Johnson & Johnson, Lockheed Martin and Swedbank are among five stocks that Kames Global Equity Income fund manager Mark Peden has held since launch in 2012.
Veteran investor Peden said he takes a long-term investment time horizon on the fund, which is reflected in the core holdings he has continued to back over the years.
The two other stocks he has held since launch are TSMC and Daito Trust.
He explained: “These five stocks have many of the attributes the Kames global income team look for: leading market positions, high barriers to entry, consistent excellence in execution, earnings growth, solid balance sheets and sustainable and progressive dividends.
“No one is right all the time but we find that if we consistently stick to stocks which have these criteria, we outperform over the longer term.”
Peden has managed the offshore Kames Global Equity Income fund since launch in 2012 and was latterly joined by Douglas Scott.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch, the fund has returned 91.32 per cent, slightly behind the MSCI AC World benchmark’s rise of 106.91 per cent. It is however ahead of the average FO Equity – International fund’s 86.42 per cent gain. The fund has a historic yield of 3.07 per cent and carries an ongoing charge of 0.65 per cent.
Below, the manager reveals why he has held the aforementioned stocks since launch.
Johnson & Johnson
“Johnson & Johnson embodies so many of the attributes we look for in a stock,” said Peden. “It’s been going for more than a century, it operates in 60 countries, it has brand strength, product excellence and strong distribution.
“It’s hugely cash-flow positive and it is keen to return excess cash to shareholders.”
The manager said the US medical devices, pharma and consumer goods company is a “true dividend aristocrat” with more than 50 consecutive years of rising dividends.
In April, chief executive and chairman Alex Gorsky announced a 5 per cent rise in the quarterly dividend rate from $0.80 to $0.84 per share.
He said: “In recognition of our 2016 results, strong financial position and confidence in the future of Johnson & Johnson, the board has voted to increase the quarterly dividend for the 55th consecutive year.”
Peden added: “It’s a genuine force for good – making little products that help along the way, such as baby oil and band aids, all the way through to life-changing drugs in the fields of immunology, neuroscience and oncology.”
Lockheed Martin
The next name on the list is US aerospace and defence firm Lockheed Martin.
“No government wants to fund their defence equipment or space programme from the cheapest provider, it’s too big a risk,” said Peden.
“Everyone has Lockheed on speed-dial for their contracts – its cumulative R&D spend, experience, patents and army of engineers gives it an insurmountable market position.”
Performance of stock over 5yrs
Source: Google Finance
Over five years the stock has grown by 236.23 per cent, as the above chart shows.
Peden said another attractive aspect of the stock for the Kames income team is the progressive dividend policy, which has seen 14 consecutive years of 10 per cent or more dividend increases.
The manager said that in addition to the strong and growing dividend, the firm has also been buying back shares aggressively, “meaning practically all the free cash-flow has been returning to shareholders”.
Peden said he also liked the fact that more than 70 per cent of sales went to the US government, adding: “If you take the approach that firms only really have the credit worthiness of the companies they supply, then the US government is an excellent customer to have.”
Swedbank
This Swedish retail bank is the manager’s third stock-pick, with Peden noting many of its strong financial metrics.
“Too many banks have spent the past decade moving away from their core competencies, gearing up, losing control of costs and pushing their capital ratios to the limit,” he said.
“Swedbank is guilty of none of those crimes. It’s a very well-run bank which sticks to its core areas of operation and its home markets. It has a high return on equity, a dividend yield close to 6 per cent, unusually low credit costs and it’s very well capitalised.”
According to the bank, it has a return on equity of 15.8 per cent and a Tier 1 capital ratio of 25 per cent.
Peden added: “Such is its financial strength it has a dividend policy of distributing 75 per cent of annual profit to shareholders.”
TSMC
Peden describes Taiwanese semiconductor firm TSMC as a “global leader in its field”.
He said: “Semiconductors are the brains and memory of so many machines, there is no scope for error. TSMC can handle more volume, provide more accuracy and build smaller products than its competition."
“In a world where miniaturisation is key, its ability to build smaller products than the competition is a differentiating factor," the manager added. “Some of its products are down to five-billionths of a metre, that’s why it is a core supplier to Apple.”
He said the company fits into the fund’s ethos of identifying stocks able to grow their dividends, noting that its payout has almost doubled in the five years that it has been in the portfolio.
Daito Trust
Japanese condominium manufacturer Daito Trust is the final stock held by the manager over the five-year life of the fund.
“This is probably the least well known of this group of stocks,” he said. “Most people know Japan’s high-quality exporters such as Toyota and Sony, but there are several excellent domestic companies such as Daito, which construct condos for the rental market.
“We like the integrated model it operates as it finds the land, constructs the rental building, attracts the tenants and manages the property. Recent changes in the inheritance laws have made owning rental properties very tax efficient – this was an unexpected boost for demand.”
Peden said the firm aims to return 80 per cent of profits to shareholders, which last year took the form of 50 per cent through a dividend and 30 per cent through a share buyback.