Trustnet Magazine Issue 43 September 2018 | Page 18

Advertorial feature
Investor discipline
Fund managers love to talk through
their investment process and how it
led them to buy a particular stock,
but frequently skip over their sell
discipline. A focus on dividend yields
provides a clear valuation discipline
for fund managers. When the
dividend yield of a stock moves to a
discount to the market through strong
share-price appreciation, it forces
the fund manager to re-evaluate
the investment. Can I still justify
holding a low-yielding company as an
income fund manager? The answer
is, sometimes. Hilton Food Group
now yields only 2.3%, having been
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[ JANUS HENDERSON ]
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one of my strongest performers over
the last few years, however, given the
good visibility over its future growth, it
still has a place in the portfolio. When
MoneySuperMarket’s dividend yield
fell to less than 3% in 2015, the payout
ratio was already high, while the rate
of growth was slowing. Despite being
a good performer, it was time to move
on. Message 3 – Stay disciplined, even
with your favourites.
Company management discipline
Company management’s role is to
keep us shareholders happy. One way
is to pay a sustainable dividend while
the other way is to invest and grow the
business. It’s a fine balance in capital
allocation. Paying a too-small dividend
may lead to the cash-flow burning
a hole in management pockets and
encourage them to spend it
irresponsibly. Think Rio
Tinto’s $38bn acquisition
of Alcan in 2007. Paying
a too-big dividend may
constrain investment
in the business and
lead to issues in the future.
Bus and Rail operator
FirstGroup cut capital
expenditure to maintain
its dividend which ultimately led to
an underinvested fleet, operational
problems, a dividend cut and a rights
issue. Message 4 – A high dividend
yield is not always attractive, especially
if the company can’t afford it.
Glossary
Price to earnings ratio:
A popular ratio used to
value a company’s shares.
It is calculated by dividing
the current share price by
its earnings per share. In
general, a high P/E ratio
indicates that investors
expect strong earnings
growth in the future,
although a (temporary)
collapse in
earnings can
also lead to a high
P/E ratio.
is
the
amount
by which
the price
Discount: When the market
per share of an
price of a security is
investment trust is
thought to be less than its
lower than the value
underlying value, it is said
of its underlying net asset
to be ‘trading at a discount’. value. The opposite of
Within investment trusts, this trading at a premium.
A focus on dividend
yields provides a clear
valuation discipline for
fund managers valuation used to screen “cheap” on-
earnings metrics, but the company
always generated poor cash-flow. This
should have been the early warning
sign to investors. Message 5 – Don’t
ignore the phrase “Cash is King”.
Cash-flow
Companies are unable to pay
dividends without sufficient cash-flow.
Cash-flow is harder to manipulate
than earnings and provides a better
indication of a company’s value.
Before Carillion got into trouble, the Dividends are very important
to investors, but only if they are
sustainable and can grow into the
future. Focusing on a well-diversified
portfolio of companies that pay a good
and growing dividend should help drive
outperformance over the long term.
Nothing in this document is intended to or should be construed as advice.  This document is not a
recommendation to sell or purchase any investment. It does not form part of any contract for the sale or
purchase of any investment. Past performance is not a guide to future performance.
The value of an investment and the income from it can fall as well as rise and you may not get back the
amount originally invested.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus
Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355),
Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757),
Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and
Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the
Financial Conduct Authority to provide investment products and services. 
© 2018, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited,
Henderson Global I