Firms that keep their profits to in­vest in the fu­ture

The Daily Telegraph - Your Money - - FRONT PAGE -

Which stocks are re­sist­ing the temp­ta­tion to hand all their cash to in­vestors? James Con­ning­ton re­ports

Over the past three decades the amount that com­pa­nies in­vest in fu­ture growth has sunk dra­mat­i­cally com­pared with how much they re­turn to share­hold­ers. Many pro­fes­sional in­vestors are con­cerned that busi­nesses are ne­glect­ing in­vest­ment in or­der to meet the demands of in­come-hun­gry in­vestors.

Glob­ally, the ra­tio of com­pany in­vest­ments to div­i­dends and share buy-backs – where a com­pany buys back its own stock to in­crease its earn­ings per share – has fallen by more than 70pc in 28 years.

Of the FTSE 100’s 10 high­est yield­ers, eight have div­i­dend cover (the ra­tio of profits to div­i­dends) of less than 1, ac­cord­ing to Stock­o­pe­dia, a screen­ing ser­vice, mean­ing they can­not af­ford to pay their div­i­dends from profits alone.

Cut­ting div­i­dends is un­pop­u­lar, but in the long run back­ing a firm that takes the hard de­ci­sion to hold back cash from share­hold­ers so it can in­vest can be a prof­itable one – as long as the in­vest­ments pay off.

Tele­graph Money asked three top fund man­agers to name some of the com­pa­nies that are in­vest­ing their cash wisely at the mo­ment.

Mar­ket value £670m; turnover £87m; pre-tax profit £10m; yield 0.5pc GB Group spe­cialises in iden­tity data, which is used to help busi­nesses check the iden­tity of cus­tomers and pro­tect them­selves from fraud.

Au­drey Ryan, man­ager of the Kames Eth­i­cal Eq­uity fund, said: “GB Group brings to­gether data re­lat­ing to the iden­ti­ties of 4.4 bil­lion in­di­vid­u­als, which helps its cus­tomers make good de­ci­sions about peo­ple.

“It has low cap­i­tal re­quire­ments, which helps it gen­er­ate a lot of cash. As it is ex­posed to a mar­ket that is grow­ing by dou­ble-digit per­cent­ages each year, its strat­egy has been to favour in­vest­ment over re­turn­ing cash to share­hold­ers,” she added.

In the year to March 2017 the com­pany de­liv­ered earn­ings per share of 11.4p and paid a div­i­dend per share of 2.4p. Its share price has risen by 82pc over one year.

Mar­ket value £580m; turnover £76m; pre-tax profit £7.5m; yield nil Ac­cesso is listed on the junior Aim mar­ket and is a leader in “vir­tual queu­ing” tech­nol­ogy. This can be used, for in­stance, to no­tify theme park visi­tors, via a rentable hand-held de­vice, when it’s their turn to go on a ride. Cus­tomers in­clude the Six Flags theme park group.

The firm’s prod­ucts also in­clude on­line tick­et­ing soft­ware and on-site tick­et­ing ser­vices. Its shares have risen by 32pc over the past year and by 550pc over five years.

Richard Hal­lett, man­ager of Marl­bor­ough’s UK Multi-Cap Growth fund, said: “The com­pany is ex­pected to make a profit of £12m in 2017 but doesn’t pay a div­i­dend. It is ex­pand­ing strongly and the board has made it clear that in the short to medium term it be­lieves the cash is bet­ter in­vested in growth.

“If a business can achieve a strong re­turn on cash in­vested, it’s an em­i­nently sen­si­ble strat­egy to de­ploy it in this way.” Mar­ket value £2.7bn; turnover £785m; pre-tax profit £98m; yield 1.9pc HomeServe is a FTSE 250 firm that pro­vides home in­sur­ance and re­pairs. Its share price has in­creased by 39pc over the past year and by 326pc over the past five years.

Mr Hal­lett said that it paid about £40m in div­i­dends. “This re­sults in a mod­est yield of around 2pc. It could have been higher, but the firm chose to in­vest £50m in grow­ing the business,” he said.

“The more cus­tomers HomeServe has, the more ef­fi­cient its business be­comes in new mar­kets such as the US. The com­pany has peo­ple out re­pair­ing boil­ers, and the more jobs they can do in an area, the less travel is re­quired and the more prof­itable the business be­comes.”

Mar­ket value £5.6bn; turnover £4.6bn; pre-tax loss £2.6bn; yield (2017 es­ti­mate) 2.2pc Ed­u­ca­tion com­pany Pear­son has had a tough two years and its share price has fallen by more than 50pc from its March 2015 peak. This pe­riod has in­cluded mul­ti­ple profit warn­ings. The col­lapse was due to prob­lems at its US text­book business, caused by fall­ing stu­dent num­bers and in­creas­ing rental of text­books via Ama­zon.

Chris Field, man­ager of the £4.1bn Ma­jedie UK Eq­uity fund, said: “This cul­mi­nated in the Jan­uary 2017 de­ci­sion to cut its div­i­dend in or­der to pri­ori­tise in­vest­ment in nextgen­er­a­tion dig­i­tal course ma­te­ri­als. Div­i­dend ex­pec­ta­tions have gone from 52p to 18p a share, which looks am­ply cov­ered by earn­ings.

“Pear­son has also raised more than £2bn from sell­ing parts of its business over the past two years as it sim­pli­fies and fo­cuses on its core business.”

Cru­cially, he ex­plained, the firm has “re­sisted the temp­ta­tion” to re­turn this cash to share­hold­ers and has in­stead given pri­or­ity to in­vest­ment and strength­en­ing its bal­ance sheet for the fu­ture.

A Ben­gal tiger dives into the wa­ter at Six Flags’ Dis­cov­ery King­dom theme park in Cal­i­for­nia. Six Flags is a cus­tomer of Ac­cesso Tech­nol­ogy

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