Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Alan Dobbie, fund manager, Rathbone Blue Chip Income and Growth Fund.
The FTSE 100 index recently hit an all-time high. But plunging commodity prices, extreme currency moves, growing political risk and the memory of two recent bear markets mean we have yet to see the investor euphoria normally associated with new market highs.
That said, while sentiment is not yet at extremes, central banks’ actions to pin down bond yields have pushed investors to take more risk, leaving many bonds and “high-quality” shares looking expensive compared to their own history.
We prefer to buy high-quality shares, but only if they are also attractively priced shares – this shrinks our range of potential buys. But there are still good buys out there. We are looking for companies that generate high returns on capital and can “beat the fade” (that is, avoid the tendency for excess returns to be competed down to a “just adequate” level). Here are three such shares.
Swiss pharmaceutical giant Novartis (Zurich: NOVN) has undergone significant change over the last 12 months. Major deals with GlaxoSmithKline and Eli Lilly have helped to reorientate the company around its three very large but focused business divisions: pharmaceuticals, eye-care and generic drugs. This leaves the company superbly positioned to provide affordable health care to the world’s rapidly ageing and growing population.
For example, Novartis’s new heart failure drug, LCZ696, should receive approval from the US regulator later this year. Heart failure is a huge challenge for health-care systems. It’s the biggest single cause of hospital admissions among the over-65s, and an area that has seen little innovation in recent years.
In time, LCZ696 should be a multi-billion-dollar blockbuster drug. Meanwhile, Novartis’s eye-care (Alcon) and generic drug (Sandoz) units are also excellent businesses in their own right and are well placed to play an important role in tackling global health-care challenges.
Distribution and outsourcing company Bunzl (LSE: BNZL) is often dismissed as a dull, low-margin business that puffs up a pedestrian organic growth rate by pursuing an aggressive acquisition strategy. We beg to differ. Bunzl is a low-margin business, but its efficient operating structure and solid cash-conversion allow it to generate very attractive cash-flow returns on capital.
Yes, it is acquisitive, but – with rare exceptions – these small bolt-on acquisitions are bought at attractive prices and create value for shareholders. At its recent results meeting, management stated that it has identified over 500 potential acquisition targets. While only a few of these deals are likely to happen, this indicates that management believes it still has ample opportunity to continue what we consider to be a successful roll-up strategy.
Anheuser-Busch InBev (Brussels: ABI) has been one of the most laudable corporate success stories of the past few decades. From almost a standing start in 1989, the Brazilian management team has led a rapid consolidation of the global beer industry. The company has cut costs, improved margins and dramatically boosted returns on capital along the way.
From where we stand today, ABI has secured its place at the head of the table in the beer industry end-game. The company now has a choice to make. It could make a final play for its closest rival, SAB Miller.
It could deploy its cost-cutting skills in a similar market (eg, soft drinks). Or it can use its stable, prodigious cash flows to deliver a growing dividend yield to shareholders. We think all options remain open to the company and each has its attractions.