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Small cap high yielders

General discussions about equity high-yield income strategies
moorfield
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Re: Small cap high yielders

#341272

Postby moorfield » September 18th, 2020, 8:34 pm

Arborbridge wrote:Speaking as a HYPer, I don't see the problem: I would buy such a share if I felt like it, but not include it in my HYP calculations and reports on HYPP.


That looks like a non sequitur and a little Cakeism to me . Call your portfolio a PHYS (Portfolio of High Yield Shares) instead, just don't misappropriate the hallowed HYP acronym lest the Peoples Front of Judea come after you. Or would that be the Judean Peoples Front? I forget which.

Anyway, whichever is irrelevant, and tees up the point of my comment - we are all pursuing the same endgame are we not, so why bother separating "HYP" and "Non-HYP" calculations in the first place?

Abandon HYP all ye who enter here (HYSS) ...

simoan
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Re: Small cap high yielders

#341282

Postby simoan » September 18th, 2020, 10:29 pm

Off the top of my head the best quality high yielding small caps I hold are:

City of London Investment (CLIG)
Belvoir (BLV)
Record (REC)
Urban Logistics REIT (SHED)
Jarvis Securities (JIM)
Somero Enterprises (SOM)
Severfield (SFR)

I don't necessarily hold because of the dividend, they are all just well managed, quality companies, with good margins that throw off cash to pay a high dividend whilst still investing in the business.

All the best, Si

Arborbridge
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Re: Small cap high yielders

#341296

Postby Arborbridge » September 19th, 2020, 7:40 am

moorfield wrote:
Arborbridge wrote:Speaking as a HYPer, I don't see the problem: I would buy such a share if I felt like it, but not include it in my HYP calculations and reports on HYPP.


That looks like a non sequitur and a little Cakeism to me . Call your portfolio a PHYS (Portfolio of High Yield Shares) instead, just don't misappropriate the hallowed HYP acronym lest the Peoples Front of Judea come after you. Or would that be the Judean Peoples Front? I forget which.

Anyway, whichever is irrelevant, and tees up the point of my comment - we are all pursuing the same endgame are we not, so why bother separating "HYP" and "Non-HYP" calculations in the first place?

Abandon HYP all ye who enter here (HYSS) ...


A joking response, I guess. You know perfectly well why I separate these things and it isn't remotely close to cake-ish. Can you not conceive yourself why people do this? Then I'll explain (again):-

I run a HYP separately from my other portfolios because I want to compare HYP with those other portfolios. To compare HYP which includes non-HYP shares would totally invalidate my comparison - or at least severely undermine if the muddy-ing is minor. If people see comments about my HYP, then can be sure that I am discussing only normal HYP shares.

I prefer to do it that way, and I would ask you to accept that and not make silly remarks based on a will o the wisp. It is far from being a non sequitur: indeed I would argue that any conclusion derived from mixing non-HYP shares with a HYP would result in a non sequitur.

Arb.

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Re: Small cap high yielders

#341465

Postby moorfield » September 20th, 2020, 9:52 am

Arborbridge wrote:A joking response, I guess. You know perfectly well why I separate these things and it isn't remotely close to cake-ish. Can you not conceive yourself why people do this? Then I'll explain (again):-

I run a HYP separately from my other portfolios because I want to compare HYP with those other portfolios. To compare HYP which includes non-HYP shares would totally invalidate my comparison - or at least severely undermine if the muddy-ing is minor. If people see comments about my HYP, then can be sure that I am discussing only normal HYP shares.

I prefer to do it that way, and I would ask you to accept that and not make silly remarks based on a will o the wisp. It is far from being a non sequitur: indeed I would argue that any conclusion derived from mixing non-HYP shares with a HYP would result in a non sequitur.



I appreciate my satire is an acquired taste Arb but it makes a serious point. Append IAAGs excellent small cap list on this thread to the FTSE350 and the PHYS investor has a deep pool from which she/he may select, say, 15 350 + 5 AIM or 5 350 + 15 AIM companies - Gateley (GTLY) is a gem I have already bought and commented on elsewhere. Now post either of those portfolios on HYP-P and watch the villagers chase you off their fields soon enough - even the Breelander Convention (which is a fudge) won't help there. That you prefer to separate for comparison if fine but I say needlessly overcomplicates what is a very simple idea and detracts from the most pertinent and ruthless question every income investor should (but probably hasn't) ask themselves - how much income do I want or need my investments to generate? That's a metric a child can measure without needing to heed any panoply of rules. I would ask you to accept too that "I'll bung a few quid into this tactic and see how it compares to the others" is the way I prefer not to do!

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Re: Small cap high yielders

#341480

Postby simoan » September 20th, 2020, 11:12 am

moorfield wrote:
Arborbridge wrote:A joking response, I guess. You know perfectly well why I separate these things and it isn't remotely close to cake-ish. Can you not conceive yourself why people do this? Then I'll explain (again):-

I run a HYP separately from my other portfolios because I want to compare HYP with those other portfolios. To compare HYP which includes non-HYP shares would totally invalidate my comparison - or at least severely undermine if the muddy-ing is minor. If people see comments about my HYP, then can be sure that I am discussing only normal HYP shares.

I prefer to do it that way, and I would ask you to accept that and not make silly remarks based on a will o the wisp. It is far from being a non sequitur: indeed I would argue that any conclusion derived from mixing non-HYP shares with a HYP would result in a non sequitur.



I appreciate my satire is an acquired taste Arb but it makes a serious point. Append IAAGs excellent small cap list on this thread to the FTSE350 and the PHYS investor has a deep pool from which she/he may select, say, 15 350 + 5 AIM or 5 350 + 15 AIM companies - Gateley (GTLY) is a gem I have already bought and commented on elsewhere. Now post either of those portfolios on HYP-P and watch the villagers chase you off their fields soon enough - even the Breelander Convention (which is a fudge) won't help there. That you prefer to separate for comparison if fine but I say needlessly overcomplicates what is a very simple idea and detracts from the most pertinent and ruthless question every income investor should (but probably hasn't) ask themselves - how much income do I want or need my investments to generate? That's a metric a child can measure without needing to heed any panoply of rules. I would ask you to accept too that "I'll bung a few quid into this tactic and see how it compares to the others" is the way I prefer not to do!

Hi,

Please let's not go down this road on what could be an otherwise interesting thread about small caps which pay good quality dividends. I have no interest in HYP as practised hereabouts either, and strongly believe it to be a losing investment strategy, just like any other mechanical strategy that completely ignores fundamental things like a company's balance sheet, returns on capital and the competence of its management. However, I don't want to be drawn into that discussion because it is not productive and a waste of everyone's time and ultimately it only leads to personalised exchanges like this. Each to their own when it comes to investing and without knowing someone else's exact financial state and time of life it is impossible to make judgment on their approach. It may be that HYP works for them as an equity strategy and is just a small part of their overall wealth, in which case, let them just get on with it.

All the best, Si

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Re: Small cap high yielders

#341516

Postby GN100 » September 20th, 2020, 2:47 pm

Under the present dividend cancellation climate I always check the various tabs on the Divened Data site and then proceed to any other divdend history I can find - often on the Company Investors website. It's very irritating to buy in with the belief that a divi is coming and then find it isn't. Of course future dividends are never guaranteed, especially now

https://www.dividenddata.co.uk/

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Re: Small cap high yielders

#341523

Postby simoan » September 20th, 2020, 4:25 pm

GN100 wrote:Under the present dividend cancellation climate I always check the various tabs on the Divened Data site and then proceed to any other divdend history I can find - often on the Company Investors website. It's very irritating to buy in with the belief that a divi is coming and then find it isn't. Of course future dividends are never guaranteed, especially now

https://www.dividenddata.co.uk/

Whilst dividends are never guaranteed you can ensure there is only a small chance of them being cancelled completely if you hold companies with sound management, good cashflow and a healthy balance sheet; especially with no (or little) debt. Under those circumstances, it is very difficult for the management to refuse shareholders the payment of a dividend even in very difficult times.

Ultimately, a dividend payment is a cash outflow so if it is not matched by free cashflow generated by the company over a period of time then the dividend will inevitably get cut or stopped altogether. IMHO many of the large caps that make up the typical High Yield Portfolio have been on borrowed time for several years because they have been paying dividends which have essentially been beyond their means whilst the balance sheet has been gradually deteriorating. And now the burden of that debt has meant the need to conserve cash and pay their lenders, not their shareholders. You only have to look at the large oil companies to see this in action.

All the best, Si

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Re: Small cap high yielders

#341528

Postby johnhemming » September 20th, 2020, 4:46 pm

The oil companies are affected by the price of oil

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Re: Small cap high yielders

#341532

Postby MrFoolish » September 20th, 2020, 5:02 pm

Arborbridge wrote:I run a HYP separately from my other portfolios because I want to compare HYP with those other portfolios. To compare HYP which includes non-HYP shares would totally invalidate my comparison - or at least severely undermine if the muddy-ing is minor. If people see comments about my HYP, then can be sure that I am discussing only normal HYP shares.
Arb.


Presumably you must have some endpoint in mind? The point at which you say portfolio B is performing better than portfolio A, so I'm going to concentrate on the winning strategy. Or is your experiment purely academic?

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Re: Small cap high yielders

#341552

Postby dealtn » September 20th, 2020, 7:05 pm

johnhemming wrote:The oil companies are affected by the price of oil


True.

Lets look at the last 5 years.

RDSB free cashflow per share.

2015 7c
2016 (19)c
2017 178c
2018 360c
2019 237c

and dividends per share of 188c in each of those years.

or BP

2015 2.65c
2016 (31.9)c
2017 12c
2018 30.7c
2019 50.7c

and dividends (close to) 40c in each of those years.

During that time Brent varied 20c to 80c, although mostly around 50c I would say.

Not immediately obvious that the issues highlighted with cash flow and the dividend level can really be laid at the door of the variable oil price. I would say there was something more structurally wrong with the dividend pay out.

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Re: Small cap high yielders

#341585

Postby simoan » September 20th, 2020, 10:41 pm

dealtn wrote:
johnhemming wrote:The oil companies are affected by the price of oil


True.

Lets look at the last 5 years.

RDSB free cashflow per share.

2015 7c
2016 (19)c
2017 178c
2018 360c
2019 237c

and dividends per share of 188c in each of those years.

or BP

2015 2.65c
2016 (31.9)c
2017 12c
2018 30.7c
2019 50.7c

and dividends (close to) 40c in each of those years.

During that time Brent varied 20c to 80c, although mostly around 50c I would say.

Not immediately obvious that the issues highlighted with cash flow and the dividend level can really be laid at the door of the variable oil price. I would say there was something more structurally wrong with the dividend pay out.

Yes, the big issue is that cashflow of the big oil cos has been artificially boosted by asset sales for several years, so the true organic FCF is much worse once you subtract money raised from those sales. There's only so long a company can pay a high dividend when it is only supported by selling assets whilst the debt continues increasing. What a dreadful investment any such company would make. The fall in the oil price was merely the straw that broke the camels back. Much better to hold some better quality small caps with dividends that are covered by genuinely organic FCF.

All the best, Si

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Re: Small cap high yielders

#341609

Postby johnhemming » September 21st, 2020, 7:14 am

dealtn wrote:
True.

Lets look at the last 5 years.

RDSB free cashflow per share.

2015 7c
2016 (19)c
2017 178c
2018 360c
2019 237c

and dividends per share of 188c in each of those years.

During that time Brent varied 20c to 80c, although mostly around 50c I would say.

Not immediately obvious that the issues highlighted with cash flow and the dividend level can really be laid at the door of the variable oil price. I would say there was something more structurally wrong with the dividend pay out.


Average oil prices
2019 $64.28
2018 $71.34
2017 $54.71
2016 $45.13
2015 $53.03
2014 $98.97
2013 $108.56

I read this differently to you. I see the 2015 and 2016 figures as ones where the companies had not adjusted to a lower oil price.

I don't have an easy source for the fcf for 2013 and 2014, but that would help to check the analysis.

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Re: Small cap high yielders

#341613

Postby dealtn » September 21st, 2020, 7:32 am

johnhemming wrote:
I read this differently to you. I see the 2015 and 2016 figures as ones where the companies had not adjusted to a lower oil price.

I don't have an easy source for the fcf for 2013 and 2014, but that would help to check the analysis.


My source has 2014 FCF 209c and dividend 188c

Even if the oil price is $100 a barrel or so that's not a lot of room between the two at the most advantageous oil price.

At the risk of this thread going off tangent I think the general point is shares that generate cash that reinvest at least some of that, are more likely to be ones that grow, and potentially grow shareholder returns over time (be that through Dividends or Capital Growth). Companies that pay out nearly all (or more) of that cashflow as dividends (and possibly increase debt or sell assets to achieve this) will find it hard to maintain such dividends let alone grow them and reward shareholders.

Smaller companies, whilst again generally riskier investments, are normally easier to understand and analyse their finances too.

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Re: Small cap high yielders

#341615

Postby Arborbridge » September 21st, 2020, 7:44 am

MrFoolish wrote:
Arborbridge wrote:I run a HYP separately from my other portfolios because I want to compare HYP with those other portfolios. To compare HYP which includes non-HYP shares would totally invalidate my comparison - or at least severely undermine if the muddy-ing is minor. If people see comments about my HYP, then can be sure that I am discussing only normal HYP shares.
Arb.


Presumably you must have some endpoint in mind? The point at which you say portfolio B is performing better than portfolio A, so I'm going to concentrate on the winning strategy. Or is your experiment purely academic?


The comparison is likely to go on until either I die or get tired of it. There is no formal end point, (I don't ssee the need for one) though if I am convinced that one income stream will never be as effective as another, that might trigger a move. At present, for exmple, I'm not too happy about my holdings in income OEICS because the income has dropped dramatically - not something one can tolerant unless they bounced back in a reasonably short time.

The other factor within "get tired of it" was my original fear of going ga-ga, in which case something more automatic for myself or MrsArb would clearly suit the purpose better.

Arb.

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Re: Small cap high yielders

#341617

Postby Arborbridge » September 21st, 2020, 7:52 am

moorfield wrote: I would ask you to accept too that "I'll bung a few quid into this tactic and see how it compares to the others" is the way I prefer not to do!



I do, I do: it's your prerogative. Though I my case, it's not a few quid, but my entire pension pot. Well, to some that's pocket money, but to me, it's most of my income.

I would also find it interesting to "bung a few quid" into the lesser known or smaller companies such as the ones you mention. I used to do that, but it isn't something I want to do on approaching my upper age range.

Arb.

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Re: Small cap high yielders

#341618

Postby MrFoolish » September 21st, 2020, 7:54 am

Arborbridge wrote:
At present, for exmple, I'm not too happy about my holdings in income OEICS because the income has dropped dramatically - not something one can tolerant unless they bounced back in a reasonably short time.
Arb.


Presumably this must be true of your HYP also?

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Re: Small cap high yielders

#341619

Postby Arborbridge » September 21st, 2020, 8:04 am

simoan wrote:Yes, the big issue is that cashflow of the big oil cos has been artificially boosted by asset sales for several years, so the true organic FCF is much worse once you subtract money raised from those sales. There's only so long a company can pay a high dividend when it is only supported by selling assets whilst the debt continues increasing. What a dreadful investment any such company would make. The fall in the oil price was merely the straw that broke the camels back. Much better to hold some better quality small caps with dividends that are covered by genuinely organic FCF.

All the best, Si


This is one problem with FCF - what really is the relevant cash flow to equity? and associated with that is the difficulty of finding it.
Although, on the face of it, it ought to easy to calculate, I've always found there are difficulties - one example would be distinguishing between capex for invesment and that for maintenance. It is not always obvious from the accounts unless you can see through smoke.

The other problem is "for how long is a negative free cash flow sustainable?" I've known cases in which the FCFE has recovered very well after a period of several years negative: in short, how do we know it's time to throw in the towel? In seems to me that this is more a judgement call rather than an exact science.
One might list a third problem that the published results are always historic so you get the nail in the coffin after the burial - the mortal wound is sometimes indicated by the share price chart long before the funeral service is printed.


Arb.

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Re: Small cap high yielders

#341622

Postby dealtn » September 21st, 2020, 8:14 am

Arborbridge wrote:
simoan wrote:Yes, the big issue is that cashflow of the big oil cos has been artificially boosted by asset sales for several years, so the true organic FCF is much worse once you subtract money raised from those sales. There's only so long a company can pay a high dividend when it is only supported by selling assets whilst the debt continues increasing. What a dreadful investment any such company would make. The fall in the oil price was merely the straw that broke the camels back. Much better to hold some better quality small caps with dividends that are covered by genuinely organic FCF.

All the best, Si


This is one problem with FCF - what really is the relevant cash flow to equity? and associated with that is the difficulty of finding it.
Although, on the face of it, it ought to easy to calculate, I've always found there are difficulties - one example would be distinguishing between capex for invesment and that for maintenance. It is not always obvious from the accounts unless you can see through smoke.



Yes this is a valid criticism, and why the numbers are only a start.

A company that has high capex, with positive NPV on that capex, needs to be differentiated from one where capex is merely replacing (or worse, not even that) the depreciation of its plant, machinery etc.

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Re: Small cap high yielders

#341623

Postby Arborbridge » September 21st, 2020, 8:25 am

dealtn wrote:Yes this is a valid criticism, and why the numbers are only a start.

A company that has high capex, with positive NPV on that capex, needs to be differentiated from one where capex is merely replacing (or worse, not even that) the depreciation of its plant, machinery etc.


It gets worse - how would would outsiders (or even management!) know whether capex will ultimately achieve a good return, or is a fool's errand. I suppose one only has to look at supermarkets as an example. One might reasonably argue that capex on new stores is likely to increase profits down the line - until a few years later one sees stores being closed or even unfinished.

And before anyone says that was obviously going to be the result (it wasn't obvious, otherwise they wouldn't have commissioned the stores, by the way), it's just an example of a type of error any company management can make in any industry.

So safer to take out all CAPEX, but then you can find this is unfair on good companies which keep profitably ploughing back.

Arb.

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Re: Small cap high yielders

#341642

Postby simoan » September 21st, 2020, 9:28 am

dealtn wrote:
Arborbridge wrote:
simoan wrote:Yes, the big issue is that cashflow of the big oil cos has been artificially boosted by asset sales for several years, so the true organic FCF is much worse once you subtract money raised from those sales. There's only so long a company can pay a high dividend when it is only supported by selling assets whilst the debt continues increasing. What a dreadful investment any such company would make. The fall in the oil price was merely the straw that broke the camels back. Much better to hold some better quality small caps with dividends that are covered by genuinely organic FCF.

All the best, Si


This is one problem with FCF - what really is the relevant cash flow to equity? and associated with that is the difficulty of finding it.
Although, on the face of it, it ought to easy to calculate, I've always found there are difficulties - one example would be distinguishing between capex for invesment and that for maintenance. It is not always obvious from the accounts unless you can see through smoke.



Yes this is a valid criticism, and why the numbers are only a start.

A company that has high capex, with positive NPV on that capex, needs to be differentiated from one where capex is merely replacing (or worse, not even that) the depreciation of its plant, machinery etc.

To be honest I don't think it is a valid argument. You shouldn't use the FCF in any particular year but an average over say a 5 year period (as you have shown for BP and Shell earlier) tells you all you need to know about the economics of a company. Earnings can be manipulated by exceptional items on an annual basis but cash is much less easy to manipulate (unless you are the CFO of Patisserie Holdings!).

Ultimately, you don't need to analyse Capex. Keep it simple - dividends are paid from free cash, the cash in the bank, or a combination of both. If you have a company that is highly indebted and giving all (or more) of it's cash and free cash to shareholders on a quarterly basis, eventually you have a problem. The first thing that happens is that the dividend payment doesn't rise which has been the case with BP and Shell for several years. The warnings were there.

All the best, Si


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