OVERVIEW TOP NEWS FEED - Hinde Capital · every possibility that the Euro is never going to survive...

OVERVIEW TOP NEWS FEED

OVERVIEW

OUR MAIN INVESTMENT IDEA 1. International Airline Group plc INVESTMENT INSIGHTS

WHAT HAPPENED? Market & Sector Analysis

HINDESIGHT DIVIDEND UK Portfolio # 1 (August 2019)

APPENDIX I: THE WAY WE THINK

APPENDIX II: HOW WE THINK

1

5

8

13

14

16

17

Last weekend, I was in Dublin visiting some old friends. The Guinness was not flowing as much as

it did in days gone by, but an exceptionally pleasant time was had by all. I was amazed at how wealthy and prosperous Dublin has become. If ever there were tales told of cycles of boom to bust to boom, Ireland would surely get a mention. Ten years ago, at the height of the financial crisis, there were 100,000 demonstrators on the streets there, protesting as the economic slump saw the unemployment rate soar from 4% to over 14%. The banks basically closed as the property market fell apart and projects were mothballed and boarded up for years. There are no signs of that today. A huge influx of financial and tech companies find Dublin to be an ideal spot for their European operations and the economy appears to be unstoppable once more. It would only be the old cynic in me if I was to say, “I’ve seen this all before.”

WWW.HINDESIGHTLETTERS.COMISSUE 57 - AUGUST 2019

2 HINDESIGHT Dividend UK Letter

As visible a recovery as Dublin has had, you don’t need to look too far to see that it is widespread. The free money on offer by the world’s central banks that ‘pulled’ the economies from the slump has driven most asset classes to incredibly high valuations.

Readers are well aware of our concerns about the ludicrously high valuations that we see in US stocks. Our old favourite chart, below, of Hussman’s margin adjusted price-earnings ratio shows that the market is valuing earnings on multiples higher than any time in history. Of course, who needs to worry about earnings’ multiples when you have Uber or WeWork among many others, regularly losing money with competition moving in, but still being valued in the multi-billions. Admittedly, Uber is down 30% in the last two months; hey, maybe losing money constantly does matter after all.

The recent IPO and surge of Trainline stands out as another moment in a time of overpriced insanity of free money and bull market lunacy. With a current £2.2bn market capitalisation for a ticket booking app, the world is surely telling us something is not right. Their recent profits have ranged from £50m to £10m losses, depending on what ‘method’ you

fancy, but it’s the low barrier to entry for competition that should be obvious, not to mention the risk of a Jermyn Corbyn government nationalising the railways. This is not one for my pension pot, for sure. Target price, much lower. While stocks remain at elevated levels, most world stock markets are broadly heading towards unchanged this year with the recent downdraft. There is a phrase in the financial markets for price movements, ‘up by the stairs, down by the elevator’, which can be seen clearly in recent months.

While the world’s stock markets tread water on their very raised plateau, gains have been seen in other asset classes this year and investors are comforted. Unfortunately, this may be short-lived. As we wrote last month, the era of low rates continues to such an extent that $16trillion of the world’s bonds now trade with a negative yield. While historically, this is rather beyond comprehension, we should focus on the worrying charts of the level of our indebtedness and the demand for bonds that is potentially driven by the signs of the coming recessions across the globe. But, in the short-term, this demand has created gains, especially in long-dated bonds. Yields have dropped considerably and bond prices have risen. Now, as you look at the 20-30% gains this year in Europe, UK and US long bonds, you should appreciate that all these bonds, which are currently trading at large premiums, will be redeemed at 100 on maturity! My particular favourite is the Austrian 100-year bond that is trading at 200. So, I can lend to the Austrian government, for 98 years now, and be guaranteed to lose 50% of my money on maturity. Appealing or not? Insanity? Just a plain old bubble. Don’t stay at the party too long. Maybe Argentina is a better bet, after all.

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

ISSUE 57 - AUGUST 2019 3

The other asset classes that could be helping portfolios this year are the precious metals. Both gold and silver have enjoyed good advances. Our long-running, Hinde Gold Fund is up almost 20% this year after several moribund years (www.hindecapital.com). We have long believed that gold is the ideal portfolio insurance against fragile times. As we expect a severe global recession with the expected equity debacle, holding gold in some shape or form is recommended. Even Warren Buffett, who used to cry, “It doesn’t yield anything,” would be hard pushed to comment when the entire German bond market trades at a negative yield now.

Brexit is just over two months away and Germany and Italy already appear to be entering into a recession. While it will be seen as the catalyst by the historians, I think there is every possibility that the Euro is never going to survive the next recession. But, it is widespread. The reality that we are just at the end of a huge debt supercycle, where we have brought forward so much GDP from the future to spend today, and temporarily have full employment and wealth but one day, the piper will have to be paid.


I must leave you with at least one chart I found this month that was uplifting, at least for me as I have recently entered a new age bracket group. Maybe, I can stay employed just a little longer, before I am put out to grass.


By Aalok SatheFUND 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 (%)

416.721,596.502,552.908,417.504.26.30%-194.70%-14.20%

INTERNATIONAL AIRLINE GROUP PLC

They have also merged their cargo operations between British Airways, BMI and Iberia into one

unified unit called IAG Cargo. There have been several rumours that IAG would make a bid for Norwegian Air but instead, IAG disposed of its stake in the low-budget competitor earlier this year.

Despite the company being turned around into a profitable group, its share price has fallen by over (40%) since its high in 2018. IAG has been transformed from a money-losing business into a significantly profitable airline business under the guidance of its CEO William Walsh. The company earned nearly

INTERNATIONAL AIRLINE GROUP PLCINVESTMENT IDEA #1

International Airlines Group (known as IAG) is a multinational airline holding company that was formed in January 2011 after the merger between British Airways and Iberia. IAG is the sixth-largest airline company in the world, generating over €22bn in revenues and is a constituent of the FTSE100 and IBEX35. Since the formation of IAG, the group has launched Iberia Express but has also gone on to acquire several brands, including British Midlands International, Vueling, Aer Lingus and Niki


€3bn last year and analysts expect it to continue performing well in 2019. In spite of their attractive earnings performance, the firm’s valuation is the lowest across the FTSE100 with its forward Price/Earnings ratio trading at 4.2x, which is a discount of over 60% relative to the market average.

IAG’s share price has been hit by several factors, including the uncertainty surrounding BREXIT and the potentially changing consumer patterns, as well as the firm’s exposure to Boeing that has left the company on shaky ground.

Since its high in 2018, IAG has fallen by over 40% on an absolute basis. Its performance has been highly collated to the UK economy, Global worries and its exposure to Boeing over the past year. On a rolling six-month basis, IAG’s share price is close to its lows on an oscillation basis.

The stock currently offers a dividend yield of 6.3% and a forward P/E ratio of 4.2x.

IAG’s share price has come under attack due to:

• Uncertainty surrounding the Brexit situation • Global Tensions• The Boeing Factor

Brexit Worries Price In

The negativity and worries surrounding Brexit, along with its eventual outcome, has been worrying the UK for some time now. The airline industry is slowing down as many travellers are worried about how difficult it may well become to travel to Europe and the uncertainty surrounding that situation. These worries are no different for IAG, as its share price has suffered a significant move down, despite the company performing well in current earnings. With substantial negativity priced to its share price and all the potential outcomes of Brexit already in the public domain, we believe any news that is related to Brexit going forward will fail to shock the firm’s value and investors will, in fact, be attracted to its low fundamental multiples. Many participants are starting to lose interest in the outcome of Brexit as they consider it to be a soap opera. We also believe that even if the UK was to leave Europe with no deal, the right arrangements will be made to enable tourists to travel. There may be some initial disruption but ultimately, neither the UK nor mainland Europe can afford to stop tourism as it is a significant revenue generator. We believe that IAG at its current level would make a sound investment given its depressed share price.

Forget Global Worries

Trade tensions across the world are having a significantly negative impact on global stock markets. IAG has also suffered. Despite these factors, IAG is powering ahead to develop a more efficient and technologically-driven company. Last month, they announced a new system to support flexible work for their support staff and to help free up managerial resources. They have developed this in the form of an app that enables employees to trade shifts in a virtual marketplace. This will drive efficiencies and it is reported that managers tend to spend as much as 20% of their time managing these issues. This new system shows that IAG is ahead of the curve on managing its employees and is helping to drive efficient lean practices that will ultimately help its

Source: Bloomberg, Hinde Capital.

Due to its relative ‘cheapness’, we want to recommend International Airline Group plc at a price of 418p. It is placed within the top 10 members of our equity factor model and we believe it is worth allocating to IAG as an investment relative to the broader market.

Source: Bloomberg, Hinde Capital.


bottom-line financials. Global tensions will continue and we may even see a slowdown in the airline sector but IAG will be well placed given its lean operations.

Boeing Factor

In June 2019, IAG signed a letter of intent to purchase several hundred Boeing 737 Max jets. When this deal was signed, the 737 Max fleet was still grounded globally following the two fatal crashes due to a Boeing design fault. IAG has shown real faith in Boeing, which has caused investors to doubt the management’s decision-making capabilities but their thought process is that this issue will be rectified. They have sent a strong message saying they are partnering with the Boeing brand as it’s the group they have worked with for years. Furthermore, it has also been revealed that IAG received a significant discount on their purchase, and are therefore making their own value investment. Despite the stress that this fault has created for the aviation industry, we believe Boeing, being the powerhouse that it is within the airline engineering sector, will come good and ultimately repay IAG’s faith.

Seasonality

Airline stock prices in the UK tend to experience the majority of their gains in H2 of any year. Historically, more than 75% of airline reported returns occur in this period following the holiday season income. Seasonality plays a major role within the airline market and across all asset classes generally. In terms of this particular industry, we are now entering a strongly positive period. With investors expecting them to report poor financials as a result of Brexit, we believe that any results announced that are better than those expected by participants should have an outsized impact on the stock towards the upside.

Analysts’ Corner

International Airline Group plc is a leading global brand that is well covered across the research community. It has been attributed with an average target price of 550p, which would represent an upside of over 30% from current levels.

Summary

IAG has come under severe pressure since its high in 2018 as its share price has come under pressure from the potential risk of Brexit and the worries surrounding the UK economy. The turmoil at Boeing has not helped the firm’s stability, but IAG has suggested that this is their own value investment. As a result, we believe much of the negativity is priced into the brand’s share price and it is now well-positioned to retrace its steps higher, given that we have entered a statistically positive period for airlines. With its share price being at the trough of its six-month moving average and its forward P/E at 4.2x, we believe that IAG will surprise to the upside and offer investors significant alpha, relative to the broader market.


INVESTMENT INSIGHTS

I get a reasonable amount of feedback from readers on this newsletter, some of it is even quite complimentary!

When we started writing these letters, in some form over 12 years ago, it was seen as an addition to our fund management business to keep investors updated on our thoughts of the macro market-place. Since the introduction of the HindeSight Dividend portfolio, several years ago, there has been a a focus on trying to help any investor build a UK equity portfolio and understand the risks across other asset classes. We have written on property, bonds, precious metals, commodities and equities extensively in that time, but our overwhelming desire is to make investors, retail and professional alike, aware of the risks that we see around us, especially in these extraordinary times of free money and the ‘warping’ of the world as our Bloomberg ad earlier showed.

Risk-reward is an often-heard phrase, not just in the financial world. I can remember an old friend in our youth, who would use it, when he asked out as many pretty girls out as he could. The risk of rejection, or even a slap, could be outweighed by the reward of getting lucky once in a while!

With the valuations, as they are in many asset prices, I see so much risk for so little reward, it is truly frightening. Having long-dated bonds in my pension that trade at 200, which will be redeemed at 100, that could drop like

a stone at any time or buying stocks with no earnings, or whose earnings you are paying 45x multiples for, seems to fit the all risk and small chance of reward scenario. Liquidity is also something we take for granted at times like these. ‘Getting our money back, quickly’. We already have Neil Woodford’s fund locked down, with no sight of redemption possibilities and the stock market is not even down much. Heaven help us when the balloon actually does go up.

My advice remains, to make sure that you have true liquidity with your monies, for the amount you may need when the system slips up again, like 2002 or 2008, and understand fully that stocks and bonds as a whole are very, very far from cheap at current levels. And like most people, I am sure you do not have enough portfolio insurance, like gold or T-bills, but there is still time.

Most readers will know the stocks that we have hated over the years, none more so than Metro bank, especially when it was at 4000 last year. It has dropped over 90% since those heady days of craziness and I was recently asked if it could go out of business completely? In my experience, any stock – whether it is Metro or any other – that drops 90% in less than a few years has a very great chance of going to the wall, especially seeing as we haven’t even gone into an actual recession or banking crisis yet, or have we?

Risk-reward is an often-heard phrase


There has been a general belief that all is well with the banks, a decade on from the last crisis, but it is not obvious to me, especially in the stock prices of the UK and European banks.

I think it is worth republishing again something that I originally wrote in 2008, “Nothing New in Banking” and reposted in March 2016. Although readers may have seen it before, I believe the title speaks for itself. It is worth understanding that the ‘recessionary indicator’ of the inverted yield curve mentioned earlier has grave implications for banking profits as well.

In Medieval Europe which was predominately illiterate and constantly short of physical money, the split tally was a technique used to record bilateral exchange and debts. A stick (usually squared Hazelwood sticks were most common) was marked with a system of notches and then split lengthwise. This way the two halves both record the same notches and each party to the transaction received one half of the marked stick as proof. The technique was refined in various ways, one such way was to make the two halves of the stick of different length until it became virtually tamper proof. The longer part was called the stock and was given to the party which had advanced money. This is where “stockholder” derives from when we refer to modern day equity owners. The shorter half was called the foil and was retained by the party that had received the goods or funds as such that both parties had an identifiable and tamper proof record of the transaction.

In AD 1100, King Henry I came to the English throne and adopted the tally stick method of recording tax payments. By the time of Henry II, taxes were paid twice a year, and the tally sticks recording partial payment made at Easter soon began to circulate in a secondary discount market, being accepted as payment for goods and services at a discount since they could be later presented to the treasury as proof of taxes paid. It didn’t take long for the King and his treasurer to realise that they could actually issue tally sticks in advance, in order to finance war and other royal spending. The selling of these claims to future tax revenue created the market for government debt-an essential part of today’s fiat money system as well.

Medieval England also saw the emergence of the goldsmith banker. Since no actual banks existed at this time, merchants and noblemen who had received gold specie in exchange for goods and services rendered, entrusted their wealth with a London goldsmith. In exchange for each deposit of precious metal, the goldsmiths issued paper


receipts certifying the quantity and purity of the metal held on deposit. The goldsmith receipts like the tally sticks soon began to circulate as a safe and convenient form of money backed by gold and silver in the goldsmiths’ vaults. Once again, it didn’t take long for the goldsmiths to realise that they could temporarily lend deposits out and collect interest on such loans. The temptation was too much and before long, they began issuing additional receipts for gold even if they were not backed by a deposit. This came to be known as ‘fractional reserves banking’ – lending out far more money than one actually has on deposit and the road to banking ruin was firmly in place.

The government and central bank of the day were still in the hands of the monarchy apart from a short Cromwellian experiment in the early 17th century. By 1660 Charles II was raising taxes although he did have to get parliament’s permission. He immediately went to cash in the future tax receipts by selling tally sticks to the goldsmiths at a discount. The introduction of making debt payable to the bearer allowed the goldsmiths to sell it in the secondary market to raise funds for more lending to the King. In order to attract more funds higher interest rates were paid to the depositors. At that stage of the game the goldsmiths had a good thing going for them, since the King was the equivalent of a triple A rated sovereign borrower, who could always be relied upon to cover his debt with future tax receipts. Despite the fact that the vaults soon contained more wooden sticks than gold and the King meanwhile had begun to issue tally sticks as he pleased, no-one thought it problematic especially as this increase in wooden stick production had started a seemingly prosperous credit boom. The natural limit to debt expansion is when your creditors are no longer willing to lend you more money despite of higher interest rates. By 1671 the annual discount on the King’s debt had reached 10% and new funds were barely enough to cover maturing loans. Time was running out. A cunning plan was called for and with some legal advice the ‘discovery’ that usury was still illegal; all interest rates in excess of 6% were not permissible. All the recent loans were now declared illegal and payment was stopped. Overnight the King’s tally sticks reverted back to their real worth –firewood. The King’s creditors, the goldsmiths and their customers had “drawn the short end of the stick” (the origin of a still used expression).

What the tally stick system and its application by Charles II shows us is that a fiat money system can work for many years where worthless pieces of wood or paper are deemed to have the same value as gold as long as there is complete faith in the government to not increase the supply of wood. Unfortunately in our history to date, no government has been able to resist the temptation to spend the future’s productivity for today’s consumption.

This historical anecdote was taken from an article I wrote in 2008, entitled ‘Nothing new in banking’. It can be found

in full at www.hindecapital.com/reports but I will draw from it for this month’s round up.

In most countries banking is seen as the life blood to the economy, its ability to lend to businesses or individuals is part of nearly every aspect of our lives, not just property and employment. Over the last year most bank stocks across the globe have suffered considerably with the Euro Stox banking index has fallen 35%. With high weightings in the main country indices such as the UK FTSE or the German DAX, this has been a key driver on the poor returns which has received far less attention than the dramatic decline in oil prices. As of today, Royal Dutch Shell is actually up 6% on the year versus Royal Bank of Scotland’s 25% loss. Is another banking crisis really possible after the last one?

In 2008, we wrote the basis of Fractural Reserve banking is simplicity itself. As a bank you receive deposits for which you pay X%, (these are your liabilities to be paid back), with which you make loans at X+% (these are your assets). The difference in the maturity of the deposits and loans, the spread (usually called the Net Interest margin) and the number of loans you make levered off the deposit base all factor into the equation of profitability. The correct analysis of risk and the diversification in determining the margin for potential defaults is key. Every bank failure in history has resulted from the incorrect analysis of the potential changes in these factors. While some seemingly conservative banks will fail at times as well as the more foolhardy; poor forecasting abilities are always at the fore front. In the pursuit of profits amid heavy competition, bankers will find new ways and hopes to avoid natural business cycle events. Not all are as stupid as others.

Our predictions from that time drew heavily from what had happened after the 1990 Japanese banking crisis showing that after the valuation bubble had burst, banking stocks collapsed by 70-80% before recovering to some degree and then spending the next 20 years going nowhere to drifting lower.

The right-hand chart seen above is of Deutsche Bank, one of the largest banks is Europe potentially following the footsteps of Nippon Credit Bank 15 years before.

The reality is that the banking crisis of 2008 is still playing out. Despite all the new capital raises, the government bail outs, and the new regulations banks are still struggling to make enough money to cover the continual write downs of the loan book even with the economic recovery that every politician has been championing.

The largest factor in a bank’s profitability is the net interest margin, the money it can charge on its loans minus the money it has to pay to its depositors, the larger the spread difference the better. The premise of this is derived from the maturity yield curve in the specific country.


The yield curve is merely the different interest rates plotted against maturity. This curve will tend to fluctuate with the business cycle, flattening and steepening accordingly. In general, short rates are lower than longer rates because the risk for default increases over time but many factors change the shape. In ‘Nothing new in banking’, we wrote that banks’ profits had tended to track the shape of the yield curve as banks borrowed short term and lent long term for many years before the 2008 crisis. In the run up to the crisis, a strange phenomenon occurred, banks’ profits continued to rise despite the yield flattening. The economist J.K. Galbraith wrote in 1994, financial innovation is usually based on an extension of leverage. We now know that a major aspect of the 2008 crisis was that the new financial innovations of sub-prime securitisation were just this, more leverage and more risk. In the end, good old-fashioned poor risk management, little understanding of the business cycle and greed fuelled over leverage brought the house down.

Whether it is a banking crisis or a recession, the policy response is usually the same. Cut short term interest rates aggressively, steepening the yield curve. This immediately helps borrowers to maintain interest payments and not default as well as improving the NIM and increases the banks’ earning powers. These increased earnings can then be used to slowly write down the losses over time and recover. Generally speaking this has happened with much greater success in the US than the rest of the world. The challenges that the banks have faced, from increased regulation, fines for miss-selling products such as PPI as well as huge fines for ‘market abuse manipulation’ of Libor, FX to name a few have been considerable. However the greatest challenge that is threatening the entire business model is the adoption of negative interest rate policy (NIRP).

Japan has showed that the banking crisis after effects seem to last a lifetime. It is only 7-8 years since the GFC and we don’t have much to show for a recovery but maybe we shouldn’t be surprised. European banks have still not been able to write down enough of the debts from their increased earning power and now we have negative rates and very flat yield curves. If you thought it was hard to make money with a flat curve, try making it when half of the curve is in negative territory. Banks in generally have been reluctant to pass on negative interest rates that the central banks have instilled on them in Europe and Japan so far which means that unless they raise their loan rates they will just make less money (anecdotally, there are reports of Swiss mortgage rates rising because of this reason).

We are potentially on the crest of the business cycle in respect to low unemployment rates, often a precursor of a downturn. Monetary conditions are generally tightening in the world and valuations are hardly attractive with high P/E ratios and zero yielding bonds.


The story about the frog who doesn’t notice the water heating up, boiling to death before he realises to jump out, springs to mind. It is meant to demonstrate that if something happens gradually, then we might miss the disaster of what is happening.

We have negative interest rates in Switzerland, Europe, Scandinavia and recently Japan. It is probably going to eventually come to the UK and the US despite all good intentions. The academic lunatics will be fully in charge of the asylum as they take interest rates increasingly into negative territory and threaten the abolition of paper money starting with large denomination notes. Starting with disbelief, outrage, then rumours before it’s a fait accompli, many bad outcomes scatter our history.

Negative interest rates and even more excessive money printing in a last gasp but vain attempt to stimulate the economies to outgrow their debts may well be the straw that breaks the camel’s back and really brings the house down. As they say, I think I hear a rather large lady warming up her vocal cords in the dressing room.

Are these bank share prices telling us all we need to know?


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

17.5124.16

1.811.60

5.10%3.36%


HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (AUGUST 2019)PORTFOLIO UPDATE AND CONSTRUCTION

No Dividends

PORT

FOLI

O

UPD

ATE


Highest ranked (‘cheapest’) stocks selected from the FTSE350 universe (as 31st of August 2019).

CURRENT EQUITY FACTOR MODEL


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

'The Outsiders- Eight Unconventional CEOs and Their Radically RationalBlueprint 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.

Our System

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

• You wiII bealerted 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

• Theentry points willthen be recorded in the next month ly in the HindeSight UK Dividend Portfolio section and the stock(s) wr itten 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, (HDVMdl), a proprietary stock-rating system

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

APPENDIX I

THE WAY 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.

APPENDIX II

HOW WE THINK


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)

OVERVIEW TOP NEWS FEED - Hinde Capital · every possibility that the Euro is never going to survive...

Documents

Transcript of OVERVIEW TOP NEWS FEED - Hinde Capital · every possibility that the Euro is never going to survive...