RBC buyout

On Thursday, Brewin Dolphin said it had agreed to a £1.6bn takeover by RBC Wealth Management (Jersey) Holdings Limited, a subsidiary of the Royal Bank of Canada. Under the deal, shareholders will get 515p per share. The takeover is still subject to shareholder approval and receipt of regulatory backing, but is likely to go through.

If the deal is accepted, the price shareholders will receive is a 62% premium to the company’s closing price of 318p on Wednesday. As a result, the FTSE 250 share jumped massively on Thursday morning as news of the proposed deal broke.

As I write, the stock sits at 510p per share, which is only a 5p discount on the figure shareholders will receive if the deal goes through.

RBC has said that it is strategically focused on evaluating and acquiring growth opportunities in the wealth management sector. This is especially true in its core markets of Canada, the US, and Europe.

RBC executive Doug Guzman stated that “the UK is a key growth market for RBC and Brewin Dolphin provides us with an exceptional platform to significantly transform our wealth management business in the region.” He added that Brewin was also a “market leader” in Canada and is growing in the US.

Why Brewin Dolphin?

Brewin Dolphin, founded in 1762, has become one of the largest wealth managers in the UK. It currently has some £55bn in assets, meaning RBC values the company at 2.8% of the assets under management.

In recent months, geopolitical tensions, notably Russia’s invasion of Ukraine, have hit the Brewin share price. On Wednesday evening, the stock was trading at a 13% discount compared to three months previous and was 17% down over the last six months.

The company said at the end of February that assets under management declined to £55bn due to market performance. As of December 31, assets under management had stood at £59bn, representing 3.7% growth over the previous three months.

The wealth manager had been offering a relatively appealing 3% dividend yield.

Will the deal go through?

Brewin’s directors have already urged shareholders to accept the deal and at a 62% premium, you can see why. “Building on the strong organic growth that we have achieved to date, the combined business will create an attractive platform for future growth,” Brewin Dolphin chief executive Robin Beer said on Thursday.

Personally, the RBC proposal was good news for me. I sold my shares in Brewin Dolphin on Thursday morning at the inflated price, deciding not to wait for the RBC offer to go through. I thought I could better use the funds right now and in other places.

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The reason for the Brewin Dolphin spike is straightforward enough. On the day, the investment manager announced it has agreed a takeover.

RBC Wealth Management (Jersey) Holdings Limited made an offer of 515p per share to acquire the whole company, and the Brewin Dolphin board has recommended it. That’s 62% above Wednesday’s closing price, and values the company at approximately £1.6bn.

It’s perhaps too late to for investors to benefit now, but I do think we can still gain indirectly from what’s happened. I have had my eye on the investment management business for a while now, thinking that some of the top companies are undervalued.

The Brewin Dolphin sale helps reinforce my take on the sector, and it might just spur me into action. It’s also a reminder that a takeover at a handsome premium is one way that the value of a cheap stock can find its way out and reward patient investors.

Another FTSE 250 winner

Shares in Trainline (LSE: TRN) jumped 21% Thursday morning, the second biggest FTSE 250 winner by the time of writing.

That’s welcome news for Trainline shareholders, who have seen the value of their stock plunge. Even after Thursday’s rise, it’s still down 48% over the past 12 months. So what’s happened?

Trainline and others have been in negotiations with the Rail Delivery Group, under pressure to lower commission rates. On Thursday, the company revealed it has agreed a cut that, combined with a fall in costs, will result in a 0.25% reduction.

That’s effectively only a backstop. If the ticketing companies cannot agree contractual terms, it will come into force. So it effectively caps commission rate reductions, and eliminates some troubling uncertainty facing the company.

The regulated nature of the business has kept me away. But one upside is that it often results in a more predictable outlook for a company’s business. I need to investigate further.

Another investment manager

The third FTSE 250 stock to climb by double digits Thursday morning is Rathbone Brothers (LSE: RAT), up 12%. Rathbone provides “individual investment and wealth management services for private clients, charities, trustees and professional partners“. So it’s another investment manager, just like Brewin Dolphin.

It seems others have an eye on this sector too.

The Rathbone share price has been flat over the past 12 months. And it’s down 18% over five years, so am I looking at good value here? I think I might be.

Rathbone’s earnings have been solid for the past few years. And it’s been lifting its progressive dividend. For 2021, it yielded a well-covered 4.1%.

On 2021 earnings, the shares are on a price-to-earnings multiple of a little over 11, which seems cheap to me at first look. But I need to do some more research before I consider buying this FTSE 250 stock. And future economic pressures could hurt the investment business. Still, it’s on my radar now.

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Buying dividend stocks can be a great way to grow income, but it isn’t a strategy suitable for all investors. It’s certainly not as safe as putting money in a savings account.

However, I’m comfortable with the level of risk involved with buying dividend stocks. So here are three companies I’d buy for my income portfolio.

Dividend stocks to buy

The first on my list is asset manager Brewin Dolphin (LSE: BRW). The corporation is benefiting from rising stock markets and increased customer numbers. The group reported a near-11% increase in funds under management to £52.6bn in its latest trading update.

I think this growth could support substantial profit expansion for the year, underpinning the firm’s dividend. At the time of writing, the stock supports a dividend yield of 4%. That said, we all know stock markets can rise as well as fall.

Brewin Dolphin may have benefited from rising markets recently, but assets under management could fall if markets change direction. Ultimately, this would reduce profitability and may even force the company to cut its shareholder distributions.

Despite this danger, I’d buy the business for my portfolio of dividend stocks today.

Cleaning up

I’d also buy distribution group Bunzl (LSE: BNZL). According to its recent trading update, group revenue in the first quarter was up 5.4% at actual exchange rates, with acquisitions contributing revenue growth of 4.3%.

The organisation has benefited from increased demand for personal protection equipment and cleaning chemicals, which it supplies to companies worldwide.

I think this revenue growth could translate into profit expansion. That, in turn, would help fund Bunzl’s dividend. At the time of writing, the stock supports a yield of 4%.

Bunzl relies heavily on acquisitions to drive growth. This has helped the company in the past, but past performance should never be used as a guide to future potential. If the corporation over expands or borrows too much to fund deals, profits could collapse. That’s something I’ll be keeping an eye on.

Dividend delivery

The final company I’d buy for my portfolio of dividend stocks is Tesco (LSE: TSCO). This retailer currently offers a dividend yield of 4.1%. The distribution is backed up by the supermarket giant’s healthy cash flows.

As food and drink is a defensive industry, I’m confident the company can continue to support the dividend. Consumers will always need to eat and drink, and there’s usually a Tesco nearby to meet this need. I think this implies the business will be around for many decades to come.

Still, the firm can and has made mistakes. For example, it had to cut its dividend several years ago as an accounting scandal wiped out profits.

There’s no guarantee this won’t happen again. Rising costs may also reduce the group’s profit margins. This may limit Tesco’s ability to return cash to investors.

Despite these risks and challenges, I’d buy the company for my portfolio of dividend stocks today.

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The demand for wealth management services across the UK, and indeed around the rest of the world, is only growing as investors and savers wake up to the value wealth managers can add to any investment strategy.

Growth ahead

According to research from PWC, the industry’s penetration rate (managed assets, as a proportion of total assets) will expand from 39.6% in 2016 to 42.1% by 2025.

With this being the case, if Brewin can keep doing what it has been doing for the past five years, I think the stock offers the potential for substantial capital gains in the years ahead.

Over the past five years, Brewin’s net profit has grown at a compound annual rate of 50%, and City analysts expect the company to report earnings growth of 29% in its current financial year and an increase of 10% for 2020.

That puts the stock on a forward P/E of 15, in line with the asset management industry sector average. In addition to the company’s growth potential, shares in the wealth manager currently support a highly attractive dividend yield of 4.7%. Put simply, there’s a lot to like about this investment.

Booming market

I’m also optimistic on the outlook for Wizz Air (LSE: WIZZ). Wizz is one of London’s most successful companies. Net profit has grown at an average of 27% per annum for the past six years and the stock has more than doubled investors’ money over the previous three. 

As the market for low-cost air travel continues to boom, Wizz has the backdrop it needs to maintain its explosive growth rate. To capitalise on customers insatiable demand for cheap air travel, Wizz is planning to nearly triple the size of its fleet and go intercontinental by 2028. The firm has 270 planes on order at the moment with more in the pipeline.

City analysts are expecting Wizz to report earnings growth of 19% this year, followed by an increase of 24% in 2021 as new planes arrive and the company opens up new routes.

A forward P/E of just 13.3 seems to undervalue the company, considering management’s long-term growth plans.

Property growth

Another company that has an excellent growth track record is student accommodation manager Unite (LSE: UTG).

Unite has managed to make the slow and steady business of managing student accommodation exciting. Over the past six years, earnings per share have grown at a compound annual rate of 15%, and book value per share has increased at 17% as Unite has reinvested rental profits back into operations to fund the development of new buildings. Over the same time frame, the company’s dividend to investors has grown tenfold.

Considering this track record, I’m excited to see what the future holds for Unite. Demand for high-quality student accommodation across the UK is only growing, and the firm’s size gives it a key advantage in this booming market.

City analysts seem to be expecting big things as well. They are expecting the company’s full-year 2019 dividend to leap a staggering 31% thanks to growth in rental income. A further increase of 19% is projected for 2020. 

If the company makes good on these projections, I think there’s plenty of potential for capital growth here as income investors rush to take advantage of Unite’s growing distribution. 

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Brewin Dolphin (LSE: BRW), an investment management and financial planning firm, currently offers a dividend yield of 5.3% for the price of 310 pence per share, taking the last total annual dividend of 16.4 pence per share as our reference. That is an attractive yield, but I would like to be confident that the dividend will not likely be cut, that it is sustainable, and that prospects for growth are there.

The company has a clear policy to pay 60-80% of adjusted diluted earnings as dividends. Since 15% or so of revenue is reported as earnings, if revenue is sustainably growing, then dividends can grow. Brewin charges fees on assets under management and advisement, and collects payments for financial planning services. These are the big, ongoing revenue sources.

Since the first quarter of 2017 to the third quarter of 2019 — the most recent of which ended in June — financial planning revenue has grown by an average of 4.8% per period. Assets under discretionary management — by far the largest source of income — have grown by 2.68% per quarter on average, over the same period. More assets mean higher revenues as management fees are charged on a percentage basis and higher earnings.

Clients will be encouraged to hand over more of their money, or at least not withdraw it, as Brewin has done 0.5% better than the benchmark selected to measure its asset management skill against since the first quarter of 2017 until the most recent. This may not seem like much, but it is positive even after clients have had fees deducted, and perhaps clients will be more impressed by the 3.7% outperformance of the FTSE 100 for the same period – that is likely a more familiar benchmark for them, and the outperformance was achieved with less volatility.

The 2019 interim dividend has already been maintained, and the latest quarterly trading update was positive despite tough economic and market conditions. Even though clients are increasingly trusting Brewin for financial planning advice, and seeing their assets managed responsibly, I expect that dividends will be maintained until conditions improve. The company did this during the financial crisis towards the end of the last decade and maintenance is more palatable to investors than a cut. A 5.3% yield is still attractive, and bear in mind even a 25% cut in the dividend would still deliver a 4% yield, which is not bad at all.

I would be happy with a maintained dividend, as the track record gives me confidence that can be grown when conditions improve. A company insider bought 33,118 shares of the stock in late August 2019; perhaps they share my confidence?

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Sanne, after years of earnings rises, looks like turning into a cash-cow dividend stock. With annual payments progressing way above inflation, we’re looking at a forecast 2.8% yield for this year, growing to 3.4% by 2020. Twice-covered by forecast earnings, I think it could be the start of a sustained dividend run.

Those yields, however, are based on the share price as I write on Wednesday, and it’s down a whopping 12% on the day so far. What’s gone wrong?

Trading update

Ahead of full-year results, the company told us it “has seen strong performance in 2018.” Business is weighted towards the second half, and is in line with the board’s expectations.

And that second half brought in record new business, which represents around £13m in additional annualised revenue. Global growth is exceeding expectations, operating margins are improving, and the company sees strong momentum going into 2019.

No problems there

But in other news, chief executive officer Dean Godwin is to retire and will be succeeded by ex-chief commercial officer Martin Schnaier. Mr Goodwin is credited with the company’s rapid success since flotation in 2015, and there may be doubts now over its continued expansion. But Mr Schnaier has played a key part in it too, and I think the company will still be in excellent hands.

With earnings growth forecasts looking strong, I’m seeing a buy here.

Another specialist

Brewin Dolphin Holdings (LSE: BRW) is another I see as being a bit of a services specialist, being one of only a relatively small number of publicly listed stockbrokers and investment managers.

It’s also become a steady income provider through inflation-beating dividend rises — though it has had longer than Sanne, tracing its history as far back as 1762.

Dividend yields are currently forecast at 5.5% for the year to June 2019 and 6.1% the year after, as the firm’s long history of annual earnings rises looks set to continue. Cover of around 1.3 times seems adequate for a company in this sector. And P/E multiples of 14 this year, dropping to 12.5 next, do not look stretching.

First quarter

In a Q1 update the firm spoke of “lower market levels and ongoing macro-economic uncertainty,” which is nothing we didn’t know, but did add that “net discretionary inflows have remained strong and ahead of our 5% target.” Intermediary client activity has, however, slowed due to market uncertainty, and that’s perhaps not a surprise.

During the period, Brewin Dolphin saw total funds fall by 7.7% to £39.5bn, with discretionary funds down by 7.2% to £34.9bn. That might not look great on the face of it, but over a traumatic time when the FTSE 100 lost 10.4% of its value, I’d rate it as a pretty decent performance.

Underpriced

Total income fell a little, by 1.6% to £77.7m, but again I’m not concerned about that in the current investment climate.

Uncertainty and fear has led to the Brewin Dolphin share price losing 20% over 12 months. But when markets are down and investors are running scared, I think that’s exactly the right time to be buying into depressed shares like this.

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Trouble Brewin?

This kind of mismatch is familiar to regular readers of company reports, as management and markets have very different ideas of what constitutes successful. Luckily in this sector, there’s one good benchmark in the advisor sector, investment platform Hargreaves Lansdown (LSE: HL), which has been setting the pace for years.

FTSE 250-listed Brewin Dolphin produced some positive figures today, including a 10.7% jump in pre-tax profits to £77.5m, slightly better than expected. Total funds under management grew 6.7% to £42.8bn, although analysts had hoped for £43.1bn.

Discretionary funds under management rose 11.2% to £37.6bn, helped by strong gross inflows of £3.2bn, and stable outflows of £1.3bn.

Strong stuff

Basic earnings per share jumped 18% to 19.5p, while Brewin hiked its full-year dividend by 9.3% to 16.4p a share. Nicol said the results proved the continued value of its personalised advice-led model, which was driving “strong earnings and dividend growth.”

The market response looks a little harsh and may reflect wider uncertainties amid Brexit and global growth fears. However, this could work in the group’s favour by driving demand for personalised advice. Perhaps it reflects a valuation of 15.3 times earnings, which is hardly bargain territory, despite a 10% share price dip in the past six months.

Its stock is up a modest 20% over five years, so maybe investors are generally wary. Yet earnings growth is steady, and the stock now yields a wealth-generating 4.9%, with cover of 1.3. Tempting.

Big juicy bagger

Brewin Dolphin is betting that demand for its high-margin wealth management services will remain robust. In contrast, Hargreaves Lansdown has made a hugely successful play for the DIY investor market, where its online platform is the biggest hitter. Investors have reaped the benefit, with the stock up 60% in the last two years, while over 10 years, it’s a 12-bagger, its share price rising from 165p to 1948p over that time.

As ever, the big question is whether it can continue to grow at the same breakneck pace. Actually, that’s easy to answer. FTSE 100 companies simply can’t do it purely due to their scale, as Hargreaves now has a hefty market capitalisation of £9.25bn.

Keep going

My worry is that it’s still priced for rapid growth, trading at 37.9 times forecast earnings. On the other hand, it has continued to deliver, with net customer inflows of £7.6bn in the year to 30 June, up an impressive 10%. City analysts are forecasting 13% earnings per share growth in the year to next June, so it might deliver again. It also enjoys high profit margins, currently 65.3%.

Further stock market volatility would be a blow, especially if this scares away mass market private investors. However, October’s travails left the stock trading 15% below its year-high of 2280p, so today might even be a buying opportunity. Hargreaves cannot keep rising forever, but I’ve said that before, and it proved me wrong then.

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Tempting growth

Brewin Dolphin (LSE: BRW), the FTSE 250 investment management company, seems attractive to me because of its tempting outlook on earnings growth.

Amid a changing market landscape, the company is leveraging its current strengths to take advantage of shifting in client needs. It has positioned itself in a strong position to take advantage of the fast growing intermediaries-led channel and has continued to attract steady fund inflows, which is translating into healthy earnings growth and further growth opportunities.

Brewin Dolphin is also continuing to move away from traditional stockbroking towards higher-margin wealth management services, a market where it is seeing robust double-digit revenue growth. Against an uncertain macroeconomic backdrop, its expanding advice-led proposition has enduring relevance for customers in uncertain and complex times.

Undemanding valuations

With the company well placed to invest and innovate for further growth opportunities, valuations seem undemanding. Although the stock trades at 17.1 times its adjusted earnings last year, City analysts are predicting underlying earnings growth of 8% this year, with an acceleration to 12% for 2019. As such, its forward P/E is a more modest 15.7 on this year’s expected earnings, and is set to fall further to just 14 by 2019.

Dividends per share are also forecast to grow impressively, from 15p last year, to 16.6p this year and to 18,3p by 2019, representing annualised dividend growth of more than 12%. This means its yield is set to rise from 4.4% currently, to just over 5.3% within two years.

Favourable fundamentals

Elsewhere, Tritax Big Box REIT (LSE: BBOX), the landlord and developer of large-scale logistics facilities, also offers enticing dividend growth.

Favourable market fundamentals, particularly the shift towards e-commerce and tight supply of suitable properties, means management is confident about delivering continued growth in rental income and property values in 2018. The company also has an attractive short cycle pipeline of new pre-let developments, adding to its outlook of value creation.

Resilient sector

In 2017, the company achieved growth in net asset value (NAV) per share of 10.3% to 142.2p, demonstrating the resilience of the warehousing sector amid a slowdown in the wider property market.

Looking ahead, it isn’t too concerned about Brexit either, as it reckons increased border controls would mean its customers would require more warehousing domestically, further increasing demand for the type of property which the company invests in.

Shares in the REIT are fairly valued, with its share price in line with its NAV, down from a 12% premium a year ago. Tritax Big Box REIT also offers a tempting prospective dividend yield of 4.7%, up from 3.6% last year.

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But dividends are what drew me to Tarsus, with their progressive nature. Yields are around 3.5%, a bit ahead of the FTSE 100 average, but the annual cash has grown from 6.8p in 2012 to 9.1p in 2016 — a 34% rise in four years, and way ahead of inflation.

Forecast hikes would take it to 10.3p by 2018. And if you’d bought Tarsus shares at the start of 2012, the forecast 2018 dividend would yield an effective 7.4% on your purchase price — and that’s what progressive dividends are all about.

In a trading update Thursday, Tarsus told us its busier second half was doing well, with strong performances at major events and buyers up 7%. Like-for-like bookings for the full year are up 8%, “promising another strong year.” And with the Dubai Airshow still to come, I can see full-year figures being in line with current forecasts.

Lumpy

That would suggest a 75% rise in earnings per share (EPS), which would drop the P/E multiple to under 11, which I think is pretty undemanding — but I do see a clear reason for the low valuation.

The thing is, the nature of Tarsus’s business, relying heavily on large trade shows and major exhibitions, means its profits are erratic. We’ve seen up years alternating with down years, and the same looks set to come — 2018 should see EPS dropping by 32%.

But the long-term earnings trend is steadily upwards, and those very well-covered dividends make me think the current share price is well worth paying.

Investment cash

Another progressive dividend stock I like is Brewin Dolphin Holdings (LSE: BRW), whose payment hikes have been easily beating inflation. Between 2012 and 2016, the dividend was raised from 7.15p to 13p, for an 80% uplift — and City analysts have rises to 16.2p pencilled in by 2018.

Cover by earnings has admittedly dropped in that period, with a figure of around 1.3 times on the cards for 2018, but that doesn’t unduly worry me at this stage.

At Q3 time, the investment manager told us that total funds had risen in the quarter by 3.7%, to £39.2bn. It also enjoyed record income of £77.3m (up 8.4% on the same period last year), with fee income up 16% to £55m, though commission income fell 11% to £16.7m.

Brewin Dolphin acquired Duncan Lawrie Asset Management in May, and chief executive David Nicol reckons the integration is going well. Mr Nicol also spoke of “delivering against our long-term growth strategy,” saying that “confidence in the future is underpinned by our robust financial position.“

What value?

On the fundamental valuation front, a forward P/E of 18.5 (against a predicted EPS rise of 8%) might look a bit high to some, but further growth of 15% indicated for 2018 would drop that to around 16.

Some may also fear that the firm’s recent strong performance has been on the back of the weakness of sterling which has added apparent strength to the stock market (that is essentially valued in US dollars), but I see more than that.

Brewin Dolphin looks to me like a very well managed company with a long-term view, and companies of that nature deserve to command an above-average valuation.

At 353p, I see the shares as a good long-term income prospect.

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Iron BRW

Wealth manager Brewin Dolphin Holdings (LSE: BRW) has struck it rich for investors lately, with its share price up 43% in the last 12 months. Performance looks just as impressive over five years, with a return of nearly 150%. They say a rising stock market floats all boats, and this is especially the case for financial stocks. These are impressive figures, whatever they say.

The question now is whether you should put money into a wealth manager just as the world seems to be convincing itself the stock market is going to crash. Don’t let that scare you away. People have been fretting over a crash every single day of this tremendous eight-year bull run.

Day of the dolphin

Brewin Dolphin’s growth figures are impressive, with total funds up 6.8% in the year to 31 March 2017 to £37.8bn and discretionary funds rising 9.4% year-on-year to £31.5bn. Basic earnings per share (EPS) increased by 13.1% to 9.5p while the interim first-half dividend of 4.25p per share rose 10.4%.

Growth prospects look promising, with City analysts forecasting a 15% rise in EPS in 2018, when the yield should hit 4.6%. Forecast operating margins of 22.3% also tempt but naturally there is a price to pay for all of this. It currently trades at a forecast valuation of 18.3 times earnings, and a forecast price-to-earnings growth ratio (PEG) of 2.5. That reflects its healthy growth prospects, provided you understand that at today’s price you are vulnerable if markets crash.

Silver screen

Cineworld Group (LSE: CINE) has been even more compelling viewing in recent years, its share price up 25% in 12 months, and a blockbusting 252% over five years. However, like Brewin Dolphin, it is also looking expensive at a forecast valuation of 18.3 times earnings, while its PEG ratio stands at 2.2. Is it worth the price of admission?

The global movie screen operator relies on a steady stream of audience-grabbing blockbuster movies to drive its profits and recent Hollywood output hasn’t disappointed. From 1 January to 11 May highest grossing films included Beauty and the Beast, La La Land, Sing, Guardians of the Galaxy Vol. 2, The Fate of the Furious and The Lego Batman Movie. These drove revenues up 15.8% with “particularly good performances” in the UK, Israel, Romania and Slovakia.

Cinephile

New screen openings and an ongoing refurbishment programme have also helped attract audiences, while new Starbucks outlets and VIP sites have driven retail revenues. Higher movie admissions also means higher advertising revenues.

Cineworld has posted double-digit EPS growth for each of the three years to 2016 and although this looks set to slow, few would turn up their noses at forecast 8% growth in 2017 and 9% growth next year. People still love a night at the movies. Yes, the stock is a little expensive, but this is a company that has driven revenues from £351m in 2012 to a forecast £951m in 2018, with few hiccups along the way. It also offers a forecast yield of 3%, covered 1.8 times. I’ll have some popcorn with that.

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