That old-time service

Hours-long queues for petrol focuses the mind on the importance of businesses that have been dismissed as ‘old-economy’. Rathbone Income Fund co-manager Carl Stick explains why he’s been adding to a few of them this year.

30 September 2021

I live in a village not far from the beaten track, yet a fair way back in time.

Take our small local petrol station: it’s one that has red diesel on one of the pumps and the attendants still come out to fill your tank for you. That old-school service is on hiatus at the moment, but for a different reason than you might think. The owners have closed the station, but they still have fuel for locals in need who call ahead. They just have to give the station a discreet call. They are some long-sighted businesspeople.

The petrol shortage makes it seem like the whole country has travelled back in time to the bad old days of the 1970s. Supply chains are squeezed. Here in the UK, HGV drivers are a principal choke point, creating shortages at the pumps all over the UK. Ikea is short of mattresses and JD Wetherspoon is running out of beer – even toast is off its breakfast menu. European power and carbon prices are surging to record highs as costs rise on the back of global energy demand and a supply crunch in the gas market. There is even a global shortage of the vials that health services, including our NHS, use for blood tests.

Employment markets have major fractures right now, especially in the UK and the US. These will be reset, but it will take time. In the UK, job vacancies have shot past 1 million for the first time ever, with a quarter of that supply coming in August alone. Firms are desperate to hire. But the supply of workers is low, with unemployment at 4.6%. Is this a basic supply/demand imbalance, or a mismatch in skills, or in expectations? We don’t know, but we are seeing the impact of this, particularly in the leisure sector, in logistics and in healthcare. Tesco is offering £1,000 in signing-on bonuses to lorry drivers – the supermarkets don’t like empty shelves; Costa Coffee is giving staff a 5% pay rise as it looks to recruit 2,000 workers; Wagamama is struggling to recruit chefs. The National Farmers’ Union is reporting “anxiety off the scale”, as a lack of seasonal workers risks leaving crops unharvested and rotting in the fields. The pattern is being repeated in the US, where labour market shortages seem to be getting worse, and job openings are increasing (even if August data are notoriously unreliable and volatile). 

I’m not meaning to scaremonger, it’s just important to take note of this accumulation of signals and to accept that they may take a while to wash through. For the past 18 months, investors have focused on inflation and whether it would prove ‘transitory’ – and exactly how long that may be – or whether it will bed in. For most investors, the point of this inflation calculus was to decide if they should rotate into ‘value’ stocks that would benefit from higher inflation and the higher GDP growth that is assumed to accompany it. I think this debate has grown beyond simply inflation, expanding into something altogether more complex. There are big changes happening both at home and abroad that will have far-reaching and unforeseeable consequences. 

Searching away from the zeitgeist

The argument for UK Equity Income is strengthening despite the travails that we have detailed. We’ve added to well-run dividend-paying companies in oils, financials, housebuilders and industrials, areas that are perhaps ‘not of today’. They are far from the ‘growth’ and IT/WFH-focused zeitgeist that has held sway for a long while. However, the sort of panic that can spark three-hour queues for fuel goes some way to showing just how important these old economy businesses are to our societies.

We are all coming to terms with new realities, trying to work out what the world will be like once the pandemic is behind us, not just in the limited focus of financial markets, but for our everyday lives as well. Meanwhile, the political pendulums of many countries are swinging back toward protectionist, nationalistic ideas. Arguably, these decisions have already begun to affect labour markets and supply chains around the world.

Such a maelstrom of change is just another reminder that we need to focus on individual companies, the area where we believe we can make a difference. All of the difficulties we’ve mentioned affect businesses differently and different businesses have varying abilities, assets and skills to adapt and thrive. Simply buying a bunch of ‘value’ companies – or ‘growth’ companies whose prices are many, many times their earnings – could lead you to come a cropper, in my opinion. We have been deeply investigating our companies to assess how well they should be able to take advantage of the current environment, and whether they are vulnerable to staff shortages, supply shocks or rising costs of labour, raw materials and components. These opportunities and weaknesses are not divided evenly across any ‘growth’ and ‘value’ investment style.

Meanwhile, fully 85% of high yield US debt trades at negative real yields. To get a real return, investors in US corporate debt need to venture into the murky depths of weak single-B credit or below. That’s a lot of risk for not much return. There is a lot of money being staked on the expectation that central banks will continue to do whatever it takes, which means baulking at the first sign of market weakness. 

Yes, there are risks to investing in dividend-paying UK stocks, but we believe they are worth taking, especially given the discount they trade at. At the end of September, our fund had an estimated trailing yield of 4.2%, and we expect a healthy further rise this year on the back of the strong resurgence in dividends from UK Plc. This income return, and the potential compounding effect of these dividends being reinvested back into the fund, alongside the disparity in value at a time when assets are generally overpriced, are arguments that we find convincing.