IN THE BACK
STOCKS
Michael Clark, who runs Fidelity’s MoneyBuilder Dividend fund, reveals
which consumer stocks he thinks are worth their “expensive” price tag
W
hile valuations today
may not be as they were
in 2009/10, we are still
finding potential in companies
where the management displays a
stronger focus on returns than they
have in the past 10 years. Seeking
out companies with consistent
and predictable cash flows, solid
balance sheets and a track record
of disciplined capital allocation
should provide attractive long-term
returns for investors.
The following three consumer
stocks have demonstrated
resilience in a low-growth
environment through a
continuous focus on cost control.
Some of these names, which are
often categorised as “expensive
defensives” are not as cheap as
they were, but most of them still
have the potential to increase
revenues and profits.
RECKITT BENCKISER IS THE
FASTEST GROWING EUROPEAN
health and personal care major and
its shift towards consumer health
will lead to greater pricing power
and improving margins and returns.
It has been called “expensive” as it
trades on 25x expected earnings;
however, it is growing by 5 per cent
a year and is not sensitive to the
economy or rate rises. In addition,
it doesn’t need capital to grow and
return on equity is 25 per cent and
rising. Reckitt Benckiser has made
compound returns of 17 per cent
a year over the past decade and I
expect strong returns to continue.
DIAGEO OWNS THE STRONGEST
PORTFOLIO of global spirits
brands, with a large exposure to
scotch, which has high barriers to
entry and strong long-term demand
fundamentals. The company has
good cash flows and is likely to raise
its dividend. Recently, shares have
relatively underperformed, but I
believe its qualities are undervalued
by the market. It has strong
distribution channels in the US
and has used acquisitions to bolster
capabilities in India, China and
Brazil. Management is scrutinising
expenditure, with a £500m costsaving initiative underway.
EVEN THOUGH IT’S AN
INDUSTRY IN STRUCTURAL
DECLINE, shareholder returns in
tobacco have been among the best
in the industry over the long term:
Imperial Tobacco, for example, has
made compound returns of 13 per
cent a year over the past decade.
The firm enjoys strong pricing
power, cash flows and returns, and
the shares yield more than 4 per
cent. It should also benefit from
the restructuring of the US tobacco
market – in acquiring brands from
the Reynolds/Lorillard tie-up,
Imperial is creating a profit stream
from the world’s largest economy.
28
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Coram Asset Management’s James Sullivan says that when it comes to
buying UK value, there are few better options than a Woodford proposition
WHAT I BOUGHT LAST
REASSURINGLY
EXPENSIVE
CF WOODFORD
EQUITY INCOME
T
here have been a small number of fund
purchases in recent weeks due to the
gradual evolution of our asset allocation.
The pickup in market volatility has also
thrown up opportunities to modestly rotate
defensive assets into higher risk, potentially
higher reward, strategies.
It would be easy to write about some of
the more exciting collective investments
that have made their way into the Coram
portfolio range – such as BlackRock
Latin American, Liontrust Strategic Bond
(investing in emerging market debt and
currencies) or the Japanese REIT. All of
these have a wide dispersion of potential
returns, yet at current levels, we believe the
medium-term upside is in our favour.
The latest addition has been the CF
Woodford Equity Income fund, following
recent UK market weakness. We have long
claimed the FTSE valuation, when taking
into consideration the current economic
weakness, was unsustainable. When this
began to unwind and the FTSE 100 went
below 6,000 points, we wanted more
exposure to our UK value theme.
Although the valuation of the FTSE
at current levels may still prove to be
unsustainable, we wanted exposure to
businesses that generate revenue regardless
of short-term volatility. The market tends
to reward and support predictability and
robustness of earnings (and subsequently
dividends). Walter B Wriston once said
“capital goes where it’s welcome and stays
where it’s well treated” – few things in
life are more comforting than a covered
dividend in times of stress.
Arguably, some of the malaise of the
resources sector could be due to the
market’s expectancy of dividend cuts. It can
become somewhat self-perpetuating.
Across the Coram range we have
exposure to the UK equity market through
a small number of positions – RWC and
Sanditon to name two – and there is always
the temptation to do something different by
buying a fund that is off most people’s radar.
However, when it comes to buying UK
value, there are few better alternatives than
a Woodford proposition.
The value tag actually does CF Woodford
Equity Income a disservice as it contains
a number of growth positions – however,
while it is easy to adopt a tag, it is not so
easy to move on from it.
We don’t manage to a benchmark at
Coram and we don’t insist our underlying
positions do. The ability to avoid, or be
significantly underweight, areas of the
market that continue to underperform
and destroy shareholder returns is a key
attraction. There is a case for active over
passive when it comes to such a hotchpotch
of an index such as the FTSE.
Additionally, a fund that takes in
money when the market falls back has
an advantage. It allows fresh capital to be
deployed at lower levels, rather than merely
switching positions.
The Woodford proposition is reassuringly
consistent in all manner of ways.
James Sullivan is investment director and senior
fund manager at Coram Asset Management