Ben Peters and Chris Elliott top the performance tables with their fledgling Evenlode Global Income fund the global dividend hunters have compiled their own top 10 of stocks offering the most sustainable payouts worldwide.
Peters and Elliott's £252 million fund has returned 16% since launch, in November 2017, placing first of 43 funds in the Investment Association's Global Equity Income sector over that period.
That builds on Citywire A-rated Peters' success with the Evenlode Income fund, which he runds with fellow A-rated manager Hugh Yarrow. That £2.9 billion fund has returned 211% since launch in September 2009, placing in the upper reaches of the UK All Companies sector over that period.
Peters and Elliott rate US technology business Cisco (CSCO.O) as the best stock worldwide for sustainable dividends.
Cisco accounts for 3.5% of the Evenlode Global Income portfolio and has been one of two top contributors to returns since the fund’s launch.
It emerged as the top or second-best performer in all bar one of Evenlode’s sustainable dividend measures - dividend growth, yield, one-year total returns, net debt to earnings, free cash flow yield and free cash flow dividend cover – all with a five-year outlook.
Cisco produced a total return of 38% in the year to October 2018. It offered dividend growth of 13.8% in 2018, recently increasing its quarterly dividend by 6% to 35 cents a share and offers a yield of 2.9%. It has debt ratio of -1.4 times earnings, free cash flow of 6.2% and dividend cover of 2.1 times.
It was one of three US-based businesses, alongside PepsiCo (PEP.O) and Paychex (PAYX.O), which ranked top for dividend growth in the study, benefitting from having more cash to spare thanks to the tax cuts in the US in 2017.
While the average dividend growth for Evenlode’s top 10 list was lower than that of the MSCI World in 2018, at 8.2% versus 9%, the managers argued the consistency of their payouts was more important.
‘In any given year the aggregated list did not cut its payout, even during the great financial crisis of 2008-9,’ they said. ‘Looking back, we see it is during this period that the performance of our list started to positively deviate from the index. In other words, the companies on the list won by not losing.’
|Market Cap ($bn)||Local Dividend Currency Growth||Current Yield||1Y Total Return (to End-Oct 2018)||Net Debt/EBITDA||Free Cash Flow Yield||Free Cash Flow Dividend Cover|
|Johnson & Johnson||379||7.1%||2.4%||3.1%||0.6||4.6%||1.9|
Brushing off hardware concerns
Peters and Elliott (pictured) brushed off recent concerns about hardware companies’ reliance on product cycles, highlighted by fund holding Apple (APPL.O)'s profit warning in January.
Peters acknowledged that hardware, such as computer monitors and in the past, hard drives, had become commoditised, explaining that consumers cared less about the maker of the product as long as it worked.
‘And if you go back a couple of years with Cisco, that's essentially what everyone was saying,’ he said. ‘It turns out that providing the critical infrastructure for [internet] networks is a bit harder than it sounds.
‘Actually what has happened in the out-turn is that Cisco, by far are the leading provider of that equipment, have had to react to improvement technology and also have been at the forefront of improving that technology.’
For instance, Cisco’s Catalyst 9000 network switch was now ‘flying off the shelves’, said Peters, and was sold with subscription making this product a combination of hardware and software. A subscription-based product also helped Cisco’s ‘revenue visibility’, he argued.
Peter added that Cisco’s strong financial position meant it had a lot of money to invest in mergers and acquisitions, something he said it had been doing ‘extensively’ to try and build out its services. The company had also been using this free cash to invest in the innovation of its ‘internet of things’ and 5G offerings, he added.
Cisco expected internet traffic to increase threefold over the next five years, said Peters, providing further potential for growth in its specialism.
Managers stick with evolving Apple
Peters argued the business was transitioning away from its reliance on the iPhone and that investors shouldn't expected a smooth ride.
‘As they transfer from being primarily a hardware company to being a hardware, software and services company the revenue isn't going to go up in a straight line,’ Peters said.
‘That's not to diminish the basic argument which, yes, iPhone will not be the future of Apple, it will be something else but there is a transition to be made,’ he said.
Elliott added that as Apple generated so much of its revenue from iPhone it scored lower on Evenlode’s diversification requirement, so does not represent as big a position in the fund as a company like Cisco.
‘There are parallels,’ said Peters. ‘Cisco... [is] now half a hardware business and half a software business. Microsoft used to just be desktop PC operating systems but now has one of the biggest cloud computing performers in the world, which is growing at 50% per annum.
‘If a business can evolve and make the most of its incumbent position and not just sit on it, and say "Right, well, what's next?" and then make steps towards it then that’s the sort of business we like.’
The managers used volatility in 2018 to buy positions in German chemicals company Henkel (HEN3.DE), US academic publisher Wiley (JW.A.N), US medical testing business Quest Diagnostics (DGX.N) and American business consultant Accenture (ACN.N).