Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today is Alan Dobbie, Manager of the Rathbone Blue Chip Income and Growth Fund.
Hello, Alan.
Alan Dobbie: Hi, Emma.
Wall: So here today to give three stock picks, what is you first stock?
Dobbie: My first stock is the Swiss pharmacy drug company, Novartis (NOVN). I would say just on the sector first of all, very positive on the outlook for the healthcare sector. We think it's going to be one of the few beneficiaries of some of the big global demographic trends that we've got going on in the world, both in terms of aging populations in the west and also the very rapid population growth in many emerging markets, increasingly affluent populations in many emerging markets.
Novartis, in particular, we think is a company that has really transformed itself over the last 12 months. They've done deals with Glaxo and Eli Lilly. They are now centered around three business units; they've got innovative pharmaceuticals; eye care, they own Alcon; and quite unusually for a pharmaceutical company, they own a generic drug business, Sandoz.
But on innovative pharmaceuticals, I think this is a real differentiator for Novartis. There's been quite a change I would say over the last couple of years in terms of the balance of power between the big pharma companies on one hand and the drug buyers on the other hand, well that's National Health Services or some private health insurers in the U.S. And essentially these drug buyers are now saying, we are not willing to pay ever-increases prices for drugs that are only showing very incremental improvements on the current standard of care.
I think Novartis maybe spotted out a bit sooner than some of their competitors, so they are really focused on searching in areas, drug discovery in areas where they think they can actually add great value and deliver value for money for their clients.
Wall: I mean the one big concern with all pharmaceutical companies is you are only as good as the last blockbuster drug. You can talk about pipelines. The pipeline is just a pipeline. Really it's not revenue-producing at that juncture. Is that something we should be concerned about with this company?
Dobbie: You always have to look at the pipeline. I think Novartis do have a strong pipeline. One drug that I would mention maybe is they have recently or hopefully just later this year, they should get a drug for heart failure approved in the U.S., a drug called LCZ696.
Actually hopefully they will change the name if they get it approved. Heart failure is an extremely serious condition. It affects more than 30 million people throughout the world and this drug – the clinical data was actually so strong that they had to stop the trial six months early, because the effect of that, they had already proven their case. So we expect that to get approved later on this year and that should be a multi-billion dollar blockbuster drug.
Wall: What's the second stock today then?
Dobbie: Second stock is Bunzl (BNZL). Boring-boring Bunzl as many of the analysts like to call it. I know it's quite boring to be fair. But it's been a fantastic performer over the last few years and we think it can continue to be so going forward. It's a distribution and outsourcing business. So in kind of more plain language, they are a key supplier to many of the world's supermarkets, restaurant chains, coffee shops, basically everything that you see in a supermarket that's not for sale is probably a Bunzl product.
They supply 2,000 products, till roll cleaning products, the butcher's hat, all these kind of things. So it's a low-margin, high-volume business, generates good returns, very good cash conversion, good management team.
But the real excitement with Bunzl though is in the acquisition strategy. They have built around about 100 businesses over the last decade, and unlike most acquisitions, they actually these are value-creating acquisition. They've got a great track record of doing this.
Generally it adds about two-thirds or accounts for about two-thirds of the company's growth. At the recent results, the company said they have identified around 500 potential acquisition opportunities. I am not suggesting they are going to do all of these, but it gives you some idea of the potential growth trajectory that company could have.
Wall: So you mentioned supermarkets there. Obviously U.K. supermarkets are in a bit of flux at the moment. The previous reliable dividend players can no longer be relied on. How much does that threaten Bunzl's business?
Dobbie: It's a risk. I mean Bunzl are a global business, so we have to put this into scale. 50% of their earnings are earned in the U.S. They also have a big business in South America. But they are working with the U.K. supermarkets. They supply companies like Sainsbury's, Waitrose, Asda. So I mean they do offer cost savings.
They are an outsourcing company. They manage these companies working capital. So they are working closely, but ultimately lower food volumes, lower sales in these companies will affect them.
Wall: And what's the third stock today?
Dobbie: The third stock is another company which has grown by acquisition, Anheuser-Busch InBev (ABI), and it maybe a different scale, transformational acquisition. They are the world's biggest brewer. They own brands like Budweiser, Stella Artois, Corona, about 200 others, so a fantastic example, probably one of the best corporate success stories over the last few decade.
It has a great management team, great corporate culture.
Why do we like it at the moment? We think it's a good play on the U.S. consumer recovery, low fuel prices, recovering economy. That feeds right into the Anheuser-Busch, the Budweiser demographic really.
It's also becoming more of an income stock. Company recently increased their dividend by 46%. So it's now yielding a similar kind of level to the Nestles and Unilevers of the world. Finally, there is a big kind of opportunity in China. At the moment, China is a huge volume market, it's very low margin, but we expect that to develop along the same lines as many other developed beer markets in the world.
Wall: To increase you dividend by nearly 50% is a pretty punchy move. Is that sustainable that kind of growth or even that kind of level?
Dobbie: We think it is sustainable. It's a pretty punchy company. They are quite happy to increase their dividend and then if they see a big acquisition opportunity. Companies like SAB, Pepsi, even Coca-Cola has been mentioned as potential acquisition opportunities.
Then they would cut the dividend and use that cash to buy a company. But at the moment, I think, the signal that you get from a 46% increase in the dividend. They also did a $1 billion buyback. That suggests that they are not seeing attractive opportunities at the moment.
Wall: Alan, thank you very much.
Dobbie: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
