MoneyWeek: Personal View, December 2022

Dividend income has always formed an important part of total equity returns. Looking forward we suspect dividend income will form a bigger part of the total return an investor receives from their investments in the coming ten years than the years from 2010 to 2020, where capital growth arising from multiple expansion was the key driver of returns. We feel the record low bond yields that drove that revaluation of equities in the past decade are unlikely to return despite the lower inflation we expect in 2023.

When we analyse companies, we do not look at dividend income in isolation, rather as one component of total return, hence we seek to invest in good quality businesses with strong balance sheets and robust market positions, generating sufficient free cashflow both to pay and grow dividends but also invest to grow the business. Market volatility and short-term news flow sometimes gives you the opportunity to buy such companies at an attractive price… We call it ‘buying good companies on sale’

Below are three companies we have held in the Trust for some time, and we continue to believe offer the potential for good returns.

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Coca Cola: (KO US) This company needs no introduction, though it has successfully diversified into juices, water and coffee in recent years and is not so dependent on the iconic carbonated drink!

New management has sought to drive operational improvements. It was hit hard by the pandemic as a significant proportion of its sales are in restaurants and bars and has thus enjoyed a strong bounce back in the last 18 months. We still see opportunities for this mature company to grow its sales, especially in emerging markets but also improve efficiencies in its bottling and distribution network.

The dividend is close to 3% at present and we expect the company to be able to grow the dividend above inflation for the next three years.

Zurich Insurance: (ZURN SW) Zurich is a leading Swiss based global insurance company. Its business mix is roughly two thirds property and casualty insurance(P&C), 1/3 life insurance. It has sought over the last decade to improve its cost efficiency, and sharpen its business focus, by divesting operations where it has no strong competitive edge whilst building scale in regions, or sectors of the insurance market where it is advantaged.

The insurance industry tends to grow slowly as it is mature in western markets, however it normally exhibits lower volatility of financial returns than the broader equity market.

We believe high quality, well capitalized businesses such as Zurich can have the ability to outperform the industry. We believe Zurich can continue to modestly enhance its returns in the coming year. The 5.5% dividend is well covered and should be able to grow mid-single digits over the coming three years.

Broadcom: (AVGO US) Broadcom is a semi-conductor company specializing in chips for networking and broadband and wireless applications. Around 20% of its sales comes from networking infrastructure software. The founder of the business remains CEO, and he has a superb track record for capital 2 allocation and acquisitions. There remains ample growth in its business as we move to 5G and greater integration of the Cloud in everyday life. Whilst we accept the earnings growth of a semiconductor company maybe bumpy and cyclical, we feel that is more than priced into the valuation.

Broadcom trades at around 14x 2023 p/e, with a 3.5% dividend yield.