1/ I wanted to put together a thread about a unique Covid value opportunity that I've been thinking through and trying to take advantage of this year-
Investing for future yield.

2/ Many companies have temporarily cancelled or cut their dividends this year, due to economic hardship, regulatory recommendation or pure caution, but are likely to resume them in the medium term.

3/ So if you like yield, but don't need it tomorrow, many of these companies are bargains today, some in part because of their abandonment by the income-hungry crowd.

4/ In many cases, the underlying cashflows have only been marginally affected or there is a clear line of sight to their return- but you will have to be patient (thus ruling out 90% of market participants)!

5/ In many cases, pulling the payout is a healthy sign that management have acted to protect the business, rather than remain slaves to any "progressive" dividend policies. This is music to the ears of long-term investors.

6/ I believe those who invest now will realise a generous-yielding portfolio over 1-3 years and on top of these juicy dividends, stand to make a capital gain when the resumption of payouts make these stocks "investable" again.

7/ A few examples from my portfolio may illustrate the point. The UK regulators encouraged businesses to curtail their dividends this year and sensibly so, when there was so little clarity in March-May.

8/ $LYG had finally shown signs of moving past its PPI payments and resuming healthy dividends when Covid hit, removing any near-term hopes. But the co. looks likely to earn sustainable normalised ROE of 12-15% (40-50c per share), I estimate 75% of which could be paid out.

9/ This would give Lloyds a 15% dividend on the current $2.03 price in a post-Brexit and Covid world. $LYG still sells at 60% of book even after a healthy run in November.

10/ Energy has been another deep value sector heavily affected by dividend cuts. In many cases, the underlying income truly isn't there this year to responsibly pay 2019 level dividends. Some have tried, like $XOM, but I would rather those that played it safe.

11/ $LUKOY has a surprisingly shareholder-friendly attitude for those who aren't familiar with Russian businesses. The company introduced a new policy in late '19 to pay out all excess free cash after capex and buybacks.

12/ This equates to an 11% 2019 dividend on the current price at a payout ratio of only 56.3%. Lukoil also bought back 5% of its stock in 2019- an incredible shareholder yield. I expect 2020 numbers much lower, but this is the opportunity I am outlining.

13/ And yes, Russian stocks may not be to everyone's taste, but I believe there is a price for every asset and shareholder yields in the high teens (with a lot of that cash coming out in short duration) coupled with a strong balance sheet are enough for me in this case.

14/ For fellow energy bulls, it is important to remember that 2019 was far from peak energy prices. Even though last years prices were much higher, they were still year 6 of a grinding bear market. Potential upside may be very large if prices recover sustainably.

15/ Back to the UK, $MFGP is one of my largest holdings and has caused me a lot of pain this year. Micro Focus is a software/IT business with a strong history of capital returns and cash flows.

16/ I believe the div cancellation this year caused the final capitulation for many long-suffering holders. The company also drew down $175m from its revolver in March, but has since paid it back as cash generation remained strong.

17/ $MFGP made $576m in FCF in '19 (market cap $1.6b) and paid out $1.23 per share div. The company is undertaking a turnaround, but a recent update has shown the business tracking to guidance and cash generation still strong.

18/ A buyback would be the best result for shareholders at current prices, but a resumption of the dividend would be a likely catalyst for the price. FCF of $305m through H1 '20 suggests either may be possible.

19/ So there you have some of my favourites. The flexibility to not need the income today, is the key to taking a long-term view and waiting out the returns on offer. I believe there are plenty of similar situations out there, worthy of your attention.

20/ Thanks for bearing with me. I will endeavour to write this topic up on the blog, but until then, all feedback welcome and keep hunting out those juicy future yields!

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