The fight against climate change is likely to be the defining issue of our generation. Governments, corporations and individuals continue to race towards a net-zero economy (when the amount of greenhouse gas produced and the amount removed from the atmosphere balances out). Against this backdrop, we seek to invest in businesses that emphasise, or benefit from, the efficient use of resources and are working to reduce their environmental footprint.
We also apply strict criteria when it comes to quality and value, seeking out stocks with enduring assets that generate long-term, predictable, minimum-risk cash flow. These businesses must benefit from high barriers to entry (enduring competitive advantages that prevent rivals from gaining a foothold in their market) and possess genuine pricing power, allowing them to outpace inflation. Finally, we must be able to buy them at reasonable valuations. This approach has served us well. The net asset value (NAV) of our investment trust has compounded by 14% over the last five and a half years. The trust is on a discount to NAV of more than 25%.
Google goes green
Tech-giant Alphabet (Nasdaq: GOOGL) continues to pursue sustainability. It is one of the largest corporate buyers of renewable power worldwide and aims to run entirely on carbon-free energy by 2030. We have been a shareholder since January 2018 and remain optimistic on the company’s prospects. Its core “search” business, YouTube, Google Play and Google Cloud all continue to fire on all cylinders. We believe that the secular growth of digital advertising, successful scaling of the Google Cloud business and accelerating capital returns can continue to drive significant earnings-per-share growth, while the stock trades on nearly the same valuation as the overall market.
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Customers’ savings mean higher returns
Telecommunications company Charter Communications (Nasdaq: CHTR) is set to play a critical role in the ongoing digital transformation. It will also facilitate significant improvements in resource and energy-efficiency as the smart tech of the “internet of things” continues to develop.
The company’s network currently spans more than 50 million households and continues to grow. Charter reported its emissions for the first time in 2021 and announced its plans to become carbon-neutral by 2035. We believe the company can continue to expand its broadband reach and gain share in mobile with its bundled broadband and mobile subscription, which offers customers significant savings. Both strategies should result in increasing free cash flow and support higher capital returns.
A ubiquitous player
Microsoft (Nasdaq: MSFT) is aiming to go one better than Alphabet. It wants to become carbon negative by 2030 – and to remove all the carbon it has emitted since its inception by 2050. We think the group will continue to keep benefitting from digitisation for many years. CEO Satya Nadella expects IT spending to increase from 5% to 10% of global GDP by the end of the decade. The company is the key technology partner for all enterprises and its
software is ubiquitous. Its core profit drivers (Office 365 and Azure) can continue to drive significant earnings growth for many years.
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