Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today is Hugh Yarrow to give his three stock picks. Hugh is the Co-Manager of Evenlode Income.
Hi, Hugh.
Hugh Yarrow: Hi, Emma.
Wall: So, what's your first stock today?
Yarrow: My first stock is Unilever (ULVR), which is Evenlode's largest holding, currently yielding 3.6% and it's one of the great dividend growth stocks of the U.K. market. So, it's grown its dividend by more than 10% on average per year over the last 50 years and even in the current low inflation environment, it's growing its dividend at 6% per annum. So, a great global portfolio of consumer branded goods from Dove soap to Lipton tea and it's had some headwinds in some of its global markets over the last few years, but it's a very resilient business, low-ticket repeat purchase items that it sells, fairly economically resilient.
So, it's been able to continue to grow its sales and earnings. And the cash generation has remained strong. The balance sheet has remained strong. So, it continues to invest in its long-term future growth, both in terms of its brands but also in terms of its global expansion in its distribution network.
Wall: Now that stability could act against it though, because is Unilever one of these stocks that has been branded a bond proxy and therefore may not do so well when bond yields do start to rise?
Yarrow: Well, we think Unilever looks good value. I mean, as I say, it's offering a 3.6% initial dividend yield combined with good growth potential, which is obviously a very different type of financial asset to a fixed coupon bond. And I think businesses like Unilever are actually good at protecting investors from inflation. And you look at periods like the 1970s when inflation was quite high and actually they performed – a lot of these sorts of companies performed very well in a way that clearly fixed coupon bonds didn't. So, we actually think that Unilever on a long-term view, dividend and dividend growth does look attractive.
Wall: And what's the second stock today?
Yarrow: The second stock is Fidessa (FDSA), which is a very strong, market-leading software business, selling into the financial services sector. So, again, like Unilever, it's had its headwinds over the last few years because it sells to financial services customers, some of whom have been under pressure. But it's a subscription-based business model. So, 85% of revenues are recurring with very high renewals rates. And something we really like about Fidessa is it has a very strong balance sheet, is an inherently cash-generative company.
So, it's been able to really invest very heavily in product development which is burdening current financial results, but we think is very good in terms of the prospects for longer-term growth in both free cash flows and dividends. Fidessa currently yields about 3.7% if you include its regular special dividend.
Wall: And what's the third and final stock?
Yarrow: My third stock is the recruitment company PageGroup (PAGE), which is actually a holding we added to the fund following the U.K. referendum result when it was quite weak. So, Page is a global recruitment company, very diversified both by geography and by sector. Now, clearly, it's an economically-sensitive business, but we think that the structural growth potential in its markets is very good, particularly in developing countries companies increasingly look to the specialists for their recruitment needs. And it's also very conservatively-managed business.
So, a net cash balance sheet, and you can tell this is a theme for us, strong free cash flow and management very committed to a progressive dividend policy across the cycle even in the bad times and continues to invest in their organic future too even times are tougher.
Wall: Hugh, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
