Each week, aprofessional investor tells us where he'd put his money. This week:Mark Whitehead, Securities Trust of Scotland.
This year is shaping up to be an interesting one for global investors, following a year characterised by surprises. There's been palpable exuberance in the market since the US election, driven by hopes of an increase in infrastructure spending, free trade, lower corporate tax rates and less regulation. Some may argue that equities are overbought. But the signs are that corporate earnings are beginning to grow, which could underpin the market.
That said, risks continue to lurk around every corner: the economic consequences of Brexit, monetary policy and the strength of the global economy remain the focus of the equity markets. Macroeconomic fragility has not disappeared and, although the Fed looks poised to raise rates further this year, central banks elsewhere will probably maintain an accommodative stance.
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As income-focused investors, we look for dividends, but unlike many peers our starting point is not yield, but growth. We look for well-managed companies that can demonstrate an ability to generate strong cash flows (and by extension dividends) throughout the business cycle. Below are three examples of the type of company we look for.
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Huntington Bancshares (Nasdaq: HBAN) is a high-quality bank, as evidenced by its return on assets and strong balance sheet. We expect Huntington to deliver decent organic loan growth driven by its vehicle and commercial businesses. Despite the attractive growth and quality profile, the bank's valuation offers potential upside on both a multiple and intrinsic (discounted cash flow) basis. The recent acquisition of FirstMerit Bank should enable Huntington to achieve substantial cost synergies and deliver an attractive and sustainable dividend.
Civitas Social Housing (LSE: CSH) buys UK social housing from housing authorities and leases it back to them. It raised £350m in equity at the end of 2016 and will use leverage of up to 40% to build a diversified portfolio of properties across the country. The industry suffers from a lack of supply because little new social housing is being built following the government's withdrawal of development grants for this type of housing. It is targeting a dividend yield of 5%, with the rental stream coming predominantly from the government, as most occupants are on housing benefits.
DSM (Amsterdam: DSM) is exposed to strong global trends in nutrition (human and animal) and materials. The former segment is underpinned by population growth, rising protein consumptionand greater use of packaged food, while the latter is driven by demand for better-performing plastics (in-car and electronics) and safer coatings. It's embarked on a three-year cost-saving plan, adding some potential "self-help" to the structural growth case.
