Fund Manager July 2021 Commentary – Lowland Investment Company

July was an encouraging month for UK dividends. The energy company, Royal Dutch Shell, positively surprised with a large increase to its quarterly dividend from its reduced level of last year, while miners including Rio Tinto and Anglo American announced special dividends as a result of high commodity prices (such as iron ore). The banking sector dividend outlook is also improving, partially driven by lower than expected loan losses as a result of the pandemic. The overall dividend growth for the UK market is being driven by large companies in these three sectors (energy, mining and financials). Smaller company dividends are also recovering, but some companies are choosing to rebase payout ratios at lower levels than they were prior to the pandemic.

A number of portfolio companies have now reported on earnings for the first half of 2021 and the results are (broadly) encouraging, with many companies reporting higher than expected sales and earnings. One particularly encouraging trend that we have noted is that among several of the industrial companies held in the portfolio, there is evidence of margins being re-set at higher than historic levels. For example, at engineer IMI, while sales have recovered to approximately in line with 2019 levels, the operating margin is over 2.5% higher. This trend fits with what we have been hearing from companies over the course of the pandemic; which is that many companies have accelerated cost saving programmes and some of these savings (such as closing manufacturing facilities) will be permanent. We continue to think that this potential margin gain is being underappreciated in some company earnings forecasts.

A physical good such as oil, gold or wheat. The sale and purchase of commodities in financial markets is usually carried out through futures contracts.

Operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating income by its net sales.

The payout ratio is a financial metric showing the proportion of earnings a company pays its shareholders in the form of dividends, expressed as a percentage of the company’s total earnings.

A special dividend is a non-recurring distribution of company assets, usually in the form of cash, to shareholders. A special dividend is usually larger compared to normal dividends paid out by the company and often tied to a specific event like an asset sale or other windfall event. Special dividends are also referred to as extra dividends.

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.