Medical products giant Johnson & Johnson, consumer brands specialist Unilever, drinks company PepsiCo and media firms Relx and Thomson Reuters are among the best stocks in the world for investors looking to balance yield with growth, according to Evenlode’s Ben Peters and Chris Elliott.
The co-managers of the TB Evenlode Global Income fund, which launched in September last year, said in their global dividend sustainability report for 2018 that while the global economic environment remains patchy, there are still decent returns to be made for income investors.
“Balancing yield today with the potential for future growth can deliver an attractive income stream and strong total returns over time,” the managers said.
“Moreover, searching globally for businesses provides a deep and diverse pool of sectors and companies to examine.”
Below the managers highlight ten stocks from across the globe that have a balance of free cash generation today with potential for growth.
Table of stocks
Source: Evenlode Investment
First up is the £208bn US tech firm Cisco Systems which has been on an incredibly strong run over the last five years with its share price up 95.22 per cent.
“Cisco is the global market leader in the technologies that underpin the internet,” the Evenlode managers said.
“With the advent of cloud computing, it has expanded into providing security services for networks, the cloud and the internet of things and this includes the ability to detect malicious threats in encrypted internet traffic.
“Cisco has a very strong balance sheet with $35bn of net cash, and free cash flow and twice covers the 3.6 per cent yield.”
Staying in the US large-cap space, multinational medical devices, pharmaceutical and consumer packaged goods manufacturing company Johnson & Johnson is another strong option for investors, despite its share price almost doubling over the last five years.
“Often associated with its consumer products division, with iconic brands such as Listerine and Neutrogena, Johnson & Johnson is predominantly a pharmaceuticals and medical devices company,” the managers said.
The company’s Janssen pharmaceutical division generates 46 per cent of revenues and has a broad portfolio of drugs treating a range of disease areas with strong results in oncology and immunology.
“Medical devices is similarly diversified, creating systems that aid surgery, diagnostics and wound care,” they added.
The draw for income however is the company’s dividend yield which currently stands at 2.5 per cent.
Thirdly, drinks brand company PepsiCo is another that investors looking for income could consider, with a dividend yield of 2.9 per cent.
“Something of a misnomer, PepsiCo derives only 12 per cent of sales from its eponymous drink. The company also owns a wide range of food and beverage brands including Tropicana, Lays, Doritos, Quaker Oats and Cheetos,” Peters and Elliott said.
“A majority of revenue comes from North America, and 40 per cent from the rest of the world. Twenty-two of PepsiCo’s brands generate more than $1bn of sales annually, and the company’s portfolio boasts four of the top ten retail brands across all categories.”
Moving further down the market cap scale, US-focused provider of human resources services to small- and medium-sized businesses Paychex is an option for investors.
Its shares have more than doubled over five years (116.74 per cent) but its dividend yield remains attractive at 3.1 per cent.
The managers said: “A little over half of revenues are derived from payroll outsourcing, clearly an important function for any business and a task for which smaller firms are very willing to utilise a specialist.
“The other part of the business is other human resources services, such as pensions administration, and management of workplace policies. Once integrated into a client’s business, renewal rates are extremely high. The cash flows that back the yield are very stable as a result.”
Closer to home, the team said consumer products giant Unilever remains attractive despite being one of the main beneficiaries of the low growth environment experienced over the last decade, as the below chart shows.
Performance of stock and index over 10yrs
Source: FE Analytics
“Unilever’s consumer products are instantly recognisable to the 2.5 billion people who use them globally every day,” the managers said.
“Selling products from Dove to Domestos, Lifebuoy to Lipton, this diversified consumer goods giant has a history stretching back to the 1880s.”
Around 55 per cent of revenues are from emerging markets and many brands have been present in their local market for decades or longer as a result of the firm’s colonial heritage, they added. The stock has a dividend of 3.2 per cent.
Another UK-listed option is Anglo-Dutch media conglomerate Relx – another stock gaining traction in recent years – which is up by 280.98 per cent over the last decade though most of this gain has been in the last five years.
The firm is diversified across a number of sectors with the academic publishing business Elsevier disseminates 16 per cent of the world’s scientific articles.
Performance of stock and index over 10yrs
Source: FE Analytics
It also provides risk and business analytics provides services such as risk analysis tools to insurers, and anti-money laundering tools to banks.
The firm’s legal division operates the LexisNexis database for lawyers, while its exhibitions business is the largest in the world, operating ‘go to’ events that are often monopolies in their given industry.
“Diversification and a large degree of subscription-based revenue give stability to the group’s cash flows,” the managers said. The stock has a yield of 2.4 per cent.
Next up is the Canadian media company Thomson Reuters, which in addition to being in a duopoly in the legal space with Relx, also operates in finance, risk management and tax and accounting, as well as owning the Reuters news agency. It has a yield of 3.2 per cent.
“The financial segment provides data and terminals to market participants, as well as some of the plumbing for the foreign exchange market,” the managers said.
“Tax and accounting provides software to accounting and consulting firms, as well as tax departments of large companies, that enable them to manage their affairs.”
In Europe, Dutch information, software and services company Wolters Kluwer is attractive as 78 per cent of revenues coming from recurring sources such as subscriptions.
Finnish company Kone is one of the world’s largest elevator manufacturers and the leading provider of new equipment in China. There is a growing regulatory imperative for ongoing elevator maintenance, and services account for 45 per cent of Kone’s revenue.
Finally, Givaudan is the world’s largest manufacturer of fragrance and flavour products selling into the food and cosmetics market.
“The company’s formulations are custom made and often the defining feature of a product. This gives the firm great integration into its customers’ supply chain, as once the flavour of a product has been established as a winning formula the manufacturer is unlikely to want to change the supplier,” the managers said.