OVERVIEW - Hinde Capital · Most people are aware of the term ‘BRICs’. Coined in 2001 by Jim O’Neill of Goldman Sachs, it means the new developing countries of Brazil, Russia,

HINDESIGHT DIVIDEND UK LETTER / JUL 17

Mark Mahaffey Ben Davies

1

Aalok Sathe

OVERVIEW

Despite a reasonable outlook for the weather this summer in England, profits from investments and trading seem harder than ever with many participants treading water at best. The FTSE is up a few percent as a whole, 10-year gilts yield 1% and bank interest is still almost zero.

The US SP500 index has barely been out of a 1% trading range for the last 6 weeks, which is almost unheard of. This

extraordinary lack of volatility at an elevated plateau of valuations might have been the catalyst for US Fed Chairman

Janet Yellen to predict that there would be no more financial crises in her lifetime. She will be 71 years old on August

13th and we are not aware of any imminent demise, so that is quite a statement at a time when ridiculous monetary

policy has increased the size of the central banks’ balance sheets and money supply to the moon, zero interest rates

have allowed anyone and everyone to borrow more and more with impunity for NOW, and valuations on most asset

classes are at such levels that investors face crippling losses on any kind of normalisation while current returns are

minuscule. Now, admittedly, she has never had a proper job, which some would say allows a certain sense of arrogance, but sadly, all I see is another academic forever out of touch with the real world.

JUL 17

“It is important how we view the youth of our nation. To simply consider them as new age voters will be a big mistake. They are the new age power.”

Narendra Modi

HINDESIGHT DIVIDEND UK LETTER / JUL 17 2

Yellen’s predecessor Ben Bernanke made many memorable quotes before the last crisis that were equally short-sighted.

A recent article from Money Week, which revealed lessons from ten legendary traders, was quite timely for us.

In our search for investment returns, it is hardly surprising that we have to look overseas with the current state of play

in the developed markets. However, we are not intending to invest broadly in emerging markets. We know far too well the investment risks of being too exposed to general higher beta markets in times of crisis.

But specifically, we are going to focus on one overseas market, India.


Most people are aware of the term ‘BRICs’. Coined in 2001 by Jim O’Neill of Goldman Sachs, it means the new

developing countries of Brazil, Russia, India and China. South Africa joined the group in 2010 and it is now BRICS. While China stands out as the true success story, the others have enjoyed soaring growth rates amid setbacks.

Less than a decade ago, Chindia was a much-used expression to group the two largest growing economies. Today, it

is used less frequently. The primary statistics suggest that focusing on India as an investment target will be worth the research work.

In the next five years, India will overtake China as the most populous country and continue for decades with a huge growing working population (whose median age at 29 is 8 years younger than China’s).


Source: Bloomberg, Variant Perception

Politically, India’s popular Prime Minister, Narendra Modi, is driving change through the country despite all the bureaucratic headwinds.

As a long-time bond trader, one of the most grabbing potential investments is looking at the Indian Yield curve.

Interest rates are 6.20% at the front-end bank rate to 7.20% in the longer dated paper with high-grade corporate bonds

at least 1% higher. Emerging markets invariably have higher rates that reflect both strong growth and high inflation. However, CPI in India is currently 2.40, giving a real rate pick of at least 3.80%.

Compare that with the Sterling market where CPI is actually higher than India’s at 2.9% and yet the yield on a 10-year gilt is 1.2%, making it a negative real yield of 1.7%!!! Go figure.

Source: Bloomberg


It doesn’t take a rocket scientist to see that the fixed income bond comparison is currently heavily skewed in the favour

of India despite historically higher inflation. Naturally, any investment overseas must take into account the currency

switch from home currency to local and this is the Achilles heel on many occasions, but it can equally work

exceptionally well. The holy grail of overseas investing is finding higher yielding assets in cheap currencies that are likely to appreciate and give a double kicker.

Unfortunately, investing in India is not that easy at the moment as the markets are somewhat restricted, especially for

individuals, but times are slowly changing. We believe strongly that every bit of research work and monitoring that is

done of this developing situation will pay off for our fund’s, clients’ and personal investments. As a result, we have

decided to launch a quarterly India newsletter with interim blogs to keep anyone who is interested up to speed. It will be

edited by our very own Indian analyst and fund manager Aalok Sathe. The first issue is scheduled for early September

and will be on a free distribution list. Anyone wishing to receive the free Indian letter going forward should sign up on the website-blog http://www.hindesightletters.com/our-new-indian-investment-letter

http://www.hindesightletters.com/our-new-indian-investment-letter


CONTENTS

Inside this edition of the UK Dividend Letter you’ll find:

OVERVIEW 1

INVESTMENT IDEA #1 SHIRE PLC 7

INVESTMENT INSIGHTS 12

PORTFOLIO UPDATE - WHAT HAPPENED? MARKET & SECTOR ANALYSIS 16

HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (JULY 2017) 18

APPENDIX I THE WAY WE THINK 20

APPENDIX II HOW WE THINK 21

Our main investment idea this month is:

1. Shire plc


INVESTMENT IDEA #1 SHIRE PLC by Mark Mahaffey

Shire plc

Price (£) 4,189.0

Turnover (£mm) 8,441.8

Net Income (£mm) 242.5

Market Cap (£mm) 39,266.1

Fwd P/E Ratio 11.0

Dividend Yield (%) 1.0

Payout Ratio (%) -

Total Debt to Total Equity (%) 75.8%

FCF to Market Cap (%) -

ROIC (%) 2.6%

Shire plc (SHP: LSE) is a global biopharmaceutical business that is headquartered in Ireland. Formed in Basingstoke (England), the company was founded by four entrepreneurs in 1986:

Harry Stratford – who remained CEO until 1994

Dennis Stephens – entrepreneur

Peter Moriarty – entrepreneur

Geoff Hall – entrepreneur

From its modest origins of producing calcium supplements for patients who were seeking to treat or prevent osteoporosis, the firm has gradually moved into all core therapeutic areas, such as haematology, immunology, neuroscience and the emerging areas of oncology.

Shire plc was listed on the London Stock Exchange in 1996. Today, the firm is primarily listed on the LSE, but also has a secondary listing on the NASDAQ, guided by MD and CEO Flemming Ornskov. Employing over 22,000 individuals, the company has a market capitalisation of approximately £39bn.

Over the years, Shire plc has grown to become one of the fastest moving specialist pharmaceutical companies in the

world. It is now a market-leading brand in the attention deficit and hyperactivity disorder (ADHD) space. However,

before it became a leading name within the pharma industry, Shire was a small company called AimCane that was

situated above a shop in Hampshire. As it grew, the time came to change the company’s name. Its four founders chose Shire, as this was the name of the building they first started in.

AimCane originally sold a range of calcium-based products that were designed to help with osteoporosis. One of the products that the group had launched, called Calcichew, is still a leading product today.

This pharmaceutical specialist expanded quickly and made its first acquisition in 1995, purchasing another local

business in Hampshire called Imperial Pharmaceutical Services. This brought Shire a range of product licenses and

capital, which helped it in its quest to expand through a string of acquisitions. It then immediately formed an agreement with Johnson & Johnson Pharmaceutical Research to develop Reminyl (Galantamine), which is a treatment for

Alzheimer’s. This drug still continues to generate millions for Shire.

After floating on the London Stock Exchange in 1996, the company began its expansion plans and acquired two

companies the following year. The first company was Pharmavene, which had a wide portfolio of drug delivery and

screening technologies. The second company, and possibly its most significant acquisition, was the takeover of Richwood, as it eventually led to the launch of Shire’s ADHD treatments, Adderall and Adderall XR. These

acquisitions were important as they eventually formed their US based subsidiary called Shire Laboratories and facilitated the group’s access to the US market.


As Shire grew in experience, it became better at acquiring businesses that expanded its own product line and capital

base. This growth in capital has always enabled them to embark on further expansion plans. By 1999, Shire had

doubled in size by merging with a company called Roberts. This was a historic deal as it meant that Shire gained the anti-inflammatory medication Pentasa, which is used for Ulcerative Colitis, ProAmatine, used for low blood pressure and Agrylin, used to treat low blood platelets.

This aggressive acquisition trend has continued over the past sixteen years. Shire plc has set its targets high. Its aim has always been “to achieve leading market positions in each of its target therapeutic areas while imagining and

leading the future of healthcare, enabling people with life-altering conditions to lead better lives, thus creating value for society.” Please see the following list:

Having acquired and produced a number of drugs over a number of years, Shire is establishing itself as a leader in the following areas:

Genetic Diseases

Haematology

Immunology

Neuroscience

Oncology

Ophthalmics

After acquiring a number of pharmaceutical businesses, Shire’s portfolio of drugs that treat rare diseases has become

very valuable. Likewise, Shire as a company has become big enough to fight off takeover attempts. This is exactly

what Shire did when they received a preliminary offer from AbbVie in June 2014, which valued Shire plc at £27.3bn, a

premium of 30% to the market at the time. AbbVie then returned with an increased 10% secondary offer that was

accepted. Unfortunately, the deal broke down and this led to Shire’s share price plummeting by over 25% after the

news broke that AbbVie was reconsidering their proposed takeover due to changes in US “Tax Inversion” law despite AbbVie having to a pay $1.64bn break-up fee.

Shire’s CEO from 2003 to 2008 was Matthew Emmens, who oversaw a significant part of its growth cycle before he

was succeeded by Angus Russell in 2008. Russell then departed just as the firm’s ADHD treatments were feeling the

pressure from generic alternatives in 2013. Finally, the helm was taken over by Flemming Ornskov who joined from Bayer and outlined an aggressive M&A path.

Since July 2015, Shire’s share price has fallen by over 28% with its maximum loss at one point being over 40%. During this time, there have been numerous reasons for the negativity surrounding its share price:

Transformational 2016, BAXALTA / Concerns Over Level of Debt

Sideways Pharmaceutical Industry / Industry Threats

Year Acquired/Merged Drug/Treatment

2001 BioChem Pharm

2003 Bayer Yakuhin Fosrenol

2004 TKT Elaprase

2007 New River Vyvanse

2008 Jerini AG Firazyr

2009 UCB Equasym

2010 Movetis NV Resolor

2011 Advanced BioHealing Dermagraft

2012 Ferrokin BioSciences Iron Chelator Therapy

2013 Lotus Tissue Repair Dystrophic Epidermolysis Bullosa

2013 Premacure AB Protein Replacement Therapy

2013 SARcode BioScience Ophthalmology Therapy

2014 Fibrotech Antifibrotic Compounds

2015 NPS Pharmaceuticals Gattex/Natpara

2015 Foresight Biotherapeutics Budesonide

2015 Dyax Kallikrein Inhibitors

2015 Meritage Pharma -

2016 Baxalta -


Shire plc enters the HindeSight Dividend portfolio this month. For all the negativity that the stock has suffered, we

believe this is now priced into its valuation. The firm is a leader in the Pharmaceutical and Biotech industry, trades on a

forward P/E of 11x and offers a dividend yield of approximately 1%. We generally tend to target opportunities that have

a higher income yield, but Shire now ranks within the top 20 positions of our screening process and is the cheapest large cap stock within the FTSE350, according to our analytical metrics. After a multi-year acquisition-spree, “Shire plc

has now positioned itself as one of the world’s foremost producers of treatments for rare diseases, which is classified as conditions that affect fewer than 1 in 2000 people.”

Transformational 2016 / Concerns Over Level of Debt

Shire plc went through what many are calling a transformational year in 2016 when it purchased Baxalta. Shire’s

management believed that the purchase would put them at the forefront of the Immunology industry. However, the

acquisition saw the firm’s debt level rise just shy of five times its cash profits. Worries over its debt pile, along with poor results from some of its divisions in 2016, saw investors put their guard up.

Since the deal, Shire’s challenge has been to bring its debt under control. When the group went on its acquisition spree

in 2016, it took out a significant loan and share issuance to fund its $32bn buyout of Baxalta. For many investors, this

became a major red flag. Despite investors’ worries, the group repaid $423mm of its borrowings in the first quarter of

2017. Management is confident that Shire’s net debt can be brought down to between 2-3x their cash profits by the end

of this year. It is their impressive drug pipeline – driven by its high-margin rare disease products – that has assured the

management team about Shire’s long-term outlook and its ability to control debt levels. Despite all the guarantees,

investors have shown a lack of belief in the firm’s abilities over the past 12-24 months, which has seen its share price

struggle. However, just to reiterate, we believe this is unjustified, given the group’s substantial pipeline. With large-

scale M&A deals off the table for the time being, Mr Ornskov and his team are preparing the launch of certain drugs,

such as SHP465, which has been designed to treat ADHD in adults. In June 2017, the firm received FDA approval for the drug, which will add to Shire’s robust revenue stream and eventually help its share price to re-rate higher.


Sideways Pharmaceutical Industry / Industry Threats

The pharmaceutical industry has pretty much moved sideways over the last two years and, with the exception of

Shire’s downward move in Q4-2015 / Q1-2016, it has overall tracked the rest of the industry. Unfortunately, this down

trade was due to investors’ worries over the margin compression / competition that Shire faces from generic

competition to its flagship gastrointestinal drug Lialda. These worries offset any positive news that was being reported

regarding treatments against rare diseases and its ADHD results. Investors have also been sent into a tailspin regarding the threat posed by Roche and its ACE910 drug.

Since its initial negative movements, Shire’s share price has been tracking the rest of the industry at a lower level,

trading at a 30% discount to its peer group. As mentioned earlier, with plans to roll out a number of its drugs that are

showing great promise, you would expect a significant conversion in value with its wider peer group. Furthermore,

worries about Roche’s threat have been overplayed with there being concerns about Swiss group’s drug. In a similar

vein, the threat from generic producers has been allayed by Shire’s management team, who have suggested that the

results from these generic producers only came from their own testing and they are unlikely to win approval for copies

any time soon. Shire is a leader with the rare-disease space and their experience and knowledge will eventually help the producer to regain its market capitalisation.


Analysts’ Corner

Shire plc is a unique, market leading biopharmaceutical business. Trading on the FTSE100, it is a mature company

that is well covered by the analyst community. The stock trades at approximately 11x forward earnings. Currently, the

firm is being attributed with an average 12-month target price (TP) of 5941p, representing an upside of over 39% from current levels.

Summary

Shire plc has been underperforming relative to its peer group and its own cycle over the past 12-24 months. The

company has suffered due to worries about competition from generic drug producers, as well as the potential threat

coming from much larger rivals, such as Roche. To add to this, investors have become worried about Shire’s growing

debt levels due to their purchase of Baxalta in 2016. Despite all of these worries, Shire is a cash generative machine

that has already started to pay off large proportions of this debt in 2017. Management has assured investors that they

will be able to bring down their gearing by the end of this year. With a debt reduction programme in place, as numbers

are reported throughout the year, we hope that investors will once again gain confidence and help to push the Pharma

giant higher. Shire plc is a leading biotechnology / pharmaceutical group specialising in rare diseases. This is the type

of drug portfolio that takes years to develop and, therefore, gives Shire a level of stability that many of the other giant

drug producers do not have. With Shire plc sitting on a long-term support line and all its bad news priced into its value, we believe this is an ideal point in time to start building a position.


INVESTMENT INSIGHTS

In the overview, we compared the level of real interest rates in the UK to those currently in India in order to observe the

poor investment opportunities and probability of losses in the UK bond and interest rate market. Anyone with cash

deposits knows full well they are receiving next to nothing on their savings, but it’s less well known that those owning

fixed income bonds, whether in their investment accounts or no doubt in their pension plans, also receive very low yields and could see some outsized capital losses if interest rates start to normalise at any time.

Interest rates were dropped worldwide as a response to the last financial crisis to ‘enable the system to survive’.

Arguably, in the short term, this worked. The potentially huge side effects from the extent of the monetary policy that was needed to ensure this are yet to be seen.

But what happens when interest rates rise?

Last month, Dame DeAnne Julius, one of the founding members of the Bank of England’s monetary policy setting

committee, now chairwoman of the University College London council, said: “With unemployment as low as it is, with

inflation almost touching 3 per cent, if this isn’t the time to raise interest rates, I don’t know when we are going to find it.”

We agree. She could have added, with the consumer’s incredible urge to take on increasing levels of debt because of

free money and the new challenger banks that are using this cheap funding to make low yielding loans. Talk about lighting the blue touch paper and throwing on the petrol.

The trouble is the world is hooked on cheap money. The belief is now firmly rooted that the central banks can’t afford to

raise interest rates without an economic collapse as debtors will fail to make the increased payments. There are far too

many overstretched debtors benefitting from cheap money at the expense of savers who are feeling the pain of negative real rates. With the Retail Price Index at almost 4%, how could they not?


UK yield curve chart.

Source: Bloomberg

Look at the spectrum of interest rates across maturities and wonder why they are so low. The last time the

unemployment level was 4.7%, in September 2005, interest rates were 4.5% going to 5.5%. In 2000, when RPI was 3.7%, interest rates were 6%.

There are rumblings at the BOE about raising rates and there has been a small movement higher in yields, with small being the operative word. But what if they went to 5% over the next few years, as ridiculous as that sounds?


We expect interest rates to rise and the yield curve to steepen, certainly by more than the complacent market would believe.

It’s a mathematical equation to see where the price of a ten-year gilt would go if you plug in 5%. Prices would drop from 100 to 71, a 29% loss of capital.

We can assume that most property would then have to be marked lower by the same amount, and owner occupied or buy-to-let would also suffer a poor fate.

Higher rates would not be good for many indebted companies and their share prices, although there could be some winners. Insurance companies benefit from higher investment income while debt-laden utility companies struggle.


Banks often benefit early as rates rise from steeper yield curves, but eventually the defaulting debtors cut into the

banks’ profitability and capital base. As an aside, we will be looking at how some of the challengers’ fare in the coming months, such as Metro Bank.

Metro Bank’s share price has grown with the expansion of their customers’ deposits and the increase in cheap funding,

while their asset base/loan book has grown with low yielding buy-to-let portfolios. While its position as the new bank

branch on the high street has won over new customers, the huge costs of this operation concern many analysts and

the effect on its future profitability. We have learnt never to be early in shorting over-levered or poor yielding bank stocks over the years, but this is one to keep a keen eye on as the cycle rolls over.


PORTFOLIO UPDATE - WHAT HAPPENED? MARKET & SECTOR ANALYSIS

UK Market Valuations

UK INDICES PRICE/EARNINGS PRICE/BOOK DIVIDEND

RATIO RATIO YIELD (%)

FTSE 100 INDEX 31.77 1.82 4.16%

FTSE 250 INDEX 28.09 2.18 3.19%



HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (JULY 2017)

Portfolio Update and Construction


PORTFOLIO UPDATE

Babcock International Group plc

On the 29th of June 2017, Babcock International Group plc paid a dividend of 21.65p.

Royal Mail plc

On the 29th of June 2017, Royal Mail plc paid a dividend of 15.60p.


APPENDIX I

THE WAY WE THINK

We passionately believe that dividends really, really matter.

William Thorndike in his fascinating book ‘The Outsiders - Eight Unconventional CEOs and Their Radically Rational

Blueprint for Success’ examined one of the most important aspects of running a business a CEO must undertake:

Capital Allocation. He summarised how a CEO deploys capital in order to best utilise cash flow generated from his or her business operations. Essentially, CEOs have 5 ways of deploying capital:

Investing in existing operations

Acquiring other businesses

Repaying debt

Repurchasing their own stock (buybacks)

Paying dividends

Dividend payments are a crucial operation in creating stakeholder wealth. It is this aspect of a business that we are so

fixated by – the propensity for a company to produce and continue to grow dividends so that we may accrue wealth

over a generation. But as readers will know we can’t just grab stocks with the highest yield for fear that this signals

some cash flow or even solvency issues for the firm. So it is with this very real threat in mind we explore only well-capitalised FTSE 350 companies.

This letter’s purpose is to help inform readers on dividend investing so that they can construct a portfolio of sound UK dividend stocks based on our recommendations.

Our prerequisite is that any stocks selected for this letter must be liquid, well-capitalised with a strong free cash flow and a progressive dividend policy.

Our System

Every month we will provide a write up of 3 to 4 stocks until we create a portfolio of 25 UK dividend stocks. This

will be the HindeSight UK Dividend Portfolio #1

You will be alerted by subscriber email intra-month when these stocks become a buy. Timing is critical to the

strategy, not only buying quality stocks but buying them at the right time

The entry points will then be recorded in the next monthly in the HindeSight UK Dividend Portfolio section and the

stock(s) written up in full

We will run our winners but tend to rotate every 6 months depending on specific criteria which would elevate

cheaper companies into the portfolio relative to stocks that had performed

The basis for stock and portfolio selection is derived from our quantitative systematic methodology which screens

these companies using the Hinde Dividend Value Matrix®, (HDVM®), a proprietary stock-rating system

In the section on ETPs we will highlight our investment philosophy and the investment process behind our stock

selections. This is the basis of our dynamic risk and money management in our portfolio construction for you. You

can also read the stand-alone Hinde Dividend Value Strategy document to see the methodology behind our stock

selection


APPENDIX II

HOW WE THINK

“We have met the enemy, and he is us.” Walt Kelly

Our key to long-term performance investing is premised on the following:

Systematic rule-based strategy

Systematic risk and money management

Occam’s razor, aka ‘K.I.S.S.’, Keep It Simple Stupid

Consistency

Discipline

All our investment ideas are rule-based methodologies driven by systematic and quantitative models.

Hinde Dividend Value Strategy

Hinde Dividend Value Strategy seeks to generate a total return from an actively managed basket of UK dividend-

paying stocks. The strategy selects 20 highly liquid, mid-to-large capitalised stocks on an equally-weighted basis,

which offer the highest total return potential. The 50% Hedge version of the strategy would then be subject to a strategic Beta Hedge*, which is designed to cover 50% of the value of the UK stock basket at all times.

The 50% hedge is maintained using UK equity benchmark indices to reduce exposure to overall market volatility, but

without reducing overall total returns to the market over the long run. The Hinde Dividend Value Strategy (100% Hedge) would deploy a full beta hedge at all times.

Hinde Dividend Value Matrix®

The strategy employs a quantitative, systematic methodology, whereby FTSE 100 and FTSE 250 constituent stocks

are screened using the Hinde Dividend Value Matrix®, a proprietary stock-rating system. We use the same system to

select stocks for any of our strategies, long-only, 50% Hedge or 100% Hedge. The only difference is clearly the extent of the hedge on the exposure to the overall market.

The basic premise of the strategy is to accelerate returns by selecting relatively high yielding stocks which offer the

highest potential for capital revaluation. The dynamic rotation of stocks each quarter enables us to sell stocks where

the capital revaluation and dividend has been captured, and use this additional capital to invest in more undervalued

quality companies. If successful, this cycle of capture and re-investment offers the chance to significantly improve the total return generated by the Dynamic Portfolio.

The basis of the stock selection process is the Hinde Dividend Value Matrix®, which is a derived process that looks at 3 crucial variables:

* Beta is the stock’s sensitivity to market movements, e.g. if a share has a beta of 1.5 its price tends to move by 1.5% for each 1% move in the index

1. Dividend Screen

The top ranking stocks will be those offering a relatively high dividend. A composite of the following criteria comprises the Dividend Rank:

Relative Dividend Yield

Dividend Capture

Payout ratios

The Relative Dividend Yield assesses if a company pays a higher dividend than the Index it derives from (the FTSE

100 or FTSE 250). The Dividend Capture criteria explain how quickly and how much of the dividend is paid at any point

in time. The Payout Ratio gives a snapshot of whether a company will be able to maintain and grow its dividend. It helps us to assess how much of a company’s revenue, profit or cashflow is paid out in dividends.

The lower the amount of dividends paid out as a percentage of profits, the healthier future dividend potential will be.

History is for once a good guide as to whether companies will continue to pay and grow their dividends. A stock with an

excessively high yield relative to its sector or the overall market is invariably showing signs of heightened risk to its

dividend sustainability and often the viability of the company itself. The screen incorporates a limit on yield dispersions from the overall market.

The strategy is emphatically not a yield chaser. It is the Performance and Value screens that are used to assess the

total return potential of a stock by analysis of how undervalued it is relative to its fundamentals, sector and overall market index.


2. Performance Screen

The top ranking stocks have the poorest relative performance to their index over multiple time horizons.

A composite rank of the following criteria provides the Performance Rank:

Stock relative performance ranked over multiple time periods

Average of time periods taken to select rank of stocks

3. Value Screen

The top ranking stocks by key fundamental criteria show stable fundamentals and exhibit upside momentum growth potential. The following are some of the criteria that provide the Value Rank:

Value - Price to Book (intangible book adjustment), Free Cash Flow metrics

Quality - Return on Investment and Earnings metrics

Financial Stability - Debt levels, Coverage and Payout ratios

Volatility - Stock variance, Dividend variance

Momentum - Sales Growth, Cashflow metrics

Liquidity - Minimum market capitalisation relative to index, Shares outstanding

Implementing the Hinde Dividend Value Matrix®

The FTSE 100 and FTSE 250 stocks are ranked using the Dividend, Performance and Value screens. An equally-

weighted composite rank is then taken of these 3 ranks, which provides a final ranking from which a selection of 20 stocks is made for the portfolio.

The stocks with the highest ranking are compiled for the FTSE 100 and the FTSE 250. The top 10 from each index are

then taken, subject to diversification rules, which entail that normally only 1 stock per sector per index can be invested

in. For example, if the top 10 stocks are all mining companies, the selection process would take the first of these and

then move on to select the next top stock from another sector. As long as a stock has the highest score in its sector,

the fact that it has appeared in the final ranking means it is already eligible for investment. In exceptional circumstances, it may be that more than one stock has to be selected from an individual sector.


External Analyst Score (EAS)

This score is derived from 3 inputs that have been obtained from all the external analysts at leading institutions who are covering the stock:

1. The 12 month target price in relation to current price

2. The number of analysts covering the stock

3. The recommendation analysis, e.g. STRONG SELL, SELL, UNDERPERFORM or HOLD

This score is used to observe the other analysts’ view of the stock and is helpful when understanding the methodology

that other analysts use to determine their 12-month target price. We ultimately get a blend of price targets that is based on different valuation metrics.

EAS Score Output:

1. The combined score will vary from 30-70

2. A stock with a lowest score of 30 shows the majority of analysts not only have a full sell/underweight

recommendation, but also a low 12-month target price in relation to current price.

3. A stock with the highest score of 70 shows the majority of analysts not only have a full buy/overweight

recommendation, but also a high 12-month target price in relation to current price.

Note:

- On a standalone basis, the EAS score must be viewed in the following context:

Equity analysts issue far more positive recommendations than negative

If all analysts are overwhelmingly bearish or bullish, then this can signal a contrarian position be held, but this is

determinate on the where the stock is valued.

- However, in conjunction with the HDVM®, we have found the score to be useful when it is high or momentum is turning higher, as this suggests that the stock offers deep value.

Disclaimer This newsletter is intended to give general advice only on the importance of dividends within the equity space. The investments mentioned are not necessarily suitable for any individual, and you should use this information in conjunction with other advice and research to determine its suitability for your own circumstances and risk preferences. The value of all securities and investments, and the income from them, can fall as well as rise. Your investments may be subject to sudden and large falls in value and you may get back nothing at all. You should not buy any of the securities or

other investments mentioned with money you cannot afford to lose. In some cases there may be significant charges which may reduce the value of your investment. You run an extra risk of losing money when you buy shares in certain securities where there is a big difference between the buying price and the selling price. If you have to sell them immediately, you may get back much less than you paid for them. The price may change quickly, particularly if the securities have an element of gearing. In the case of investment trusts and certain other funds, they may use or propose to use the borrowing of money to increase holdings of investments or invest in other securities with a similar strategy and as a result movements in the price of the securities may be more volatile than the movements in the price of underlying investments. Some investments may involve a high degree of ‘gearing’ or ‘leverage’. This means that a small movement in the price of the underlying asset may have a disproportionately dramatic effect on your investment. A relatively small adverse movement in the price of the underlying asset can result in the loss of the whole of your original investment.

Changes in rates of exchange may have an adverse effect on the value or price of the investment in sterling terms, and you should be aware they may be additional deal ing, transaction and custody charges for certain instruments traded in a currency other than sterling. Some investments may not be quoted on a recognised investment exchange and as a result you may find them to be ‘illiquid’. You may not be able to trade your illiquid investments, and in certain circumstances it may be difficult or impossible to sell or realise the investment. Investment in any of the assets mentioned may have tax consequences and on these you should consult your tax adviser. The opinions of the authors and/or interviewees of/in each article are their own, and are not necessarily those of the publisher. We have taken all reasonable care to ensure that all statements of fact and opinion contained in this publication are fair and accurate in a ll material respects. All data is from sources we consider reliable but its accuracy cannot be guaranteed. Investors should seek appropriate professional advice if any points are unclear. Ben Davies and Mark Mahaffey the editors of this newsletter,

are responsible for the research ideas contained within. They or any of the contributors or other associates of the publisher may have a beneficial interest in any of the investments mentioned in this newsletter. Disclosures of holdings: None relevant to any content discussed within this issue of the newsletter

Documents

OVERVIEW - Hinde Capital · Most people are aware of the term ‘BRICs’. Coined in 2001 by Jim O’Neill of Goldman Sachs, it means the new developing countries of Brazil, Russia,