Aberdeen’s Jeremy Whitley, manager of the five crown-rated Dunedin Income Growth fund, says that he can only find opportunities at the upper end of the market, and few even there. He told FE Trustnet about some of the larger cap stocks he is holding in anticipation of dividend growth.
Tesco
Over the past year, Whitley and co-manager Ben Whitley have sold out of Morrisons and retained their position in Tesco.
All the supermarkets are facing challenges, such as adapting to the internet and weaker demand in a period of economic struggle, and the managers say they think Tesco is better-placed than its rivals.
"We only want to face these challenges in one business," Whitley said. "We thought it had a better dividend and better medium-term prospects."
Tesco shares have suffered in recent years as the company’s attempts to expand into the US and China have struggled and were eventually abandoned.
Performance of stock vs market over 3yrs
Source: FE Analytics
Although this year has been better for the company, it has still lagged the index somewhat.
Performance of stock vs index over 1yr
Source: FE Analytics
"Tesco is going to take time to turn around the business," Whitley admitted. "There are some units that aren’t performing very well and should do better."
Whitley says the company’s strong balance sheet and huge property portfolio put it in a good position to improve its fortunes.
"We think it starts with the assets – and they have the chance to turn it around," he said.
The stock is yielding 4.3 per cent.
Royal Dutch Shell
Whitley also sees value in Shell, which has lagged the All Share in recent years. It has done well in comparison to BP, however, as the latter struggles to deal with the fallout from the Gulf of Mexico disaster.
Performance of stocks vs index over 5yrs
Source: FE Analytics
Both stocks are on cheap valuations compared with the market, perhaps hindered by the sluggish economic recovery. The company is trading on 8.1 times earnings, which is forecasted to rise to 9.7 times.
"Shell has underperformed and the weighting has come down, but it’s still a big income contributor," Whitley said.
The manager adds that he is a big believer in the stock in the long-term and thinks it is set up to do well over a period of decades, which the market is not factoring in.
"We think about 35 per cent of Shell’s balance sheet is in unproductive assets and will take 20 years to come through, but people aren’t interested because it’s too far away," he said.
"If it was to underperform more, we would ask if we should be adding more," he added.
Shell is yielding 4.9 per cent.
National Grid
Another contrarian position the managers have taken up is in National Grid. The energy industry has suffered on the back of political threats from Labour leader Ed Miliband to cap prices if his party wins the next election.
Although National Grid shares have outpaced the market in recent years on the back of demand for secure dividends, the share price was hit over the summer by the political issue and is yet to recover.
Performance of stock vs market over 1yr
Source: FE Analytics
"We have bought more recently on the back of weakness there," Whitley said. "We are more concerned about tough trading for the business than the politics. There are always issues with capping and the gas price."
Whitley points out that the company continues to provide earnings that are less dependent on the business cycle than those in many other sectors.
Ultimately the manager is unconvinced the political threats will become reality.
"There are better ways of lowering energy bills and better political ways of lowering energy bills," he said.
The stock is yielding 5.3 per cent.
AstraZeneca
Whitley also likes AstraZeneca, which is attempting to turn itself around under a new chief executive.
The company, like its large cap pharma rival GlaxoSmithKline, has been hit by the expiration of a number of important patents before new drugs were ready that could replace the revenue.
Data from FE Analytics shows the stock has actually outperformed the FTSE All Share over the past 12 months, and Whitley says new boss Pascal Soriot’s strategy is bearing early fruit.
"The new chief executive from Roche and Genentech is focusing on growth and the early signs are quite promising," he said.
Performance of stock vs index over 1yr
Source: FE Analytics
AstraZeneca has reorganised and relocated its headquarters to Cambridge in order to focus more on research and development.
It is yielding 5 per cent.
Vodafone
Dunedin Income Growth was one of the beneficiaries of the sale of Vodafone’s stake in Verizon Wireless, which saw shareholders receive a huge special dividend.
Whitley says he is happy to continue to hold the stock and may even reinvest the Verizon shares he is receiving into Vodafone.
"We might continue to hold Verizon or we might increase our position in Vodafone itself," he said.
Whitley praises the company’s management for holding out for a good price, which gives it a huge amount of cash to reinvest and enhances shareholder value.
The funds may end up being invested in the Indian offshoot of the company, he suggests.
In any case, the structure of the deal means that shareholders will gain more if they sit tight into next year.
The stock is yielding 4.5 per cent.
