ADrunkenMarcus' 'Dividend Growth Portfolio'.

[ADrunkenMarcus]

As I write, DOM is up about 8% at 379p. The dividend was nudged up and they have announced further share buybacks. The dividend for 2023 looks on course to be higher than forecasts for the 2024 dividend and they have increased guidance. Since March 2021, the £398 million they have spent on dividends and buybacks represents about 26 percent of the current market cap. Last time I checked, share count had been reduced about 19 percent since c. 2016 so it has shrunk significantly. Leverage is also below target range.

I have had concerns about DOM and saturation in its core UK and Ireland market, particularly with the exit from its ill-fated international efforts, but the most recent data shows them gaining market share and I don't think it impossible that they could double their market share (of a growing market) over time. Their rewards programme mooted for 2024 sounds promising, too, and has proven popular at rivals. As things stand, since purchase in 2010, the capital gain is about 227 percent and it has returned a further 82 percent of the book cost in dividends (taken as cash). It is a business nearing a state of maturity compared to when I purchased it, but I hope that decent capital allocation policies can still deliver good returns. Provided they do it at good prices, continuing share buybacks could reduce the current share count substantially further.

There is a call later this morning which I can't listen to live but hope to be able to play back.

Best wishes


Mark.

[kempiejon]

That's another one I share with you, I have had mixed feelings about DOM; they nearly got the chop a while back as I needed cash in the ISA that holds DOM for a corporate action but I didn't have enough. Their slowing of income growth put them in the cross hairs. In the end they stayed. Up 35% in a month, I hadn't even noticed.

[ADrunkenMarcus]

That's another one I share with you, I have had mixed feelings about DOM; they nearly got the chop a while back as I needed cash in the ISA that holds DOM for a corporate action but I didn't have enough. Their slowing of income growth put them in the cross hairs. In the end they stayed. Up 35% in a month, I hadn't even noticed.

Yes, slowing growth is a concern. Taking dividends as a proxy, I believe the first dividend increase I got after investing in 2010 was c. 30 percent and the latest was 3 percent for the interim. Since purchase the dividend per share has compounded c. 9 percent CAGR. I would hope it can nudge up to mid single digits from the current rate of increase.

The talk this morning has been interesting. An example on 'white space' was that they seem to think one store per 29,000 people is feasible and they are currently at 53,000, so there is still plenty of scope for higher store numbers in both the UK and Ireland. Executing that without cannibalising sales from existing stores (splits) is a risk. The statistics on the app usage were promising, because app usage is going up substantially and app users orders are greater.

Best wishes


Mark.

[simoan]

That's another one I share with you, I have had mixed feelings about DOM; they nearly got the chop a while back as I needed cash in the ISA that holds DOM for a corporate action but I didn't have enough. Their slowing of income growth put them in the cross hairs. In the end they stayed. Up 35% in a month, I hadn't even noticed.

From the Smithson IT July factsheet:
We exited our position in Domino’s Pizza Group after becoming dissatisfied with frequent management turnover and disappointing results.

Unfortunate timing! Shows even the best can't time the market but assume they enjoyed some of the run up YTD.

[ADrunkenMarcus]

They also missed today where it rose to over 400p a share and was a rare blue/green share in my portfolio.

I sympathise with much of what they said and the missteps. DOM took a hit over several years from international losses. However, they do have a new CEO coming in who is well regarded (let's see what they do). And, while forecasts are always to be taken with a pinch of salt, dividend growth is forecast at 10 and 9 percent in 2024 and 2025; growing profit margins are anticipated; and debt has come down vs. EBITDA. Much of what they said could have applied to when they acquired DOM in the first place, IMHO.

Best wishes


Mark.

[simoan]

They also missed today where it rose to over 400p a share and was a rare blue/green share in my portfolio.

Well, the good news is that it was the smallest Smithson holding at 0.9% at the end of June according to the recent HY results. The even better news is they used the sale proceeds to take part in the Oddity Tech IPO at $35. Price now is $54

All the best, Si

[monabri]

That's another one I share with you, I have had mixed feelings about DOM; they nearly got the chop a while back as I needed cash in the ISA that holds DOM for a corporate action but I didn't have enough. Their slowing of income growth put them in the cross hairs. In the end they stayed. Up 35% in a month, I hadn't even noticed.

From the Smithson IT July factsheet:
We exited our position in Domino’s Pizza Group after becoming dissatisfied with frequent management turnover and disappointing results.

Unfortunate timing! Shows even the best can't time the market but assume they enjoyed some of the run up YTD.

Fundsmith also sold out of AMZN in May....

[simoan]

From the Smithson IT July factsheet:
We exited our position in Domino’s Pizza Group after becoming dissatisfied with frequent management turnover and disappointing results.

Unfortunate timing! Shows even the best can't time the market but assume they enjoyed some of the run up YTD.

Fundsmith also sold out of AMZN in May....

Depends what they bought with the proceeds. Personally, I’m glad they sold out of Amazon. Not one of their best ideas although they probably made money on the trade. The fact is, nobody knows the future. and on any metric other than recent share price movement, the valuation of Amazon is pricing in a lot of future good news.

[ADrunkenMarcus]

Some pleasing announcements this week, with Rotork showing signs of its former glory and raising the interim dividend over 6 percent and Spirax Sarco raising its interim 8 percent (one of the lowest increases since I bought it in 2015, which shows its usual high standard - and following 12 percent in 2022).

Murray International's half year report shows a continuing revenue increase and addition to reserves, which bodes well for future dividend growth. The full year 2022 dividend was well covered so it seems they have scope to increase reserves and deliver a modest increase in the dividend per share for 2023 (they have aimed to at least match the 2022 figure). Comments in recent reports have indicated they have restrained dividend growth somewhat, recognising the current dividend yield is pretty high compared to peers and that they may wish to build up reserves further.

Murray International's dividend income makes up a substantial proportion of the portfolio's overall dividend income and so it has a disproportionate influence on the overall dividend growth rate per income unit.

Best wishes


Mark.

[simoan]

Lovely full year results from Diploma today: https://www.londonstockexchange.com/new ... s/16215558

Nothing to dislike at all, other than maybe a FY dividend increase of only 5% with regard to the subject of this thread! However, given the increased number of shares following the capital raise, maybe not entirely unexpected. But let's face it, who needs a dividend when the company can re-invest cashflow at these kind of returns on capital and continue compounding. A thing of beauty. Share price up over 8% as I write.

All the best, Si

[ADrunkenMarcus]

Lovely full year results from Diploma today: https://www.londonstockexchange.com/new ... s/16215558

Nothing to dislike at all, other than maybe a FY dividend increase of only 5% with regard to the subject of this thread! However, given the increased number of shares following the capital raise, maybe not entirely unexpected. But let's face it, who needs a dividend when the company can re-invest cashflow at these kind of returns on capital and continue compounding. A thing of beauty. Share price up over 8% as I write.

My main dislike is that the shares closed up about 11% and close on their all time high from almost two years ago. Quite frustrating when you have a chunk of cash coming your way, which you intend to invest into your dividend growth portfolio, and one of the contenders for a top up suddenly has a significantly lower dividend yield.

As a serial acquirer, Diploma have been criticised for even paying a dividend. They have compounded it about 14% CAGR since I bought in 2012 and so I am happy. They even raised it 42% and then 26% as I recall for 2020 and 2021 respectively. They also had a critical question about it on a recent call.

However, at their June 2023 investor day they presented their 'financial model' (page/slide 136) which targeted double digit EPS growth and 5% DPS growth. Some have read that as a minimum intention but I suspect they might run with it for a few years. What I think they are doing is continuing to grow the dividend (and even 5% is pretty healthy except by Diploma's recent standards) while bringing it down as a proportion of profit and free cash flow, thus freeing up resources for future acquisitions. As the company scales up, they need larger acquisitions to 'move the needle'. However if they continue their track record then we should see the dividend reduce as a payout ratio and then probably reaccelerate in the long run as acquisitions and double digit EPS carry on. I can live with that. The payout ratio is already down from about 50 to 45% but they have not set an explicit future target. (They did set a leverage target of debt at 2x EBITDA or under, and they've reduced it from 1.4 to 0.9.) It does make me wonder why they increased the dividend so much several years ago, though.

Today was a green day for me and several of my top holdings surged. DP Poland closed up about 13%; Diploma closed up about 11%; Biovenix closed up about 5%; and Spirax Sarco up about 3%. Against a flattish FTSE, my portfolio is up over 2% on the day. Again, all very annoying because I anticipate I will have a significant lump sum to add to the portfolio and some quality companies which were within my valuation tolerance are now edging away. I suspect DP Poland and Bioventix performed as they did due to low liquidity. Indeed, one of my purchases of DP Poland once was on its own the vast majority of shares traded on that one day.

Diploma is now 6.3% of the portfolio and DP Poland is 5.7%.

I assume I will be enlarging the portfolio by at least 10% of the current portfolio value (based on capital) in the coming months. What I have been doing since inception is sacrificing current dividend yield for higher dividend growth prospects and the latter has given me some of my best performers. I want to chose companies capable of growing their dividend (or earnings) at a double digit rate in the medium term.

I am attracted to topping up Blackrock Smaller Companies, which is at a discount to NAV and has grown its dividend 12% a year since 2003, earning the status of a 20-year dividend raiser. MasterCard, Spirax Sarco and Diploma are candidates for top ups, too, because I believe they can sustain double digit earnings growth for a while yet. I have my eye on some foreign companies as potential new holdings including some Swedish and Dutch firms (such as ASML). Dutch withholding tax is not too bad for dividends at 15%. I don't want to add too many holdings!

Best wishes


Mark.

[ADrunkenMarcus]

I assume I will be enlarging the portfolio by at least 10% of the current portfolio value (based on capital) in the coming months. What I have been doing since inception is sacrificing current dividend yield for higher dividend growth prospects and the latter has given me some of my best performers. I want to chose companies capable of growing their dividend (or earnings) at a double digit rate in the medium term.

I am attracted to topping up Blackrock Smaller Companies, which is at a discount to NAV and has grown its dividend 12% a year since 2003, earning the status of a 20-year dividend raiser. MasterCard, Spirax Sarco and Diploma are candidates for top ups, too, because I believe they can sustain double digit earnings growth for a while yet. I have my eye on some foreign companies as potential new holdings including some Swedish and Dutch firms (such as ASML). Dutch withholding tax is not too bad for dividends at 15%. I don't want to add too many holdings!

Reviewing some of the options I had been looking at months earlier, it's rather frustrating to see companies such as Indutrade, Investor AB and Lifco up by 22 to 39% each compared to a few months ago. There are many companies in the Nordics (Sweden in particular) which would be worthy long term holds (dividend withholding tax is, of course, an issue).

Engcon Group caught my eye. It has a 55% ROCE, 20%+ CROIC and 22% EBIT margin and recently listed in Sweden. It has a 45% share globally of the tiltrotator market!

Nibe Industier has a pretty astonishing growth track record and pays a rising dividend, although CROIC has not been above 12% since 2011. ROCE and EBIT margin are low teens.

Another annoyance is Diploma's share price strength, up about 29% on its recent low and at an all-time high: shares are up 673% since my 2012 purchase and dividends amounting to 72.5% of book cost have been paid, making a total return (just capital gain plus dividends, not reinvested) of about 745% over those eleven years. The share price capital gain is over 20% CAGR for that period. (That thrashes my portfolio and, I think, even the NASDAQ.) The forward free cash flow yield is 3.8% and, on a p/e basis it is trading at similar levels to 2018-19.

ASML is a quality company with 35% ROCE, 38% CROIC and 31% EBIT margin (pretty moaty IMHO). Again, an issue is it is substantially more expensive than a few months ago. The p/e is now 35 but that is actually down on the 48 it averaged from 2019-22, representing the cheapest since 2018; free cash flow yield forecast at 2.8% for 2025.

Did I miss the boat on Novo Nordisk? It has a 65% ROCE, 56% CROIC and 42% EBIT margin which makes it a quality company but the p/e was averaging low 20s from 2011 to 2020 and it's now 37. Strong growth is forecast and thus a free cash flow yield forecast at 3.3% for 2025 does not look horrific. The issue is whether it grows into its rating and whether that growth is strong enough to deliver a decent investment return.

MasterCard has always looked expensive but my return since April 2019 is very pleasing and the dividend has almost doubled, including a recent 16% increase.

DPP does (finally) seem to be turning a corner under new management. The issue has been share issuance/dilution and the investment needed to get it going. Market cap represents 1.5x forecast 2024 turnover and it looks like it will breakeven on a pre-tax profit basis in 2024. Longer term, I'd expect a mature Domino's Pizza franchise to trade closer to 3-4x turnover. There does seem to be substantial potential for store estate expansion in Poland and Croatia, which should lead to rising turnover as well.

I have given thought to collectives or ETFs (perhaps a global one with quality criteria - any suggestions?), too.

A good few options but I may well end up just topping up current holdings!

Best wishes


Mark.

[ADrunkenMarcus]

MasterCard has always looked expensive but my return since April 2019 is very pleasing and the dividend has almost doubled, including a recent 16% increase.

As I approach a five year holding period since I bought this 'expensive' looking share, MasterCard has now more than doubled for me in sterling terms and so the share price has followed rising profits and dividends.

The operating margin has been steadily recovering since 2020, when it fell to 'only' 51 percent, and is now back up to 56 percent (close on the 58 percent reported for 2019). The pandemic and lack of cross-border travel probably set the underlying business back 12-18 months from where it would have been otherwise.

Earnings per share are forecast (FWIW) to increase by 67 percent altogether over 2024, 2025 and 2026, compared to 2023. However, the share price as it stands today has already doubled on its nominal cost and so that additional growth (if reflected in the share price) equates to another 134 percent on my original investment and take the capital return to 235 percent. The beauty of compounding! This continued growth has taken the proportion of the portfolio in MasterCard up to 13.3 percent.

All very positive but I'm annoyed that MasterCard (and a number of the other companies above) have got all that much more expensive before I have had chance to top them up!

Best wishes


Mark.

[ADrunkenMarcus]

The portfolio's size was increased today by about 14 percent (measured by increase in number of income units). The first transaction has been to increase my holding in MasterCard by 25 percent, taking it to about 15 percent of the portfolio from the current 13.4 percent. MasterCard has a current dividend yield of about 0.5 percent, which is between one-forth and one-fifth of the current dividend yield on the portfolio as a whole; I don't think the next dividend will arrive until after my year end report.

Given the increase in the number of dividend units and the fact that I do not expect any of the securities purchased by this additional capital to yield any dividend payments this year, I now expect the dividend per income unit to fall modestly (even though the absolute level of dividends has increased). Without the new capital, it would have increased. This is part of a pattern where the size of the portfolio has grown considerably since 2016, yet that new capital has typically gone into much lower yielding securities. Thus the dividend per income unit has been diluted continuously even as the absolute level of dividends increased.

Best wishes


Mark

[ADrunkenMarcus]

As noted several days ago, the portfolio's size increased 14 percent with the addition of new capital. I had then topped up MasterCard. I have now also increased my holding in Diploma by 50 percent in terms of the number of shares held, increasing its position size from 6.1 percent to 8.2 percent of the portfolio. The other change is a near trebling of my position in Blackrock Smaller Companies Trust, taking it from 3.9 percent to 9.6 percent of the portfolio. It's currently paying a c. 3 percent dividend and seems to have excellent prospects for further dividend growth (it's record since 2003 is a 12 percent CAGR), moreover UK smaller cap valuations have been battered and it also sits on a double digit discount to net asset value.

Diploma has modelled raising the dividend 5 percent a year, which is significantly less than the anticipated growth in earnings. Thus, we should see a growing dividend in absolute terms but falling as a proportion of earnings. This will free up resources to make acquisitions.

MasterCard has been held since 2019 and grown its dividend 15 percent CAGR since then. I think prospects are strong for continued double digit dividend growth.

I expect dividend growth from Blackrock Smaller Companies may be more subdued in the short term but with potential for continuing recovery and hopefully high single digit growth. The compensation there is that it has a much higher starting dividend yield.



I had written:

Given the increase in the number of dividend units and the fact that I do not expect any of the securities purchased by this additional capital to yield any dividend payments this year, I now expect the dividend per income unit to fall modestly (even though the absolute level of dividends has increased). Without the new capital, it would have increased. This is part of a pattern where the size of the portfolio has grown considerably since 2016, yet that new capital has typically gone into much lower yielding securities. Thus the dividend per income unit has been diluted continuously even as the absolute level of dividends increased.

It now looks like one of my holdings, Evolution, which makes a single dividend payment annually, is going to move the payment date from April to May. This means the reported dividend per unit will fall a bit further, but solely because of a change of timing bringing the dividend into the next year rather than because of any dividend cut. In fact, they increased the dividend by 32 percent in their reporting currency.

In terms of a breakdown of allocation UK equities are now down to 49 percent of the portfolio, investment trusts up to 29 percent and international equities (directly held) up to 21 percent. The UK equities I hold do include some large blue chips like AstraZeneca, Diageo, Reckitt and Unilever, but the majority are smaller, more dynamic companies with stronger growth records than the FTSE 100 stalwarts and majority international exposure. Eyeballing the position sizes above, probably about 42 percent is in smaller or mid cap equities.

Best wishes


Mark.

[ADrunkenMarcus]

The Mead Johnson legacy is quite appalling.

Reckitt Benckiser (to use its old fashioned branding) is down to 1.4 percent of the portfolio due to a double digit share price fall on full year results and a further double digit share price fall with this week's news. There is concern that they will have to make provision for compensation (unquantifiable) and that no provision seems to have been specifically put aside.

As recently as May 2023, it was trading over 6500p, however the current share price is under 4500p and represents the lowest since 2013 (before the spin off of its pharma business). My capital gain since purchase in July 2011 works out to 1.9 percent CAGR (less than inflation) and the dividend per share has compounded at less than 4 percent (under 1 percent CAGR in real terms). I'm really looking for something closer to the high single digits.

The total return (just adding up capital gain per share plus dividends received) is 83 percent. Not a disaster by any means, but I do wish I had put that capital to work into Diploma, which I added to the portfolio in November 2012. Reckitt's 83 percent beats inflation of 62 percent during that period, whereas Diploma has multi bagged in real terms and shown genuine, strong compound growth. Hindsight is a wonderful thing!

Nonetheless, this is an example of how hard picking individual shares is - even when you think it is a 'quality' company. The current free cash flow yield is touching 7.5 percent. Could it turn out to be a bargain? If so, the logical thing to do is buy more shares. OTOH, more bad news could be incoming! Hindsight will give us an answer.

The natural temptation is to sell (I do have other companies in the portfolio which I think are reasonably cheap and will exhibit stronger growth in the coming years) but perhaps that is to make the classic mistakes of over-tinkering and selling low. C'est la vie.

Best wishes,


Mark.

[simoan]

The Mead Johnson legacy is quite appalling.

Reckitt Benckiser (to use its old fashioned branding) is down to 1.4 percent of the portfolio due to a double digit share price fall on full year results and a further double digit share price fall with this week's news. There is concern that they will have to make provision for compensation (unquantifiable) and that no provision seems to have been specifically put aside.

As recently as May 2023, it was trading over 6500p, however the current share price is under 4500p and represents the lowest since 2013 (before the spin off of its pharma business). My capital gain since purchase in July 2011 works out to 1.9 percent CAGR (less than inflation) and the dividend per share has compounded at less than 4 percent (under 1 percent CAGR in real terms). I'm really looking for something closer to the high single digits.

The total return (just adding up capital gain per share plus dividends received) is 83 percent. Not a disaster by any means, but I do wish I had put that capital to work into Diploma, which I added to the portfolio in November 2012. Reckitt's 83 percent beats inflation of 62 percent during that period, whereas Diploma has multi bagged in real terms and shown genuine, strong compound growth. Hindsight is a wonderful thing!

Nonetheless, this is an example of how hard picking individual shares is - even when you think it is a 'quality' company. The current free cash flow yield is touching 7.5 percent. Could it turn out to be a bargain? If so, the logical thing to do is buy more shares. OTOH, more bad news could be incoming! Hindsight will give us an answer.

The natural temptation is to sell (I do have other companies in the portfolio which I think are reasonably cheap and will exhibit stronger growth in the coming years) but perhaps that is to make the classic mistakes of over-tinkering and selling low. C'est la vie.

Best wishes,


Mark.

The biggest problem with Reckitt (for me) is that ROCE and CROCI have been on a firmly downward trajectory since 2010. Long gone are the days of 30% returns on capital. Currently in the 10-15% range. I owned it for a couple of years believing new management could turn it around following the dreadful acquisition, but it soon become apparent they could not. I realise it’s difficult to sell sometimes but we all need to fight price anchoring and the endowment effect on a daily basis. There are many better companies than RKT on the market.

[ADrunkenMarcus]

The biggest problem with Reckitt (for me) is that ROCE and CROCI have been on a firmly downward trajectory since 2010. Long gone are the days of 30% returns on capital. Currently in the 10-15% range. I owned it for a couple of years believing new management could turn it around following the dreadful acquisition, but it soon become apparent they could not. I realise it’s difficult to sell sometimes but we all need to fight price anchoring and the endowment effect on a daily basis. There are many better companies than RKT on the market.

Yes, ROCE basically collapsed following the Mead Johnson acquisition, but had been starting to recover as they deleveraged the balance sheet. Operating margin had held up somewhat better.

CROIC has not exceeded 15% since 2016 and was 11.5% in 2023. In the late 2000s it was consistently in the 20%s.

I think old management were trying to buy growth because of concerns about sluggishness back in the mid 2010s and their answer to that was even worse. The share price return has not been positive in a calendar year since the close of 2020.

The case for buying in 2011 was pretty strong (to me, because I bought it!) but I'm left wondering if I would buy it today. There had also been a warning sign at the full year results for 2023.

Let's see what Monday brings.

Best wishes


Mark.

[simoan]

The biggest problem with Reckitt (for me) is that ROCE and CROCI have been on a firmly downward trajectory since 2010. Long gone are the days of 30% returns on capital. Currently in the 10-15% range. I owned it for a couple of years believing new management could turn it around following the dreadful acquisition, but it soon become apparent they could not. I realise it’s difficult to sell sometimes but we all need to fight price anchoring and the endowment effect on a daily basis. There are many better companies than RKT on the market.

Yes, ROCE basically collapsed following the Mead Johnson acquisition, but had been starting to recover as they deleveraged the balance sheet. Operating margin had held up somewhat better.

CROIC has not exceeded 15% since 2016 and was 11.5% in 2023. In the late 2000s it was consistently in the 20%s.

I think old management were trying to buy growth because of concerns about sluggishness back in the mid 2010s and their answer to that was even worse. The share price return has not been positive in a calendar year since the close of 2020.

The case for buying in 2011 was pretty strong (to me, because I bought it!) but I'm left wondering if I would buy it today. There had also been a warning sign at the full year results for 2023.

Let's see what Monday brings.

Best wishes


Mark.

The back end of 2020 is when Fundsmith sold out near the top for the share price after the Covid rise. The Mead Johnson acquisition was in 2017 but ROCE was already in decline because capital turnover was on a steady downtrend. I assume the acquisition didn’t look totally stupid at the time given Fundsmith held on following it.

Personally, I wouldn’t sell out here. From experience in similar situations, the reaction to the court case looks overdone to me if you take a longer term view. They still have good brands, good margins and the debt is being reduced. If they can reduce it further and get ROCE back up to 20%, it looks decent value.

[flyer61]

Hi Mark,

good to see you are still hard at it. Sold out of RB in the high 50's, some of my replacements have not done so well eg ULVR.

interested in your thoughts on MYI as I note it remains a substantial holding. Have toped up here as the discount had reached 10% given the underlying Companies are decent. So taking a long term view should be ok.

One IT you might like to look at is LTI. The share price seems to have lost the plot! Mind you there are many IT's you could say the same about. Have a look at the underlying equities then look at the SP versus the value placed on the FM business and I am happy to just keep on buying. Probably a dividend cut coming down the line but the board may yet surprise us and use 'reserves' to keep it unchanged. Over to you!