Liontrust Asset Management : Where can income investors go for dividend growth?

The outlook for income investors seems bleak. Dividend cuts, overleveraged companies, poor capital allocation by management, permanent capital loss - and the list goes on. Income investing over the next decade, however, will not be about chasing yield by investing in fallen stars but buying an increasing number of companies that are well-positioned to drive dividend growth for investors.

In particular, we seek temporary price to value dislocations in great businesses that can provide us with both dividend and capital growth over the next five years. As vaccinations are about to begin, we have built some new positions in companies that are temporarily at the epicentre of this crisis.

One such company is Amadeus, which provides the infrastructure backbone of the global airline booking system. Amadeus connects customers who are seeking to fly to a holiday destination or book a business trip to air flight availability so they can find the most convenient or the cheapest price. The company takes a small slice of every booking made on its rails and therefore has suffered from the collapse in demand in global airline travel this year.

The most important characteristic we look for when investing in companies is that the business has a strong barrier to protect its competitive advantage. In the case of Amadeus, the company has software infrastructure, a distribution network and technical knowledge.

Importantly, Amadeus has an enviable market position with over 2 times the market share of its nearest competitor, Sabre. This enables Amadeus to benefit from its scale, ability to spread its fixed costs over more customer relationships and bargaining power with its suppliers. And unlike its competitors, Amadeus has a robust balance sheet to provide a bridge until airline travel eventually returns - closely followed by a return to dividend growth.

Whist entering this year in a dominant market position is important, a company's ability to successfully innovate and either lower the price to customers or increase the quality is critical to competing with new more agile companies that are intent on disrupting the status quo.

Over the last decade, Amadeus has focused on harnessing technology to provide the airline industry with new products to lower their costs and increase efficiency for airports. Even during the pandemic, the company has been deploying new services to airlines to enable them to refund ticket purchases and transitioning airports to a contactless ecosystem to accelerate the return to international travel.

Companies must be able to convert their barriers and opportunities into profitable growth to fuel growing income distributions to us as shareholders. And over decades Amadeus has evidence of converting market opportunities into shareholder value creation through its ability to maintain a strong and steady return on invested capital and a durable and growing dividend.

Amadeus cancelled its dividend this year, as you would expect, to maintain its investment in innovation, but we anticipate that the company will return to income distributions next year as travel demand returns.

In a low-rate environment, income is more important than ever - but be careful as not all income is the same. If you chase income yield, you will end up with fallen stars and the prospects of permanent capital loss, but all is not lost as plenty of companies are ready to take up the mantle for clients seeking income.

These companies, which have strong competitive positions and have focused on providing customers with real benefits, are well-positioned to provide us with dividend growth over the next decade.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, December 18, 2020, 11:54 AM