OVERVIEW WHAT’S INSIDE

OVERVIEW

OUR MAIN INVESTMENT IDEA 1. WPP plc

INVESTMENT INSIGHTS

WHAT HAPPENED? Market & Sector Analysis

HINDESIGHT DIVIDEND UK Portfolio # 1 (May 2018)

APPENDIX I: THE WAY WE THINK

APPENDIX II: HOW WE THINK

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

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ISSUE 42 - MAY 2018 WWW.HINDESIGHTLETTERS.COM

Sugar Taxes

In the 1998 film, ‘Meet Joe Black’, actor Brad Pitt, pretends to be an agent from The US Internal Revenue

Service, rather than reveal his true identity of being Death, the grim reaper, who has come to tell William Parrish, played by Anthony Hopkins, his time is up. It plays on the belief that nothing is certain in this world apart from ‘death and taxes’.

Last month, the UK saw yet another tax come into force, this time on sugar-sweetened soft drinks, a legacy of George Osborne’s 2016 budget. Then, it was proposed that at least a 20% tax was imposed and the forecast revenue of £520m would be used to provide extra funding for child sports. Since April 6th this year, manufacturers will have to pay a tax of 24p per litre on drinks with more than 8g of sugar per 100ml in then and 18p on drinks with 5-8g. For now, fruit juices

"Sugar is 8 times as addictive as cocaine" - Dr Mark Hyman

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and drinks with a high milk content will be exempt.

We are rather late to the party with 26 nations worldwide, from Saudi Arabia to Mexico already levying some form of sugar tax. There are some notable exceptions, such as Australia (Queensland’s sugar industry employs 16,000 people and exports $2bn a year, say no more).

Despite the obvious protests by the soft drinks industry and accusations of the nanny state, the governments of the world have been forced to take drastic action because of the huge, growing problems of obesity and diabetes, its long-term health effects, and most importantly, the associated costs.

Of course, sugar-sweetened drinks are just part of the problem. Food is too plentiful and too cheap in this modern world of ours to seemingly resist, and our sedentary lifestyles do not burn anywhere near the calories that we consume. Research suggests that the liquid sugar from drinks enters the body much faster than the sugar in food. This overloads the pancreas and liver, leading to diabetes, obesity and cardiovascular problems over time. Americans typically consume up to six times the recommended daily sugar intake. It is literally killing us.

The UK’s initial forecast of a tax collection of £500-600m has been revised down to less than £300m as manufacturers have reduced the sugar content in many of their drinks, but no forecasts have been made about the size of the reduction in consumption there will be. In Mexico, when a small 4% levy was introduced in 2014, sugar drinks’ consumption dropped by an average of 7.6% in the first two years while prices went up by 5%. With 70% of the country's inhabitants overweight or obese, weening them off their addiction to Coca-Cola seems like a healthy plan.

To date, sugar taxes globally have been set between 10-20% for the most part, so the UK’s upper tax band of 24p per litre falls on the high side. While 10% might not sound excessive, the margins of the drinks and retailing businesses are fairly low. PepsiCo operates on a 10% operating margin while a typical retail distributor like Tesco operates on less than 5%. Less than 10% of the total sales costs are accounted by the actual manufacture of the product, the water, its flavouring / sugar and the packaging. The cost of marketing and distribution takes up the bulk of the rest, leaving a slim fee for the companies who are involved in getting the end product to their consumers.

So, a whopping 24p is going to have a massive effect. Clearly, the manufacturer, who has to actually pay the tax to the authorities, cannot absorb the tax cost with its tight profit margins. The industry's response to date has been threefold:

• Increase prices and pass them on to the consumer

• Decrease drink sizes• Re-formulate the drinks to reduce

their sugar content

THE COMPANY

Mark Mahaffey

Ben Davies

Aalok Sathe

HindeSight Publishing which runs HindeSight Letters is a unique blend of financial market professionals – investment managers, analysts and a financial editorial team of notable pedigree. The co-founders of Hinde Capital, Ben Davies and Mark Mahaffey, a successful alternative investment management company joined forces with the financial journalist David Stevenson best known for his regular columns in the FT Weekend, Money Week and numerous other global media titles to deliver something different in the financial newsletters segment – simply put it’s a reliable newsletter version of a managed fund.

Our writers actually run money, not just write about it, so they are the right mix of book smarts and street smarts. Truly a team of individuals that make up a formidable pool of knowledge, wherever the investing landscape shifts to.

CONTRIBUTORS

CO-FOUNDER & CFO OF HINDE CAPITAL

CO-FOUNDER & CEO OF HINDE CAPITAL

FUND MANAGER

ISSUE 42 - MAY 2018 3

According to most reports, the global non-alcoholic beverage market size is currently over $1 trillion, and it is growing in an estimated CAGR range of between 6-10% until 2025. Population growth, higher disposable income and changing lifestyles are some of the factors behind this. The general belief is that obesity and health awareness will lead to a larger growth rate in the functional beverage and bottled water sectors, while demand for carbonated products will drop.

Coca-Cola have taken the route of maintaining the taste of its classic sugar version, introducing price rises on standard sizes, rebranding, packaging and marketing smaller sizes, while also trying to convince consumers that they can still drink their favourite tipple and be health aware and drink less. The new small soda cans and bottles are very noticeable in the shopping aisles, but are they hiding the price increases effectively?

We have had diet or lite drinks for decades, mainly formulated with artificial sweeteners, and the road for many manufacturers may well be just that in future, with all of their drinks. Today, the iconic classic Coca-Cola still outsells the non-sugar varieties that trail with a combined 45% of the total.

In this country, Lucozade and Ribena, now owned by the Japanese conglomerate Suntory, decided to reformulate their age-old drinks with two sweeteners, aspartame and acesulfame K, instead of sugar. In the original formula for Lucozade, a 500ml bottle of original had almost 45g of sugar with the orange flavour variety, an enormous 64g, equivalent to 15 teaspoons of sugar. With the new recipe, they have managed to bring this down to under 5g per 100ml, thus avoiding the sugar tax completely. The management have recently been stating that this was done purely “because it’s the right thing”, but the fact they did it very quietly hoping that no one would question the potential taste difference makes an old cynic like me believe it had much more to do with a worry about sales drop off, as their prices would have been forced up.

The increased prices of sugar-sweetened drinks are sure to see sales decline, and whether it is Lucozade, Diet Coke or Volvic flavoured water, there is sure to be a rise in the use of sweeteners by all companies to avoid the new tax levies. As with many tax revenue forecasts, they are usually reliant on unchanged behaviour, and the sugar tax will be no different. Governments will get a lot less money than they thought, and the consumer will either have to stump up for sugar drinks or be forced to accept the artificial sweetened versions. But what of all those concerns about artificial sweeteners over the years; have they all been swept under the table, ruled out as scaremongering? Despite being up to 600 times as sweet as the real thing, they have no caloric content, so they are theoretically better for the health-conscious consumer. But regular research shows that if you consume ‘sweet’ drinks, however sweetened, your body makes preference changes to its cravings. It can’t be a good thing if, by drinking a diet soda, you crave more chocolate or cookies.

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But one of the questions we should be asking is why do we need sweet tasting drinks at all, flavoured by sugar or artificially, especially if the consumer’s palate is changing? The answer, which you may never have come across anywhere, is that the manufacturers have to use sugar or a sugar substitute in order to flavour water and hold that flavour in place, whether after carbonation or just still, to fulfil our one trillion-dollar desire market place. Without one of sugar or a sugar substitute, the flavour, the infusion or the recipe ingredients would just fall through and just the water would remain. Putting a raw cucumber in a glass at home may work briefly, but it is completely non-viable on a commercial scale.

I will leave you with a potential hope for the Holy Grail of solving this global problem. This is the hope that a scientist can come up with a method to make stable alkaline water with a PH > 9, that is not done by electrolysis or ionisation, which is not stable (it returns to PH 7 within minutes of opening), because it is well understood that an alkaline water of that nature and structure would be able to hold the flavour without the need for sugars or sweeteners. As yet, it is still undiscovered, or is it?

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Our original thesis was developed as the advertising giant’s share price had slumped due to:

• A downturn in sentiment as there were serious concerns over global growth

• WPP investors were also worried about an industry-wide account review at the time, leading to fears of extreme pricing pressure

The company quickly extinguished any fears surrounding its future sustainability as the investment community became convinced that the firm was extremely undervalued, especially given its diversified revenues and superior client offering that saw WPP’s share price surge in less than 6 months. Eventually, the stock reached its high in Q1 2017 after which it once again fell into a torrid negative trend. This was triggered by the firm’s lighter than usual guidance that caused industry experts to fret, especially as fears over a downturn in global growth have never really dissipated.

Since February 2017, WPP plc has fallen over 44% in absolute terms and the company seems to once again be the biggest dog across all the large-cap FTSE350 stocks. Over the years, WPP has built an impressive portfolio of companies that are helping to service the world's branding and marketing needs. Unfortunately, the company has come under pressure as there are fears over its earnings potential going forwards due to global pricing

pressure and a general sense that the global markets are overheating. Furthermore, experts believe to some extent that the firm has become too big, and ultimately, this is creating inefficiencies in its operations. The situation is being compounded by Silicon Valley’s greatest successes (Facebook & Google) taking aim at the marketing industry, offering an alternative and some say cheaper option in comparison to the leading and more traditional players, such as WPP. This has been a serious threat to WPP’s business and over the past few years it has muscled its way into the marketing agencies territory, gaining a rapidly growing share and creating serious worries across the firm’s investor base.

Aside from all the worries stated above, WPP investors and employees were stunned in April when it was reported that Sir Martin Sorrell would be investigated for his “personal conduct and misuse of company assets”. This news sent shockwaves throughout the company and the final nail in the coffin came when it was announced that the company's founder would be stepping down immediately. This was the man who created the world’s leading advertising powerhouse out of a wire-basket and trolley company, and was once described as "an odious little shit" by one of the marketing industry’s founding patriarchs (the late David Ogilvy). Sir Martin Sorrell was the merciless captain of this ship and was famed for often playing his own firms against each other in the quest to meet client needs.

INVESTMENT IDEA #1WPP PLC (LSE: WPP)

AALOK SATHE

Our current Buy Recommendation for WPP plc (WPP: LSE) was generated on 24th of April 2018 at 1129p. We originally recommended WPP plc (WPP: LSE) in September 2015 at a price of 1330p when the FTSE100 was trading at 6086. We took a profit in April 2016, during which time the advertising giant had risen 25.79% and 25.70% in absolute and relative terms respectively.

FUND MANAGER ATHINDE CAPITAL

Price (£)Turnover (£mm)Net Income (£mm)Market Cap (£mm)Fwd P/E RatioDividend Yield (%)Payout Ratio (%)Total Debt to Total Equity (%)FCF to Market Cap (%)ROIC (%)

1,129.015,265.41,816.616,752.711.26.90%-69.0%-11.3%

WPP PLC

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Since we last recommended WPP, the company has gone through some serious highs and lows, with its current situation being an extreme low. The exhaustion that we are seeing has been flagged by our proprietary trend indicator (shown below).

Coinciding with the exhaustion patterns that we have been observing, this stock is also trading at the lowest levels that we have seen since 2008/2009 on a long-term RSI basis, which demonstrates how extreme the current lows really are.

WPP is hugging the bottom of its trading range, and having triggered signals on our 18-month RSI indicator, we believe this is significant as it is a rare observation. Clearly, with the company trading at such low levels and offering a forward P/E of 10.94, it is evident that a lot of the negativity is now priced into the firm’s value. How much worse can it get when your commander and chief has left abruptly without having planned for succession?

Despite all the negativity surrounding the firm, it has maintained its earnings and free cash flow generation.

Just to summarise, the firm’s share price has come under attack due to:

• The investigation and abrupt departure of Sir Martin Sorrell

• WPP becoming too big and inefficient• Lingering worries over the global economy• Facebook and Google attacking the marketing arena

Too Big, Too Diversified

Several equity specialists have been concluding that WPP has become too big and should be broken up in order to make it a more efficient enterprise. Over the years, Sorrell grew the company through a series of acquisitions. However, it feels like not all of them have gelled in the manner that may have been expected. Given the upheaval at WPP, we believe there will be several vulture funds looking to approach the company for some of its assets or even looking to break the company up. Industry experts believe that the restructuring at WPP could start with the offloading of Kantar (a market research firm). Asset sales will help the firm to reduce its debt load and become more flexible with its cash allocation, going forward. This will help the advertising giant to become nimbler and ultimately revert higher from its lowly valuations.

Leaving so soon?

It is not surprising that the market did not take the news too well that Sir Martin Sorrell was departing, especially with no apparent heir being groomed. As much as his presence has been a core influence on the firm’s direction, all good stories must come to an end. With revenues falling slightly over the past year, Sorrel has had significant heat on him and his departure may be a chance for the company to freshen up and take cues for a new creative source. Even though Sir Martin built WPP from scratch, no man is bigger than the company. We believe this advertising giant has an experienced group of executives leading the firm. Under the guidance of Roberto Quarta (who has an extensive CV), WPP are taking the right steps (hiring an independent search firm) towards quickly appointing the right candidate to sculpt the firm’s next chapter. Sorrell’s departure was the final piece of bad news, signifying a turning point in the firm’s fortunes. We believe any news going forward ¬ ¬– even no news – will be better than expected and help WPP’s share price to revert higher.

Silicon Valley Gaining a Bad Reputation

The likes of Facebook and Google have been muscling in on the territory that WPP has built over the decades and it has become a serious problem for many, but with Facebook's current reputational problems, we believe that the tide is set to turn in WPP’s favour once again. Clients will seriously think twice about using the likes of

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Facebook after they have been found guilty of misusing the data they collect to coerce client/user behaviour. With fewer individuals trusting platforms, such as Facebook, around there is light at the end of the marketing tunnel, as WPP will have the upper hand as it fights back.

Cheap Valuations

WPP’s market valuation has fallen significantly over the past 12 months. It is important to understand that it has reached a significant support level. Aside from 2008, WPP’s valuation is at one of the lowest levels it has ever reached. With all the negativity priced into the stock’s valuations, this is an unusual opportunity to invest in a leading global company that generates significant free cash flow and who we are expecting to go through significant changes. Relative to the index, WPP is trading at its lowest level in 12 years and was one of the highest ranked opportunities within our quantitative model (below), making it one of the dogs of the FTSE350. Just like an elastic band, if it’s not deformed and you haven't stretched it too much, you will eventually observe a rebound (compression).

This is exactly the situation that we believe WPP finds itself in and ultimately believe the stock will revert higher to its natural mean. Analysts Corner

WPP is an industry moving giant within the branding and marketing industry. It has a global presence and is widely followed by the research community. The company is attributed with an average target price (TP) of 1452p, representing an upside of over 26%.

Summary

WPP is possibly the largest advertising company in the world and is going through significant changes, trading at a significant discount and ultimately offering a rare investment opportunity. The company has been on the rocks over the past 12 months as revenues have slightly dipped, but more significant has been the news that its founder was initially being investigated and then stepping down. Many felt that this left the company high and dry; however, we believe this presents an inflection point and a serious shake-up within the company will help it to revert higher. Revenues and earnings will pick up, leaving the firm at a much higher level going forward. With several corporate actions expected, we believe these will help to drive out the inefficiencies within the agency and create a more streamlined business. Currently being led by Roberto Quarta, WPP will install the right leader to help drive the firm’s next chapter.

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A few years ago, for our write-up of Admiral Insurance, we looked extensively into the company, including their earnings and the general business of repeating insurance premiums. We discovered that Admiral, like most insurance companies, relies on the ‘too busy’ to check consumer who will accept the new or unchanged premium quote by doing nothing, and the direct debit just gets collected. By not challenging or comparing, the customer invariably ends up paying significantly more. In fact, we believe that anyone who actually made a call to Admiral to say that they would be reviewing their policy would immediately be shown up to 20% more favourable terms, which with

some haggling could reach 30%. It would appear that most companies will bend over backwards to avoid losing customers and have substantial more wiggle room in their prices for ‘doing’ business than most would imagine.

The term ‘buyer’s market’ is used to describe a condition where supply equals demand and buyers have the upper hand in negotiating price. Most people’s experience of a market place is the property market, but unfortunately, for the last two decades in the UK’s housing market, it has been the opposite – a ‘seller’s mark et’ where the buyer has had little power at all. In recent months, especially in London, there are signs that it may be changing.

INVESTMENT INSIGHTS

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While not wanting to appear as the cynical old ranter of Victor Meldrew’s (above) ilk, I have found that understanding this ‘margin flexibility’ to not lose customers at all cost has paid substantial dividends, both in professional and personal business dealings.

In recent years, we negotiated 30% in our worldwide fund audit with KPMG and a 25% reduction in our legal fees with reasonable ease.

Last month, a friend of mine called me, asking for advice on how to sell some old gold jewellery left by a relative. I advised him that he should visit http://www.sellgoldcomparison.co.uk and find the service that looked best for him. The process with most of these companies is to get you to sign up. They send a stamped addressed envelope which covers insurance and you send the gold to them. They will then call you within 24-48 hours to tell you how much gold you have sent (obviously, you should have a good idea yourself) and the ‘best’ price they can pay. If you don’t accept their price, they will return your gold free of charge.

My friend texted me to say they had received the gold, it was 20 grams worth and they were able to pay him £500, was that good? Well, that depends on the price of gold.Gold is typically priced in US dollars per ounce, so a quick look at any of the gold price web pages, www.kitco.com or www.goldprice.org, told me that gold was currently $1320/troy ounce.

According to the FX currency rates, GBP/USD was 1.4045 and there are 31.1035 grams to the troy ounce. So, 1320/1.4045= £939.83/ounce, then 939.83/31.1035 = £30.216/per gram.

And as there was 20 grams of actual gold from the jewellery, 20x £30.216 = £604.32 would be the exact spot price. So, the offer of only £500 was assuming a 20% fee to be charged. Of course, these companies are in the business of making a living but 20% is pretty steep. I told him to call them back and go through the workings above that I texted him, and suggest to them that he would look elsewhere. He duly did that and low and behold, they immediately offered him £550, so their fee had quickly dropped to 10%, much more reasonable. And he accepted it.

It is also worth understanding, in the same vein of customer retention, the potential ‘credit’ or ‘rebate’ you may be able to obtain if you feel that the service you have received has been below par. Utility suppliers are an excellent example. They are constantly concerned about their complaint league tables, so any consumer claim of poor service, such as a lack of timely statements, no call

back or lengthy wait times, is so often ‘rewarded’ with a bill credit. It is really extraordinary to what lengths companies will go to not lose customers.

I hope these insights and anecdotes are not too much of a deviation from the usual ‘Investment Insights’ section, but in light of the relatively quiet financial markets, I felt its inclusion was justified, editor’s privilege and all that. But in terms of being able to make investments in the first place, it is normally out of your hard-earned savings, and there’s no better way to start than by not overpaying or under receiving. Haggling and complaining, while knowing your product’s worth, is certainly not too much trouble if you can get up to 30% more. Whether, it is never accepting the first offer when your car has been written off, selling gold online or asking suppliers for a better price, take control and don’t be meek and too English again. And naturally, invest all your ‘winnings’ according to the HindeSight dividend recommendations!

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UK MARKET VALUATIONS

PORTFOLIO UPDATE - WHAT HAPPENED?MARKET & SECTOR ANALYSIS

UK INDICES PRICE/EARNINGS RATIO PRICE/BOOK RATIO DIVIDEND YIELD(%)

FTSE 100 INDEXFTSE 250 INDEX

13.4621.43

1.812.05

4.32%3.13%

The proprietary indicator used at Hinde Capital called the Trend Index has been very successful over the years. One of its functions is to highlight significant points of trend exhaustion, up or down (and with that turning point). This year alone we have had two exhaustion signals when the index fell rapidly in the first quarter this year.

With the FTSE100 rallying over 14% since the 23rd of March 2018, our model is now suggesting that this particular up trend is becoming exhausted. It is important to observe the UK markets movements, as the probability of a reaction to this trend has risen significantly and you could very well experience a consolidation.

Coupled with the old saying, ‘Sell in May and go away’, it might be considered wise to lighten up on UK equity positions at this time.

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HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (MAY 2018)PORTFOLIO UPDATE AND CONSTRUCTION

ITV PLC On the 12th APRIL 2018,

ITV plc paid a dividend of 5.28p.

MERLIN ENTERTAINMENT PLC On the 12th APRIL 2018,

Merlin Entertainment plc paid a dividend of 5p.

GALXOSMITHKLINE PLC On the 10th May 2018,

GlaxoSmithKline plc paid a dividend of 19p. PO

RTFO

LIO

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PDAT

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We passionately believe that dividends really,really matter. William Thorndike in his fascinating book

'The Outsiders- Eight Unconventional CEOs and Their Radically RationalBlueprint for Success' examined one of the most impor tant aspects of running a business a CEO must undertake: Capital Allocation. He summarised how a CEO deploys capitalin 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 let ter

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 untilwe create a portfolio of 25 UK dividend stocks. This will be the HindeSight UK Dividend Portfolio #1

• You wiII bealerted 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

• Theentry points willthen be recorded in the next month ly in the HindeSight UK Dividend Portfolio section and the stock(s) wr itten 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, (HDVMdl), a proprietary stock-rating system

• In the section on ETPs we will highlight our invest ment philosophy and the investment process behind our stock selections. This is the b*is of our dynamic risk and money management in our portfolio con struction for you. You can also read the stand-alone Hinde Dividend Value Strategy document to see the methodology behind our stock selection.

APPENDIX I

THE WAY WE THINK

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“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.

APPENDIX II

HOW WE THINK

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The basic premise of the strategy is to accelerate returns by selecting relatively high yielding stocks that 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 cash flow 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, Cash flow 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.

16 HINDESIGHT Dividend UK Letter

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 dealing, 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 all 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

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 30-702. 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.

EXTERNAL ANALYST SCORE (EAS)