Transcript: Dividend equities offer returns with a smoother ride
David Pastor of Setanta Asset Management says dividend payers deserve a spot in client portfolios for their steady performance
- August 15, 2023 August 15, 2023
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For today’s Soundbites, we’re talking about global dividend investing with David Pastor, portfolio manager with Setanta Asset Management. We talked about metrics he looks for, the cost of focusing on dividends, and dividend-payers he likes. And we started by asking if dividend investing is a good way to hedge against volatility and inflation.
David Pastor (DP): What we look for in dividend companies are high-quality companies, well-run, profitable, with a proven business model, a track record of earnings and earnings growth, some form of competitive advantage and obviously a strong balance sheet. These are not fledgling start-ups. They are known by the market. They are going to be profitable. They’re going to survive. We expect — and the market expects — these companies to do better than the average, in terms of drawdowns. When it comes to inflation, there are some characteristics in these dividend companies, the competitive advantage, the ability to pass on price increases. Those are all beneficial in times of high inflation.
Metrics he looks for.
DP: The starting point is always some sort of assessment of the quality of the business. We look to understand the profitability of the business, the sustainability of the business model, the strength of the management, the soundness of the financial position. We look at measures of margin, of return on capital, how those have evolved over time, indebtedness, measures of margins — all of those give you an idea of the quality of the company. Then, in terms of how all that translates into a dividend pay-out, what we normally say is that we try to understand the capacity and the commitment of a given company to pay a dividend. There’s no magic number. It’s a question of understanding the quality of the company. Some of these companies are cyclical, right? So, demand may ebb and flow, and you may find that a company may feel that they are in a very strong position and continue to pay the dividend when their earnings for the year are not sufficient to cover it. You want a good business and almost that it runs by itself. But you also want a talented and responsible management, who is going to allocate the capital that they don’t distribute in the form of dividends prudently and be able to exploit the opportunities for growth that the company may have.
Names he likes.
DP: One of the companies that we like is Home Depot [Atlanta, Georgia-based The Home Depot, Inc.]. Earnings are expected to come down this year. But what we find is that the long-term trend is still very favourable for Home Depot. It’s a good dividend payer. It has a fantastic track record of dividend growth. We also like CRH [Dublin, Ireland-based CRH plc], which is one of the largest heavy-sized construction materials producers in the U.S., with 50% of their sales coming from out of the U.S. This company has a very bright demand outlook with infrastructure spending. We see long-term opportunity in Exelon [Chicago, Ill.-based Exelon Corporation], which is one of the best owners of regulated utilities in the U.S. It is expected to benefit from investment in the way we consume energy in general. They have a very clear and long-term outlook for investment and earnings growth. We also like Boliden [Stockholm, Sweden-based Boliden AB], which is a copper miner in Sweden. Mining and mineral processing can be quite risky. What we liked about this is their very risk-averse culture, the way they approach investment and the geographies where they seek to own assets for the energy transition. And we also see long-term opportunity in hearing aids, which is a consolidated industry. There are high barriers to entry and we like a company called Sonova, out of Switzerland [Stäfa, Switzerland-based Sonova Holding AG]. It’s a market leader. The company pays 2% dividend yield, but we see a very long, long opportunity for dividend growth.
And finally, what’s the bottom line on dividend investing in the current environment?
DP: Dividend equities, we believe, are right in the intersection between quality, value, and growth. So, these companies, we expect them to offer the right kind of returns, perhaps with a smoother ride in terms of volatility. Every person is different, right? But having an allocation to dividend equities, I think, in most cases, would not be wrong. It would be a success, hopefully! You know, dividend equities still have a strong value proposition that stands quite well.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to David Pastor of Setanta Asset Management.
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