David Ginther, senior vice-president at Waddell & Reed Investment Management Inc., is putting greater emphasis on consumer staples and health-care stocks in the U.S dividend portfolio he manages.
At the same time, Ginther, who is an energy specialist, has reduced the portfolio's weighting in that sector.
This is in keeping with his generally more defensive approach to the equity market, given "the macroeconomic uncertainties." There is a question mark, he says, over the pace of global economic growth and the related demand for key commodities, such as oil.
To Ginther, the ongoing financial crisis in Europe, the huge fiscal and balance-of-payment deficits in the United States, and the slowdown in China are likely to dampen global growth over the next 12 months and provide a headwind for economically sensitive stocks.
From an investor standpoint the good news, he says, is that corporations are focusing more on dividends and share repurchases as a means of boosting total investment returns.
Global consumer-related brand-name companies in products like tobacco and beer, along with the major drug producers, have proven to be good at returning capital to shareholders, says Ginther. "These defensive stocks are not inexpensive," he says, "but are a relatively safe place to be in the current climate of uncertainty."
Based in Overland Park, Kansas, Waddell & Reed, which recently celebrated its 75th anniversary, is one of the oldest mutual-fund companies in the United States. At the firm, Ginther is responsible for managing US$1.9 billion. His mandates include an energy fund and a U.S. dividend fund, on which Mackenzie Universal U.S. Dividend Income, managed by Ginther, is modelled. The Mackenzie fund was launched in May 2006.
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| David Ginther | |
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Mackenzie Universal U.S. Dividend Income is benchmarked against the Russell 1000 Index. The fund invests in dividend-paying common stocks of large companies. The targets should have a commanding market share and offer above-average growth in dividends and earnings. It is also important that these stocks trade at reasonable valuations.
"The focus is on total return, so there should be some potential for capital gains in the stock over time in addition to a high dividend yield," says Ginther.
This dividend portfolio has 53 names. At the end of March, the largest sector weightings were industrials (18.7%), consumer staples (14.6%), energy (14.3%) and financials (12.6%.) At that date, 88.2% of the fund was in U.S. stocks.
The tobacco giant Philip Morris International Inc. PM was the largest holding in the fund at the end of March, at 4.8%. The company, which operates outside the United States, has 16% of the international market for cigarettes, says Ginther. Philip Morris International (PMI) produces some of the international market's major brands including Marlboro, L&M, Bond Street and Parliament.
A competitive edge for PMI, he says, is that it has an agreement with China National Tobacco Co. for the licensed production of Marlboros in China. "This is a substantial and growing market for tobacco products." The company is a strong cash-flow generator, he notes.
The stock has a dividend yield of 4.5% and the dividend payout ratio (the dividend as a percentage of earnings per share) is 65%. "There is a possibility that the company will increase its dividend by a modest amount," says Ginther. The stock trades at 14 times forward earnings-per-share estimates.
The global brewer Anheuser-Busch InBev N.V., based in Leuven, Belgium, is another holding in the U.S. dividend fund. The company is a dominant player globally, says Ginther. "For example, it has 50% of the U.S. beer market and 70% of that market in Brazil." Flagship brands include Budweiser, Stella Artois and Beck.
The stock trades as an American Depository Receipt on New York, under the ticker BUD. Its price-earnings multiple is 13.5 times forward earnings estimates and it has a 2% dividend yield. The company is a "strong cash-flow generator and could double its dividend over the next couple of years," says Ginther. "Anheuser-Busch InBev is good at returning capital to shareholders."
Big-cap pharmaceutical stocks have been out of favour for some time, says Ginther, on concerns over the challenges of patent expirations. "But a number of the leading companies are global in reach, have new drugs in their pipelines and are good at returning capital to shareholders." In all, these stocks provide shareholders with high dividend yields and good capital-appreciation prospects, he says.
Here, Ginther's holding is Pfizer Corp. PFE, "which has been successfully selling off its non-core businesses and will be returning some of the proceeds to shareholders." For example, Pfizer has agreed to sell its infant-nutrition unit to Nestlé SA and is also looking to sell its animal-health business.
The stock trades at 10 times forward earnings-per-share estimates and has a dividend yield of 4%. "It is a good opportunity to invest in this stock, which should do well over the next two to three years," says Ginther.
| Anhueser-Busch InBev N.V. |
Pfizer Corp. | Philip Morris International |
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| May.22 close | $68.64 | $22.37 | $79.00 | |
| 52-week high/low | $75.08-$49.05 | $23.30-$16.63 | $82.95-$49.80 | |
| Market cap | $110.2 billion | $167.5 billion | $134.7 billion | |
| Total % return 1Y* | 15.7 | 12.2 | 32.7 | |
| Total % return 3Y* | NA | 18.1 | 22.8 | |
| Total % return 5Y* | NA | -0.3 | NA | |
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| *As of May 22, 2012. All figures in U.S. dollars. Source: Morningstar |
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Turning to the U.S. financial-services sector, Ginther says that the recently announced US$2-billion trading loss at JPMorgan Chase & Co. JPM took the market by surprise. The stock is a major holding in the U.S. dividend fund.
Ginther says the bank "remains one of the strongest globally." It is likely to increase its dividends and is seeking regulatory approval to repurchase shares, he says. The dividend yield on the stock is 3.3% and the payout ratio is 20%.
Ginther has trimmed his holding in Capital One Financial Corp. COF, a major retail banker and credit-card specialist in the United States. "I considered that JPMorgan Chase offered better dividend-growth prospects."
In the energy sector, a long-standing holding is Exxon Mobil Corp. XOM, a major global integrated company. Exxon recently raised its quarterly dividend by 21%, says Ginther. "It had a lower dividend payout than other integrated energy companies and Exxon Mobil's management has moved to remedy this."
Ginther notes that Exxon Mobil, a strong free-cash-flow generator, has historically favoured share repurchases over dividend increases. "But its management has now recognized the need to stay competitive when it comes to dividend payments."
