Yield scarcity and the case for dividends

For Professional Investor Use Only. Not for Distribution to Retail Investors.

Yield Scarcity and the Case for Dividends

Colin Morton Manager, Franklin UK Equity Income Fund

1

The Dilemma Facing Many Investors

Their investments are at a standstill

Lehman Brothers

Bankrupt

Gulf Oil

Spill

European Debt

Crisis

2009 FTSE

Hits Bottom

Fears of a Chinese

Hard Landing

UK Double Dip

Recession

Banking

Scandals

Japanese

Tsunami


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2

But, their investment goals remain the same

BUYING A HOME UNIVERSITY EDUCATION RETIREMENT



The Importance

of Dividends

4

Source: Morningstar Direct®. © 2012 Morningstar UK. All rights reserved. Based on FTSE 100 TR Index, in GBP as at 31/07/12. Past financial performance is no guarantee of

future results. Due to rounding the percentages shown may be within 0.1% tolerance of the true value.

Dividends Are Critical to Delivering Long-Term Returns

-100%

0%

100%

200%

300%

400%

500%

600%

1 Year 3 Years 10 Years 15 Years 20 Years 25 Years


Dividend

Return

Capital

Return

5

Source: Morningstar Direct®. © 2012 Morningstar UK. All rights reserved. Based on FTSE 100 TR Index, in GBP as at 31/0712. Past financial performance is no guarantee of

future results. Due to rounding the percentages shown may be within 0.1% tolerance of the true value.

FTSE High Yield Relative to FTSE Low Yield (15yr)


0

50

100

150

200

250

300

FTSE 350 High Yield TR GBP FTSE 350 Lower Yield TR GBP

6

Why Dividends Are Important

•Significant contribution to the total returns

•Higher yielding stocks tend to outperform lower

yielding stocks over the long-term

•More resistant to volatility because of “yield-support”

•Ability to pay cash dividends demonstrates underlying

health of a company


7

The Problem of Going with the Flow

12-Month Forward Price/Earnings Ratio

4

6

8

10

12

14

16

18

20

22

24

1986 1990 1994 1998 2002 2006 2010

Source: © 2012 Oriel Securities Limited; © 2012 FactSet Research Systems Inc.*. All Rights Reserved. The information contained herein: (1) is proprietary to FactSet Research Systems

Inc. and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither FactSet Research Systems Inc. nor its content

providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. For Professional Investor Use Only. Not for Distribution to Retail Investors.

8

Now may be a very good time to increase equity

allocations – with P/E ratios typically below 10

10.8

7.6

6.1

4.9

1.8

0.8

0

2

4

6

8

10

12

Less than 8x Between 8x and10x

Between 10x and12x

Between 12x and14x

Between 14x and16x

More than 16x

Source: © Oriel Securities Limited.


Starting Year Price Earning Ratio and 10-Year Average Annual Real Returns

9

Gilt Yields Have Been Trending Down Since 1975

Source: © Oriel Securities Limited.

%

UK 10-Year Gilt Yields


0

2

4

6

8

10

12

14

16

18

20

22

24

26

1915 1921 1927 1933 1939 1945 1951 1957 1963 1969 1975 1981 1987 1993 1999 2005 2011

Yield (%) Average

10

Gilt Yields Have Now Dropped Below Dividend Yields

0

2

4

6

8

10

12

14

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Dividend yield (%) Gilt yield (%)

Source: © 2012 Oriel Securities Limited; © 2012 FactSet Research Systems Inc.*. All Rights Reserved. The information contained herein: (1) is proprietary to FactSet Research Systems Inc.

and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither FactSet Research Systems Inc. nor its content

providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

%


12-Month Forward Dividend Yield and 10-Year Gilt Yield

11

The Number of Companies with Net Cash is Climbing

Steadily Higher

9

51 48 45

5863

68

7772

66

7682 84

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: © 2012 Oriel Securities Limited; © 2012 FactSet Research Systems Inc.*. All Rights Reserved. The information contained herein: (1) is proprietary to FactSet Research Systems Inc.

and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither FactSet Research Systems Inc. nor its content providers

are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results; FTSE. FTSE™ is a trademark of London Stock

Exchange Limited and The Financial Times Limited and is used by FTSE International Limited under licence. Neither FTSE nor its licensors shall be responsible for any error or omission in

the FTSE 350 INDEX.

FTSE 350 Index


12

GlaxoSmithKline

Ordinary Shares Prospective Yield 4.92%

Prospective Free Cash Flow Yield 8.40%

Interest Cover 13.00x

6.375% 2039 Redemption Yield 4.25%


Assuming Inflation of 2% - Nominal Dividend Growth Required to Hit Long-Term

Real Equity Return of 5% is (5%+2%=7%-4.92%)=2.08%

Last 5 Year Dividend Growth 9.02%

Source: Franklin Templeton Investments and Bloomberg as at 13/08/2012.

This is an example of an investment purchased pursuant to investment advice of Franklin Templeton Investment Management Ltd; the investment may or may not be currently held by

Franklin Templeton funds. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment

recommendation. The actions taken with respect to this investment, and its performance, may not be representative of other advice or investments. Factual statements are taken from

sources considered reliable, but have not been independently verified for completeness or accuracy by the fund’s manager or its affiliates. These opinions may not be relied upon as

investment advice or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. Past performance does not guarantee future results.


13

BAT

Ordinary Shares Prospective Yield 3.95%

Prospective Free Cash Flow Yield 6.70%

Interest Cover 13.5x



Assuming Inflation of 2% - Nominal Dividend Growth Required to Hit Long-Term

Real Equity Return of 5% is (5%+2%=7%-3.95%)=3.05%

Last 5 Year Dividend Growth 16.56%


This is an example of an investment purchased pursuant to investment advice of Franklin Templeton Investment Management Ltd; the investment may or may not be currently held by

Franklin Templeton funds. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment

recommendation. The actions taken with respect to this investment, and its performance, may not be representative of other advice or investments. Factual statements are taken from

sources considered reliable, but have not been independently verified for completeness or accuracy by the fund’s manager or its affiliates. These opinions may not be relied upon as

investment advice or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. Past performance does not guarantee future results.



Appendix

15

Franklin UK Equity Income Fund

Fund Details

Management Colin Morton

Asset Category UK Equity

Investment Style Blend

IMA sector UK Equity Income

Benchmark FTSE All Share Index

OEIC Launch Date 17/10/2011

Number of Positions 51

Portfolio Size £143.5 million

Source: Franklin Templeton Investments, as at 31/07/12. Portfolio holdings are subject to change. On 17/10/2011 Franklin UK Equity Income Fund was launched to receive the

assets of the Rensburg UK Equity Income Trust. Fund performance data from 29/04/1988 is based on the mid-price of the trust and from the 17/10/2011 it is based on the net asset

value of the fund’s A(inc) share class. © Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may

not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses

arising from any use of this information.


16

Yield Comparisons

Franklin UK Equity Income Fund 4.20% (Historic Yield)

FTSE All Share Index 3.65% (Historic Yield)

Current Yield Premium of Fund 115.00%

UK 10 Year Bond Yield 1.47%

Current UK Base Rate 0.50%



17

Franklin UK Equity Income Fund Performance

1 Year 2 Years 3 Years 5 Years 10 Years

Franklin UK Equity Income Fund A(inc) 6.68% 24.20% 43.29% 11.84% 108.04%

FTSE All Share Index 0.37% 15.36% 37.68% 6.86% 101.97%

IMA UK Equity Income Sector 3.06% 18.04% 39.51% 3.32% 94.79%

Quartile Ranking 1 1 2 2 2

17

Source: Franklin Templeton Investments and Morningstar as at 31/07/12. © 2012 Morningstar, Inc. All rights reserved. The Franklin UK Equity Income Fund launched on 17

October 2011 to receive the assets of Rensburg UK Equity Income Trust, a unit trust. Fund performance data is based on the mid price of Rensburg UK Equity Income Trust from

its launch on 31/08/1987 to 31/09/2011 and the net asset value of the Franklin UK Equity Income Fund A(inc) shares thereafter. The fund charges all or part of its management

fees to capital. This could lead to a higher level of income but may constrain capital growth. Past performance is no guarantee of future performance.


18

Fund Manager Biography

Mr Morton is the Lead Manager of Franklin UK Equity Income Fund and Franklin UK Blue Chip Fund and

specialises in large cap UK equity analysis and investment.

Colin joined Franklin Templeton Investments when it acquired Rensburg Fund Management in January 2011.

Colin began his career in 1983 as a trainee stockbroker with Wise Speke & Co. He joined, Rensburg in 1988 as

a Private Client Executive, becoming an Investment Manager in 1991. He became the Manager of Franklin UK

Equity Income Fund in January 1995, Manager of the UK Blue Chip Fund in September 2000 and has been a

Joint Manager of the Franklin UK Managers’ Focus Fund since its launch in September 2006.

Colin holds an Investment Management Certificate (IMC) and is a Fellow of the Securities Institute (FSI).

Colin Morton

Vice President, Fund Manager

Franklin Templeton Fund Management

Location: Leeds, UK

18


19

Important Information

For professional investor use only, this document is not aimed at, nor intended for use by retail investors.

Copyright © 2012 Franklin Templeton Investments. All rights reserved.

This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares in the Franklin UK

Equity Income Fund. Nothing in this document should be construed as investment advice. Opinions expressed are the author's at publication date and they are subject to change

without prior notice. Performance details provided are in GBP, include the reinvested dividends net of basic rate UK tax and are net of management fees.

On 17/10/2011 Franklin UK Equity Income Fund was launched to receive the assets of the Rensburg UK Equity Income Trust. Fund performance data from 29/04/1988 is based on

the mid-price of the trust and from the 17/10/2011 it is based on the net asset value of the fund’s A(inc) share class. The fund charges all or part of its own management fees to

capital. This could lead to a higher level of income but may constrain capital growth. Past performance is no guarantee of future performance.

© 2012 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; an (3) is not warranted to be

accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

The price of the shares in the fund and the income received from it can go down as well as up, and investors may not get back the full amount invested. Currency fluctuation may

affect the value of overseas investment. An investment in the Fund entails risks which are described in the Fund’s prospectus and in the relevant Key Investor Information

Document. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus, the relevant Key Investor Information Document, accompanied by the

latest available audited annual report and the latest semi-annual report if published thereafter. No shares of the Fund may be directly or indirectly offered or sold to nationals or

residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and prospective investors should confirm availability with their local

Franklin Templeton Investments representative before making any plans to invest.

References to indices are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. An index is

unmanaged and one cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any

Franklin Templeton Group fund.

For a free copy of the latest prospectus, and the relevant Key Investor Information Document, the annual report and semi-annual report, if published thereafter or for more

information about any Franklin Templeton Investments’ fund, UK investors should contact: Franklin Templeton Investments, Telephone: 0800 305 306,

Email: [email protected] or write to us at the address below.

Issued by Franklin Templeton Investment Management Limited (FTIML). Registered office: The Adelphi, 1-11 John Adam Street, London WC2N 6HT. FTIML is authorised and

regulated in the UK by the Financial Services Authority.


Yield scarcity and the case for dividends

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