GREAT IDEAS

How to get low-cost exposure to the UK’s biggest dividends

This stocks in this fund are cheaper than the FTSE 100 and yield nearly twice as much

ISHARES UK DIVIDEND

UCITS ETF  BUY

(IUKD) 698p Net assets: £826 million

With consumer prices hitting a 40-year high, more investors are searching for high-income instruments to try to offset the impact of inflation on their cash.

The danger with picking individual stocks just for their income is high yields are usually indicative of some underlying problem with the business and are not sustainable.

The iShares UK Dividend ETF (IUKD) takes much of the legwork out of hunting for high yields, and offers diversification across a large number of different stocks so that if one or two companies cut their dividends, your income won’t be too drastically affected.

The fund tracks the performance of an index composed of 50 shares with ‘leading’ dividend yields, giving diversified exposure to the highestyielding subset of the FTSE 100 index and the upper reaches of the FTSE 250 index.

In other words, it screens both indices by market value and automatically rejects any non-dividendpaying companies, focusing on those with the most attractive yields.

Due to the focus on dividends, the fund has a completely different look to the FTSE 100, which is most obvious from the fact that the top 10 holdings don’t include Shell (SHEL), AstraZeneca (AZN) or Unilever (ULVR), the top three stocks in the index.

Instead, the top three holdings in the fund are Rio Tinto (RIO), Anglo American (AAL) and Persimmon (PSN).

The smallest stocks in the fund are Centamin (CEY), Redrow (RDW) and Jupiter Fund Management (JUP), all of which are towards the top of the FTSE 250 in terms of market value.

The 12-month trailing yield on the fund is 6.5%, almost double the 3.3% offered by the FTSE 100, and the 12-month trailing PE (price to earnings multiple) is 8.6 times against 12.7 times for the index.

Fees are low at 0.4%, meaning investors get to keep more of the yield on offer, and dividends are paid quarterly.

The total return in 2021 was 23.2% against 20.7% for the FTSE 100, while for this year up to the end of October the ETF is down 8.2% against a 2% gain for the index representing a rare period of underperformance.

For investors wanting exposure to a broad selection of liquid, ‘best of’ dividend-yielding UK stocks with a low fee, a quarterly payout and scope for recovery potential, as well as somewhere to park their money until markets settle down, this fund is just the ticket. [IC]

Top 10 holdings in the UK Dividend ETF (November 2022) Top 10 holdings in the UK Dividend ETF (November 2022)

Stock Stock

Rio Tinto

Market cap £ Market Weight cap £ Weight

46.4bn 5.6% Anglo American Rio Tinto 42.4bn 46.4bn 5.1% 5.6% Persimmon Anglo American 34.6bn 42.4bn 4.2% 5.1% Legal & General Persimmon 30.9bn 34.6bn 3.7% 4.2% Vodafone Legal & General 30.8bn 30.9bn 3.7% 3.7% Imperial Brands Vodafone 29.8bn 30.8bn 3.6% 3.7% British American Tobacco Imperial Brands 29.1bn 29.8bn 3.5% 3.6% Aviva British American Tobacco 28.2bn 29.1bn 3.4% 3.5% Aviva HSBC 27.1bn 28.2bn 3.3% 3.4%

BP HSBC 26.0bn 27.1bn 3.1% 3.3%

BP 26.0bn 3.1%

Data correct as of 14 November, 2022 Table: Shares magazine • Source: iShares, Shares magazineData correct as of 14 November, 2022 Table: Shares magazine • Source: iShares, Shares magazine

Why Indivior looks too cheap relative to its growth potential

Sales of pharma firm’s flagship drug are expected to ramp up significantly

INDIVIOR

(INDV) £17.08

Market cap: £2.31 billion

Heightened macroeconomic risks and recession worries increase the likelihood of seeing more downgrades in company earnings. This puts a premium on finding companies whose earnings are less affected by the worsening economic backdrop.

One such company in our view is Indivior (INDV) which develops medicines for drug addiction and mental illnesses. The company has seen continued strong demand for its lead drug Sublocade, leading to persistent earnings upgrades.

Indivior trades on 15.8 times expected 2023 earnings which looks too cheap against the growth potential.

Sublocade is the only long-acting treatment for OUD (severe opioid disorder) which delivers a measured and controlled amount of the drug.

This keeps patients on an even keel and prevents the ‘highs’ and ‘lows’ associated with drug abuse. Injections are made monthly and can only be delivered by certified healthcare professionals.

The drug has generated strong sales momentum since launch in 2018 when it generated sales of $12 million. This year sales are expected to reach over $400 million while the firm’s medium-term sales target is $1 billion.

A key part of management’s strategy is to diversify the business beyond its marketleading opioid drug into other therapies such as schizophrenia, cannabis use disorder and alcohol use disorder.

The company is building a pipeline of drugs currently in clinical development to address these huge markets. Indivior plans to use the roughly $1 billion of cash on the balance sheet to make selective acquisitions and buyback shares.

Indivior is executing its second $100 million share repurchase programme, equivalent to around 4% of total shares outstanding.

On 14 November the company announced a deal to buy Nasdaq-listed Opiant Pharmaceuticals (OPNT:NASDAQ) for $145 million, representing a 112% premium to the undisturbed share price.

The deal further strengthens Indivior’s leadership position in addiction medicine while giving the company ownership of an opioid overdose rescue treatment OPNT003.

Management sees sales potential of between $150 million-to-$250 million after a potential launch in late 2023.

Shareholders have approved an additional listing for Indivior in the US which is expected to take place in the spring of 2023 alongside a five-for-one share consolidation.

The idea is to increase liquidity and attract wider analyst coverage and interest in the shares. The bulk of Indivior’s business is conducted in the US.

In October management increased 2022 revenue guidance by around 4% to between $890-to-$915 million. Analysts’ consensus estimates sit around the middle of the range at $900 million.

One risk to be aware of is the risk of further litigation regarding legacy OUD drug Suboxone. [MG]

Indivior Indivior

1,600 1,600

1,400 1,400

1,200 1,200

Jan Jan 2022 2022 Apr Jul Oct Apr Jul Oct

Chart: Shares magazine • Source: Refinitiv Chart: Shares magazine • Source: Refinitiv

Discover why Bob Iger can bring back the Disney magic

Former CEO’s return to the hot seatis a positive catalyst for for the ‘House of Mouse’

WALT DISNEY (DIS:NYSE) $97.78 Loss to date: 43%

Shares highlighted the compelling case for buying Walt Disney (DIS:NYSE) in January 2021 at $171.82, but after generating early gains, the shares have drifted lower to leave the shares 43% on our entry point.

But there is hope at hand, as former boss Bob Iger is back as CEO for the next two years and customers, staff and shareholders believe he can bring some of the magic back to the ‘House of Mouse’, since Disney’s shares did exceptionally well during his first period in the hot seat.

WHAT HAS HAPPENED SINCE WE SAID BUY?

Disney has parted ways with CEO Bob Chapek after a lacklustre tenure since his February 2020 appointment. Staff morale appears to have got worse, and customers are angry at large price hikes and constant disruption to rides in its theme parks. Chapek also riled those working for the company by getting rid of wellrespected TV content executive Peter Rice.

But it was the recent fourth quarter results (8 November) that proved the final straw for Chapek, as the numbers fell short of expectations for sales and profits. Direct-to-consumer revenues for the quarter increased 8% to $4.9 billion, yet the operating loss increased by $0.8 billion to $1.5 billion due to a higher loss at Disney+ and disappointing results at Hulu, partially offset by improved results at ESPN+.

Walt Disney

2018 2019 2020 2021 2022 2023

Chart: Shares magazine • Source: Refinitiv

WHAT SHOULD INVESTORS DO NOW?

Disney is worth sticking with for the long run. Iger was the driving force behind the launch of the streaming strategy in 2019 and he should reassure investors that the streaming business is on the right track.

We’d also expect Iger to devote attention to the profitability of the domestic parks, a very important part of the Disney investment case alongside the streaming service.

However, not everyone is welcoming Iger back with open arms. The Wall Street Journal has reported that activist investor Nelson Peltz opposes his rehiring and wants a seat at the board to push for more cost cuts. [JC]

WE’LL FOCUS ON THE DIVIDENDS, YOU CHOOSE THE ACCOMMODATION

The Merchants Trust PLC

The Merchants Trust aims to provide an above average level of income that rises over time. So whilst we focus on investing in large UK companies with the potential to pay attractive dividends, you can focus on travel, family, home, retirement – whatever really matters to you. Although past performance does not predict future returns, we’ve paid a rising dividend to our shareholders for 40 consecutive years, earning us the Association of Investment Companies’ coveted Dividend Hero status. Beyond a focus on dividends, Merchants offers longevity too. Founded in 1889, we are one of the oldest investment trusts in the UK equity income sector. To see the current Merchants dividend yield, register for regular updates and insights, or just to find out more about us, please visit us online.

www.merchantstrust.co.uk

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