Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Jeremy Whitley, head of UK and European equities and manager of the Dunedin Income Growth Investment Trust
We champion a bottom-up approach and concentrate on finding good-quality companies at attractive valuations. Within an income-focused portfolio, the ability to generate a sustainable and growing dividend is also a critical consideration. The current environment of low interest rates, where investors prefer almost anything with a decent yield, makes finding good-quality businesses at prices that are likely to offer high long-term returns particularly challenging. It requires a good deal of vision about where businesses may be in the future rather than where they are today. Here are three that look to be on the right track.
The first is Cobham (LSE:COB), a company traditionally focused on American and NATO defence markets. It has come under pressure recently as western governments have reined in spending. However, this is a business with a lot of proprietary technology in the communications and air-refuelling fields, which makes commensurately high margins and has a strong balance sheet. Management has implemented a significant cost-cutting programme and disposed of business units in the most challenged areas. The new CEO intends further to refocus the firm's efforts on faster growth areas, such as commercial aerospace and developing market defence spending. This will be reinforced through acquisitions and better exploitation of the firm's intellectual property. The shares offer a 4% dividend yield that I believe has good scope for growth over the medium term.
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I've recommended GKN (LSE:GKN) in this column before. While an undoubtedly cyclical business, it continues to offer growth, but at a very modest price. The firm is benefiting from rising demand in its key powder metallurgy market and improvements it has made within its new Land Systems division. Meanwhile, the driveline business has close to a 50% market share within the global automotive industry and is set to continue to benefit over the long term from emerging market demand. The company also has interesting prospects within its aerospace division, which focuses on designing and engineering key aircraft structures and engine components. It has recently expanded through the £630m acquisition of Volvo Aerospace. GKN maintains a reasonable balance sheet and offers a 3.2% dividend yield that we expect to grow at a decent pace.
My third tip, ENI (IM:ENI), is an Italian oil and gas company. In recent times it has suffered somewhat from its association with one of the weaker eurozone countries. Yet operationally it has undergone some significant and very positive changes. These include a series of restructurings and disposals, particularly the partial sale of its holding in the gas transmission business Snam Rete Gas. That sale has substantially improved its balance sheet and cash flow. Within its upstream exploration and drilling operations Eni has also had success in Mozambique, where it has discovered some potentially huge offshore gas fields. All this leaves investors with the prospect of a much more streamlined company with no debt and some exciting future growth prospects. As an added bonus, the shares carry a 5.9% dividend yield that we expect to grow at least in line with inflation.
|The stocks Jeremy Whitley likes
|Row 1 - Cell 0
Jeremy Whitley is manager of the Dunedin Income Growth Investment Trust.
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