Sunday, August 25, 2013

3 Picks From A Safer Pool Of Stocks

Alex Crooke, Portfolio Manager Henderson Global Equity Income Fund, Henderson Global Investors

Alex Crooke:  We have a very simple philosophy that says that the companies that pay dividends tend to be safe investments if you can apply some fairly standard valuation techniques.  So stocks with a slightly high yield and growth puts them into an even better subset of companies.  By focusing on those dividends, you're screening out a lot of companies that don't have the profits to pay dividends.

So the philosophy then on dividends is that you're buying companies with cash profits, from which they can pay out dividends to us as investors.  So it's a safer pool of stocks.  Above that, we apply standard valuation metrics such as balance sheet strength, moderate levels of debt, top-line revenue growth and margin expansion.

They're all measured in order to try to identify that subset of companies that can grow a dividend.  Hopefully there's a long-term track record of growing dividends that suggests they also can grow their dividends over the next two or three years for the benefit of investors.  We try to find companies with 3% or higher dividend yields.  It's a global fund, so we look for opportunities all over the world.

We find certain markets like Europe, U.K., Australia, and Hong Kong have a slightly higher dividend yield than the U.S. market.  But equally, we have 20 stocks or about 23% of the fund with U.S. exposure in them.

Wally Forbes:  To what degree do you have to try to take into account the ability of each currency to maintain its value, relative to others?

Crooke:  Good question.  The current GBP hedge is 10.5% versus a UK weighting in the Global Equity Income Fund of 35%.  As a general rule we try to hedge the domestic UK exposure.  Currently in the Fund there is roughly 10% of what is classed as domestic UK stocks rather than those with an international sales base.

Occasionally, we take a view on sterling.  For example, towards the beginning of the year we increased the hedge to 15% as we expected the pound to weaken.  As the Fund is overweight UK versus the MSCI World Index, which is around 10% UK, we maintain the hedge to limit currency risk exposure to our investors.  We expect to keep the hedge in place for the foreseeable future unless our view on sterling changes, or the Fund's weighting in the UK reduces dramatically – which is very unlikely.

Forbes:  Let's get into some specific stock ideas.

Crooke:  Let's start with the technology area.  Often when you talk about income funds or stocks, you hear about utilities.  But we have more fun hunting in markets where a shift is taking place.

And there are a lot of mature technology companies where investors have moved on and said, "These businesses are boring, they're not innovating, times are moving on."  To us, what's often happening is that these companies are now paying very large dividends and growing those dividends; and actually as long as they can maintain their margins and grow the top line a little bit, we think they can be very attractive investments.

Forbes:  Do you have any specific names?

Crooke:  Cisco (NASDAQ: CSCO) is one.  It is one of our top ten holdings because we think you've come from a period of quite low spending by customer companies that are hoarding cash.  We do think that you'll see a bit more expansion if the economy picks up; and you should see some more spending by the telecom companies and basic companies spending on Cisco's products.  So we see top line revenue growth of 7%.  If they can maintain margins we should see this business produce an awful lot of cash.  At 11 times earnings, you have got a really attractive investment.

Forbes:  Good.

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