Each week, a professional investor tells MoneyWeek where she'd put her money now. This week:Sarah Emly, co-manager, JPMorgan Claverhouse Investment Trust.
We remain positive on UK stocks given their current valuations, although we do expect to see more ups and downs. The UK economy is growing more quickly than any other major advanced economy. Conditions are also good for UK consumers inflation is low, due to lower oil and energy prices, unemployment is low, and there are early signs of real (after-inflation) wage growth. As a result, the average UK family has more disposable income this year than last.
Meanwhile, the Conservative government's victory in this year's general election means greater medium-term certainty for companies and investors. Many British companies continue to generate plenty of cash, which is being put to work in various shareholder-friendly ways, such as increased dividend payouts, and sometimes special dividends. Here are three examples.
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Two years on from his arrival as the new chief executive of UK insurance group Aviva (LSE: AV), Mark Wilson has restructured the business, and Aviva is now a dividend growth story. When Wilson was appointed as CEO in early 2013 he set about transforming the group, focusing on strengthening its capital and cash profile. The operational performance of Aviva has improved markedly.
Importantly for income investors, when Aviva announced its proposed acquisition of rival Friends Life in December 2014, Wilson spoke of the positive consequences this deal would have on Aviva's capital strength and cash generation. Now that the proposed deal is complete, the outlook for Aviva's dividend growth is very encouraging the market now expects dividend growth of almost 20% for each of the next two years.
ITV (LSE: ITV) has recently announced its fifth year in a row of double-digit profit growth. It raised its annual dividend per share by 34% to 4.7p and the management team led by CEO Adam Crozier announced a third special dividend for shareholders. For each of the past two years ITV has paid a special dividend of 4p per share. But for the year just ended, shareholders received a special dividend of 6.25p per share. ITV has become both an attractive dividend growth stock and a premium dividend yielder.
This dividend growth story has been down to the management's five-year strategy, in which they have focused on rebalancing, strengthening and growing the business, with an emphasis on cash generation. More than £650m of cash has been returned to shareholders over the past five years. Management aims to grow the full year ordinary dividend by at least 20% a year for the three years to 2016, so the future for income investors remains positive.
Specialist bread shop chain Greggs (LSE: GRG) has a thriving history dating back to its first shop in 1951, but has been losing ground to the big supermarkets in recent years. Under new CEO Roger Whiteside, Greggs is now a year into a five-year plan to transform itself into a "food on the go" operator. Shops are being set up in more attractive locations where consumers spend the most leisure, work, or travel time. The recent rise in like-for-like sales has been encouraging.
The company has 1,600 stores and is adding around 20 each year. Cash generation is strong and likely to improve further as management works through the estate revamp. The company recently announced the first of what we expect to be a series of special dividends.
Sarah Emly is co-manager of the JPMorgan Claverhouse Investment Trust.
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