Stay smart and look for value

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Jeremy Whitley, manager, Dunedin Income Growth Investment Trust (LSE: DIG).

Recently-founded internet companies are being floated at super-premium valuations. Mergers and acquisitions are back on the agenda. Smaller companies are beating their larger brethren. In short, the environment is a bit frothy', and investors are keen to take on risk.

In this atmosphere, it's easy to forget that over the long term, it's reinvested dividends that provide the largest proportion of total returns. Smart investors will keep this in mind, and focus on companies at sensible valuations that offer strong market positions, robust balance sheets and the potential to grow earnings (and hence dividends) over the long run.

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One company that fits the bill is consumer goods giant Unilever (LSE: ULVR). It has been affected by the recent slowdown in emerging markets growth, but in the medium-to-long-term, its exposure to these faster-growing geographical areas where it has built up extensive distribution networks, giving it a significant competitive advantage will generate appealing returns.

Unilever benefits from a strong portfolio of well-known brands (such as Hellman's, Dove, Lynx and Magnum). There is scope to improve profitability in its European and North American operations as it focuses on making its supply chain and production more efficient.

Unilever is run by a far-sighted management team and it has a robust balance sheet and attractive cash flow characteristics. It should deliver decent earnings and dividend growth over time.

I also like miner BHP Billiton (LSE: BLT). Chief executive Andrew Mackenzie has reshaped the group's strategy in the year since he was appointed. BHP is now more focused on simplification: it has sold a number of non-core assets, and will concentrate more on its existing assets rather than making big acquisitions.

The group has good exposure to iron ore, coal, copper and oil and gas. This latter provides a good energy hedge (in other words, while a rise in energy costs might hurt its other operations, it benefits this one). The majority of the company's assets lie in politically stable countries, and its operating performance has been very strong compared to its peers.

On top of all this, BHP has one of the highest yields in the mining sector and an excellent record of dividend growth. We see a strong chance that the company will start to generate excess capital, which may possibly lead to a share buyback or special dividend.

My final choice is Sage (LSE: SGE), one of the top global suppliers of accounting and business management software to small and medium-sized businesses. The company provides a relatively low value but vital service to its customers, which promotes customer loyalty.

There are significant barriers to entry such as the need to tailor products to individual countries with different tax regimes, and the ability to provide trained support staff to answer thousands of customer enquiries per day (in fact, I'd say that Sage is more like a support services company than a technology group).

Growth should come both from customers upgrading existing products, and from the sale of new products and services, such as payment and enhanced support packages. The company is moving towards a subscription model which should increase customer stickiness further and provide higher lifetime revenues.

Sage has a very attractive capital-light business model which generates high returns. It also pays a healthy dividend which should grow as earnings progress.