Each week, a professional investor tells us where he’d put his money. This week: Ben Peters, manager of the Evenlode Global Income Fund, chooses his favourites.
We aim to find high-quality companies with both a good starting yield and real dividend growth over the long term. Businesses with a sustainable competitive advantage and strong pricing power are best positioned to offer these.
Sources of competitive advantage range from strong brands that inspire loyalty to products protected by patents. The assets underpinning these advantages are often intangible; they can include strong network effects between users or the value of software developed internally.
These companies therefore often have the added benefit of being asset-light as well as cash generative, requiring little reinvestment to maintain the asset base and providing shareholders with a recurring stream of dividends from the cash flows. Once we identify these stocks, we invest at sensible valuations. Our portfolio is diversified by both industry and geography.
Pharma with a global footprint
The French pharmaceutical giant Sanofi (Paris: SAN) is involved in an array of therapeutic areas, including oncology, immunology and rare diseases. Its highly technical products constitute valuable intellectual property, protecting the company from competition and giving it strong pricing power.
However, as patents eventually expire, it is vital for pharmaceutical companies to reinvest in an innovative pipeline of molecules and therapies. We believe Sanofi’s focus on proprietary technologies bodes well, and we are also encouraged by its emphasis on drugs that are hard to replicate and have wide-ranging applications. The company has a strong presence in emerging markets, enabling it to continue growing sales on established products. A diversified portfolio of consumer goods and vaccines, meanwhile, provides steady cashflows.
From chips to data centres
Chip giant Intel (Nasdaq: INTC) is best known for processors commonly found in desktops, laptops and tablets. However, in recent years the company has shifted focus towards data centres: facilities comprising networked computers that store and process data.
In this field, customers are willing to pay a lot more for the market-leading technology. Intel has come to dominate the data-centre processor market, taking a 95% share. But rather than rest on its laurels, Intel has explored innovative new techniques around memory, data transfer and programmable chips.
This has yielded new sources of revenue and prompted customers to integrate many Intel products into their data centres. They will now be loath to switch to other firms’ components, which will reinforce Intel’s competitive advantage.
Cutting down on sugar and salt
While PespsiCo (Nasdaq: PEP) still sells plenty of Pepsi-Cola, the majority of revenues now come from snacks and other drinks. Management has stayed on top of shifts in consumer demand: 50% of revenues now coming from “guilt-free” products with reduced sugar and salt. Add to this a willingness to embrace new distribution channels, such as online and direct-to-consumer sales, and we believe Pepsi is displaying the flexibility all consumer goods companies require to thrive in rapidly changing markets.