Gearing up for a U.S. upturn

Mackenzie sub-advisor David Ginther expects machinery makers will be among the winners.

Sonita Horvitch 16 March, 2011 | 6:00PM
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David Ginther, senior vice-president at Waddell & Reed Investment Management Inc., has substantially increased his holdings of industrial stocks in the U.S. dividend portfolio that he manages.

He has also added to his holdings in consumer discretionary stocks, another economically sensitive sector. This is part of his ongoing theme to focus on more cyclical stocks geared to the global economic recovery.

Ginther says that U.S. industrial companies have emerged from the recession with lower cost bases, after implementing significant cost-cutting measures, and are now starting to reap the rewards of improving revenues. The U.S. consumer is starting to feel more confident, he says, and will be spending more money on discretionary items such as travel and entertainment.

A specialist in energy, Ginther notes that he has "modestly boosted his holdings in this sector, with an ongoing focus on energy-services companies." His enthusiasm for energy has been a factor in his portfolio strategy for some time. "It pre-dates the recent political upheaval in some oil-producing countries, which is putting upward pressure on the oil price."

At Waddell & Reed, which is based in Overland Park, Kansas, Ginther is responsible for an energy fund (assets of US$481 million) and a U.S. dividend fund (US$1.6 billion), on which Mackenzie Universal U.S. Dividend Income, managed by Ginther, is modelled. The Mackenzie fund was launched in May 2006.

Ginther targets big-cap names in the U.S. dividend fund, and its benchmark is the Russell 1000 Index. The portfolio has 56 names, and its two biggest sector weightings are industrials and energy.

Ginther favours companies that have commanding market shares, offer above-average growth in dividends and earnings, and trade at reasonable valuations. "There must also be the potential for capital gains on the stock. The focus is on total return," he says.

Two global brand-name industrial companies that feature in the top 10 holdings in the portfolio are Caterpillar Inc. CAT and Deere & Co. DE. "They are well established, high-quality companies that sell their machinery worldwide and they are currently benefitting from the growth in emerging economies," says Ginther.

Caterpillar Inc.

Deere & Co.
March. 15 close $100.75 $87.68
52-week high/low $105.86-$54.89 $97.36-$52.73
Market cap $64.4 billion $36.9 billion
Total % return 3Y* 12.3% 3.2%
Total % return 5Y* 7.8% 18.8%
Total % return 10Y* 17.4% 16.3%
*As of March 15, 2011
All figures US$
Source: Morningstar

Caterpillar is one of the world's largest manufacturers of construction and mining equipment, compressors for the energy sector and other key infrastructure machinery. "The company has undergone a major restructuring and is benefitting dramatically from this." The stock has had a good run, but it is still attractive, says Ginther. Its dividend yield is 1.7%.

There are, he says, prospects that Caterpillar will increase its dividend "slowly and modestly, as it becomes more comfortable with the upturn in the economic cycle and generates increasing amounts of cash."

David Ginther

Deere also makes a wide range of machinery: tractors, engines and equipment for construction and forestry. "There is growing demand for agricultural equipment, with higher grain prices reflecting both the growing emerging-market demand and that inventories are low," says Ginther. "There have been problems with crops in major growing areas of the world, such as in Russia last summer." The stock carries a dividend yield of 1.5%.

A smaller holding in the industrial sector that is also a good play on global growth is Honeywell International Inc. HON. This company offers good exposure to both the upturn in the aerospace cycle and the increasing push for automation in factories in key parts of the world, Ginther says.

Honeywell's aerospace products are, he says, in demand by emerging economies looking to grow their aircraft fleet. There is also a push by some of these countries -- for example China -- to automate more to improve their efficiency, as they are facing rising labour costs. Honeywell offers a range of automation and control solutions. This stock has a dividend yield of 2.2%.

In the consumer discretionary sector, a global brand name that will benefit from "improved spending on vacations and entertainment" is Walt Disney Co. DIS, says Ginther.

Disney has theme parks, cruises and resorts; it produces movies and owns the ABC television network. The latter owns ESPN, a channel dedicated to sports. "ESPN is a material and growing part of Disney's business." The stock has a dividend yield of around 1%.

Turning to energy, Ginther says that a world leader in the manufacturing of components for rigs that is a "tremendous cash-flow generator" is National Oilwell Varco Inc. NOV. This stock is in the top five holdings in the portfolio.

National Oilwell has a 70% market share of its niche globally, says Ginther. The company is mainly focused on components for deep-water rigs. It has recently been acquiring companies that make products for floating production, storage and offloading ships, he says. The company started paying a dividend more than a year ago. "It is small but growing." The dividend yield is 0.6%.

Two other major global energy services companies in the fund's top 10 holdings are: Schlumberger Ltd. SLB and Halliburton Co. HAL. Ginther highlighted these two stocks in the March 31 Encounter column.

In the technology sector, a core holding in the portfolio is the semiconductor manufacturer Microchip Technology Inc. MCHP, which has a dividend yield of 3.8%. Ginther has sold his holding in the software giant Microsoft Corp. MSFT, another dividend-paying tech stock.

Microsoft, says Ginther, is geared to personal computers and laptops and dominates this business. "Yet, there is a growing demand for mobile devices such as smart phones and tablets, where Microsoft is not the dominant player."

Microsoft launched a challenge to Google Inc. GOOG in 2009 to take some of Google's market share of Internet search and online services, says Ginther. But, thus far, Google remains in a dominant position in this space. Of Microsoft, Ginther concludes that it is "tough to turn a big ship around and refocus it."

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Sonita Horvitch

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