Jan Luthman: my top six dividend plays
Luthman’s Liontrust Macro Equity Income fund has registered a total return of 31% over the last three years versus a 24.7% gain in the FTSE 350 High Yield index. He highlights the following six stocks as his top dividend picks.
‘We expect Heinz, the US-based owner of a portfolio of food brands, including ketchup, to also benefit from rising incomes and declining savings ratios in emerging markets. As with Unilever, the company has significant exposure to rapidly developing countries, such as China.
‘China has a five-year plan committed to expanding domestic consumption through sustained rapid increases in minimum wages (13% a year for each year of the five-year programme), coupled with the rollout of improved social security and healthcare.
‘As well as experiencing earnings growth from emerging markets, we expect Heinz to benefit from the recovery in US consumer spending. The company has a strong focus on optimising free cashflow and its shares yield over 3.5%.’
‘We have positions in AT&T, Vodafone and BT Group as we believe that, with demand exceeding capacity for non-voice (data) telecoms traffic, these operators all have significant pricing power and the ability to generate healthy earnings growth.
‘BT, the UK fixed-line incumbent, has acquired Premier League football and Premiership rugby rights, which improves its television proposition and significantly enhances its competitive position. We expect BT, through its BT Vision service bundle, to see a strong cash return on its network over the coming years, which should support dividend returns to shareholders.’
‘A recent addition to the fund, Reed Elsevier provides publishing and data services targeted at scientific, medical and legal professions, as well as operating an events business. The company has successfully restructured, focusing more on digital and online products and services, while non-core businesses have been disposed of.
‘Reed Elsevier is cash-generative, and disposal proceeds are likely to be returned to shareholders in the form of share buybacks. Shares yield 4% and in July’s results for the first half of 2012, management announced a 6% increase in the interim dividend.’
‘Unilever’s global brand strength and pricing power should allow it to benefit from rising consumer spending in emerging markets. Strong wage growth in emerging economies should provide both the capacity and the pre-disposition to consume more. This should result in strong profit growth for multinational consumer-orientated companies selling into these regions.
‘Unilever derives over 70% of its revenues from outside of Europe and more than half from what it classifies as emerging markets. These growing profits should be further boosted by translation into a weakening sterling. The shares yield 3.7%.’
‘The pharmaceutical sector is perceived as a low growth industry with little pricing power, political interference and high risks of litigation.
‘Pharmas such as UK bellwether GlaxoSmithKline (GSK) are reorientating their businesses from mature Western markets to rapidly growing emerging markets, and to new product areas such as lifestyle drugs, over-the-counter medications and branded generics.
‘With a yield of 5.7% and a price/earnings ratio of 12 times current earnings, GSK is valued at a substantial discount to utilities. In fact, we see it as well positioned within the expanding arena of global health, in which populations are increasing and rising numbers of people can afford access to medicines.’
‘With the fortunes of banks still driven primarily by political and regulatory imperatives, rather than free market forces, and the true state of their financial health obscure, asset management groups are our preferred route to financials sector exposure. If economic activity and corporate earnings improve, equity markets will tend to rise and bond markets decline as interest rates firm.
‘Asset managers will benefit from rising fee income, from new inflows as investors regain confidence and from reallocation out of fixed interest funds into higher-fee equity funds. As a global operator with more than $680 billion of assets under management, US-based Invesco is well placed to benefit.’