Sunniva Kolostyak: Welcome to Morningstar. Today, in the studio, I have Ian Mortimer with me from the Guinness Global Equity Income Fund, who is going to give us his three dividend stocks.
Ian, thank you very much for being here. Let’s start with your first stock. What is it?
Ian Mortimer: Yeah. So, my first stock is Cisco (CSCO). So, this is sort of quite well-known technology company in the U.S., and I think it espouses quite a lot of the types of characteristics of the businesses we’re looking for in our portfolio. And that’s in particular – this is more of a sort of modest growth business. We’re looking at earnings growth in the mid-single-digits, 5%, 6%, 7% potentially on a longer-term basis and a company that can compound really successfully. It’s a business that obviously doing networks and switches historically in terms of the tech space, I think is developing, I think there is slightly more competition coming in. But it is a company that’s also moving into more software and services as part of that. And I think longer term they will ultimately benefit for that move from cloud computing, hybrid working and other elements as that develops over time. I think you get a pretty healthy 3% dividend yield off it and that dividend has been growing really healthily.
Kolostyak: Okay. So, what’s your second stock?
Mortimer: Our second stock is a bit different. So, now, we’re moving across to Australia, a company called Sonic Healthcare (SHL). So, this is one of the world’s largest pathology and testing businesses. It’s a pretty fragmented market and they’re a company that generally speaking dominates in terms of their market leaderships in the geographies they work in. And I think what’s interesting about this stock at the moment is it was a Covid winner, if you like, clearly, so testing and pathology and therefore generated significant profits through that period, and now that’s falling off. So, it’s a company actually which looks like to some extent is in decline. Returns on capital are dropping. Revenues are coming down. But ultimately, it’s going back to its base business, and we think that base business is really strong. I think that’s got the potential to grow at the 10% type level, and it’s a company that’s grown both organically and inorganically. So, it does many, many smaller acquisitions consolidating that fragmented market. They have a great management team. They’ve been doing that business model for decades. And today, they’ve got a debt profile that’s about 0.5 times net debt to EBITDA. Historically, that’s been on average around 1.5. That’s their optimum. And the reason that’s lower is because all the cash they made during the pandemic period. So, actually, I think now they’ve got quite a lot of firepower, if you like, to go and do some of these acquisitions to boost some of that earnings maybe beyond what the market is expecting, and then hopefully provide that rerating potential alongside that good growth. And again, this is a company growing dividends at 3% per year and potentially growing those dividends at maybe double digits.
Kolostyak: Cool. So, we’ve been to the US, Australia. Where are we going for your third stock?
Mortimer: We’re going back to the US, in fact, but a different sector. So, we looked at IT, we looked at healthcare, and our final stock is VF (VFC). This is the consumer discretionary stock. So, they make things like Vans trainers, Timberland, North Face jackets and so on. So, it’s an apparel business. And actually, this is a stock that’s really had quite a difficult time more recently. It’s now trading, I think, around 8 or 9 times P/E. And clearly, this is a business that was affected by the pandemic. Footfall fell, people bought less things, particularly apparel, and they suffered alongside other consumer discretionary stocks. Unfortunately, one of their main drivers of their business was the Vans trainers business. This has been a big growth area for them. And unfortunately, that then stumbled. So, brands maybe weren’t so popular and so on. Maybe it wasn’t managed as well, maybe inventory levels got too high. And that’s something the company is now very much focused on tackling. And we think at these sorts of valuation levels a lot of the bad news, if you like, is priced in. Significant discount to peers. I think the company is doing the right things to tackle the problems they have. And I think, interestingly, just a couple of days ago, they announced their new CEO, who is the ex-CEO of Logitech. And I think the medium-term story on that company, I think, could be very positive. But it would be one of those that’s more at the value end of what we’re looking at. The dividend yield, therefore, reflects that around 6%, 6.5% today.
Kolostyak: Cool. Well, thank you very much for bringing these three stock picks to us today. For Morningstar, I’m Sunniva Kolostyak.
