Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Julian Chillingworth, chief investment officer and manager of Rathbone Income and Growth Fund
At the time of writing, investors are worried about potential US bank nationalisations and the effectiveness of various government stimulus packages. There is a struggle for direction and a growing feeling of despondency about the recession. The market could be making a bottom, a point that represents maximum opportunity for investors. The caveat is that this is uncharted territory, which is throwing up more questions than answers. We are playing the current market via a portfolio of defensives that offer some protection on the downside, although investors need to be careful of entry points as these stocks could be subject to profit-taking. Furthermore, with some predicting that dividends could fall 30%-50% between now and 2010, high free cash-flow yields are vital.
One stock we like is drinks giant Diageo (LSE:DGE). Like many defensives, the valuation looks stretched, but this stock has proved itself a safe haven. Since the 1970s, Diageo’s dividend stream has grown regardless of the share price. The firm released reasonable numbers earlier this year, although there were downgrades to organic growth (4%-6% from 7%-9%), which shouldn’t be a surprise in this environment. Diageo is now looking to increase its presence in India through a majority stake in United Spirits. The stock yields 4.13%.
Telecoms giant Vodafone Group (LSE:VOD) is another business that has grown its dividend stream since 1990 regardless of movements in the share price. This is a high-quality, cash-generative company, where earnings and dividend streams have the potential to grow. Third-quarter figures were solid. Group revenue was 1% higher than consensus. And the weakness in Spain and Turkey was offset by strength in Germany, Italy, Britain and South Africa. There have been no changes to full-year underlying guidance, but Vodafone is benefiting from sterling weakness – this translates into a 5% increase to revenue – and the group announced 500 job cuts at its UK mobile-phone business in a bid to cut group operating expenses by £1bn by 2010/2011. Vodafone’s diverse geographic portfolio and robust growth in data revenues makes the stock look like a good place to hide. The shares yield 6.17%.
The Ukraine/Russia ‘gas spat’ in January was beneficial for oil and gas explorer Venture Production (LSE:VPC). The company recently discovered substantial gas in the Cygnus field in the North Sea. It is good to have a decent stream of news at long last from a company that has disappointed in the past. Venture is enjoying ongoing takeover speculation and its shares yield 2.40%.
Finally, there’s packaging group Rexam (LSE:REX). We believe the market has become over-bearish on this stock. Can manufacturing volumes are down 5% in North America, but Rexam expects slow re-stocking after heavy de-stocking at the end of 2008. The company appears circumspect about efforts to diversify away from its core business of can manufacturing, and these efforts have been reined in. The group’s debt facility has been rolled over and is enough to maintain working capital requirements. We believe that Rexam will beat more aggressive analyst expectations. This is a value play and the shares yield 7.98%.
The stocks Julian Chillingworth likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Diageo | 1,085p | 775p | 827p |
| Vodafone Group | 169.5p | 96.4p | 124.5p |
| Venture Production | 950p | 280p | 517.5p |
| Rexam | 485.75p |
253.75p |
263.5p |