Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Paul Atkinson, portfolio manager, North American Income Trust.
The North American Income Trust aims to provide investors with above-average income and long-term capital growth by investing predominantly in companies listed on the S&P 500, the American stock index.
Despite the uncertainty around growth prospects in China and the economic ramifications of the unrest in Crimea, our select investments in US and Canadian companies remain in rude health.
American companies that were badly affected by the great recession have emerged stronger and wiser. As confidence in the domestic recovery improves, as consumers feel better, and as management teams focus more on the long term, company profits will be increasingly committed to earnings-boosting re-investment projects. But, by instinct, we don’t want our trust to be overly reliant on a cyclical recovery.
So we typically invest in companies with durable earnings streams that can ride out the vagaries of the business cycle. Our holdings are fairly concentrated in number but diversified by business model and geography. Many have overseas earnings. Here are three examples.
Restructuring has put growth back in focus at Microsoft Corp (Nasdaq: MSFT). We believe its recent leadership transition – it now has its first non-founder CEO – is positive for the company. In 2014 Microsoft is expected to ramp up its capital expenditures to invest in international data centres and servers in order to leverage cloud-based computing and storage. The acquisition of Nokia should help Microsoft gain traction in mobile and tablet computing.
Its shift from licensing to subscription models will stabilise core revenues, upgrade earnings quality and help the company learn to live with the decline of the PC. At 14 times consensus earnings for this year, we believe Microsoft’s stock has further to run. The solid balance sheet and strong 8% free-cash-flow yield provides additional scope to grow dividends.
Dow Chemical Company (NYSE: DOW) is a diversified, worldwide manufacturer of chemicals, plastic materials, and agricultural products used primarily as raw materials in manufacturing. We believe management is doing the right things to improve cash flows, margins and, ultimately, shareholder returns.
The company has done a great job in repositioning product exposure away from commoditised offerings in favour of higher value-added businesses. It also continues to focus on lowering costs and improving returns on invested capital.
Dow has demonstrated a disciplined capital allocation strategy by paying down debt and increasing its regular dividends. At 16.8 times consensus earnings for 2014, Dow has recently been rewarded for its improved earnings potential. We look to earnings growth as the key driver of stock performance in the near term.
Genuine Parts Co. (NYSE: GPC) has increased its dividend in each of the past 57 years. The firm distributes automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials throughout the US, Canada and Mexico.
Tom Gallagher, the chief executive, has proved himself a good operator and capital allocator over a sustained period. The firm has invested in itself to grow organically and through acquisitions, and has done so while also growing its dividends – which is in alignment with our view that sound dividend payout policies help drive smarter capital allocation decisions by management. A valuation of 19 times forward consensus earnings is supported by fundamentals.