Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Chris White, senior investment manager, Premier Income Fund, Premier Monthly Income Fund and Premier UK Alpha Income Fund.
As global uncertainty persists, I believe investors should stick with high-yielding, cash-generative, defensive equities that are not over-exposed to the economic cycle. Here are three I like.
Most professional investors would have regarded Dairy Crest (LSE: DCG) as uninvestible a few months ago. The company had a stretched balance sheet, a pension deficit and a high dividend yield – surely something had to give? Fortunately, the company has found a neat solution to its problems; selling its French business, St Hubert, for £344m. This move brings down debt and leaves the company with cash for UK acquisitions and funds for the pension deficit.
The firm is divided into two parts. The branded business includes names such as Cathedral City and Davidstow Cheddar, Utterly Butterly and Clover. There’s also a dairy and milk-processing business. Dairy Crest makes nearly all its profit from the branded business, which has seen considerable growth over the past few years, and should continue to drive the business forward. The dairy business, meanwhile, is low margin and poor quality.
However, I think the returns from this division can be boosted on a three-year view. There is already a plan in place to recover profitability and it helps that the dairy business in the UK is now an oligopoly, featuring just three big players. The supermarkets may be tough customers to negotiate with, but they realise the importance of having three suppliers, as a move to two processing firms would substantially reduce their bargaining power.
As for the recent dispute with the farmers, that’s a bit of a sideshow. Milk processors make far lower margins out of milk than the supermarkets, so I think the latter should show more leadership here. Overall, I think the shares are cheap, given Dairy Crest has a clean balance sheet and offers a reliable yield of 6%.
The second stock I like is Informa (LSE: INF), the publishing business with interests in academic publishing, events, training and professional and commercial information. Informa is cash-generative, offers growth potential and is not overly dependent on the economic cycle.
Strong cash flow means the company has been the subject of takeover talks on a number of occasions in the recent past – further consolidation in the sector seems likely. In the meantime, Informa offers decent defensive qualities, exposure to any recovery and trades at a significant discount to peers with similar characteristics.
Finally, I like BT (LSE: BT.A). The recent rocky results were a flashback to a few years ago when the global services division proved a costly headache. These days, BT is a focused, cash-generating machine, which is operating well and benefiting from the move to fibre-optic technology. This should result in above-average dividend increases.
The global service division has improved markedly in terms of cash generation over the past few years, so I would regard the latest statement as a blip. The recent acquisition of football rights is bold, but it means BT is a dangerous competitor to BSkyB. It is large, cash-generative and offers consumers a viable alternative. The dividend yield of over 4% should grow strongly from here.