What have a retailer, a bank and a tobacco company got in common?

They have all outperformed the Magnificent Seven over the last three years.  If you asked most investors which stocks have stood out over that period, most would turn first to the technology giants. These stocks have dominated markets and sentiment, led by a boom in Artificial Intelligence, meaning other more traditional businesses often get overlooked.

In the UK, there are stocks that have outpaced the Magnificent Seven, especially in the last three years when interest rates have increased.  What’s interesting is that they aren’t UK technology stocks.  They are more traditional businesses, but the scale of outperformance has been significant and surprising.  For example, Private Equity investor 3i has produced 180% total return since 31 December 2021, driven by the success of its European discount retailer Action.  This compares to a mere 42.5% from the Magnificent Seven.

While one can point to 3i benefitting from the popularity and fast growth of Action as the driver of its strong returns, the likes of NatWest and Imperial Brands have managed a total return 111% and 98% respectively without strong underlying growth.  Although NatWest has benefitted from the change in the interest rate environment and Imperial Brands has delivered modest profit growth by stemming market share losses there is another factor at play that is vital for investors and especially Henderson High Income – the significant cash returned to shareholders.

Notably, a proportion of returns drawn from the businesses came from dividend payments, which have grown over the last three years.  These have been supplemented by share buybacks at low valuations. Management teams have recognised their businesses are undervalued and used excess cashflow to buy back their own shares at attractive prices.

All this combined has compounded a very attractive total return proposition for investors over the last 3 years.  What’s more interesting is that despite the strong total returns both Imperial Brands and NatWest still trade on low valuations – less than 10x price-to-earnings.

Similarly, other companies held in Henderson High Income are also returning cash to shareholders through dividends and share buybacks e.g. HSBC, Shell and contract caterer Compass Group.  Despite all three companies not being tech businesses, they have still produced a significant total return over the last three years ahead of the Magnificent Seven.

While the UK equity market gets overlooked due to its lack of exciting tech businesses in hot areas such as AI, one shouldn’t ignore it given the potential for strong performance among more traditional businesses.

 

 

Glossary

Dividend

A variable discretionary payment made by a company to its shareholders.

Magnificent Seven

Seven stocks that have led US and global market gains since 2020: Alphabet (GOOGL; GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA).

Outperform

To deliver a return greater than that of a company’s assigned benchmark. Also often called excess return.

Share buybacks

Where a company buys back their own shares from the market, thereby reducing the number of shares in circulation, with a consequent increase in the value of each remaining share. It increases the stake that existing shareholders have in the company, including the amount due from any future dividend payments. It typically signals the company’s optimism about the future and a possible undervaluation of the company’s equity.

 

Disclaimer

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

There is no guarantee that past trends will continue, or forecasts will be realised.

Past performance does not predict future returns.

Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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