Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Sam Morse, portfolio manager, Fidelity European Values.
Since I began managing money, more than 20 years ago, I have always sought attractively valued companies that are capable of growing their dividends in a sustainable way.
My goal is to identify firms that are growing their free cash flow from underlying operations, so that they are able to increase their payouts to shareholders consistently over time – in effect, I’m using the growth of the dividend as a positive signal of the overall financial well-being of the companies I invest in.
Since taking over as manager of the Fidelity European Values Investment Trust (LSE: FEV) at the start of 2011, I have continued to use this approach. The result is a high-quality, long-term, low-turnover portfolio that is capable of outperforming through the cycle, and will do its best work for investors when the overall market outlook is uncertain and investors are nervous.
There have also been recent changes that allow me greater flexibility to invest in UK-listed names and to use derivatives – so if needs be, I can short stocks where our research suggests that a dividend is unsustainable and likely to be cancelled.
Here are three stocks that currently fit my investment criteria. Global pharmaceutical giant Novo Nordisk (Copenhagen: NOVOB) is well placed to tackle and make money from increased levels of diabetes in both developed and emerging countries, thanks to its leading position in the insulin market.
It benefits from strong barriers to entry and faces no imminent patent expiries among its key products. It has no net debt and has been able to generate double-digit growth in sales, earnings and dividends over many years. This is a long-term holding that I am happy to continue to own at a reasonable valuation.
I also like Intesa Sanpaolo (Milan: ISP). This conservative, well-run Italian bank has a simple business model that stands out among its peripheral European peers. Intesa has a strong capital base and a well thought-out business plan centred on improving its return on tangible equity. Its latest results show that it remains on track to deliver these benefits to shareholders in the form of increased dividends.
The bank is also well placed to take advantage of opportunities afforded by Italian prime minister Matteo Renzi’s announced reforms of the Italian “Popolare” banks’ ownership structure – both by winning business as others merge and from the greater profitability arising from the consolidation of the Italian banking system as a whole.
Another interesting stock is Aena Airports (Spain: AENA). This is a recent initial public offering by the Spanish government of its domestic airport operator. Low-capacity usage allows for significant passenger growth without the need for major additional capital spending, which will boost free cash flow and allow the company to pass this on to its shareholders in the form of an increased dividend.
At the moment Aena is highly levered (it’s borrowed a lot of money), but having gone through its peak phase of capital expenditure, I expect this to fall rapidly as passenger growth accelerates. In recognition of the regulatory and political risk associated with Spain in this year of elections, I chose to fund this new position by replacing, in part, some existing Spanish holdings, rather than by adding greatly to my overall exposure to the country.