Investors that suffered through the market falls in 2022 face an uncertain future, but this doesn’t necessarily make it a risky time to invest, according to analysts at Evenlode.
While times were tough last year for investors in anything other traditional value stocks, this doesn’t mean quality investors are under threat in the long term, they said.
Robert Strachan, analyst on the TB Evenlode Global Income fund, said the biggest risk to equity investing is the potential to make a loss over the long run, while uncertainty is more of a short-term phenomenon, using the potential for recession as a good example.
Source: Evenlode
“Perhaps the biggest topic in the financial columns is whether we are entering, are already in, or are exiting, a recession, with logical arguments and bodies of evidence on all sides,” said Strachan.
“We are well into US Treasury yield curve inversion, a classic recessionary indicator. However, what is known to be true is that uncertainty remains, as always. Critically, uncertainty is different from risk.”
However, there are “green shoots appearing” that suggest inflation could be on its way down, such as normalisation of Covid-related supply chain disruption.
“Global shipping container rates, after having spiked up to roughly 10x in September 2019, have now all but fallen back to earth and pre-pandemic levels,” Strachan said.
“Manufacturing levels stayed relatively resilient despite China’s zero-Covid policy, and the re-opening is good news for releasing global economic capacity (at an inevitable cost to health for some citizens and the healthcare system).”
Although uncertainty may remain for the year, over the long term there are still names that investors will want to own for the future and now could be a good time to buy them.
As such, below Strachan looks at 10 dividend-paying companies that can sustain their pay-outs into the future. The metrics used for inclusion on the list include the cash flow return on invested capital; net debt to earnings before interest, tax, depreciation and amortisation (EBITDA); free cashflow cover; dividend history; and current yield. This is then whittled down to a top 10 as determined by the analyst and his colleagues.
“While a good yield today is important, we think sustainable, stable growth of the dividend through time is more important. The ideal outcome of our selection process is a good current yield combined with dividend growth and low dividend volatility,” Strachan said.
Technology
Three stocks fall into a broad technology theme, headlined by IT networking specialist Cisco. The US firm’s core business of selling switches and routers is transitioning to longer-term subscription purchase models, which provides a recurring stream of cashflows that can be used to pay dividends, said Strachan.
“Demand continued to be high in 2022 after a rebound from reduced corporate spending in 2020 into 2021. However, supply chain bottlenecks restricted its ability to deliver to customers. There is evidence that this is easing going into 2023.”
Also on the list was Paychex, a provider of human resources services to small and medium-sized businesses, predominantly in the US. Around half of revenues are derived from payroll outsourcing, with the remainder from human resources services, such as pensions administration, and management of workplace policies
“After a strong set of year-end results in July, in which it announced a 20% increase in the dividend for the current financial year, management has seen no signs of slowdown among small and medium-sized businesses,” Strachan said.
Dutch information, software and services company Wolters Kluwer also got the sustainable dividend seal of approval. Its products and services range from helping healthcare professionals to make decisions, accountants to manage compliance and lawyers to draft documents.
“While the total return of -10% in 2022 could not match 2021’s 42% gain, in the real world it has been very much business as usual; good organic growth and a growing share of subscription revenue from embedded solutions,” said Strachan.
Lastly, UK firm RELX provides information services to academics and businesses, although it is a diversified company with several arms, including publishing sleeve Elsevier, a risk analysis branch and legal division.
“The diversification of the business has come to the fore since the pandemic as revenues from its smallest division – trade exhibitions – dried up due to lockdown restrictions,” said Strachan.
Performance of stock vs FTSE All Share over 3yrs
Source: FE Analytics
Healthcare
Another theme is healthcare, with European giants Roche and Sanofi making the grade. The former is a Swiss pharmacology giant that has invested heavily in the field of immuno-oncology, which has yielded breakthrough therapies that are enabling patients to live longer and allow Roche to capture market share, the analyst said.
“Around a quarter of Roche’s portfolio by revenue is formed of its Diagnostics division, which supplies diagnostic testing equipment to laboratories worldwide. This was clearly beneficial during the coronavirus pandemic, but also has longer-term drivers from the increased use of personalised medicine and the need for efficiency within healthcare systems,” Strachan added.
The latter is a French pharmaceutical and healthcare company specialising in four main areas: specialty care, general medicines, vaccines, and consumer healthcare.
“Growth in 2022 was driven by demand for flu vaccines during a tough season and continued growth for the blockbuster immunology drug Dupixent,” Strachan said.
The final company in this area is the only new entrant to the list this year. Australian medical diagnostics firm Sonic Healthcare replaces money transfer agent Western Union.
“As one of the largest providers of outsourced lab testing, the company enjoys considerable advantages in coverage and cost efficiency. Additionally, Sonic Healthcare experienced a boom in testing volumes during the pandemic, which has enabled it to invest in extra capacity, partially funded by government grants,” said Strachan.
“In normal times, capital intensity is limited relative to cash generated, and testing volumes are relatively stable, enabling a consistently healthy dividend.”
Source: Evenlode
Consumer-related
Inflation has caused a headache for firms but some have been able to pass on these price rises thanks to strong brands and customer loyalty.
Strachan said: “Ultimately it came down to pricing power; were consumers willing to spend more on everyday purchases in a challenging environment? Or is price the primary factor in purchase decisions?”
Two names on the list – Nestlé and Unilever – are two of the biggest consumer staples companies in the world and were able to increase prices at “unprecedented rates”, with “minimal impact” on the amounts sold.
While there were signs that consumers were tightening their belts towards the end of last year, Strachan said what matters in the long run is these companies’ ability to invest behind brands irrespective of whether conditions are favourable or not. “Our experience with Unilever and Nestlé since the pandemic has reassured us in this context,” he said.
Lastly, French company Bureau Veritas is part of the testing, inspection and certification industry, which helps companies ensure a high quality of products and suppliers.
“The company dominates the niche of asset inspection for ship construction and industrial machinery, both examples where the cost of failure is very high. Demand for these services is set to grow through time, with trends such as sustainable sourcing and emissions tracking becoming priorities,” said Strachan.