Next and Royal Mail fit the ‘terminal decline’ narrative but reinvention is possible

Faltering growth, Brexit, structural industry decline – these are the issues the market likes to chew over

TWO holdings in this income portfolio attract a consistent drip of negative newsflow. Analysts don’t like them, investors don’t like them and they’re dragged down by worries about everything from Brexit to nervous consumers and wider structural change within their sectors.

We bought Next on Jan 6 at £40.89. That was following a 14pc sell-off in the wake of its dismal Christmas trading and a gloomy statement by Lord Wolfson, the chief executive.

News has not improved. A trading statement on May 4 set out a 2.5pc reduction in total sales, including discounted items, and full-price sales in the Next stores were down 8pc. That was a horrible figure. Shares fell about £3 on the day. They now trade at £37.83.

Next Directory continues to grow (3.3pc) but, as analysts swiftly point out, developments at rivals including Amazon pose threats. A further update is due in a fortnight.

We bought Royal Mail on Dec 2 at 455p. It’s currently trading at 398.1p.

In a statement on Tuesday, Royal Mail said letter volumes were down 6pc and letter revenues 4pc. Without election mailings this decline would have been worse, it said.

We are nursing big paper losses with these purchases – at 12.5pc Royal Mail registers the biggest capital loss of any in this 23-holding portfolio – but there have been compensations with both.

Our portfolio’s object, to remind readers, was to invest £500,000 to generate a sustainable income of 5pc.

Our original £10,000 in Next has provided us income of £478 to date: this comprises the 45p dividend paid in May and the £1.50 payable on Aug 1 (the latter being made of a second special 45p dividend along with a £1.05p final). That’s nearly 5pc in six months.

Royal Mail, in which we invested an initial £20,000, has paid just over £1,010 in dividends: 7.4p in January and 15.6p to be paid very shortly. Once again, our 5pc target met. No one wants to own companies that are irreversibly withering away. But here’s what these two businesses have in common: their weaknesses are fully visible, understood and much discussed. You don’t need to be an analyst to know that postal services and high street shops are less used and in trouble. The directors of each business are themselves cautious in summing up immediate prospects, if not bleak. This is good.

What is not dwelt upon are the areas of strength and aspects of reinvention. For Royal Mail, this is its international division; for Next, new outlets and ranges. Both businesses are strongly cash-generative. Whatever happens, Next looks well able to pay its promised two further 45p dividends (and more).

The “terminal decline” narrative in much of the commentary on both is unwarranted, the more so because the negative cases are so easy to build. For now, both are holds.

Tickers: NXT, RMG

Northern Venture

Several readers have asked about Northern Venture Trust (NVT), whose shares fell at the end of last month. The fall tallies with the distribution of 8p at the end of last month, this being made up of a 3p interim dividend and a 5p special dividend.

We own two venture capital trusts in this portfolio, NVT (bought on Oct 21 for 70p) and Baronsmead (BVT, bought on the same day, for 83p). They are risky but high-yielding, effectively translating investment in high-growth businesses into a stream of taxefficient dividend income.

NVT has built up cash as a result of selling holdings, and under VCT rules cannot sit on this cash indefinitely: it needs either to invest it in qualifying enterprises or distribute it, which is what has happened here. With that distribution, NVT’S value has declined accordingly, as reflected in the share price.

There is some anxiety in the venture capital world that the tax perks attaching to these investments might be withdrawn. Investors in new share issues get income tax relief and dividends are tax-free for all shareholders including those, like Questor, who buy on the open market.

The Government’s attack on pension tax relief has driven higher earners into investing in these vehicles as a pension alternative, and there is a suspicion that the Tories – let alone Labour – mighwwt broaden their assault.

The Treasury’s Patient Capital Review will report to the Chancellor ahead of the Autumn Budget, and that could turn out to be a trigger. An issue to watch.

Ticker: NVT Share price at close: 68.5p