23 September 2016
What to do when oil dividends dry up
Stephen Bailey, manager of Liontrust's Elite Rated Macro Equity Income and Macro UK Growth funds
Yesterday, I had the pleasure of meeting Stephen Bailey, manager of the Elite Rated Liontrust Macro Equity Income fund. He makes for entertaining company and has a very different approach to investing to his peers in the UK equity income sector.
Three months on from Brexit and the mass exodus from smaller, domestically-focused companies to the big US dollar earners, Stephen is convinced income seekers are in danger of seeing their dividend payouts fall – but that there is new value to be found in the global telecommunications sector.
Could dividend cuts mean the sack for oil CEOs?
“One of the investment consequences of Brexit is that, with the pound weakening, investors flocked to US dollar denominated stocks and sectors, including oil and gas. Unfortunately, however, for income investors, big oil doesn't necessarily mean big dividends.
“I think the game is almost up for making money from fossil fuels. Crude oil production is set to increase in places like Nigeria, Iran and Columbia whilst the cost of production of US shale gas continues to fall making those companies profitable at lower prices. The demand for electric and battery-operated vehicles is set to increase, and the debt of the six largest oil majors has doubled.
“The macroeconomic outlook for these companies doesn't paint a pretty picture. The major oil companies need the price of crude oil to rise to $50-$60 to maintain cash flow expenditure – which is what is used to pay shareholders – and I don't believe this will happen soon enough for them.
“Both BP and Shell said at the start of the year that they would be monitoring the price of crude oil and that it would dictate dividend policy. Asset disposal is an option, but they are all trying to do it and there are very few buyers. Where there are buyers, they are getting the 'family silver' at a huge discount.
“It just doesn't bode well for dividends and I expect many will be forced to cut them. CEOs will be loath to do this as it might well cost them their jobs, but it is the lesser of two evils as leaning any further on the balance sheets could lead to a deterioration in the company credit rating.
“We've cut back on our exposure to the sector as a consequence and have gone from 9% to just 1% in the fund.”
Monetising our growing mobile addiction
“In contrast, the outlook for the global telecommunications sector is really starting to look positive.
Data usage is growing rapidly, with no signs of slowing, and consumer behaviour is changing as accessibility increases: two thirds of people now use their mobile to access the internet. Beneath the headline numbers there is also evidence of human addiction: 55% of all users check their device within 15 minutes of waking and 44% of young people pick up their phones 50 times a day.
“Global telecommunications companies have now identified a key element for assured growth and the monetisation of this data consumption: content.
“Content can immediately provide these companies with a competitive advantage. For example, buying the rights to football matches, US box set dramas, or film and music streaming. Barriers to entry are possible and with that comes pricing power. And the regulators are actually happy to let this happen as long as services for the customer are improved at the same time. As any Sky user will know, there are plenty of new things you can see and do using your Sky box or mobile now... and your monthly subscription has gone up accordingly.
“We like this sector a lot as it is still cheap compared with the rest of the market but has a higher average yield.”
Stephen also manages the Elite Rated Liontrust Macro UK Growth fund.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Stephen's views are his own and do not constitute financial advice.