Buy, hold or sell: Hugh Yarrow


Yarrow initiated his position in business-to-business (B2B) media publisher and events firm Informa in the second half of 2014 and the company now accounts for around 2% of the total portfolio, placing it firmly in the fund's top 20. He added to his holding in the FTSE 250 company in May, following a price dip that saw shares fall from a peak of 600p on 10 April to a trough of 545p on 6 May - an opportunity he is pleased not to have missed.

"Informa has three very strong B2B media brands and its cash flow valuation and dividend growth potential look very attractive. Its main business and academic publisher Taylor & Francis has a 98% renewal rate on subscriptions to its medical journals, while its events arm is the largest publicly owned organiser of exhibitions, events and training in the world," says Yarrow.

However, the firm's business intelligence division - which provides market research and data services - is a weak point. According to Yarrow, this side of the business simply hasn't been growing and annual subscription renewals are dwindling at around 75%.

A new management team has recently been drafted in with the task of turning this division around within three years, and Yarrow believes the seeds of transformation have been sown.

He remains positive on the stock: "Informa is very cash-generative. The dividend is 3.6% and that's more than twice covered by free cash flow, so there is a nice safety buffer there; the dividend growth is currently low single digits, but once it gets through its three-year investment programme the potential for growth looks very good," claims Yarrow.


Global alcoholic beverage manufacturer Diageo has featured within Evenlode Income's top 10 holdings since the fund launched in October 2009 and is currently its second largest holding, accounting for around 6% of total assets. But despite being a popular blue-chip income stock – it is currently yielding around 3.1% – Diageo's shares have suffered a little of late, as the company's performance in key emerging markets including China and Nigeria has disappointed.

"Diageo is an interesting one, as it's often name-checked as a bond proxy - meaning it is believed to have benefited from falling bond yields over the past few years. However, it has actually under-performed the FTSE All-Share index by more than 30% in the last two and half years," says Yarrow.

However, the manager still favours the company, as over the long term he believes Diageo still has "very good potential" due to its dominance over the US and European markets as well as in emerging markets.

Moreover, the stock remains a solid income choice: "Diageo is on a good dividend yield and I think the potential for long-term growth backed by a good level of free cash flow is very good. Diageo has grown its dividend by 7% a year over the last five years, and there is no reason that can't continue," says Yarrow.


Another firm favourite at launch, consumer goods conglomerate Reckitt Benckiser has fallen largely out of Yarrow's good books, and as a consequence the stock holding is being reduced; it accounted for around 6% of the fund at launch, but occupies less than 3% today.

Yarrow has no complaints about the business itself, observing the Reckitt Benckiser has a "very good management team and a much-admired chief executive (Rakesh Kapoor)," combined with good growth opportunities in emerging markets. However, the fact is that the stock has become a little expensive for his tastes.

"Reckitt is a great business - it has a fantastic portfolio of health and hygiene and homecare brands and, like Diageo, there's lots of potential for long-term growth. But, unlike Diageo, it has had a great time in terms of underlying performance over the past two years and so the valuation has shot up," he says.

When he initially purchased shares in Reckitt Benckiser, they were paying a yield of around 4%; however, as those shares have risen in price its dividend has fallen to around 2%, and this makes it an unattractive holding for Yarrow.

"The future return potential is still attractive, but it's not as attractive as it was in terms of the cash flows you are going to get out of the business if you buy at the current level. It simply doesn't look as attractive as it did a year ago," says Yarrow.

This feature was published in our sister publication Money Observer