UK Dividend Stocks Portfolio 2024 Q1: Results season review

model portfolio Apr 04, 2024
UK Dividend Stocks Portfolio - Dividends paid per calendar year

Results season is over and for that I am thankful. This year has been particularly busy, with 22 of the portfolio’s 25 holdings announcing interim or annual results in the first quarter. And, while I do enjoy reviewing annual results, you can definitely have too much of a good thing.

But enough of my whining; how did the 2024 results season go for the UK Dividend Stocks Portfolio and the wider UK stock market?

Let’s start with the overall market.

Overall, UK dividend stocks had a generally good results season

According to SharePad, there are 183 dividend-paying companies in the FTSE All-Share and AIM UK 50 indices (my chosen hunting grounds) with annual results dated September 2023 or later, most of which were announced in Q1 of 2024.

Of those 183 companies, 19% cut or suspended their dividend, 13% held their dividend and 68% raised their dividend. In other words, about 20% of UK dividend stocks cut their dividend while 80% held or raised their 2023 dividend.

Personally, and in contrast to the endlessly gloomy weather forecasts and endlessly gloomy economic forecasts, I would call that a fairly positive results season.

The UK Dividend Stocks Portfolio also had a generally good results season

As for the UK Dividend Stocks Portfolio, out of 25 holdings, 22 have released interim or annual results in Q1. Of those 22, 12 raised their dividend, five held their dividend flat and there were five dividend cuts, one of which was a suspension. 

Proportionally, that’s similar to the overall universe of UK dividend stocks, and that’s slightly disappointing because I want the portfolio’s dividend to be more defensive and progressive than the wider market. I realise that’s a big ask for a portfolio with 25 relatively high-yield stocks compared to an index with hundreds of stocks, but I still think it’s a worthwhile goal.

To see if I could fix this, I spent some time reviewing the differences between the dividend holders and dividend growers on the one hand and the dividend cutters on the other. The most noticeable difference was that the dividend holders and growers tended to have longer and stronger track records of progressive dividend growth, especially when measured over two decades.

Based on that review, I’ve added a new check to my dividend investing checklist (and spreadsheet) which will weed out companies that don’t have a reasonably strong 20-year track record of progressive dividend growth. This won’t be a silver bullet, but I think it’s another step in the right direction for this defensive dividend portfolio.

Dividend suspensions and reinstatements at Close Brothers and Direct Line

As I mentioned, there was one dividend suspension in Q1 and it came from Close Brothers, a leading UK merchant bank. In my opinion, Close Brothers is an exceptional business, but it operates in the heavily regulated financial industry where the regulator is becoming a clear and present danger to all UK financial firms, whether they’re good, bad or ugly.

Although even one dividend suspension is disappointing, as an investor you have to accept that bad things can happen, even to good companies. Sometimes, a seemingly sane CEO makes an ill-judged acquisition or loads a company up with debt to fuel too-fast growth, or a regulator begins to think that good regulation means more regulation and punishment.

I’ll have more to say about the situation at Close Brothers in an upcoming blog post.

Going in the other direction, Direct Line was a source of good news as it announced a final dividend for 2023, having suspended its dividend at the start of 2023. The dividend was suspended because Direct Line was caught off-guard by double-digit claims inflation in 2022 and 2023, which left it with a loss, a hole in its balance sheet and a departing CEO. 

While its losses have grown larger in 2023, the balance sheet has been repaired by selling off a non-core business and insurance premiums have been dramatically hiked back to profitable levels. Just as importantly, the new CEO seems to know what he's doing (although the proof of that particular pudding will be in the eating) and he's keen to make the most of Direct Line’s powerful brands and extensive vertical integration.

As with Close Brothers, I’ll have more to say about the ups and downs of my investment in Direct Line in an upcoming post.

Surprisingly robust growth at Bodycote

But results season wasn't all about dividend suspensions or reinstatements, and if I had to highlight one holding for its unexpectedly strong results in 2023 and throughout the pandemic, then I’d have to pick Bodycote (although Next would be a close second).

Bodycote is the world leader in heat-treating metal components. That makes it sound like an old-economy dinosaur, but nothing could be further from the truth. Heat-treated and surface-treated components are harder and more durable, so they can be thinner and lighter while also reducing friction and lasting longer.

Those features are exactly what the world needs as it transitions towards net zero, and Bodycote has started to explicitly use carbon reduction as a key message when trying to get manufacturers to outsource their heat-treating activities.

Bodycote’s 2023 results included an example where it was competing for a multi-year contract to heat-treat hybrid vehicle drivetrain components. Bodycote offered the client a service that would lower energy use by 50%, lower gas use by 99% and lower processing time by 20%. Unsurprisingly, Bodycote won the contract.

Thanks to its market-leading scale and strong balance sheet, Bodycote was able to maintain or grow its dividend throughout the pandemic, leaving it with a 36-year track record of progressive dividend growth.

For 2023, the dividend has been increased by 7% and the company has initiated a £60 million buyback programme that brings the shareholder yield (from dividends and buybacks) to almost 8%. This is a company I am in no rush to sell.

Trades: Two new holdings take the total to 25

In terms of activity, I added two new holdings to the portfolio, one in January and one in February. This is in line with my long-standing rule of not adding or removing more than one holding per month.

This increased the number of holdings to 25 and I expect it to stay close to 25 for the foreseeable future, marking the end of a multi-year period where the portfolio went from 30 holdings in 2019 to a high of 34 in 2020 and a low of 20 in 2023. 

It was a period of instability and experimentation as I looked for the optimal balance between concentration, diversification and manageability, and I think I’ve found the right balance with 25 approximately equally weighted positions.

I also trimmed and topped up several positions in Q1 as I rebalanced them back to my target size of 4%. The rules here are pretty simple: positions over 6% are trimmed and positions under 2% are either topped up or sold (also known as double or quits).

At the beginning of April, all positions were within the target range of 2% to 6%.

Outlook for 2024: Slightly optimistic

Last but not least, let's have a look at the general outlook for 2024.

Based on the outlook statements across the 22 holdings that announced results in Q1, sentiment is broadly in line with dividends: Five holdings are pessimistic about 2024, four are somewhat ambiguous and 13 are optimistic that 2024 will be slightly or significantly better than 2023.

In percentage terms, that’s about 20% pessimistic and 80% either non-commital or optimistic, so I’d say the outlook is mostly optimistic that 2024 will be another year of progress towards some sort of normality, after four years of varying degrees of disruption.

As for valuations, the outlook is almost unfailingly positive. UK stocks are trading at levels ranging from mildly to chronically depressed, and I said as much in my recent FTSE 100 valuation and FTSE 250 valuation. Nothing material has changed since then.

And while the FTSE 100’s yield is an okay but unexceptional 3.8%, the UK Dividend Stocks Portfolio has a dividend yield of almost 6%, which is about as high as it’s been since I launched it in 2011.

Taking all of that into account, I’m optimistic that UK share prices are more likely to expand than contract over the next few years, just as they did after the 2007-2009 financial crisis (although, of course, there are no guarantees).

Disclosure: My personal portfolio holds exactly the same stocks as the UK Dividend Stocks Portfolio

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