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Trains and chips and rigs

How Waddell & Reed's David Ginther is investing for a U.S. revival

Sonita Horvitch 31 March, 2010 | 6:00PM
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David Ginther, senior vice-president at Waddell & Reed Investment Management Co., continues to boost holdings of economically sensitive stocks in the U.S. dividend portfolio he manages, and to reduce more defensive names.

His emphasis on cyclical stocks has been under way for some time on evidence, he says, that the global economy is indeed recovering. "The U.S. economy's pace of recovery is slow. By contrast, China's economy has rebounded so sharply that the country's monetary authorities have moved to a more restrictive stance, so as to slow the pace."

Although there are concerns that this tightening will be overdone and cause problems in key areas of the Chinese economy, Ginther disagrees. "The strategy is a sound one, as it helps to mitigate excesses associated with an economy that is growing too fast."

In keeping with his cyclical emphasis, Ginther has added a number of new names to the portfolio in areas such as chemicals, railroads and technology. He has pared back holdings in the defensive sectors such as consumer staples, though this sector still represents a big weighting in the U.S. dividend portfolio at 14%.

Energy, at 17%, is the biggest weighting. Ginther notes that he has not added to his holdings in this sector because "it is already an overweight." Instead, he has been refining his energy holdings with a continued emphasis on energy-services companies.

At Waddell & Reed, which is based in Overland Park, Kansas, Ginther manages some US$1.6 billion. A 15-year veteran of the firm, he is responsible for an energy fund (US$340 million) and a U.S. dividend fund (US$1.3 billion) on whichMackenzie Universal U.S. Dividend Income, managed by Ginther, is modelled. The Mackenzie fund was launched in May 2006.

 
David Ginther

Ginther targets big-cap names in the U.S. dividend fund and its benchmark is the Russell 1000 Index. This fund currently holds 54 names.

In stock selection, Ginther favours those companies that have commanding market shares, offer above-average growth in dividends and earnings, and trade at reasonable valuations. As part of his discipline, he assesses both the sustainability of the company's dividend and the scope for it to increase, as well as the potential for capital gains on the stock.

Illustrating his bias toward economically sensitive stocks, Ginther has added the global industrial company, Dow Chemical Co. DOW, which now represents 1.5% of the portfolio. It is one of the largest chemical companies in the world.

Dow Chemical, says Ginther, is transforming itself from a producer of commodity chemicals to one producing specialty chemicals where there is more pricing power. Its purchase of the specialty materials company Rohm and Haas Co. last year was part of this strategy, he says. In terms of input costs, a "plus for Dow is the lower price of natural gas."

Dow has undertaken strong cost-cutting measures, says Ginther, and "could produce better earnings per share (EPS) for 2010 than the market anticipates." The stock is reasonably valued, he adds.

The recovery in the United States and around the world is providing a boost for U.S. railroad companies, says Ginther, by increasing both traffic and pricing. He recently added Norfolk Southern Corp. NSC to the portfolio.

Its Norfolk Southern Railway subsidiary operates in 22 states, serves all major container ports in the eastern United States and has connections to other rail carriers. The company, says Ginther, is a major transporter of coal and industrial products. "The demand for coal from China is strong and Norfolk is benefitting from this."

A long-standing rail position in the portfolio is Union Pacific Corp. UNP. This stock represents 3% of the portfolio and is in its top 10 holdings. Union Pacific's subsidiary, Union Pacific Railroad, links 23 states in the western U.S. Its business mix is diversified and includes agricultural and industrial products. "Like that of Norfolk Southern, Union Pacific's stock is reasonably valued based on historic valuations," says Ginther.

Norfolk Southern Corp.        (NSC/NYSE) 

Union Pacific Corp.                      (UNP/NYSE)  
March. 29 close $55.81 $73.58
52-week high/low $56.17-$32.59 $74.35-$39.82
Market cap $20.6 billion $37.2 billion
Total % return 3Y* 6.0% 14.7%
Total % return 5Y* 10.8% 17.9%
Total % return 10Y* 16.2% 15.5%
All figures are in $US
*As of March 29, 2010
Source: Morningstar

It is a challenge, says Ginther, to find dividend-paying stocks in the technology sector. But, he adds, there are some brand-name U.S. companies that do pay dividends. An example is Intel Corp. INTC, which Ginther has added to the portfolio.

Intel is one of the world largest semiconductor companies, and global economic growth is "fuelling the demand for personal computers, particularly in emerging economies," says Ginther. "China is one of Intel's largest markets." The stock, he says, carries a "handsome" dividend yield of 3%.

In energy, Ginther sold his holding in the major oil-services company Weatherford International Ltd. WFT. The company, he says, is facing a number of headwinds, including shrinking margins on some projects. Instead, he has deployed the proceeds of this sale in the two energy services stocks that are in the fund's top 10 holdings: Schlumberger Ltd. SLB at 3.7% and Halliburton Co. HAL at 3.6%.

Schlumberger, says Ginther, is one of the most technologically advanced companies in its field. It has a strong presence in Russia and the Middle East and is benefitting from higher prices for its services.

Halliburton is a leader in providing services for shale gas development in the U.S. and it is taking this expertise globally, with an initial focus on Europe. "Like Schlumberger, it is one of the largest providers of products and services to the energy industry in the world."

In paring back his exposure to the defensive consumer-staples sector, Ginther sold his holding in Diageo PLC, which trades on New York under the ticker DEO. Diageo is one of the leading global purveyors of wine, spirits and beer. "Although the stock has a decent dividend yield, I felt there was more upside in some economically sensitive names."

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Sonita Horvitch

Sonita Horvitch  

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