The Times - UK (2022-04-09)

64 Saturday April 9 2022 | the times

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Bumper FTSE payout

I

nvestors in Britain’s largest compa-

nies are set for their second best

year ever, with FTSE 100 firms

expected to deliver a £114 billion cash

return in 2022.

They will pay £81.2 billion in divi-

dends this year, up from £78.5 billion in

2021, according to AJ Bell, the invest-

ment platform. The rest of the return

comes from share buybacks, which are

already at £32.7 billion, close to the

record high of £34.9 billion hit in 2018.

A buyback is when a firm purchases

its own shares. It reduces the amount of

shares on the stock market and increas-

es a firm’s earnings per share (EPS), a

measure used to value firms. A higher

EPS often means a higher share price.

Russ Mould from AJ Bell said: “Firms

may be choosing buybacks because

halting one is less likely to attract criti-

cism than cutting dividends.”

More share buybacks and special div-

idends could be announced, potentially

beating 2018 when FTSE 100 compa-

nies paid a record £127.5 billion, AJ Bell

said. Special dividends are supplements

paid when a firm comes into extra

money, say after the sale of a division.

The miner Rio Tinto is the biggest

dividend payer for 2022 at £7.4 billion. It

has a dividend yield of 10.1 per cent. The

energy company Shell is second with

£5.6 billion and a 3.6 per cent yield, and

Glencore, another miner, is third with

£5.4 billion and a 8.1 per cent yield.

Persimmon, a housebuilder, is the

only firm to trump Rio Tinto’s yield,

with 11.2 per cent.

David Brenchley

Is this warning sign of a

recession a false flag?

T

he four most dangerous

words in investing are,

according to the renowned

investor Sir John Templeton,

“this time it’s different”.

It’s a phrase well-known to industry

figures, yet still they claim that this

time is, indeed, different.

Today, we’re being told to believe

that a key indicator of US economic

recessions — an inverted yield curve

— will not lead to a decline in the

world’s biggest economy.

Yet history suggests that staking all

of your investment portfolio on this

outcome would be foolish. You

shouldn’t think that a recession is a

slam dunk, but consider investments

that might keep your portfolio

resilient if it does happen. These

include utilities, healthcare, the

FTSE 100 and commodities

(especially oil), according to Andrew

Sheets from Morgan Stanley, the

investment bank. Thankfully, I am in

the process of buying funds in some

of these areas.

Let’s back up a bit first. Last week,

the yield offered by an investment in

a two-year US Treasury bond went

below the yield on a ten-year

Treasury bond.

This is rare: normally, yields on

short-dated US government bonds

(those set to mature in three months

to two years) are lower than yields on

long-dated bonds (those maturing in

five to thirty years). Investors usually

demand a higher return for locking

their money away for longer.

Sometimes, though, investors are

happy to receive less from ten-year

bonds than from two-year bonds

because they are worried about the

long-term prospects for the economy.

In this scenario if you plot the yields

for these bonds on a graph you will

get what’s called an inverted curve.

On every occasion except one since

1955 when the two-year/ten-year part

of the US curve has inverted,

America has fallen into a recession

within the next six months to two

years. That’s quite the record.

This suggests there could be a

recession some time before the

middle of 2024. So, we should sit up

and take notice, right?

Not according to many of the

investment experts in my email inbox.

They argue that it was a brief

inversion and that other parts of

the curve, such as ten-year bonds

v three-month bonds, remain very

much positive.

They also say that quantitative

easing programmes, where central

banks buy bonds to inject money into

economies, introduced by central

banks after the 2008-09 financial

crisis and accelerated by the

pandemic, have forced yields on

long-term bonds to be lower.

But this is the same excuse trotted

out the last time we saw an inversion

of the curve in March 2019. Lo and

behold, almost exactly 12 months

later, Covid lockdowns plunged the

US into a recession. Sure, the yield

curve didn’t predict the pandemic.

But it did precede another recession.

You can’t always predict why a

recession will happen, but you can

have a good guess on when it’s going

to happen.

Central banks have already

underestimated inflation. The fear is

that the US Federal Reserve will be

forced to raise interest rates even

faster. Indeed, more Fed officials are

banging the drum for rate hikes of 0.5

percentage points, rather than 0.25.

This could damage household

finances because mortgage rates

shoot up and cause a recession.

The good news is that there’s no

need for investors to panic. Global

stocks have risen by 8 per cent on

average in the 12 months following

the last four yield curve inversions,

Sheets said. So, carry on saving into

your stocks and shares Isa and buying

your investments on a monthly basis.

As for the best-performing

investments during these periods,

Sheets highlights the US utilities and

healthcare sectors, which have

outperformed the S&P 500 index by

between 6 per cent and 8 per cent.

For pure utilities exposure, consider

the Xtrackers MSCI World Utilities

exchange traded fund, the Ninety

One Global Environment and

Schroders Global Energy Transition

funds, and Impax Environmental

Markets Trust.

For healthcare, stick with Scottish

Mortgage and Fundsmith Equity,

which have about a fifth of their

portfolios in the sector. I’ve started to

buy Bellevue Healthcare Trust too.

The FTSE 100 could beat its US

peers and Temple Bar Investment

Trust is another I’m buying.

Commodities also tend to do well,

but have shot up rapidly this year, so

you may have missed out already.

Only time will tell whether this

time is different — and don’t forget

we’ve had one false flag before. Just

don’t believe the hype too much.

Recession predictor

10-year US Treasury yield minus two-year US Treasury yield

Source: Federal Reserve Bank of St. Louis

3

2

1

0

-1

-2

-3

Highlighted areas show US recessions

1980 1990 2000 2010 2020
David

Brenchley

Get rich slowlyowly