Standard Life Income Fund Buys EasyJet for Income Fund

Standard Life Investments’ Thomas Moore is betting the U.K. companies that paid below-average dividends in 2013 will increase their payouts in 2014 as Britain’s economy heads for its fastest growth in seven years.

Moore, who manages the 269 million-pound ($442 million) U.K. Equity Income Unconstrained Fund, is increasing stakes in companies from low-cost airline EasyJet Plc (EZJ) to recruitment manager Staffline Group Plc as the Office for Budget Responsibility predicts that 2014 will witness the fastest economic growth since 2007. Both stocks have rallied more than 80 percent so far this year, while paying out less than the average for members of the FTSE 100 (UKX) or the FTSE All-Share Index.

“An improving economy has forced investors to think about not which companies will pay them a high yield today, but those than can grow their dividend,” Moore, 38, said by phone from Edinburgh on Dec. 2. “They have more peace of mind doing that with better economic momentum because it’s no longer all about self help, cost cutting and surviving. You can’t be lured in by a high dividend yield anymore.”

Britain’s gross domestic product will rise 2.4 percent in 2014, according to the OBR. It had forecast growth of 1.8 percent next year. The U.K. government’s independent forecaster has also raised its growth prediction for 2013 to 1.4 percent from 0.6 percent, Chancellor of the Exchequer George Osborne told lawmakers during his Autumn Statement last week.

British Manufacturing

A report this month showed U.K. manufacturing expanded in November at the fastest rate since February 2011. Markit Economics’ purchasing managers’ index has exceeded the 50 level that separates expansion from contraction for the last eight months. A separate release showed activity in the services industries has expanded every month so far this year.

Moore’s fund, which targets individual investors rather than pension funds, has rallied 32 percent so far in 2013, almost three times the growth of the FTSE 100. It has beaten 95 percent of 325 similar funds this year, according to Chicago-based research company Morningstar Inc. BT Group Plc, the fund’s biggest holding, has gained 61 percent. Moore started his tenure as fund manager on Jan. 1, 2009.

“We’re looking for companies that can surprise the market on revenues, cash flow and dividends,” Moore said. “These companies still have their best days ahead of them and tend to grow their dividends faster.”

Dividend Payouts

The average dividend payout for companies listed on the FTSE 100 is 3.8 percent, while the broader FTSE All-Share Index yields 3.6 percent, data compiled by Bloomberg show. The FTSE 100, the second-worst performing developed European market tracked by Bloomberg this year, trades at 13.6 times its members’ projected earnings, exceeding its average valuation in the last five years of 11.3 time profit per share.

With a dividend yield of 2.3 percent and a price-earnings ratio of 13.4 times estimated profit, EasyJet has the potential to increase its payouts to shareholders because the company will continue to fill its airplanes and expand its fleet, according to Moore. EasyJet, Moore’s third-largest holding as of Oct. 31, has returned 236 percent to investors since his fund first bought shares in the carrier on Jan. 26, 2012.

Insurers and asset managers such as Legal & General Group Plc, Beazley Plc and Polar Capital Holdings Plc will benefit from their stable balance sheets, good earnings prospects and specialist focus, Moore said. Financial stocks make up a third of his U.K. Equity Income Unconstrained Fund, the largest weighting to a single industry. Moore is also buying more shares in HSBC Holdings Plc, which trades 8.2 percent below its 10-year average price-to-earnings ratio.

“Financial services have been a hated sector for some time,” Moore said. “Banks have been unloved. Just at the margin it feels like regulatory policy is beginning to tilt back in favor of the U.K. banks. There are some early signs that the goalposts are beginning to be set on capital requirements. This is encouraging.”

Edinburgh-based Standard Life Investments oversaw about 179 billion pounds as of Oct. 30.

To contact the reporter on this story: Sofia Horta e Costa in London at shortaecosta@bloomberg.net

To contact the editor responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net

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