Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Stuart Reeve, Manager of the BlackRock Global Income Fund.
Hello, Stuart.
Stuart Reeve: Hello, Emma.
Wall: So, you're here today to highlight three sectors that you're seeing investment opportunities in. What's the first sector that you'd like to highlight?
Reeve: Well, consumer staples to us still looks really attractive. I know people argue about the valuations of that area, but particularly – I think you have to be selective. So, particularly, I'm still interested in owning and buying tobacco exposure. So, not a well-loved industry, but fantastic yields. So, you can buy businesses like Altria in the U.S., 4% dividend yield.
It's been growing that dividend at 8% per annum. We think it's going to continue to grow it at 8% per annum and that dividend is well-covered by the cash flow generation. And the key point here is that these businesses have real pricing power. So, the volume growth environment for them and for many other businesses is not that great, but it doesn't matter for that business because prices go up every year.
Wall: And of course, there are some threats to the tobacco industry when you think about it from a developed market point of view. But tobacco is a global industry and people maybe moving across to e-cigarettes in the west, but it's certainly not the case in emerging markets, is it?
Reeve: It's not. So, there is still a high degree of sort of prevalence of smoking in emerging markets. We can argue about, again, the health and benefits of that. But the key issue is, well, when you've got threats emerging like e-cigs, like vapes, the question is, are the businesses alive to that and investing in that area? And they are. All of these companies are looking at how their product may be replaced and investing a lot of money just to make sure that their positioned for that.
Wall: And what's the second sector you'd like to highlight, perhaps one that benefits from the first sector?
Reeve: Well, pharmaceuticals indeed. So, the healthcare space, there's again a lot of debate. U.S. pricing, particularly, is a key issue for many people around the U.S. election, of course. But again, I think you have to take a view beyond just the next three or six months and these are businesses which, again, have big structural factors behind them and emerging amount of healthcare spend in emerging markets but also in developed markets where you have the aging population, everybody knows this. And you are looking for businesses that can profit and benefit from that.
A name that's currently under a lot of debate is AstraZeneca here in the U.K. So, a lot of people look at that and think it is one of these bond proxies of 4% dividend yield and it won't grow and probably for the next year or two it won't. But the debate you're having to have is what does the pipeline look like? Is the business going to going to grow its profits over the next five or six years?
Of course, the management said that they could grow the business significantly when they were defending against the Pfizer takeover. And there is a degree of debate around that. But we are on the side that we think today's valuation with the yields you are getting to wait, the potential for growth in the future and the possibility of success of the oncology pipeline all looks like a great lineup.
Wall: And that's the key point, isn't it? You may not be getting growth today, but actually you're still being paid in the meantime?
Reeve: Well, indeed, so 4% starting point, every year you start 4% ahead at the current share price, that's a nice starting point for me.
Wall: And what's the third and final sector?
Reeve: Well, a place where we've been adding money to recently is in technology. So, obviously, quite difficult to do that in Europe, much easier to do it in the U.S. We steer clear of all of these emerging technology and software platforms. We like businesses that are well-established. So, something like a Cisco which trades at a 9% free cash flow yield and it's hard to find that kind of valuation today in the market.
It's a business which is competitively embedded within the networks of telecom companies that it services and it's got some emerging growth platforms around security. I really like that business. And it's one of these things that's been forgotten. It's kind of unloved. The starting yield is just over 3%, so again, you've got a starting point which is nice and positive. You have to believe that the business survives over the next 10 years and grows. Again, a debate, but we think it's got a real opportunity there.
Wall: Stuart, thank you very much.
Reeve: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
