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Ken Wotton talks to Investment Week
Ken Wotton talks to Investment Week
The IA UK Equity Income sector’s reputation as a challenging space for investors seeking diversification has led to disproportionate investing in a relatively small number of stocks.
Ken Wotton discusses how this herding has created value opportunities in small and mid-cap companies typically trading at a valuation discount to larger peers.
Ken identifies five companies offering strong income generation characteristics:
1. Income taps flowing
One hidden gem is Vianet Group, a UK market-leading data services business operating in the pub management and vending machine sectors. By monitoring the flow of beer in pubs, its proprietary equipment helps companies optimise barrel yield and limit waste.
Vianet’s equipment and management information also allows operators to ensure beer lines are regularly cleaned, enhancing quality for customers.
In the vending machine space, Vianet uses an automated communications process for collecting data, which optimises yield by monitoring sales and pre-empting maintenance.
Vianet, a classic example of a mature smaller company operating in niche spaces. We have owned the company in our portfolios for 12 years, over which time it has delivered strong income, having paid a consistent annual dividend per share of 5.7 pence since 2010. The company offers a prospective 4.7%* yield, underpinned by solid cash generation.
2. Striking dividend gold
Ten Entertainment Group is the second-largest tenpin bowling operator in the UK, with 43 sites and 1,000 bowling lanes under its Tenpin brand. This investment capitalises on the shift in consumer preferences within today’s ‘experience economy’.
Consumers, particularly younger generations eager to post on social media, are increasingly seeking happiness and status from entertainment and leisure activities, rather than material goods.
Ten Entertainment, which has the potential to deliver industry-leading financial metrics, currently offers a prospective yield of 4.5%. Through continued capital investment and measured site expansion, the company also offers compelling profit and dividend growth potential.
3. Brewing quality returns
Another stock unlikely to feature in many UK equity income portfolios is Strix, the world leader in kettle controls. With a 38% share of the global market, Strix supports appliance companies through the design and production process to ensure kettles pass external certification tests.
Strix-calibre kettles are manufactured to consistently exceed 12,000 cycles of normal operation.
Strix was admitted to AIM in 2017 at 100p per share, which has risen to about 160p. It offers a prospective yield of 4.5% as well as the potential for modest ongoing growth in revenue, profits and dividends over the coming years.
4. Energy-efficient earnings
Inspired Energy is one of the UK’s leading independent energy consultants, advising mid-sized corporates and higher-end SMEs on how best to optimise utility expenditures.
The appeal of Inspired Energy is its revenue is largely derived from energy providers. While it advises mid-sized corporations, Inspired Energy is paid in commission from contracts with large energy suppliers, with payments based on the energy usage companies incur.
This guarantees multi-year revenue and high earnings visibility for the business.
We believe Inspired Energy, which we have held in our portfolios since 2011, is poised for continued strong performance as the company truly understands its customers.
In addition to paying out dividends – it offers a prospective yield of 3.3% – Inspired Energy continues to reinvest to grow the business, supporting our long-term investment thesis
5. Raking in royalties
Another niche operator is Duke Royalty, an alternative investment business in the area of royalty finance. This non-equity funding model, which is linked to the future revenues of a business, is already well-established in North America.
It appeals to private business owners because it avoids the dilution which comes from equity finance and has a longer time horizon, with fewer covenants, than traditional bank or mezzanine debt.
Duke Royalty has built up a diverse portfolio of investee companies which are typically established, family-owned businesses generating good cash flow.
The company boasts strong annual cash returns, which allow it to pay an attractive and growing dividend to shareholders. We first invested in the company last year, on the basis of its proven concept and well-developed pipeline of opportunities.
The stock was expected to deliver a 6.5% dividend yield for the year to March 2019.
Please note, the views expressed in this article are Ken’s own and should not be taken as investment advice.
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