Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Will James, Manager of the Standard Life Investments European Equity Income Fund.
Hi, Will.
Will James: Hi, Emma.
Wall: So, you're here today to give your three stock picks. What's the first stock?
James: Well, the way we construct the portfolio is taking the three-bucket approach. So, I'd say the first stock is a high-dividend stock and we consider to be very attractive is a Finnish food retailer, which may not be familiar to that many people, but it's called Kesko (KESAV). Very interesting stock, because this is a company that's been under pressure in its domestic market within Finland.
They had a new management team come in with a CEO who has got a great track record in terms of restructuring businesses. And this is a business that's actually taken cost out, repositioned some of the brands that they have and in fact, more recently, have started to do some acquisitions where they have started to consolidate the market.
In the face of what we've seen in, say, the U.K. where there's the onslaught of hard discount names such as Aldi or Lidl, in fact, in Finland it's Lidl who have been quite active. But this is a company that's done really, really well. They are taking cost out. They have made these acquisitions which are value-enhancing. They paid a special dividend this year. Dividend yield this year has been 7.5%. Current dividend yield at the moment is 5%. We think that's actually quite a prudent assessment of that dividend yield and the prospect for both dividend growth and surprise to the dividend is really, really strong there.
Wall: And what's the second stock you'd like to highlight today?
James: Well, the second bucket within the three-bucket approach is dividend growth. Now, dividend growth can fall into a number of different categories. Sometimes you look at the past history of dividends and say, we need a nice sort of track record. In fact, our view has been around companies – we think companies investing for the future are really interesting at the moment. So, the second stock is Umicore (NVJN), which is a Belgium specialty chemicals company.
They took a view two, three years ago to actually start investing countercyclically and have been investing both in their precious metal recycling plants and therefore expanding capacity against a fairly tough pricing environment. But then on top of that they are one of the preeminent providers of battery material for electrical vehicles. And so, therefore, they have been investing there and this year has been great.
I mean, we had – the last couple of years they didn't grow their dividends at all. We were quite happy with that because they were investing. This year we're starting to see the benefits of that investment and their dividend was grown 20% this year and we think that's a pretty good rate of growth in the current market environment, with a yield of just under 3%.
Wall: And what's the third and final stock?
James: So, the third and final stock within the bucket approach we would look at it from dividend upgrade perspective where the market really misprices the dividend-paying capacity of a company. So, that company that we would highlight is a company called LafargeHolcim (LHN), which is a combination of the French company Lafarge and the Swiss company Holcim. Cement producers, that industry has been going through a lot of tough times post financial crisis, post the slowdown in China and therefore, they've consolidated. And we took our time.
The M&A happened about 18 months ago. We took our time to really assess the business. They had a commitment to capital return, but we really didn't think it was time to invest until more recently where we started to see a real change in the cash profile of that business where their commitment to capital return is now underappreciated and where we see that cash inflection coming and very attractive dividends on offer for shareholders.
Wall: Will, thank you very much.
James: Thank you very much, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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