UK Equity income and COVID-19

The devastating impact of COVID-19 has tragically caused a huge amount of suffering globally, impacting untold numbers of people – directly or indirectly – and altering the way we live our lives. From the way we socialise to the way we work, few of us have ever experienced anything like this before, and hopefully we won’t ever again.

For investors, the landscape has also shifted, likely for a long time. Some sectors are now uninvestable, while others have seen demand for their services spik to levels that they have struggled to cope with.

Income investors in particular have faced something of a crisis in 2020. Dividends were scrapped by many companies as they sought to strengthen balance sheets, and many are yet to be reinstated. In the UK, headline dividends were down by more than half for the second quarter of 2020¹ , with big payers such as Royal Dutch Shell having ‘permanently’ reset their dividend.

The real issue facing income investors now is where you can find certainty. With so many unknowns surrounding the virus, further lockdowns and questions around how and to what extent we go back to the previous way of living or not, it means finding a reliable and sustainable income is harder than ever.

However, some trends have emerged which look set to be around for more than just the short term.

Pharma naturally a winner…

The global health crisis caused by the coronavirus has thrust the pharmaceutical sector into the limelight like never before, but for income investors, yields remain key.

Biopharma Credit is one example of a healthcare name that pays an attractive income. The UK-listed company carries out secured lending to the pharmaceutical sector, and currently yields around 7%. In a time of vanishing dividends, a company such as this could potentially provide a more dependable income for investors.

Among the giants in the sector, GlaxoSmithKline also remains attractive from an income perspective. Investors have historically been put off investing in pharmaceuticals companies based on their vaccine outlook, but clearly in the new world that is changing. With a dividend yield of 5.5%² , and a pipeline of promising drugs even before COVID, Glaxo represents a good source of income among the UK market.

Looking for opportunities in surprising places

Traditional retail might seem an unlikely area to hunt for income, given the rise in online shopping, but the UK still boasts several attractive specialist plays.

Such has been the scale of share price falls since March, there are clear opportunities where, even if pay-outs have been cut, companies have – or are poised to – returned to the dividend register. As a result, we initiated a new position in furniture store DFS, which saw a pick-up in trading post-lockdown.

Another interesting sector is home repair. This had been muted before the crisis, with one statistic showing that homeowners only replaced their windows once every 50 years. This is changing following the pandemic; and while analysts are concerned that we are simply seeing demand being brought forward, we believe that is too pessimistic an explanation.

On some estimates, UK household savings have increased by more than £100bn over the past year. We may well see some of that money being put to work, especially with consumers’ ability to spend on leisure activities restricted. Coupled with low valuations following the March sell-off, and low expectations going forward, home repair stocks could offer an appealing combination.

A touch of caution

On the other hand, there are parts of the market which have been negatively affected by the pandemic. It is just as important to cut disadvantaged companies from a portfolio as it is to pick winners.

One of the areas we are more cautious on is telcos, and Vodafone specifically – historically one of the main stocks for income in the UK. With clear cashflows, it has been a stalwart for dividend-hunters for years, but COVID has cast a shadow over its prospects. Already bloated with debt, the pandemic is now hitting its roaming revenues in the short term, but also potentially over the longer term too.

It is far from clear whether areas such as business travel will come back up to previous levels, even if you look out to 2022 and beyond, because the pandemic has made people realise you simply don’t need to do business face-to-face. That could have an impact on roaming revenues for telcos.

Vodafone also faces a specific challenge from the Huawei debacle. This has already been damaging for the business, but if Huawei’s kit is not allowed to be used by Western countries, it will mean a huge additional cost for Vodafone and other telcos to replace it.

Tourism a clear loser

The tourism and leisure sector is at the epicentre of the COVID pandemic. From airlines to holiday insurers, any company connected to the notion of going abroad has seen some of the worst share price falls on record. We expect airlines’ passenger number to remain depressed and regard airlines as uninvestable, even with their shares down a long way from pre-COVID levels.

Remaining optimistic

Such has been the scale of share price falls since March last year, there are clear opportunities where, even if pay-outs have been cut, companies have returned to the dividend register or are poised to. As a result, we initiated a new position in furniture store DFS, which saw a pick-up in trading post-lockdown.

Stocks are mentioned for illustrative purposes only and do not constitute investment advice or a recommendation.