A professional investor tells MoneyWeek where he’d put his money now. This week: Wouter Weijand, global head of high income equity, ABN Amro Asset Management
After a stressful and chaotic 2007 for markets as the credit crisis loomed large and financial stocks in particular suffered, investors could be forgiven for giving equities in general the cold shoulder. But even amid this economic uncertainty, and even for risk-averse investors, our funds are able to find investments with high, solid and growing dividend payouts.
Our North American team highlights, for example, the strengths of CBRL Group’s (US:CBRL) business model. This small-cap firm is successfully leveraging its fixed costs by blending an offering of breakfast, lunch and dinner with a range of gift merchandise in its Cracker Barrel Old Country Stores. The concept appeals to local shoppers and travellers visiting shops located mainly along interstate highways in the southeast of America.
The team likes CBRL’s strong shareholder orientation: buying back stock, paying down debt and raising its dividend steadily. It has reduced the number of outstanding shares by more than 50% between the fourth quarter of 2006 and of 2007. As for financial strength, its property portfolio is worth nearly $1bn.
As value- and income-focused investors, we are attracted by the 35% discount to its sector at which this stock is trading, which is roughly 8.5 times the cash flow for the 2008 financial year, excluding net debt. Another, equally attractive trait is that we expect the dividend to be almost doubled in the next three years.
It is worth noting that peer companies have been bought at higher multiples in the last few years: Ryan’s Steakhouse was bought at nine times 2006 cash flow less net debt, OSI Restaurants at 9.4 times 2006 cash flow, and Rare Hospitality at 10.3 times 2007 cash flow. After the sharp correction that this small-cap stock has seen over the last 12 months, we could now see it rising once again to $52 a share.
Our European team has been focusing on defensive retail banks, such as Danske Bank (CPH:DANSKE). Its operations in Scandinavia and Northern Ireland are stable and it has been paying an attractive 5% dividend. The stock is trading at a modest seven times 2008 earnings, while earnings for this year are actually expected to grow by around 5%. With its credit quality being above average and Danske less exposed to subprime debt than its peers, the recent underperformance of its stock compared with the banking sector isn’t warranted. The price is discounting DKK30bn-40bn of credit writedowns. Even on gloomy assumptions, that is overdone. All in all, we see Danske as a defensive play with significant upside.
Lastly, our team in Hong Kong finds value in places where one wouldn’t expect, for example Taiwan-based Quanta Computer (LSE:QCID). Growth at the world’s largest notebook-PC manufacturer (with a market share of nearly 30%) remains solid; 20% more notebooks are expected to be shipped in 2008. Despite concerns about competition and margins, its cash flow and earnings continue to grow. At 7.8 times 2008 earnings and 7.6 times 2009 earnings, plus a dividend yield of 4.2%, we expect the stock to have significant upside.
The stocks Wouter Weijand likes
Stock, 12mth high, 12mth low, Now
CBRL Group, US$50.74, US$24.00, US$32.59
Danske Bank, DKK263.50, DKK152.50, DKK163.00
Quanta Computer, US$12.90, US$5.75, US$6.58