

JUN 16

„Wir haben, Genossen, liebe Abgeordnete, einen außerordentlich

hohen Kontakt zu allen werktätigen Menschen. Ja, wir haben den

Kontakt. Ihr werdet gleich hören, warum. Ich liebe doch alle

Menschen... Ich setze mich doch dafür ein!“

―Erich Mielke

Zitate und Aphorismen - http://gutezitate.com

HINDESIGHT DIVIDEND UK LETTER / JUN 16 2

The United States run an excellent immigration policy with their green card system and strangely they do not have

anywhere near the issues with immigration, even with Trump’s rantings. The old 7Ps army saying, ‘Piss poor planning

prevents proper performance’ seems most apt here. The UK, as well as most parts of Europe, has demonstrated the

7Ps admirably with regard to immigration for the last 2 decades.

The concerns of Brussels bureaucracy are far reaching, whether it is the size and shape of fruit or the sizes of

subsidies and rebates to member states, but we have potentially linked the dramatic rise of regulation to European

bureaucracy, which may be somewhat misplaced.

In the mid-1980s, I was fascinated with the cold war spy stories, especially the ‘Game, Set and Match’ trilogy by Len

Deighton, initially set in West and East Berlin, divided by the infamous wall. Several weekends were spent flying into

West Berlin to party in a true hedonistic frenzy (that only comes with the Russians on your doorstep threatening

nuclear Armageddon). Then, slightly worse for wear, we would go through Checkpoint Charlie early on Sunday

mornings and pass into East Berlin for the day. Once in the East, different rules applied. The East German Stasi

(Ministerium fur Staatssicherheit-Ministry for State Security) and the People’s Police, ‘Deutsche Volkspolizei’,

controlled their citizens through surveillance and by reporting in incredible detail. They had over 100,000 official

members and there were many more unofficial informants. People, including us, would be asked for their papers at any

time, not only at the checkpoints, but also in the street, countless times. ‘The Lives of Others’ is an excellent film to

better understand the paranoia of those days.

Regulation, surveillance and excessive reporting (spying?), like most things in life, come in cycles. Often, it comes

firstly in response to a crisis to better administrate new state policy but then leads into excessive monitoring and

surveillance, with the size of the ‘monitoring’ community growing by the thousands where before there was none. It is

not only costly to businesses, forcing many eventually to close, but also resented by the masses, who are afraid of the

consequences of stepping out of line. Most reading this may laugh at the suggestion that the compliance officers of

today are merely the Stasi officers of the 1980s, but the characteristics are alarmingly similar. It is not only Europe that

is responsible for increased regulation, but more a typical widespread upswing in the cycle where those people who

want to control (with the State’s backing) have gotten the upper hand for a time. Naturally, the cycle peaks and there is

a revolution of ‘liberty’ and deregulation, often in the name of business enhancing, but we are nowhere near that yet I’m

afraid.

Our business at Hinde Capital of boutique fund management has experienced first-hand the dramatic increase in

regulation and reporting. We spend far too much time and money producing reports for the regulators on both sides of

the Atlantic, hidden in the acronyms of MIFID and FATCA, knowing full well that the volume of reports produced can

never even be glanced at, let alone read by even the massively increased monitoring community. It should be well

understood that the only people who are reaping the benefits of this are the new compliance and legal teams that are

naturally non-revenue producing. They don’t make anything, sell anything or have ideas to create anything. They

are just an expense, which currently our system wants to justify in the name of better policing. Unfortunately, the

consequences of these added expenses are straightforward. Small businesses hire less as they struggle to survive.

Large businesses see reduced profitability until such a time as the smaller businesses have been wiped out. As a

result, we are left with large monopolies and less competition, hardly the original game plan one would have thought.

Long live Erich Mielke!

My desire to vote to REMAIN in the EU is based more on the potential of unintended consequences that I place at too

high a probability to be ignored. The EU is clearly flawed, whether it is the discussion of a currency union without a

fiscal union or the issue of unelected bureaucrats with their noses in the proverbial trough, deflating economies with


burgeoning paperwork. It has not worked anywhere near as well as it should have, maybe it never can. However, the

status quo of remaining in, to watch the slow grind death of socialism or federalism, call it what you want, might be

preferable to the alternative. If there is a true LEAVE vote recorded, my belief is that it will signal an end to the

European project very quickly. If the UK can leave, then there are probably several other breakaway potentials, and

sooner rather than later FINITO. Good riddance, the Brexiteers will say. Cui Bono?

Will Europe return to the fence building, barrier constructing of the past? Probably. Allegedly, one of the conspiracies is

that Russia has not only funded many of the Anti-EU parties, but has also manipulated the Syrian crisis to force the

migrants west in hope of stirring up the pot. Geopolitics in extremis. Whether it is the rise of Donald Trump and his

supporters in the US or Hilary Clinton, there is a real threat of a reduced global US superpower or even a return to

1930s isolationist policies. I do not think a fragmented Europe with an isolationist US makes the world a safer place or

a better place for business, no matter how untenable the current path appears to be leading.

Europe needs the UK to remain in, we are the voice of reason. Our long history has developed processes in all aspects

of the law that are far better respected than most. There were some benefits to being in charge of a quarter of the

globe for a hundred years or more. Our general populace has a great sense of fair play and resents injustice, within a

broadly GOOD capitalistic business beneficial model. The reality is that the UK has embraced many of the European

policies for labour and integration far better than many of the main continental countries.

I cannot engage in strong debates on the matter, whether ranting or putting forward seemingly coherent arguments, but

with my view on the potential outcome and subsequent consequences, I feel that the REMAIN vote slightly tips the

balance for me personally.

One thing I will not be doing is voting on the worry about house prices falling!!!

In the financial markets, the phoney war goes on. The month of May was full of Federal Reserve officials, reminding us

of their desire to raise interest rates. The bond markets reluctantly tried to price this in, as did the USD currency while

the stock markets trod water. Yet again, they were scuppered by a terrible non-farm payrolls employment number and

a weaker ISM economic number, and all bets were off. The USD currency lost 2% in minutes and interest rates

tumbled. Oh dear, the blind leading the blind.

John Hussman of www.hussmanfunds.com sums it up neatly in suggesting that the market currently believes that low

interest rates are ‘good’ for financial assets, whether that is because the economy is starting to weaken or fall off a cliff

is immaterial. If there is no hike in rates, assets can’t go down, period.

Unfortunately, that is not a long-term believable strategy as we remain at hugely elevated valuations across the board.

‘Stability breeds instability’ as Hyman Minsky would say. Ourselves, we await the Wiley Coyote moment.

http://www.hussmanfunds.com/


CONTENTS

Inside this edition of the UK Dividend Letter you’ll find:

OVERVIEW BY MARK MAHAFFEY 1

INVESTMENT IDEA #1 WILLIAM HILL PLC 5

INVESTMENT INSIGHTS 11

EASYJET OVERVIEW 16

PORTFOLIO UPDATE - WHAT HAPPENED? MARKET & SECTOR ANALYSIS 18

HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (JUNE 2016) 20

APPENDIX I THE WAY WE THINK 22

APPENDIX II HOW WE THINK 23

Our main investment ideas this month are:

1. William Hill PLC

2. A review of EasyJet


INVESTMENT IDEA #1 WILLIAM HILL PLC by Mark Mahaffey

William Hill PLC

Price (£) 314.0

Turnover (£mm) 1,590.9

Net Income (£mm) 189.9

Market Cap (£mm) 2,880.6

Fwd P/E Ratio 11.9

Dividend Yield (%) 3.00%

Payout Ratio (%) -

Total Debt to Total Equity (%) 55.0%

FCF to Market Cap (%) 10.4%

ROIC (%) 11.1%

William Hill (LSE:WMH) is a British bookmaker headquartered in Wood Green (United Kingdom). The company was founded by William Hill in 1934 when gambling was illegal in Britain. William Hill is the largest UK gambling operator that represents approximately 25% of the market across the UK and Ireland. The firm employs more than 16,000 individuals with a market capitalisation of over £2.5bn. William Hill is listed on the London Stock Exchange as a constituent of the FTSE 250 Index and is led by James Henderson. Last year, (2015), the firm generated revenues of £1.52bn and operating income of £283mm.

Prior to betting shops becoming legal in 1961, they were a mix of operations behind closed doors. William Hill offered a

postal and telephone betting service where customers would send checks and place their wagers well in advance of

the events. WMH established a reputation for reliability at a time when bookmakers were under no legal requirement to

pay out on winning bets with no governing body in place. With the arrival of television and the legalisation of the

industry, more people spent time in betting shops watching sports and racing and the business grew considerably.

The company changed hands several times, having first been acquired by Sears Holdings in 1971, shortly after the

death of William Hill. Subsequently, Grand Metropolitan owned it and eventually Brent Walker in 1989. Despite

surviving fraud relating to the purchase, Brent Walker finally collapsed in 1997. WMH was then bought out by Nomura

Investment Bank, before it was finally purchased by buyout firm CVC Capital Partners in 1999 for £825m. The firm was

eventually listed on the London Stock Exchange in 2002 after making history by going online with its sportsbook.

Despite early success, the company was relegated to the smaller FTSE 250 index in 2005. The changing landscape of

the gambling ‘offshore’ business saw Gibraltar based-companies spring up, as well as global expansion.

The sports betting and gambling industry has seen regulation changes continue to impact their bottom line, most

notably the introduction of the ‘point of consumption’ tax away from ‘point of supply’ in the last year. Recent outrage at

the small taxes paid by multi-nationals, such as Google, may well see the POC tax issue becoming more widespread in

this electronic global world.

By 2013, WMH had spread its services to Australia and furthermore set up joint ventures across the world, including

Spain, while expanding to Nevada, which is the only US state to allow sports wagering. William Hill was, in fact, the first

European Gaming operator to be given a full gaming licence in Nevada. By 2015, the firm’s popularity has dramatically

increased with its sports betting app passing the two million download milestone.

A few years ago, I was touring Scotland and visited Skara Brae on the Orkney Islands, the oldest preserved European

Neolithic settlement dating back to 3000 BC. First discovered in 1850, but only officially recognised in 1924 as being of

historic interest, this group of less than a dozen houses revealed how similar the interiors were in many aspects to

modern day dwellings. Beds, dressers, private cubicles, living areas with fireplaces were all discovered. One of the

most fascinating finds for me was a set of dice (pictured below). Made out of bone with grooves, they look remarkably

similar to those of today.


Human beings, while we like to seem superior to the rest of the animal world, are quite basic in our needs. We mostly

fulfil some barterable skill in order to provide food, water and shelter for our family, while most of the rest of the time is

spent in leisure pursuits to fill the time. Anyone who has retired will know how difficult it is to fill 24/7 with leisure

activities when there is no longer the need for work. Games of chance and betting on the outcome is a leisure pursuit

for a large part of the population, whether you are playing dice in 3000 BC or having a flutter on the Grand National.

Large fields of early mathematics were dedicated to the laws of probability.

William Hill has generally been at the forefront of this leisure activity in the UK’s betting industry and spreading its

services globally. It now operates through four main avenues:

Retail

Online

William Hill Australia

William Hill US

WMH and their rivals have come under threat from regulation and taxation over the past two years. In order to continue

to collect income in this reasonably inelastic tax area, the UK government announced the introduction of the ‘Point of

Consumption’ tax for remote gambling that has seen firms, including WMH, pay 15% duty on their remote gambling

activities. This duty, along with other regulatory changes, have seen an increase in operating costs for betting houses

across the British market. This has worried investors, with the UK market being described as one of the most

developed within the western world for remote betting by size and maturity. The new levy has seen WMH lose over

11% in online revenues, which ultimately meant that they saw a 3% drop in overall group sales. The changes that

came in this year resulted in online revenues of £550mm, as opposed to approximately £648mm, and are said to have

also contributed to a 29% decline in operating profits.


While the company has suffered as a result of regulation/taxation changes within the United Kingdom, the industry as a

whole has faced disruption through competition across new mediums. The past five years has seen brick-and-mortar

betting shops come under threat from online bookmakers, although fixed odds betting terminals in shops have

historically generated high revenues. Unfortunately, they come with labels, such as ‘crack cocaine’ gambling machines,

and are constantly under threat by potential regulation to stop addicts pouring money into them. Mobile betting

continues to grow significantly, taking market share away from the traditional brick-and-mortar shops. The betting

industry has been spooked by this information, making the UK gambling sector one of the most heated, with William

Hill’s investors particularly worried as the firm has the largest number of stores across the UK.

Consolidation and diversification is the current modus operandi in the industry. William Hill’s management team has

been quickly diversifying their business, increasing their exposure to the Australian market and becoming the first

European gaming operator to gain a licence in Nevada. This is part of the group’s long-term strategy and the transition

they have been going through has been overlooked with the firm generating greater revenue across the world and

particularly through their online channel. The mergers of Paddy Power Betfair and soon Gala Coral and Ladbrokes will

change the landscape again.


While regulatory changes are reshaping WMH’s revenues, the betting giant was also negatively affected by large

losses at the Cheltenham horseracing festival and unfavourable European football results. Leicester City’s Premier

League win caught most bookies off guard. At the start of the season, many bookmakers were offering 5000/1 against

Leicester taking the title, which at the time was double the odds being offered on Elvis Presley being found alive. Even

at Christmas, betting houses were adamant that Leicester City’s bid would fail, still offering 20/1 against the Midlands

minnows. Bookies across the UK were taken by surprise and the industry is estimated to have lost approximately £25m

on the football club’s heroic season (with William Hill paying punters over £3m). Furthermore, the horseracing saw

WMH’s losses deepen as the favourites raced to victory. These hopefully one-off events cost the betting industry

dearly, and they have forced WMH to rethink their approach on setting the odds on outsiders. With multiple results

going against the firm, the past year has felt like the most perfect storm, culminating in a profit warning (which is very

rare for a bookmaker, and as such WMH are expected to improve through operation the changes already mentioned)

that saw its share price loss over 13% in one single day.

William Hill enters the HindeSight Dividend portfolio this month. The stock price has fallen almost 30% since early

March this year. We believe the clearly observable negative factors for the stock and the industry as a whole are

reasonably well-built into the currently depressed share price. William Hill has been around a substantial amount of

time and is likely to be able to weather the storm. Despite the firm having to pay-out substantial winnings to numerous

people, it continues to generate positive free cash flow, demonstrating its ability to manage (rare) adverse situations,

which gives comfort that the management team will guide the group’s share price higher over the next six months.


Its forward P/E is now trading at 13x. The firm has shown its financial strength and grown its dividend every year.

William Hill may have suffered from a string of adverse sporting results, but they still have time to recover some of their

losses over the next six months with a summer of sport, including Euro 2016, the Copa America, Wimbledon and the

Summer Olympics, fast approaching (from June to August 2016). Sporting events like these tend to provide William Hill

and its rivals with a good opportunity to generate further revenues. Bookmaking profitability is a cyclical business,

which for WMH can dramatically improve through the numerous sporting bets that are expected to go through (both

online and offline). Revenue remains strong. While government taxation is never welcomed, it firstly brings uncertainty

to companies who need to adapt business models but usually a strong business will live to recover in a changed

environment.

Analysts’ Corner

WMH PLC is a long-serving business spread across the world that is well covered by the analyst community. Over

recent month, these individuals have turned negative on this business with over 40% giving a hold rating. Our scoring

system suggests that the stock has an average 12-month target price (TP) of 357p, representing an upside of over

17%.

Summary

William Hill PLC trades at a discount relative to itself and its peer group over the past two years.


The business has suffered a series of negative events (unexpected sporting results and disruptive technology) that

have weighed down on the firm’s share price. The company continues to diversify its geographical exposure by making

inroads into Australia and the United States. The firm has won several awards over the years for offering the best

prices and the quickest speed to its punters. This maturing business offers genuinely portfolio diversification and an

average dividend yield of at least 4% has demonstrated the management’s ability to provide loyal investors with a solid

income. With the stock suffering from negative price movements over the past year, this provides new investors with a

good entry point into William Hill PLC.


INVESTMENT INSIGHTS

Gold investment

Hinde Capital was founded in the spring of 2007 to establish the Hinde Gold Fund that would invest in physical gold bullion and its derivatives, including equities of companies in the business of mining of precious metals. The fund is still operational, having seen gold rise from the ashes of near extinction in the mid-2000s to the 2011 highs of almost $2000/oz. Since then, we have written numerous articles on gold that can be found in the reports section at www.hindecapital.com, ranging from its role as a currency of first resort to its application in a diversified portfolio. For the purposes of this article, we are simply going to look at whether gold is worthy of an investment, either in the short or long term, and some of the ways that an investment can be made.

Gold seems to engender binary emotions within the investor community with rarely a middle ground. The mere mention

of the word can induce comments more on a par with those of Marmite. People either ‘love it or hate it’, as the advert

for the nation’s most divisive breakfast spread chimes.

The legendary investor, Warren Buffett, will tell you that it earns you no interest or dividends, as it is merely dug up in

one part of the globe to sit in a vault in another part of the world. A barbaric relic was once how John Maynard Keynes

described it. On the other hand, you have the gold bugs that believe we will return to a gold standard of yesteryear, as

the world’s paper currencies disappear in a hyperinflationary bonfire. The truth is like most investments, there are good

times to own it, when it is ‘cheap’, and times not to own it. Many people make the argument that as gold is never used

up like oil, the supply is always available; it is just held in someone else’s account at a different price. However, that

argument is just as relevant with shares of Coca-Cola; someone always owns them, it’s only the price that is an issue.

Gold has been mined for 3000 years, although most of it has been extracted in the last 150 years. However, everything

mined is still in existence today. It is estimated at about 180,000 tonnes, a cube with sides of just 20m. The annual

mined supply currently is approximately 2500 tonnes, with an estimate of only 52,000 tonnes of mineable gold still

remaining in the earth’s crust. The coincidental and convenient fact is that the new supply of gold over time is relative

to the existing stock pile that has increased at the same rate as the population growth, currently 1.1% a year, which

makes it an ideal long-term currency, which of course it was.

Prior to the 1970s, the gold price was fixed, either as part of a true gold standard or a quasi-standard. From then on,

the price has floated with some spectacular booms and busts.

http://www.hindecapital.com/


Paul Brodsky via Macro-Allocation reminds us here that world paper currencies have indeed had a torrid devaluation

time relative to gold over the last 10 years, with Russia leading the charge. A Russian would have been well advised to

transfer his savings into gold from roubles 10 years ago, increasing by 370% his purchasing power loss in downtown

Moscow.

While the price of gold is often viewed against a change in valuation in the currency it is being measured, it is still just

an ounce of gold. There is a cost involved in extracting the new supply of mined gold from the ground and these costs

have risen in the last two decades considerably, despite recent drops. Labour, energy and machinery have all

experienced substantial increases, prior to last year’s oil collapse. The cost of all-in extraction is estimated to have

risen from a mere $200/oz in 2001 to over $1000/oz today, with many mines concealing the fact that their real break

even is considerably higher. As a result of those increases and the drop in the gold price from 2011, we would expect

global production to fall over the coming years.

With all the benefits of a crystal ball, we would have vastly increased our wealth if we had made some simple

investment decisions since the time that gold became free floating. Namely, holding gold from 1970 to 1980, switching

to holding any developed market equities from 1980 to 2000, switching back to holding gold from 2000 to 2011, before

finally switching back to equities for the last 5-year period until the current day. The almost five decade compounded

return profile, even without dividends, is truly astounding. Oh for that crystal ball…

The crux of that ‘impossible’ investment strategy is to understand that the cycles of gold and equities have historically

often been inversely correlated. When gold is cheap, equities are rich and vice versa as a whole. With that in mind, the

fact that gold has fallen 40% from 2011 and US equities have rallied 200% in that time to nose-bleed P/E valuations,


we may draw the conclusion that this is the time for that regular switch. Of course, no investor is likely to switch 100%

of his portfolio into gold at this point, but it would be quite foolish to hold almost 0% in gold, which unfortunately is the

case for many investors, professionals and retail alike.

There are many ways to gain precious metals exposure, whereby your wealth increases as the price of gold increases.

It can be as simple as jewellery, but for investors it usually falls into the following categories:

Investing in actual physical gold coins or bars and storing them yourself. We always recommend people to have a

small home or safety box portfolio of this nature for the real what-if day of reckoning. We have used

www.goldinvestments.co.uk for many years. The smaller the denomination, the higher the bid-offer cost, but this is

an excellent service.

Gold Exchange Traded Funds have been developed in the last decade, such as ETFS Physical Gold (PHAU),

which offer security holders a simple, cost efficient and secure way to access the gold market by providing a return

equivalent to the movements in the gold spot price and are on most UK share platforms. Most prospectus details

that ETFs are backed by physically allocated gold in secure vaults, but these relatively new products have not

been tested in a true crisis. The note on unallocated gold is relevant on this point.

Vehicles, such as Bullionvault, offer an internet-based solution to access ‘physical gold’ and have exposure to the

gold price, like a bank account. There are some new opportunities developing in this space, which may

revolutionise this dramatically.

Spread betting accounts offer the ability to buy gold on margin, as well as many of its derivatives. The best spread

better in my opinion is IG Group (IG Index), which was founded by Stuart Wheeler in 1974. IG was in fact an

abbreviation for Investors Gold (Index), where gold was the first spread betting contract. Opening an account here

is a straightforward process. LINKhttps://go.ig.com/visit/?bta=35278&nci=6134

Professional investors can do trades in the Comex futures market place or in unallocated form with bullion banks,

which is where 90% of all ‘gold trade’ goes on.

http://www.goldinvestments.co.uk/

https://go.ig.com/visit/?bta=35278&nci=6134


Investors can invest in actual gold funds that will typically invest in gold mining companies, as well as more hybrid

vehicles that invest in both physical gold and equities.

Prior to ETFs, investing directly into mining equities, usually listed on the Toronto Stock Exchange, was the typical

method for gaining exposure to a rising gold price. The extreme volatility, especially the collapse of over 90% of

many from the 2011 highs, has revealed how leveraged these often small companies really are. They are the

ultimate in boom/bust cycles, either you are a billionaire or a pauper. The rewards can be immense, but the risks

may well not justify it. Not for the fainthearted.

In reviewing all of these options, many investors decide that investing in gold is either too costly, too volatile or just too

damned risky and they may have a point. However, gold has not only given some fantastic returns for several periods

of times over the last 50 years, it has also been a source of wealth storage for several thousand, while many currencies

have disappeared. If you had been given the opportunity to hold dollar bills in a safety deposit box for 100 years, or its

equivalent value today in gold to be held for the same time, it would be a wise bet that your great grandchildren would

wish you had chosen the gold option.

Our previous report, which can be found at www.hindecapital.com, also reminds us that gold can be a strong balancing

part of any portfolio, especially if the portfolio is equity heavy; even more so with bonds unable to offer their usual

protection at the zero bound.

As the chart shows, the gold to equity switch methodology potentially suggests that another switch is worth

considering. Gold-like equities also have a strong inter-year seasonality, which is strongly biased to start in August

time, running into Xmas. The reasons for this have often been attributed to the Indian wedding and festival seasons, as

well as the Chinese New Year. Whether there is any element of truth, the reality is that investors should be well aware

of the following chart to help time their gold purchases.

Over the last 18 months in our letter, we have usually recommended two or sometimes three stocks every month to

add to the portfolio. This month, for the first time, there is only one new write up, for William Hill, the bookmaker. The

reason is, we really can’t identify a stock at the current prices that passes muster on our parameter which is not already

in our portfolio. While June is the worst month of the year for stock returns historically, it is also the second month of

the summer where stock prices tend to drift lower. Of course, there are stocks that are not going to go down, but as an

index there is a decisive drag over the holidays.

http://www.hindecapital.com/


Unfortunately, we cannot include Sports Direct in the HindeSight dividend portfolio, as it currently pays no dividend at

all, but we recommend that people do their own research on this company. We think it is one of the most efficient

retailers in the business, as we are heading into a full summer of sporting events. The stock has been under severe

pressure over the last year, as The Guardian has highlighted some ‘appalling’ labour business practices at their

warehouses. After Mike Ashley’s appearance in front of the parliamentary committee yesterday, we think that the bad

news and uncertainty is potentially fully priced.

We wrote about EasyJet in last June’s letter and it is currently a component of the HindeSight dividend portfolio, but we

feel it is worth briefly revisiting here, as the price languishes at around 1500p.

EasyJet was recommended on 9/6/2015 at a price of 1563p. Since then, investors have received 55p in special

dividends and with the current price of 1435p, investors are roughly 5% underwater on their investment. The index

itself is down 10% over the same period.


Share prices of the airline industries have been off the boil in the last year, with investors seemingly happier to focus on

terror-related concerns affecting passenger numbers rather than the continued low oil price. The price/earnings ratio at

11x is back to the 2011/2012 lows with the forward p/e ratio closer to 9x. We are concerned about the average stock

p/e ratio of the index being 16x and the ability for earnings to continue to deliver. In the case of EasyJet, we believe this

low multiple and a lower oil price gives the airline fare price cutting flexibility. Passenger numbers will continue to grow

and the earnings are better protected, and at a larger discount than most.


Like many stocks, the airlines demonstrate inter-year seasonality, which is often dictated by their lean winter periods

and financial year accounting ends. The total relative (to index) return for EZJ is shown in the matrix and graph below,

which shows a clear bias to improved share performance in the second half of the year. From a timing perspective,

investors will certainly benefit for summer purchases and we believe that it is still a worthwhile part of, or new entrant

to, anyone’s portfolio.


PORTFOLIO UPDATE - WHAT HAPPENED? MARKET & SECTOR ANALYSIS

UK Market Valuations


Sector Weight

.


HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (JUNE 2016)

Portfolio Update and Construction


PORTFOLIO UPDATE

Carillion PLC

Carillion PLC had an ex-dividend date on 12th of May 2016 for 12.5p.

Mitchells & Butlers PLC

Mitchells & Butlers PLC had an ex-dividend date on 26th of May 2016 for 2.50p.

Vodafone PLC

Vodafone PLC had an ex-dividend date on 9th of June 2016 for 7.77p.

Johnson Matthey PLC

Johnson Matthey PLC had an ex-dividend date on 9th of June 2016 for 52p.


APPENDIX I

THE WAY WE THINK

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 important aspects of running a business a CEO must undertake:

Capital Allocation. He summarised how a CEO deploys capital in 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 letter must be liquid, well-capitalised with a strong free cash flow

and a progressive dividend policy.

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 will 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 monthly 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


APPENDIX II

HOW WE THINK

“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.

The basic premise of the strategy is to accelerate returns by selecting relatively high yielding stocks which 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 cashflow 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, Cashflow 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.


External Analyst Score (EAS)

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 30-70

2. 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.

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

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