Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Ben Ritchie, senior investment manager at Aberdeen Asset Management.
We take a long-term view on investment, champion a bottom-up' approach and concentrate on finding good-quality companies at attractive prices. Within an income-focused portfolio like the Aberdeen UK Equity Income fund, the ability to generate a sustainable and growing dividend is also a critical consideration.
The current environment of low interest rates and appetite for all things with yield makes finding good-quality businesses at prices that are likely to offer high long-term returns particularly challenging. It means that, more than ever, we have to use our research capabilities to take a view on where businesses may be in the future, rather than perhaps where they are today.
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The first company that warrants investors' attention is Experian (LSE: EXPN). Experian has leading market positions in consumer and business credit data in Britain, Brazil and America.
The company gathers data from several sources at very low cost and sells the information to credit-granting institutions. This data is built up over years, which creates a high barrier to entry for potential competitors.
Experian has significant market shares in its chosen markets, which puts it in a strong position to benefit from credit growth in its core markets, particularly as the UK's economic outlook improves, and Brazil's middle class continues to expand.
The company also has strong cash flows, which will be used to buy other businesses and to continue to grow payouts to shareholders in the form of both share buybacks and dividends. While the shares are not cheap, trading on 19 times 2014/2015 earnings, we believe the company's growth is sustainable in the long term.
Despite some fairly pedestrian share-price performance in recent years, banking giant HSBC (LSE: HSBA) has undergone some significant operational changes following the financial crisis. The bank has sold more than 50 non-core businesses and has reduced its annual operating costs by nearly £3bn, with management believing there are still further efficiencies to be made.
Current interest rate and regulatory conditions remain challenging. However, an improving economic picture in America and Britain, coupled with strong market positions in the developing world, alongside its internal improvements, leave HSBC well placed to grow in the coming years.
The shares carry a dividend yield of 4.5% that we expect to rise ahead of inflation. HSBC also trades at around 1.2 times book value, which is very modest in a historic context.
Oil major Royal Dutch Shell (LSE: RDSB) is another large UK-listed company that has been somewhat out of favour in recent times, and yet has made significant progress in refocusing and improving its business.
Through divestment of downstream assets and a large capital expenditure programme, Shell is now more focused on its upstream operations (exploring and producing oil). This investment phase has constrained cash flows, but the first of its pipeline of long-term projects is starting to come on stream and its other major projects are on schedule. This leaves investors with the prospect of less expansionary investment and higher production, which should generate significantly increased free cash flow.
With the company retaining a strong balance sheet, we see mid-term opportunities for shareholder returns to be substantially increased on top of the already attractive 5.3% dividend yield that the shares offer, while the valuation remains undemanding on 8.6 times 2014 earnings.
Ben Ritchie is a senior investment manager at Aberdeen Asset Management.
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