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OVERVIEW

INVESTMENT IDEA (1) ROYAL DUTCH SHELL INVESTMENT INSIGHTS

HINDESIGHT DIVIDEND UK Portfolio # 1 (March 2020)

APPENDIX I: THE WAY WE THINK

APPENDIX II: HOW WE THINK

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On 20th February, the SP500, US stock index stood at 3400. Just one month later, it had dropped to 2200, a fall of 35%. Paper wealth destruction has been seen across the globe. It is estimated there were losses of $22 trillion in global stock market capitalisations, which doesn’t include the huge corporate bond markets. As prices sank and yields to government bonds fell, neither the prices at which real estate would be marked to market. There have been very few safe ports in the storm, government bonds, gold and, of course, cash.

You don’t get much more sudden than the recent market events. Was it really just January 21st that Ray Dalio, manager of the huge $160bn Bridgewater

WWW.HINDESIGHTLETTERS.COMISSUE 63 - MARCH 2020

“How did you go bankrupt? Two ways. Gradually, then suddenly” – Ernest Hemingway, ‘The Sun Also Rises’

2 HINDESIGHT Dividend UK Letter

fund, announced that investors shouldn’t stay on the side-lines in the 2020 market because “cash is trash”. It would appear that a good portion of that $160bn has disappeared now. In a few short weeks, most stock markets have lost all their gains over the last five or more years. That’s one of the problems with pesky maths. You make 55% on your portfolio, then you only have to lose 35% to get back where you started.

Ray is not alone, unfortunately. The losses are widespread, and it should come as no surprise because even the most flexible investment managers have held only small cash allocations. Of course, you then have the much touted, low-cost passive index funds, ETFs and the like. These ‘smugly’ enjoy only close to index losses but are only paying 0.69% costs.

We should not be surprised that the market has fallen so far, so quickly. Here are two charts that have featured often in the HindeSight letter over the last year, which show the extent of the overvaluation pre-crisis, the highest in history on most metrics. We should not be surprised at how much money has been lost, as so few people saw cash or gold as large portfolio allocations. All we can be surprised about is that this crisis came from a viral pandemic, rather than a world war, or a mortgage bubble, but stocks were priced for perfection on Feb

20th and paid the price for complacency. Unlike 9/11, the markets have remained open and many finance employees have been deemed ‘essential’ workers. The market goes on at cheaper levels.

‘Unprecedented’ is currently the most used word. And, in terms of the pubs being closed, it is unprecedented. Even during the last two world wars, pubs were open. Who knows how long the lockdown will be, but I presume the definition of normal life resuming will be the ability to go back to the pub.

I believe ‘normal’ life will change for many people after the lockdown and there will be lifestyle changes for many. I’m isolating with family in Rye, grateful that it’s surrounded by fields, which is luckier than those living in the confines of the city, but I still question whether I need to return to commuting and paying for services that I am now doing myself. Dogwalker, gardener, cleaner, home schooler, the list is seemingly endless. I am enjoying the enforced time with my family and my internet still functions and work goes on. As Bruce Springsteen sung on ‘Atlantic City’:

The HindeSight letter is written primarily to help people with investments and risk, but also to be current and thought-provoking. I would like to think that most of our long-term readers will appreciate how focused we have been on the insanely high market valuations of the last year and the risks of that, which have been exposed in the proverbial stark naked emperor. The urge to hold large cash balances and gold portfolio allocations will have made differences to wealth maintenance, as well as the advice to be a basic prepper. There’s much less laughter on that now.

In the new world, there will no doubt be winners and losers, and I would like to be on the right side of the new line, which is not at all only financial. There will be more on investments in the insight section but, for now, as the new saying goes:

“Stay safe”.

THE COMPANY

Mark Mahaffey

Ben Davies

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

“Down here, it’s just winners and losers and don’t get caught on the wrong side of that line”.

ISSUE 63 - MARCH 2020 3


By Mark MahaffeyCO-FOUNDER & CFO OF

HINDE CAPITAL

The company is vertically integrated and is active across the following areas:

• Exploration & Production• Refining• Transportation• Distribution & Marketing • Petrochemicals• Power Generation • Trading• Biofuels• Wind• Energy-kite• Hydrogen

Royal Dutch Shell operates across 70 countries and has 44,000 service stations worldwide, producing 3.7mm barrels per day. Its primary listing is on the London Stock Exchange and has been by far the largest company across the index.

We first recommended the company in December 2014, at which time the investment had to be stopped out as it hit a limit.

After six years, we would now like to recommend this oil giant once again, given recent unprecedented moves, which have seen the company’s market capitalisation more than halve. It now offers a dividend yield of 11.8% and trades at a deep discount of 7x current earnings due to:

Royal Dutch Shell is a British-Dutch oil and gas company, considered to be one of the supermajors from across the world. In 2019, Shell was ranked the 9th largest company in the world and the largest outside of China and the United States.

ROYAL DUTCH SHELLINVESTMENT IDEA


• Impact of Covid-19

• OPEC Oil War

COVID-19

No one truly knows the impact of Covid and how long it is going to last, except that it will have a lasting effect on all companies and global economies. The shock of this virus has already created significant stress in the capital markets and forced strong responses from central banks. Even though from a policy perspective we may already know the solutions, such as bailouts and recapitalisation, from a financial perspective, capital formation will take a huge hit and drive a prolonged slump within the labour market and in terms of productivity. Pandemics tend to last approximately a year and, therefore, we are nowhere near to seeing the light at the end of the tunnel. Despite this, and the significant negative moves that we have seen, it means savvy investors are able to start building a position into Royal Dutch Shell over the next 12 months. This company was formed in 1907 and has weathered several wars and other pandemics, along with global crises. We believe these experiences and its strong network within the oil & gas industry will enable it to come out on the other side much stronger. As you can see below, its market cap ratio has almost halved, which is a rare situation that was not even observed in the last financial crisis. As a result, we believe these price levels are far too low and the stock is now trading a significant discount to its own history. Another metric is that it makes up just 5.5% of the wholes index, rather than an average of 9%. Pandemics create disruption but do not last and neither will Covid. Instead, it will create generational opportunities and Royal Dutch Shell is one of them.

Oil Shock / OPEC War

As the Pandemic took hold of the world, so did Putin and his attempts to shake up the global oil market. Some say it was his retaliation for the treatment of some of the Rosneft executives and how they were handled by the US government. Others say it is Putin’s goal to wrestle market share back from American frackers, whose debt-fuelled growth has caused Russia to lose its title as the world’s largest oil producer. As a response to Russia, Saudi Arabia said it would slash oil prices and launched a ferocious attack that saw US crude oil plummet approximately 30%.

As a result, near-term prices have dropped significantly, derailing oil producers, such as Royal Dutch Shell, who have also been hit by the impacts of the global pandemic we are currently seeing. Investors should not be worried and, in fact, those who do not hold Royal Dutch Shell should see this as an opportunity to allocate to one of the world’s leading companies during a period of distress. According to history, price wars tend to last approximately 14 months:

Price War I: 13 months. In June 1985, at a meeting in Taif, Saudi Arabia, King Fahd warned OPEC countries that his country would no longer carry the burden of production cuts alone. In November, Riyadh moved to flood the market. Oil plunged from $31 a barrel to $9.75 a barrel in six months. The peace didn’t come until December 1986.

Price War II: 17 months. It started in November 1997 at a meeting in Jakarta, Indonesia. Saudi Arabia boosted production to fight Venezuela, which was quickly grabbing market share in the lucrative U.S. market. What Riyadh hadn’t anticipated was that demand would collapse amid the emerging-markets crisis and a warm winter. Oil fell from about $20 a barrel to less than $10, and the peace didn’t arrive until April 1999.


Price War III: 22 months. It started in November 2014 with a meeting in Vienna. Tired of non-OPEC countries freeloading on the cartel’s production cuts, and worried about the impact of the U.S. shale revolution, Saudi Arabia adopted a policy of pumpat-will. Oil collapsed from about $100 a barrel to $27.88. The peace didn’t come until September 2016: Riyadh made a U-turn and Russia joined the cuts.

Given that current levels are not sustainable for the nations that have caused this crash, we will see a resolution and oil prices will eventually rise higher. However, while they are still distressed and the world has come to a halt, it is important to take advantage of this situation.

No dividend cuts

Since the oil crash, most investors have been worried about whether Royal Dutch Shell can maintain its dividend, which it has never cut. Shell managed to get through the oil price downturn of 2014-2017, when oil prices toppled from over $100 per barrel to less than $30 per barrel, without cutting its dividend. The company also increased its debt load and cut costs to adjust its operations to the new normal of low oil prices, which was enough to get it through the last oil price downturn. A company usually will not cut its dividend except as a last resort. Specifically, a dividend cut is much more likely if it's not generating enough free cash flow to cover its dividend and capital spending needs and it cannot take on more debt to cover the dividend temporarily.

In a statement on March 23, Shell CEO Ben Van Beurden outlined the company's plan to free up additional cash:

Today, we are announcing that we have embarked on a series of operational and financial initiatives that are expected to result in:

• A reduction of underlying operating costs by $3-4 billion per annum over the next 12 months, compared to 2019 levels

• A reduction of cash capital expenditure to $20 billion or below for 2020 from a planned level of around $25 billion; and material reductions in working capital.

In total, Shell's management believes this will result in $8 billion to $9 billion of additional free cash flow. The company is also suspending its share buyback program to preserve capital.

Clearly, Shell’s financial performance is going to take a hit over the coming year, as oil prices have declined due to oversupply and the coronavirus keeping demand low. However, we believe the company is in a strong financial position to maintain its dividend, which is what a large proportion of investors are looking for. The added benefit is that you are now purchasing Royal Dutch Shell at levels that have not been seen for years and at a deep discount.

Impressive Portfolio

Royal Dutch Shell is slowly changing as a company and has an impressive portfolio. Its upstream and integrated gas assets are some of the most significant. The company managed to start-up 12 major projects in 2019. At the same time, it has started drilling some high-potential exploration wells. Across the company's portfolio, it's using its global expertise to high grade its portfolio.

Two of the most impressive things to pay attention are the company's diversity, along with its focus on growing areas. The company is diversified across the world, including North America, Europe, South America, Southeast Asia, the Middle East, and Africa. Its impressive and diverse portfolio of assets prevents it from having geopolitical risk in any one area.

The second important thing here is the company is high-grading its portfolio and focusing on growth areas. The company has new assets in the Permian Basin, Gulf of Mexico, Brazil, and Guyana, which are some of the highest growth areas in the world. These growing assets are examples of the company high-grading its portfolio. Royal Dutch Shell’s taking advantage of the downturn to improve its assets, which should allow strong shareholder rewards in a recovery.

The company also has a growing and incredibly impressive retail business. It opened more than 1500 new stores in 2019 and is focused on growing the business through its credit card business. It has had more than 8 million active cards in the past 12 months and it's expanding rapidly into both growing countries and developed countries. The company's retail expansion should help to significantly increase earnings.

Finally, one of the most bullish aspects of the firm’s business has been its focus on emerging areas. As a fossil fuel company, Royal Dutch Shell has a significant geopolitical risk, but its diversification efforts into new businesses are helping to protect the company.

Source: Javier Blas.


Royal Dutch Shell is focused on effectively becoming a utility company that generates clean electricity and is, simultaneously, part of the transition to electric vehicles. For clean energy, the company has focused on rapidly acquiring different businesses to increase its share in the wind and solar businesses. The company makes some fixed amount per kWh and can use its scale to undergo huge projects.

Lastly, the company is growing its clean charging portfolio, which could tie into its utility business and be deployed throughout the EU or even the world. The company already has 50,000 private charging points and is looking to expand that further. This highlights the company's focus on its retail businesses, which combined with its utility businesses, is a way to use its cash flow to generate significant shareholder cash flow.

Analysts’ Corner

Royal Dutch Shell plc is a leading global brand that is well covered across the research community. It has been attributed with an average target price of 2000p, which would represent an upside of over 80% from current levels.

Summary

Shell has come under severe pressure over the past few months, as its share price has come under pressure from the OPEC war and the impacts of the Coronavirus. This turmoil is now priced into the company’s share price and it is now well-positioned to retrace its steps higher. With its share price being at the trough and its P/E at 7x, we believe that Royal Dutch Shell will surprise to the upside and offer investors significant alpha, relative to the broader market.


INVESTMENT INSIGHTSMy 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.

It seems a lifetime ago now, but it was only a few weeks back that, pre-lockdown, my local mechanic was at the

house, servicing our car. Knowing that I was ‘loosely’ involved in finance and banking, he asked me a very basic question which I thought was worth mentioning.

“Can you explain to me how only a few months ago, every company said they were making loads of money and their stock prices were soaring, and now they say they haven’t got a pot to piss in and the government has to bail them out? Look, I’m just a self-employed mechanic, but even I have got six months savings just in case I can’t work for some reason.”

Now, of course, my mechanic did his training at the local garage or maybe a Volkswagen apprenticeship, not Harvard Business school. He can’t possibly understand the intricacies/bullshit of high finance. So, I just tried to give him the straightforward answer:

“Ah, yes. (Trying hard not to resort to Blackadder total Bollox plan speak.) Unfortunately, the management of these fantastic companies spent all the money, mainly on enriching the senior executives with 1000-1 pay ratios compared to their employees, buying their own stock back or paying huge dividends to other shareholders. They are far too smart to keep money in reserve for a rainy day, in

case the shit hits the fan, for any reason. They know the government will bail them out.”

Unfortunately, that is capitalism at its worse. Capitalism that is supported by socialism when it goes wrong. If anyone wants a textbook example, I urge you to read Ben Hunt at Epsilon Theory’s Boeing article, detailing how every bit of cash that Boeing has made over the last seven years has been used for stock buybacks and dividends, enriching shareholders and, most of all, senior management. And now, the cupboard is bare.

Of course, Boeing is not alone in now asking for a government bailout after spending all the cash, in heads you win, tails you win modus operandi. We have our own Richard Branson, with his net worth of £4.5bn, straight in the trough for a government hand out, having put all of his staff on unpaid leave well before the government said they would pick up 80% of salaries. All class, these guys.

But just like companies, too many people spend all they make every month, and more, and have no savings to see them through the bad times. Or they have ploughed all of their savings into the financial markets at sky-high valuations, rather than have cash on hand to be able to take advantage of some cheaper stock prices after indices have plunged back to 2013 levels.

HindeSight Letter August 2019


It is a new world, an unprecedented world, when revenue in many industries has dropped to zero overnight. From airlines to restaurants, gyms to cruises, taxis to barbers, mass unemployment has occurred with the accompanying income loss. Hopefully, the government will pick up some of the promised tab. It is far better for the PAYE employees (how many self-employed people haven’t ‘earned’ much on their tax returns and now regret that, I wonder?), and hopefully, it will be relatively short-lived. Mid-May?

In theory, the game plan of companies, like individuals, should be straightforward. Cut expenses as much as possible, live through cash balances and savings, and maybe state aid if offered, and then return and start again. Clearly, the difference between six weeks and six months is a huge difference. Fingers crossed.

My good friend, the legendary US broker, Mark Gomez, wrote in his weekly article:

“Hope is not a strategy. There is the standard “V” (shaped recovery) touted by the Street catalysed by Monetary and Fiscal nukes thrown last week and the variations “U” and “L”. I am somewhere between U and L with a deeper low and a longer tail. Markets have taken a long time to recover after previous shocks, typically 18-24 months.”

Most people have been blissfully unaware that actual company profits in general have been stagnating for years. Earnings have been hidden by the ability to borrow cheaply, issue debt and still rising stock prices. Unfortunately, it was only the Price that was rising, not the Earnings.

Companies who justified high debt-equity gearing ratios pre-crisis are finding out the hard way that nominal debt levels remain the same, even when your equity price falls 50%. No revenue, no cash reserves and increasing debt balances and ratios, and hope is not a strategy.

So, what is the strategy for investors going forward?

Followers of the HindeSight Portfolio will have high balances of cash over the last few years. Currently, there are just five stocks in the portfolio, out of a maximum weighting between 25-30, suggesting 80% cash and, hopefully, some gold allocation and T-bills. While we congratulate ourselves on those cash holdings and the stop losses that saw Cineworld, among others, exited

before they disappeared off the cliff face, we have not been immune to the huge gaps and are left with an albeit small current portfolio severely underwater.

Since 2013, the FTSE 100 has roughly risen from 5000 to 7500 and back again, a rise of 50%, and fall of 35%. This is more pronounced in the FTSE 250, which has gone from 13000 to 22000 and back, a rise of 70%, fall of 40%. It is going nowhere fast, apart from maybe some dividends. By definition, the market is considerably ‘cheaper’ than three months ago. Prices are lower and, based on last year’s earnings and last year’s dividends, P/E’s and yields are much more favourable. The big question is how big a hit will earnings take and how many companies will cut dividends to shore up cash balances at this time.

Our strategy for stock selection will not change in the coming months, we will recommend stocks that score highly on the HindeSight Dividend Model, but favour larger companies with high scores rather than smaller ones. While smaller companies may have risen further in the good times and fallen further in the crisis, and some will be nimbler than others, we do not expect a sustained V-shaped recovery in the economy or stock prices. Therefore, the best place to start is good, long-term companies that will weather the storm better. We will seek to significantly reduce our cash balances over the coming months by adding to UK stocks and adding to gold. Maybe a target, in time, would be 20% cash, 50% equities and 30% in gold. While the governments have been unable to cut rates by much, they have thrown the kitchen sink at it

Source: SG Research. US Profit Share as % of GDP


in other ways. That type of monetisation of debt will surely see gold prices rise in a similar way to the 2009-2011 era. The worry is that the last decade saw free central bank money benefit asset prices the most. This time we will probably see inflation in goods and services, perhaps like a South American country that’s used to losing its grip on its currency.

The world will come out of the pandemic and recover, some stock prices will do significantly better than others and we will move on. But, after such a shock and wealth loss, we should not expect P/E’s to just return to the silly speculative levels of before. Until the next time of human madness, of course.


HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (MARCH 2020) PORTFOLIO UPDATE AND CONSTRUCTION

Valuation Date: 4/2/2020Index UKX Index

LIVE PORTFOLIO

Index Index Div Ex-Div Ttl Div Abs Rel StopName Industry Group Entry Date Entry Price Valuation Price Entry Price Valuation Price Yield (%) Date Rec Return (%) Return (%) Loss Price

PRUDENTIAL PLC Insurance 9/2/2019 1,375.00 959.40 7,315.00 5527.2 4.30% 22/08/2019 310.07 -9.91% 14.53% 1,031.25JOHN WOOD GROUP PLC Oil&Gas Services 9/2/2019 359.00 170.50 7,315.00 5527.2 5.40% 22/08/2019 0.00 -52.51% -28.07% 269.25

SAINSBURY (J) PLC Food 3/18/2019 233.30 208.50 7,299.00 5527.2 5.37% 11/06/2020 11.20 -6.12% 18.15% 174.98VODAFONE GROUP PLC Telecommunications 3/18/2019 143.02 110.66 7,299.00 5527.2 6.86% 11/06/2020 8.66 -17.64% 6.63% 107.27

SYNTHOMER PLC Chemicals 11/29/2019 303.70 228.00 7,420.10 5527.2 4.66% 08/10/2020 0.00 -24.93% 0.58% 227.78ROYAL DUTCH SHELL PLC-B SHS Oil&Gas 3/25/2020 1,270.00 1510.2 5,580.00 5527.23 10.06% 14/05/2020 0.00 18.91% 44.42% 952.50

Average Live Portfolio Return per Stock 6.11% -15.37% 9.38%

CLOSED PORTFOLIOIndex Index Capital Ttl Div Abs Rel

Name Industry Group Entry Date Exit Date Entry Price Exit Price Entry Price Exit Price Rec Return (%) Return (%) StateSTANDARD LIFE ABERDEEN PLC Diversified Finan Serv 10/2/2014 5/8/2015 **** 475.10 6,446.39 7046.82 73.00 85.25 17.63% 8.10% PROFIT

Amlin plc insurance 5/6/2015 9/8/2015 454.00 655.01 6,933.74 6,146.10 0.00 0.00 44.28% 55.63% TAKEOVERCENTRICA PLC Gas 10/2/2014 9/23/2015 301.90 223.50 6,446.39 6,032.24 0.00 8.40 -23.85% -17.43% STOP LOSS

IG GROUP HOLDINGS PLC Diversified Finan Serv 11/18/2014 9/28/2015 620.00 783.00 6,709.13 6,109.00 0.00 8.45 28.04% 36.98% PROFITROYAL DUTCH SHELL PLC-B SHS Oil&Gas 12/10/2014 9/28/2015 2,098.00 1,545.00 6,500.04 6,109.00 0.00 92.87 -22.95% -16.93% STOP LOSS

HUNTING PLC Oil&Gas Services 4/7/2015 9/28/2015 540.00 402.00 6,962.00 6,109.00 0.00 15.23 -23.40% -11.14% STOP LOSSANTOFAGASTA PLC Mining 3/17/2015 9/28/2015 690.50 494.00 6,962.00 6,109.00 0.00 8.60 -27.56% -15.30% STOP LOSS

NATIONAL EXPRESS GROUP PLC Transportation 1/16/2015 11/9/2015 259.60 314.00 6,550.27 6,357.54 0.00 10.64 26.12% 28.95% PROFITROLLS-ROYCE HOLDINGS PLC Aerospace/Defense 11/18/2014 11/12/2015 845.00 567.00 6,709.13 6,238.23 0.00 23.37 -30.99% -23.97% STOP LOSS

IMI PLC Miscellaneous Manufactur 12/10/2014 1/11/2016 1,229.00 935.00 6,500.04 6,238.23 0.00 37.90 -21.50% -17.47% STOP LOSSASHMORE GROUP PLC Diversified Finan Serv 5/8/2015 11/12/2015 319.90 239.93 7,046.82 6,014.00 0.00 12.10 -22.05% -7.40% STOP LOSS

KINGFISHER PLC Retail 11/18/2014 1/20/2016 302.20 325.00 6,709.13 5,673.00 0.00 10.03 11.24% 26.68% PROFITHSBC HOLDINGS PLC Banks 1/16/2015 2/9/2016 593.00 432.50 6,550.27 5,632.19 0.00 33.33 -22.72% -8.71% STOP LOSS

SAINSBURY (J) PLC Food 12/10/2014 3/21/2016 226.40 278.75 6,500.04 6,184.58 0.00 12.20 30.14% 34.99% PROFITADMIRAL GROUP PLC Insurance 10/7/2015 3/21/2016 1,521.00 1,921.00 6,326.16 6,184.58 0.00 0.00 26.30% 28.54% PROFIT

BRITISH AMERICAN TOBACCO PLC Agriculture 6/17/2015 4/5/2016 3,511.00 4,118.00 6,726.57 6,091.23 0.00 154.00 22.67% 32.11% PROFITELECTROCOMPONENTS PLC Electronics 7/14/2015 4/5/2016 209.90 264.10 6,708.00 6,091.23 0.00 5.00 28.89% 38.09% PROFIT

WPP PLC Advertising 9/7/2015 4/5/2016 1,330.00 1,653.00 6,086.00 6,091.23 0.00 15.91 25.79% 25.70% PROFITCOMPASS GROUP PLC Food Service 8/13/2015 4/5/2016 1,038.00 1,246.00 6,571.19 6,091.23 0.00 19.60 22.35% 29.65% PROFIT

RIO TINTO PLC Mining 1/20/2016 4/14/2016 1,577.00 2,242.50 5,673.58 6,365.10 0.00 74.21 49.22% 37.03% PROFITROYAL MAIL PLC Transportation 2/11/2015 4/14/2016 438.00 490.00 6,820.02 6,365.10 0.00 21.30 17.59% 24.26% PROFIT

GLAXOSMITHKLINE PLC Pharmaceuticals 10/2/2014 4/14/2016 1,417.50 1,502.00 6,536.29 6,365.10 0.00 142.00 17.76% 20.38% PROFITNATIONAL GRID PLC Gas 6/17/2015 4/14/2016 860.00 1,002.00 6,726.57 6,365.10 0.00 15.00 18.58% 23.95% PROFIT

TALKTALK TELECOM GROUP Telecommunications 12/21/2015 4/28/2016 213.00 273.00 6,034.84 6,250.00 0.00 0.00 28.17% 24.60% PROFITCOBHAM PLC Aerospace/Defense 3/21/2016 4/29/2016 218.00 160.00 6,175.00 6,123.00 0.00 8.13 -23.76% -22.92% STOP LOSS

MARKS & SPENCER GROUP PLC Retail 10/7/2015 5/27/2016 515.00 386.70 6,326.16 6,260.00 0.00 6.80 -23.91% -22.86% STOP LOSSCARILLION PLC Engineering&Construction 4/13/2015 6/27/2016 327.30 235.90 7,064.30 5,918.00 0.00 30.40 -20.55% -4.32% STOP LOSS

EASYJET PLC Airlines 6/9/2015 6/27/2016 1,563.00 1,020.00 6,753.80 5,918.00 0.00 55.20 -32.35% -19.98% STOP LOSSROTORK PLC Electronics 2/26/2016 7/4/2016 159.00 222.00 6,012.81 6,519.50 0.00 3.10 42.40% 33.97% PROFIT

TATE & LYLE PLC Food 3/17/2015 7/8/2016 615.50 687.00 6,962.00 6,475.00 0.00 47.80 21.01% 28.01% PROFITDIAGEO PLC Beverages 9/17/2015 7/8/2016 1,785.00 2,128.00 6,213.50 6,475.00 0.00 22.60 20.74% 16.54% PROFIT

JOHNSON MATTHEY PLC Chemicals 11/4/2015 7/20/2016 2,631.00 3,175.00 6,655.00 6,475.00 0.00 222.44 31.82% 34.53% PROFITG4S PLC Commercial Services 5/4/2016 9/29/2016 189.00 229.50 6,655.00 6,860.00 0.00 3.59 23.78% 20.70% PROFIT

BURBERRY GROUP PLC Apparel 12/21/2015 10/10/2016 1,192.00 1,464.00 6,034.84 7,057.00 0.00 37.00 26.75% 9.82% PROFITPRUDENTIAL PLC Insurance 2/26/2016 11/14/2016 1,226.50 1,527.50 6,012.81 6,772.30 0.00 45.85 29.38% 16.75% PROFIT

TALKTALK TELECOM GROUP Telecommunications 7/8/2016 11/24/2016 212.50 159.38 6,510.00 6,817.00 0.00 5.29 -23.09% -27.80% STOP LOSSCAPITA PLC Commercial Services 9/29/2016 12/9/2016 660.00 495.00 6,860.00 6,938.25 0.00 11.10 -23.72% -24.86% STOP LOSS

SAINSBURY (J) PLC Food 8/7/2016 1/11/2017 224.50 272.00 6,510.00 7,291.79 0.00 3.60 23.13% 11.12% PROFITDUNELM GROUP PLC Retail 2/26/2015 1/18/2017 925.00 677.00 6,949.73 7,164.00 0.00 148.10 -12.86% -15.94% STOP LOSS

PEARSON PLC Media 11/4/2015 1/18/2017 867.50 579.00 6,383.61 7,164.00 0.00 52.00 -29.00% -41.23% STOP LOSSTAYLOR WIMPEY PLC Home Builders 6/29/2016 1/18/2017 128.00 173.00 6,383.61 7,164.00 0.00 0.53 35.72% 23.49% PROFIT

LLOYDS BANKING GROUP PLC Banks 8/4/2016 1/24/2017 52.00 64.52 6,510.00 7,121.00 0.00 0.85 26.14% 16.75% PROFITGKN LTD Auto Parts&Equipment 8/14/2015 3/6/2017 306.00 372.40 6,571.19 7,344.50 0.00 8.75 25.28% 13.51% PROFIT

BRITVIC PLC Beverages 11/1/2016 4/27/2017 558.00 669.00 6,905.00 7,192.00 0.00 17.50 23.77% 19.62% PROFITSTAGECOACH GROUP PLC Transportation 3/22/2016 7/11/2017 252.00 185.10 6,155.00 7,329.76 0.00 11.70 -22.97% -42.06% STOP LOSS

NEXT PLC Retail 5/4/2016 7/11/2017 5,020.00 3,617.00 6,160.00 7,329.76 0.00 353.00 -22.50% -41.49% STOP LOSSGREENE KING PLC Retail 7/14/2015 9/11/2017 865.00 575.00 6,708.00 7,387.00 0.00 87.05 -26.09% -36.21% STOP LOSS

DOMINO'S PIZZA GROUP PLC Retail 8/2/2017 10/10/2017 264.00 333.50 7,364.80 7,465.00 0.00 3.75 28.15% 26.79% PROFITBABCOCK INTL GROUP PLC Commercial Services 2/11/2015 11/13/2017 1,050.00 753.00 6,818.17 7,415.18 0.00 72.05 -23.00% -31.76% STOP LOSS

SKY PLC Media 8/31/2016 12/12/2017 850.00 1,002.00 6,801.00 7,457.77 0.00 20.95 20.86% 11.20% PROFITIG GROUP HOLDINGS PLC Diversified Finan Serv 1/3/2017 12/12/2017 495.00 675.50 7,127.00 7,457.76 0.00 32.30 45.99% 41.35% PROFIT

ROYAL MAIL PLC Transportation 3/9/2017 12/12/2017 401.00 444.90 7,288.50 7,462.39 0.00 23.30 17.79% 15.41% PROFITINMARSAT PLC Telecommunications 1/30/2017 12/12/2017 610.00 443.10 7,070.00 7,462.39 0.00 36.66 -22.72% -28.27% STOP LOSS

INTU PROPERTIES PLC REITS 11/8/2017 12/27/2017 211.70 250.60 7,481.00 7,620.68 0.00 0.00 18.38% 16.51% PROFITPETROFAC LTD Oil&Gas 6/6/2017 1/25/2018 353.00 557.00 7,465.00 7,663.00 0.00 8.47 61.67% 58.99% PROFIT

JOHNSON MATTHEY PLC Chemicals 8/13/2017 1/31/2018 2,865.00 3,454.00 7,366.00 7,549.50 0.00 21.75 21.48% 18.99% PROFITSHIRE PLC Biotechnology 7/7/2017 2/8/2018 4,189.00 3,117.00 7,255.00 7,220.00 0.00 3.85 -25.52% -25.04% STOP LOSS

BT GROUP PLC Telecommunications 3/31/2017 2/16/2018 310.00 228.40 7,275.00 7,294.70 0.00 15.40 -22.47% -22.74% STOP LOSSAGGREKO PLC Commercial Services 5/2/2017 3/6/2018 879.00 654.40 7,201.00 7,184.00 0.00 9.38 -24.75% -24.51% STOP LOSS

GREENCORE GROUP PLC Food 10/4/2017 3/14/2018 189.60 127.28 7,422.00 7,138.78 0.00 3.37 -31.65% -27.84% STOP LOSSWILLIAM HILL PLC Entertainment 5/31/2016 3/20/2018 314.00 336.00 6,280.00 6,955.00 0.00 16.76 13.04% 2.29% PROFIT

PENNON GROUP PLC Water 3/8/2018 6/5/2018 629.00 770.00 7,159.00 7,660.00 0.00 0.00 22.42% 15.42% PROFITGLAXOSMITHKLINE PLC Pharmaceuticals 1/2/2018 6/15/2018 1,315.00 1,556.00 7,655.20 7,633.91 0.00 42.00 22.23% 22.51% PROFITVODAFONE GROUP PLC Telecommunications 1/16/2015 9/3/2018 228.30 167.00 6,550.27 7,470.00 0.00 0.56 -26.67% -40.71% STOP LOSS

PLAYTECH PLC Software 8/3/2018 12/24/2018 542.00 397.70 7,620.00 6,666.00 0.00 0.12 -26.61% -14.09% STOP LOSSGREENE KING PLC Retail 9/3/2018 1/7/2019 479.00 576.00 7,510.00 6,790.00 0.00 8.80 22.50% 32.09% PROFIT

CENTAMIN PLC Mining 9/20/2018 1/7/2019 97.00 136.00 7,387.00 7,191.00 0.00 0.00 40.21% 42.86% PROFITMERLIN ENTERTAINMENTS LTD Entertainment 12/6/2017 3/20/2019 357.30 371.10 7,328.50 7,327.00 0.00 7.50 6.09% 6.11% PROFITCREST NICHOLSON HOLDINGS Home Builders 7/9/2018 3/20/2019 383.40 397.60 7,651.00 7,327.00 0.00 11.20 6.82% 11.06% PROFIT

IMPERIAL BRANDS PLC Agriculture 4/6/2018 3/20/2019 2,528.00 2,634.00 7,140.00 7,327.00 0.00 187.79 12.55% 9.93% PROFITBRITISH AMERICAN TOBACCO PLC Agriculture 1/29/2019 3/20/2019 2,450.00 3,214.50 6,801.00 7,299.00 0.00 0.00 31.20% 23.88% PROFIT

WPP PLC Advertising 4/24/2018 3/28/2019 1,129.00 807.20 7,400.00 7,161.00 0.00 60.00 -24.49% -21.26% STOP LOSSITV PLC Media 12/5/2016 3/28/2019 169.00 125.45 6,701.00 7,161.00 0.00 20.20 -15.69% -22.56% STOP LOSS

CENTRICA PLC Gas 4/3/2019 7/31/2019 112.60 76.50 7,354.00 7,586.90 0.00 8.40 -26.58% -29.75% STOP LOSSMITCHELLS & BUTLERS PLC Retail 2/3/2016 8/27/2019 272.30 352.50 5,867.00 7,045.00 0.00 15.00 37.00% 16.92% STOP LOSS

FLUTTER ENTERTAINMENT PLC Entertainment 10/16/2018 9/30/2019 6,270.00 7,572.00 7,052.00 7,395.00 0.00 200.00 24.74% 19.88% STOP LOSSINTL CONSOLIDATED AIRLINE-DI Airlines 8/23/2019 11/4/2019 419.90 549.70 7,100.00 7,302.00 0.00 0.00 30.91% 28.07% STOP LOSSMARKS & SPENCER GROUP PLC Retail 8/23/2019 2/27/2020 218.40 165.25 7,420.00 6,895.00 0.00 0.00 -24.34% -17.26% STOP LOSSGALLIFORD TRY HOLDINGS PLC Engineering&Construction 8/23/2019 12/9/2020 630.00 766.10 6,840.00 7,232.00 0.00 0.00 21.60% 15.87% STOP LOSS

CINEWORLD GROUP PLC Entertainment 8/11/2019 2/27/2020 218.00 158.40 7,227.00 6,895.00 0.00 2.50 -26.50% -21.90% STOP LOSS

Ave Total Portfolio Return per Stock 4.43% 5.43%

****The entry price of 399.2 originally on the HSL reflects the pre 9-11 share consolidation before the 73p return of capital. The

total return of 17.63% is reflective of all corporate actions since entry on 2/10/2014.

Note: Please be aware that the Petrofac position should be half the usual size due to the level of volatility in its recent movement as recommended in the Buy Alert.

Industry Sector Proportion (%)

Consumer, Cyclical Consumer, Cyclical Industrial Consumer, Non-cyclical

No Dividends

PORT

FOLI

O

UPD

ATE

Industry Group Proportion (%)

Retail Retail Engineering&Construction Food


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)

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