Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Richard Marwood of the AXA Distribution Fund for his three stock picks.
Hi, Richard.
Richard Marwood: Hi, Emma.
Wall: So, what's the first stock you're going to highlight today?
Marwood: The first one I was going to talk about was Inmarsat (ISAT).
Wall: And why do you like that?
Marwood: Well, from a very conceptual point of view, we like businesses that have got great barriers to entry, things that you couldn't easily replicate yourself and I think it's fairly safe to say that building a satellite communications network is not a thing that's very easily replicated and that's what Inmarsat does. That's used in a variety of different areas. It's used for communication in shipping.
One of the new areas that they are coming into now is – I'm not sure I'm a fan of this from a personal point view – but they are going to put Wi-Fi onto aircraft which could be a huge growth area. So, very, very strong barriers to entry, great technology, you can see why they are going to grow in the future, pays an attractive dividend, very happy to carry on holding Inmarsat.
Wall: And presumably – or rather as you've alluded to there, diversified revenue stream. They are across a number of different other business sectors, aren't they?
Marwood: Yes. I mean, shipping traditionally was a big one for them, but they have a reasonable amount that goes into military from aircraft and from satellite phones, those kinds of things. So, it is quite diverse.
Wall: What's the second stock today?
Marwood: The second one I would highlight would be Whitbread (WTB).
Wall: And why do you like Whitbread?
Marwood: Well, Whitbread has got some very, very strong businesses and brands. We're all very familiar with Premier Inn and Costa Coffee and they've done a great job of rolling out those businesses. I think that they will carry on rolling those businesses out both domestically and internationally as well.
I think as we look at the U.K. equity market and the economy next year, we might find that people have just got a little bit more money in their pockets and as real wage growth starts to tick up. So, actually, they might buy and extra cappuccino or they might have an extra night away in Premier Inn. So, I think that could be quite positive.
The only thing I'm watching there quite carefully is one of the reasons that we're going to have a bit more money in our pockets is because there's going to be a bit more real wage growth. And clearly, Whitbread is quite dependent on the people who work in the coffee shops and in the hotels and the restaurants to service those customers and they are going to have to have a little bit of a balancing act just between managing their own wage costs against the positive turnover effects of their customers having a bit more money.
Wall: And of course next year we may well see interest rates rise. In fact, we probably will see interest rates rise. There is some concern that that will sort of negate the disposable income factor from the wage growth because, of course, people will see things like their borrowings costs go up, mortgage costs go up. Is that something that you're considering?
Marwood: We're considering it. I'm not sure I'm overly concerned really because I think the one thing I would say, I'm not completely convinced that the base rate has set the price of money for a little while. So, actually, although people have got an indirect linkage, I don't think it will be one-for-one in terms of interest rate increases on base rates and what people will actually pay. I don't think it will be that material.
Wall: What's the third and final stock?
Marwood: Well, the third one I would highlight would be GlaxoSmithKline (GSK).
Wall: Of course, pharmaceuticals, everyone knows. Why do you like Glaxo?
Marwood: Well, I like it partly because people don't like it very much at the moment. It's quite a controversial stock and people have been reasonably negative on it. A lot of that negativity has been around their ability to maintain the dividend and they have given commitments that they will actually do that in the short term, but people are still questioning that longer term.
The one thing I think though is that they have got four strong businesses there. It's maybe the structure that they're held in and the lack balance sheet flexibility that holds them back. But I think there are some attractive businesses there that in the longer-term will generate value.
Wall: Because Glaxo, of course, was hit hard by the bond proxy brush which a lot of people have been saying over the last year, which is, these equities behave like bonds. They just sort of – they don't have much growth in share prices, but they kick off an income. When interest rates start to rise, they are actually going to be hurt. But you say actually you're not convinced by the fact that the dividend is shaky?
Marwood: The dividend is a little bit questionable. I think that's true, but the thing that will be incumbent on the company then is to actually show some growth which I think they will be able to do in the future and that will shake off the bond proxy tag providing you can get that growth.
Wall: Richard, thank you very much.
Marwood: Thanks Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
