Europe is back on track in hunt for payouts

INVESTMENT trust Fidelity European Values has bounced back strongly since the sharp share price falls of February and early March. The result is a 20 per cent gain over the past quarter and a one-year return of nearly 9 per cent.

Although fund manager Sam Morse says it is far too early to be upbeat about investing in Europe, he believes that there are ‘encouraging’ signs. Speaking from his home in London in the aftermath of a £677billion economic ‘recovery deal’ struck by European Union leaders, he describes the mix of grants and loans as a ‘step in the right direction’.

He says: ‘At the onset of the pandemic crisis, it was easy to wonder whether we were on the cusp of a new Eurozone crisis. That hasn’t materialised and it’s now good to see action and a sense of urgency among EU leaders – action that should help some of the southern European economies that have suffered more during the pandemic, primarily through their dependency upon tourism.’ Morse also believes continental Europe has handled the pandemic ‘well’ with countries such as Spain adopting a tough approach to lockdown. The £944million trust is currently invested in 47 companies across Europe, with Morse looking to provide shareholders with a mix of capital and income return. Despite the sharp recovery in the trust’s share price, Morse does not underestimate the challenges ahead, especially on the income front.

While the trust’s annual income is modest at just over two per cent, the dividends it pays have been in upward mode in recent years. Whether this can be continued remains a moot point although the trust does have the equivalent of nearly a year’s worth of dividend income tucked away in reserve that can be drawn upon. ‘Dividend growth is still important,’ insists Morse.

In the past, Morse has been a stickler over company dividends, selling holdings where businesses have been forced to cut their income payments to shareholders. But he says the pandemic has required him to adopt a more ‘pragmatic’ rather than ‘dogmatic’ approach.

He says dividends across Europe have been impacted adversely by calls from both regulators and politicians for companies to put a hold on income distributions during the pandemic. For companies that have responded to these requests, Morse is prepared to continue to hold them. For example, luxury goods specialists LVMH and L’Oreal remain top ten holdings despite respectively cutting and maintaining their 2019 dividends. Both companies, Morse says, ‘did not need to cut dividends’.

But he is less forgiving of companies that have changed their dividend policy for other reasons – for example, a fundamental change in the markets they operate in. As a result, Morse says he is currently disposing of two (unnamed) holdings. One company he did dispose of ahead of the pandemic was oil giant Shell. This decision was taken on the back of the company’s poor fourth quarter results last year. ‘It seemed unlikely it would grow its dividend,’ says Morse. He was proved right as Shell announced a subsequent dividend cut in April.

Proceeds from the sale were used to purchase a stake in Italian utilities giant Enel. ‘It represented quite a big shift in the portfolio,’ says Morse. ‘Enel has a good track record in developing renewable energy projects and it pays a good dividend, equivalent to between four and five per cent a year.’

The trust has annual charges of 0.87 per cent.