Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Martin Cholwill, manager of the Royal London UK Equity Income Fund.
Anaemic growth has been a dominant feature of the economy ever since the credit crunch and it looks set to stay that way for years to come. Although QE may have stopped the global economy collapsing, it will not by itself drive us back to previous levels of growth.
Deleveraging has not yet fully played out and will be a significant headwind for years to come. As a consequence, interest rates will remain low for the foreseeable future. All of this means that equity-income-based strategies should deliver attractive returns, but only if investors choose stocks that can deliver sustainable and growing dividends.
The three stocks that follow reflect certain themes that have worked well for me in recent years. I like to stick to quality companies with strong balance sheets that can offer sustainable and growing dividends backed by cash flow.
I also have a ‘survivor’ bias – I like companies that have benefited, or can benefit, from competitors that have weakened or disappeared. Conversely, investors should be wary of weak companies that are vulnerable to the whims of political intervention.
My first recommendation is Cineworld (LSE: CINE), one of the largest operators of multiplex cinemas in the UK. Unlike some forms of consumer spending, cinema attendance has held up very well during the recession. It fits into the classic ‘affordable treat’ category that people will not give up lightly. Some analysts worried that this would be a difficult year for the firm, with the Olympics and Diamond Jubilee distracting viewers.
However, film-release schedules were cleverly adapted and, as we have seen from the latest James Bond film, cinema attendance is very much alive in Britain. Cineworld has fully invested in digital technology and, better still, its competitors have weakened financial positions. The shares offer close to a 5% dividend yield that should continue to grow over the medium term as more cinemas open around the country.
My second choice is Spirax-Sarco (LSE: SPX), which provides products and services for the control and efficient management of steam and industrial fluids. It has avoided recent profit warnings in the capital goods sector, and the firm claims recent economic weakening have not hit demand. It is a world leader in a fragmented but growing industry, with a market share equal to the next three or four largest competitors combined.
At some stage this firm could even be an attractive acquisition for a large corporation looking at their own anaemic growth prospects and wanting to buy ‘GDP plus’ growth. It has plenty of exposure to faster-growing economies in the Asia Pacific region, which continue to see double-digit growth rates. The shares only offer a 2.75% dividend yield, but this should grow strongly for years to come, given the firm’s solid balance sheet and net cash of almost £50m.
Aviation services company BBA (LSE: BBA) is the third stock I like. Its core business is serving the US corporate jet market, which historically has exhibited secular growth. We had an encouraging meeting with management a little while ago and, despite some recent softness in demand, they remain upbeat.
I see the shares as a US GDP proxy – any pick up in the US economy should feed directly through to increased businesses confidence and boost the number of hours flown. The shares currently yield over 4% and this should grow steadily over time.