Three true value stocks for the long term

Portfolio manager Sam Morse tips three attractively valued shares for long-term investors.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Sam Morse, portfolio manager, Fidelity European Values.

Since I began managing money, more than 20 years ago, I have always sought attractively valued companies that are capable of growing their dividends in a sustainable way.

My goal is to identify firms that are growing their free cash flow from underlying operations, so that they are able to increase their payouts to shareholders consistently over time in effect, I'm using the growth of the dividend as a positive signal of the overall financial well-being of the companies I invest in.

Since taking over as manager of the Fidelity European Values Investment Trust (LSE: FEV) at the start of 2011, I have continued to use this approach. The result is a high-quality, long-term, low-turnover portfolio that is capable of outperforming through the cycle, and will do its best work for investors when the overall market outlook is uncertain and investors are nervous.

There have also been recent changes thatallow me greater flexibility to invest inUK-listed names and to use derivatives so if needs be, I can short stocks where our research suggests that a dividend is unsustainable and likely to be cancelled.

Here are three stocks that currently fit my investment criteria. Global pharmaceutical giant Novo Nordisk (Copenhagen: NOVOB) is well placed to tackle and make money from increased levels of diabetes in both developed and emerging countries, thanks to its leading position in the insulin market.

It benefits from strong barriers to entry and faces no imminent patent expiries among its key products. It has no net debt and has been able to generate double-digit growth in sales, earnings and dividends over many years. This is a long-term holding that I am happy to continue to own at a reasonable valuation.

I also like Intesa Sanpaolo (Milan: ISP).This conservative, well-run Italian bank has a simple business model that stands out among its peripheral European peers. Intesa has a strong capital base and a well thought-out business plan centred on improving its return on tangible equity. Its latest results show that it remains on track to deliver these benefits to shareholders in the form of increased dividends.

The bank is also well placed to take advantage of opportunities afforded by Italian prime minister Matteo Renzi's announced reforms of the Italian "Popolare" banks' ownership structure both by winning business as others merge and from the greater profitability arising from the consolidation of the Italian banking system as a whole.

Another interesting stock is Aena Airports (Spain: AENA). This is a recent initial public offering by the Spanish government of its domestic airport operator. Low-capacity usage allows for significant passenger growth without the need for major additional capital spending, which will boost free cash flow and allow the company to pass this on to its shareholders in the form of an increased dividend.

At the moment Aena is highly levered (it's borrowed a lot of money), but having gone through its peak phase of capital expenditure, I expect this to fall rapidly as passenger growth accelerates. In recognition of the regulatory and political risk associated with Spain in this year of elections, I chose to fund this new position by replacing, in part, some existing Spanish holdings, rather than by adding greatly to my overall exposure to the country.

Recommended

Look beyond the blue chips for the best bargains in British income stocks
Share tips

Look beyond the blue chips for the best bargains in British income stocks

A professional investor tells us where he’d put his money. This week: Chris McVeyof the FP Octopus UK Multi Cap Income Fund highlights three favourite…
23 May 2023
It’s fallen hard – but is now the time to buy Scottish Mortgage Investment Trust?
Investment trusts

It’s fallen hard – but is now the time to buy Scottish Mortgage Investment Trust?

Shares in the Scottish Mortgage Investment Trust have plunged 45% since the beginning of 2022. We take a look at the trust's performance and discuss w…
22 May 2023
Three British stocks offering all-weather income
Share tips

Three British stocks offering all-weather income

A professional investor tells us where he’d put his money. This week: Brendan Gulston, co-manager of the LF Gresham House UK Multi Cap Income Fund.
17 May 2023
Power your portfolio with the profits of China’s electric-vehicle makers
Share tips

Power your portfolio with the profits of China’s electric-vehicle makers

A professional investor tells us where he’d put his money. This week: Ewan Markson-Brown of the CRUX Asia ex-Japan Fund highlights three favourites.
4 May 2023

Most Popular

June’s NS&I Premium Bond prize draw - are you this month’s millionaire?
Savings

June’s NS&I Premium Bond prize draw - are you this month’s millionaire?

Two fortunate NS&I Premium Bond winners are now millionaires. Find out here if you’re one of them.
1 Jun 2023
Savings inertia - why we should all be obsessed with interest rates and savings accounts right now, says Kalpana Fitzpatrick
Savings

Savings inertia - why we should all be obsessed with interest rates and savings accounts right now, says Kalpana Fitzpatrick

Are savers still missing out on hundreds of pounds by not moving their cash for better interest rates?
30 May 2023
Best savings accounts – June 2023
Savings

Best savings accounts – June 2023

Interest rates have been creeping up - we look at the best savings accounts on the market right now.
2 Jun 2023