Each week, a professional investor tells us where he’d put his money now. This week: James Davidson of the JPM Global Equity Income Fund.
After the global financial crisis and in the wake of the implementation of unconventional monetary policy by central banks, the market has been preoccupied with the “dividend aristocrats” – companies which have achieved growth in their dividends every year for 25 years or more. The aristocrats have outperformed because yield-hungry investors feared deflation and believed that the aristocrats had pricing power.
This was a trade that worked remarkably well, and defensive sectors (such as utilities, telecoms and consumer staples) outperformed their more cyclical counterparts (particularly financials and basic materials). However, today we are finding that aristocrats such as Novartis and Colgate-Palmolive haven’t grown their sales for more than three years.
Last year marked an inflection point, with cyclically sensitive stocks outperforming and defensive sectors selling off. For example, basic materials – which had undergone dividend cuts – was the top-performing sector for the year. The expectation that the US Federal Reserve would begin raising interest rates drove the turnaround in financials, which had underperformed consumer staples by about 75% over the past decade.
After years of being shunned by investors and suffering under a heavy regulatory environment, financials saw their costs fall in absolute terms. They are now in a position to offer attractive dividend yields irrespective of what happens with rates. With the market having been so dogmatically positioned the other way, this recent reversal in fortune for the “high yielders”, while still in its early stages, has given a number of investors pause for thought, as the tables appear to have finally turned in favour of more cyclical companies. Below are three stocks that should benefit from this turnaround in sentiment.
The carmaker General Motors (NYSE: GM), having emerged from the depths of bankruptcy in the years after the financial crisis, has been a good example of a turnaround story. Recently, GM’s shares have de-rated following investors’ focus on Tesla’s disruption of the carmaking sector. The company now yields 4.6% and offers a price/earnings ratio (p/e) of 5.3 times, making it the cheapest stock in the S&P 500.
Danske Bank (Copenhagen: DANSKE) has doubled its dividend over the past two years. The company plans to buy back a further 4% of its outstanding shares (so far it has cancelled 8% of them). The European Central Bank cannot keep up negative interest rates for much longer, which should support Danske Bank’s performance.
Rio Tinto (LSE: RIO), the mining behemoth, has a double-digit cash-flow yield at today’s commodity prices. It offers a 5% dividend yield and will be entirely free of debt by the end of 2018.