Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Charles Luke, co-manager of the Murray Income Trust PLC.
Around the world in 2010 both monetary and fiscal stimuli will need to be withdrawn, and in a number of cases reversed. The market may not be factoring in the full implications of this. In an environment of potentially lower growth and restricted access to credit, distinguishing winners and losers will be vital.
We focus on finding good-quality firms at attractive valuations. They need to have a strong competitive position and robust balance sheet. We also like firms that can deliver a high dividend yield, or have the ability to grow their dividends over the longer term. Even in a less-forgiving market environment, we’d expect the following firms to generate attractive returns.
The first is Centrica (LSE: CNA) – trading as British Gas – a leading supplier of energy to UK households. Following the 2009 acquisitions of Venture Production and a stake in British Energy, Centrica has improved its position with a far greater exposure to, and control over, its own energy supply. This is something the company has yet to be rewarded for by the market. British Gas’s network of service engineers provides it with a competitive advantage over its peers, helping it to improve profitability and retain a loyal customer base. Centrica also has a number of interesting avenues for growth, including its operations in the United States, gas storage and further investment in renewables. The shares offer a very healthy yield of 4.5% and are attractively valued on around 12.5 times earnings.
My next company is Unilever (LSE: ULVR). It benefits from a strong portfolio of well-known brands (such as Hellman’s, Surf, Domestos, and Dove). Of its competitor group, it has the largest sales exposure to developing and emerging markets. Under the stewardship of its CEO, Paul Polman, it has become more focused on improving profitability and returns. Unilever’s margins are lower than many of its competitors, and while it’s made good progress streamlining its production facilities, there is still scope to improve efficiency.
Unilever is slowly repositioning itself by selling lower growth businesses and reinvesting the proceeds in more attractive areas. An example was last year’s purchase of Sara Lee’s personal-care division. The management structure has been simplified and the executive directors’ average tenure reduced to inject fresh ideas into the company. The shares have performed well recently but, given strong earnings and dividend growth, a valuation multiple of 15 times earnings is still attractive.
Finally, despite the recent change of management at Morrisons (LSE: MRW), we think the company remains attractive. The supermarket’s focus on value has served it well over the last couple of years, but there have also been significant underlying improvements in the business. The company’s ‘Market Street’ concept has proved very popular with its customers and distinguishes it from competitors. Strong like-for-like sales growth has resulted in lower operational gearing and a look at Morrisons’ operating margins versus Tesco’s suggests that there is still room for future improvement. Furthermore, Morrisons has successfully trialled a smaller store format, providing a growth opportunity in Britain. The company benefits from a very robust balance sheet, offers strong dividend growth and is valued on 12 times earnings.
The stocks Charles Luke likes
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