George Luckraft: backing oil majors but fears for Vodafone divi

AXA Framlington Equity Income  manager George Luckraft has shrugged off the concerns voiced by Invesco Perpetual's Neil Woodford over the sustainability of dividends in the oil sector, but believes the prospects for Vodafone's dividend are less positive.

Referring to Woodford's recent comments that BP and Royal Dutch Shell may be unable to pay dividends this year due to a cautious short-term outlook for the oil price and a conviction that the boards will only agree to pay uncovered dividends for a short period of time, Luckraft said he did not share this view. Nonetheless, he showed respect for his equity income peer saying that Woodford has overall got more calls right than wrong over the years.

'For BP and Shell there has been some comment that their dividends are unsustainable, but I think the dividends are safe with the oil price around $80,' Luckraft said.

In fact, Luckraft believes the dividends would only be at risk if there is a prolonged period where the oil price is under $50.

'Even Shell, with its problems of declining volumes, seems to have enough cash generation and a new facility coming on stream in 2010. I am convinced that both BP and Shell will continue to pay dividends, although there has been disappointment over Shell's decision to not increase its dividend,' he said

Luckraft's optimism does not span to Vodafone, however.

'One that concerns me potentially over the medium-term is Vodafone, as it still has no access to the cashflow from its Verizon stake.'

He also remains bullish on government-backed UK banks Royal Bank of Scotland and Lloyds but does not expect either to start paying dividends any time soon. Within financials he is currently backing HSBC and Barclays, which he says are both well-positioned to increase their dividends from hereonin.

Luckcraft increased exposure to pharmaceuticals AstraZeneca and GlaxoSmithKline late last year, reflecting a more upbeat view on the sector.

'Tobaccos also look well-set to perform,' he added.

In spite of what he sees as a relatively harsh water review, Luckraft is still positive on utilities, pointing to the link betwen revenues and RPI, which he expects will spike during the year as a result of the increase in VAT this year.

Small caps also remain a key area of interest for the equity income manager. Family-run companies in which management have large stakes have on the whole continued to pay dividends, he said, and he expects that over the next few years many families will seek an exit, sparking a round of takeover activity.

'Large caps have done what they need to do for their businesses and have accessed capital through the bond market. Now, management is starting to look on the front-foot not the back-foot and want access to new markets,' he said.

He also expects an uptick in private equity activity in the small cap area, as private equity players look to put money to work and shy away from larger deals due to a lack of credit.

Luckraft, who also manages the AXA Framligton Monthly Income fund , highlights office2office and Anglo Pacific as key stock picks.

Over the three years to the end of December, Luckraft has posted a -33.5% loss with the Equity Income fund, while the FTSE 350 Higher Yield index was down -11.9% over the same period, according to Lipper.