Picking great dividend shares has helped Temple Bar Investment Trust (LSE: TMPL) outperform the FTSE All-Share Index over the past three, five and 10 years, and the trust declared a 32nd consecutive annual dividend increase on its results in February.
A presentation at the AGM revealed Temple Bar’s top overweight positions relative to the index. Among the FTSE 100 megacaps, GlaxoSmithKline (LSE: GSK), BP (LSE: BP) and Royal Bank of Scotland (LSE: RBS) were the biggest ‘active’ bets.
GlaxoSmithKline
As a dyed-in-the-wool value investor, Temple Bar tends to fish among companies boasting one or more of the classic value ratios of low price-to-earnings (P/E), low price-to-cash flow (P/CF), low price-to-book (P/B) and high dividend yield.
One theme is ‘under-managed’ companies, with scope for operational improvement, cost-cutting, disposal of peripheral assets and suchlike, and where a change of management could be the catalyst for improved business performance and a rerating of the shares.
GlaxoSmithKline looks a good example. It has faced headwinds of expiring patents and tight healthcare budgets in recent years, but a number of shareholders — including the redoubtable Neil Woodford — have been critical of how the business has been managed. There’s scope for change, as the company announced last month that chief executive Sir Andrew Witty will depart in March next year.
Glaxo looks cheap on historical earnings and cash flows, and on a sum-of-the-parts valuation, as well as offering a dividend yield of 5.4%.
BP
Oil companies, of course, have been out of favour with the market for some time, with a low oil price a result of over-supply. The price of oil has picked up of late and BP’s shares have rallied from multi-year lows earlier this year, but still remain thoroughly depressed from their historical highs.
Clearly, the oil price is the biggest single factor in BP’s performance and the shares will rerate higher when the price rises. The case for investing is rather straightforward: like other contrarians, Temple Bar argues that the world simply doesn’t work with oil at the kind of levels seen this year, and that this state of affairs can’t persist indefinitely.
BP trades on a modest 13 times forecast improved earnings in 2017. There’s also a whopping 7.5% dividend yield, although the yield isn’t the driver for investing, as Temple Bar thinks it’s perfectly possible the dividend could be cut.
Royal Bank of Scotland
Temple Bar is heavily overweight in the banking sector, and its biggest overweight is Royal Bank of Scotland. At the AGM presentation, the trust went into detail on why it’s bullish on the sector generally, pointing to considerably improved transparency and strengthened and stress-tested balance sheets. It reckons the rising regulatory burden on banks may be coming to an end, with regulators having “had their pound of flesh”, and also that there may not be much “downside disappointment” left to come on fines.
As far as the attraction of RBS is concerned, Temple Bar is grateful for the market discounting the overhang of the government’s shareholding, as it “consequently provides a cheaper entry price”. The trust also reckons RBS’s dividend is likely to be reinstated within 18 months.
Trading on a P/B of just 0.7, and a current-year forecast P/E of 14, falling to 11 for 2017, there appears considerable scope for an upward rerating in due course, as dividends resume and market sentiment towards the bank improves.
