May 19, 2013 4:28 am

Pimco shuns ‘grim’ high yield sectors

Investors should avoid US shares offering high levels of dividend income because valuations have reached risky levels, says Pimco’s equity income team.

Raji Manasseh, senior vice-president for dividend strategies at the California-based investment giant, says the team fears the prospects for many high-yielding sectors are grim.

“Financial repression has driven a thirst for yield,” Mr Manasseh says. “Clients have funnelled into a narrow range of dividend stocks and raised values to historic highs.”

The team has responded by selling down US high-income shares on its Pimco EqS Dividend global equity strategy, focusing on the telecoms, utilities and real estate investment trusts (Reits) sectors. The strategy, which is available through US and Dublin-based funds, was launched in December 2011 amid a push by Mohamed El-Erian, Pimco’s chief executive, to reduce the group’s overwhelming focus on fixed income.

“Since 1995, US telecoms have traded in line with the wider market, but now they are at a 40 per cent premium. You have to ask if these companies are worth 19-20 times next year’s earnings,” says Mr Manasseh.

The team is also concerned about valuations in US utilities. Compared with its historic trading level of roughly 20 per cent cheaper than the wider market, the sector is now also priced at a significant premium, the senior vice-president adds.

The team is further wary about healthcare, in which Pfizer and Johnson & Johnson have booked significant share price gains over the past six months, buoyed by investors’ thirst for healthy levels of income.

Pfizer’s shares have gained 19.4 per cent while Johnson & Johnson has added 21.7 per cent, with both companies contributing to the 17.4 per cent rise seen on the wider S&P 500 index during that period.

Pimco has deepened its focus on areas such as technology, which is traditionally a growth-orientated sector. News flow in the sector was hijacked by technology company Apple’s announcement in April that it was hiking its annual payout by 15 per cent to $3.05 a share. The company’s shares now yield roughly 2.7 per cent.

But Mr Manasseh says the team is instead focusing on Apple’s main rival Microsoft, on the basis that it offers a more stable dividend model.

He criticises Apple’s decision to partially fund its dividend increase with a $17bn (£10.9bn) bond issue earlier this month, adding that a number of other US companies had declared dividends in recent months “but not on a scale we like to see”.

Pimco’s income managers are also considering areas such as infrastructure, with toll road operators in China, Latin America and Europe offering a 5-6 per cent yield at “more attractive valuations”, Mr Manasseh says. Elsewhere, the managers are topping up holdings in “selected companies” in the UK, including Imperial Tobacco.

The Dublin-based Pimco EqS Dividend fund has gained 27.2 per cent since launch in December 2011, according to FE Analytics.

Nick Reeve is a senior reporter at Investment Adviser

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