Bearbull Income Fund: the great redefinition of dividends

There are two very good advantages to using natural gas as a source of energy. First, it has a higher energy content than its alternatives to fossil fuels – perhaps 25% more than oil and twice as much as coal. Second, and perhaps more importantly, it emits less CO2 for each unit of energy produced – about a quarter less than oil, but almost 50% less than coal.

So natural gas is the fuel of the future, right? Obviously not. But it is perhaps the fuel for the energy transition and particularly in the United States, which uses coal for around 40% of their electricity production. This is still much more than the share generated by gas-fired power stations. But gas’s share – currently 28 percent – is rising and is expected to continue to do so.

In which case – and this is where personal interest comes in – hold shares in Williams Companies (United States: WMB) must be reasonable. Williams, based in Tulsa, operates much of America’s gas pipelines – some 20,000 miles, which displace about a third of the country’s gas supplies. This primarily includes its Transco pipeline, 10,000 miles of pipeline that carries gas from the Gulf of Mexico to upstate New York.

Perhaps crucially for Williams, the price of the gas he moves isn’t that important. What matters is the volume and the trend is up. In 2020, on average every day, Williams’ pipelines transported 4.3 billion cubic feet of gas, 19% more than two years earlier. After a harsh winter in 2021, volumes will be on the rise again this year. It’s a big factor behind the Williams bosses’ decision to increase their forecast for 2021 cash operating profit (ebitda) to a midpoint of $ 5.5bn (£ 4.1bn) ), 8% more than in 2020.

At the same time, the group’s debt leverage decreases. At the end of September, it was 4.0 times the EBITDA against 4.2 times the management target at the end of the year. That ratio still seems high, although Williams’ utility-style predictability should be able to handle it. Its bosses seem to think so – in response to a pleasantly high cash flow generation, they just announced a one-time $ 1.5 billion share buyback program.

Of course, there are caveats. The main one is that natural gas is not necessarily such a “clean” fossil fuel since the methane it emits is a greenhouse gas about 20 times more powerful than CO2. Meanwhile, if the technology developed large-scale processes to convert coal to gas or to sequester carbon, much of the gas advantage could be lost.

These risks don’t easily undermine the logic behind stock ownership in Williams, as the Bearbull Income Portfolio has done since mid-2018. Certainly the return to date falls short of expectations. At $ 28.24, the stock price is 5% below my purchase price, although at the end of the year this shortfall was made up for by dividends received, which are currently producing a yield. 4.9% after adjusting for the inevitable US withholding tax. This is an attractive return for a stock that should come with growth prospects. I might even supplement the below-average portfolio income position.

On the file

● In the meantime, here is a first: “inexorable” in the announcement of a company’s results. In over 40 years in the investing game, I can’t remember seeing it before. “Our inexorable evolution towards a more agile and technologically diverse company” continues, said Leslie Hill, the new boss of the currency manager. Recording (REC) in its results for the first half of 2021-2022.

It is a courageous word because in the life cycle of a business nothing is inexorable except, perhaps, decline. When it comes to diversification, Record still looks a lot like the company that went public 14 years ago. Basically it manages the currency exposure for institutional clients. Part of the management is passive, with the aim of eliminating movements against a base currency anyway; a certain dynamic, which generally aims to retain gains but avoid losses. Passive coverage is bread and butter where Record’s income is relatively predictable even though margins are tight and growth is lackluster. Dynamic hedging tends to be the opposite.

On this, Record diversifies geographically and with new products. Over the summer, it launched a dynamic hedging service in Germany and its EM Sustainable Finance fund, which holds debt from emerging and frontier markets and aims to increase returns through active games in currencies. emerging markets.

More moves like this are promised, which should be fine. Not only should they increase the notional amount of funds Record manages, which hasn’t changed much over the years, but also generate business with better profit margins. Of course, diversification always comes with risk and Record operates in competitive markets with a relatively small number of clients where mandates can easily disappear. But these are facts of life that Record’s experienced bosses have lived with for years.

Arguably the biggest concern is that Record share price movements are often a gear game over the exchange rate of the British pound to the US dollar. When the pound sterling rises, the price of Record follows, as it does when the pound sterling falls. It is therefore not surprising that since the summer, and as the pound has fallen 6% from its three-year high against the dollar, the record share price (now at 83 pence ) has fallen 19% from its high of 102 pence on August 10. The British pound now looks oversold, but if its long-term trend is down against the dollar, the Record share price may face headwinds that are not due to the company.

This is a factor I can live with at the moment, especially since there is a higher priority for the income fund – how to invest the looming £ 18,000 owed from the takeover of Stock of spirits.

“This time it’s different”

Converting this investment to cash will not affect the fund’s dividend income for 2021, which is now settled. Compared to the depressed cast of 2020, 2021 will look great, 23% more at almost £ 13,000. A comparison with 2019 could be more realistic and the 2021 figure will still be 22% lower than that of 2019. That said, the comparison with 2019 is all the more demanding as the listed companies overdistributed just before the Covid pandemic. So, 2019 ended a wonderful period where the Bearbull Portfolio distributions grew by 7.2% per annum in the 10 years from 2009.

Sustained growth like this is unlikely to happen anytime soon. But it also raises a bigger question: can stocks, and especially those of companies listed in London, continue to raise dividends faster than inflation? Arguably, in the UK there was a trade-off between rising dividends and stagnating capital values. In this context, two details in the income portfolio table are revealing: the contrast between the performance of the FTSE All-Share index since the launch of the Bearbull portfolio at the end of 1998 (up 68%) and the increase in the inflation (up 90 percent) percent). In other words, the capital value of UK stocks, on average, has fallen dramatically in real terms.

There could be a causal link; the implication being that business leaders rewarded shareholders rather than investing capital in the companies they ran. Maybe it was selfish, but not necessarily, nor necessarily stupid. It would depend on where higher future yields are likely to be offered, within UK plc or elsewhere. However, that does not say much about the perception of the outlook for UK businesses.

This sad state of affairs may be due to the declining productivity of UK plc. Alternatively, it could reflect the lack of tech stocks in the London market. Whatever the cause, the performance of UK stocks is getting darker, even numbing, relative to US stocks. Unlike the data in the table for the All-Share index and UK inflation, the corresponding figures for the US are 69% inflation since September 1998 and a 358% gain in the S&P 500 index.

Certainly, the difference would be small in a comparison of the total return of the All-Share and S&P 500 indices. Then there is the consoling idea that the UK economy and its listed companies are not so bad and that the power of reversion averaging will favor a period very similar to the 20 years from the mid-1970s, when UK stock returns were higher than the US. Maybe, but don’t count on it.

About Troy McMiller

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