AIM for Growth or Income: can you have both?
When investing in smaller quoted companies and particularly those on AIM, the predominant investor focus is of capital growth, as opposed to dividend income. Indeed, the London Stock Exchange’s description of AIM as being a “Market for small and medium size growth companies” highlights the junior market’s primary purpose.
While our firm would never advocate investing in AIM quoted companies for reliable dividend income, the fall in the share prices of many cash generative AIM companies over the course of 2022, many of which have a long track record of dividend payments, has served to highlight the income potential from AIM, not to mention the modest valuations of many companies previously considered for their growth appeal.
AIM quoted Wynnstay Group, a supplier of agricultural products and services to the UK’s arable and livestock farmers, recently reported fabulous full year results with earnings up 86% and a near 10% increase in its dividend, making it 19 consecutive years of dividend increases since Wynnstay joined AIM in 2004.
Link Group’s AIM Dividend Monitor from September 2022 suggested that the total dividend payout from AIM companies would reach £1.22bn in 2022, which will be close to the record payout of £1.29 billion in 2019. Our assessment suggests that dividend payments in 2022 may actually exceed this level.
The strong rebound in dividend payments and steep decline in share prices in 2022 means that the dividend yields of well-established AIM companies have risen substantially, to levels not seen in the 19 years my firm has been managing AIM portfolios.
Returning to the earlier point of AIM being primarily a market for growth companies, it’s worth emphasising that many of these current AIM high-yielders also have considerable growth attractions.
The founder management of one fast-growing and cash generative AIM company, with an attractive dividend yield, has clearly had enough of AIM’s ‘mispricing’ of their shares, engineering a deal to take the company private, with the help of an enthusiastic private equity backer. They were probably getting fed-up of being considered for their income, rather than growth attractions! Other cash generative AIM companies, may follow suit if their share prices continue to languish.
It’s noticeable that many mature AIM companies with surplus cash have also initiated share buy backs and special dividend payments.
Footwear retailer Shoezone announced an additional special dividend at the time of its full year results, which reported 55% growth in earnings per share. It is also committed to a significant share buyback programme.
The high dividend yields of many AIM companies bely their considerable long-term growth attractions.
Another attraction for many private investors when investing in AIM quoted companies is the potential to save future Inheritance Tax (‘IHT’) – shares of ‘Business Relief qualifying’ AIM companies fall outside the holder’s estate for IHT purposes if held for 2 years or more.
Those investing in AIM for IHT planning purposes for the first time may often be transferring out of income generating funds and equities. The idea of regular dividend income from a portfolio of AIM shares may therefore be appealing.
A word of caution
It is evident that most AIM companies generating strong cash and attractive returns on capital should prioritise re-investment in their business to help drive growth, over and above paying out large dividends to shareholders.
Some AIM companies might not be re-investing enough in their operations, with a risk that trading will ultimately suffer. Worse, having previously paid out large cash dividends, companies are subsequently forced to raise further equity from shareholders in support of acquisitions, at considerable expense and dilution to existing shareholders. In this case, it would surely have been better for the company to have held back its previous generous dividend payments.
There are many aspects to consider when assessing the income appeal of AIM companies, however, just because the dividend yield is high doesn’t mean the company no longer has capital growth attractions as well – it’s possible to find both from AIM’s many excellent companies.
Our recent WEBINAR: What does 2023 have in store for AIM? also covered the income attractions of AIM. You can watch the webinar from the link here.
To find out more about the Income benefits of AIM, please speak to our Business Development Manager, Jonathan Bramall, via email [email protected] or phone 01923 713 894.