Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Tom Moore, Manager of the Standard Life Investments UK Equity Income Unconstrained Fund, to give his three stock picks.
Hi, Tom.
Tom Moore: Hi, Emma.
Wall: So, what's the first stock today?
Moore: Well, I'd like to start with Saga (SAGA), which is a business that targets people over 50s, so I don't think it applies to either of us at the moment, although it will be coming on to the radar screen soon. This company has a huge database of members and they target members who are going for home insurance or motor insurance initially and then they cross-sell products such as credit cards, travel like cruises, and also, new products that they've started such as investment services.
So, Saga is having a great resonance among the over 50s. It's a brand that really is trusted and that's quite unusual in the financial space after so many years of bad press for the banks.
So, it starts with a really big head start over the big banks and insurance companies and I think that's what they are using to cross-sell and it's a business that should continue to grow its earnings by mid-single digits, 5% to 7% is their target, over the coming years. They've got multiple levers through which they can achieve that.
So, we've got confidence in this management team. It's been owned by private equity for some time, slightly under-managed. We think there is more they can do to start to grow earnings a bit faster, pay down debt and over time that will come through in the form of growing dividends.
Wall: And the grey pound is incredibly powerful in the U.K. We've recently seen its influence over politics in the U.K. But indeed, the disposable income of the baby boomers is large. Are there competitors for this grey pound though in the market or is Saga standing alone?
Moore: I think they are on their own. We asked them that question. When we meet management, we said, look, is there anybody comparable globally to you? And actually even in the U.S., even in the rest of Europe and Asia, it's very hard to find anybody with this resonance, with this brand that just means something to people. It's trusted.
And I think that gives them a huge head start. So, I think this is unusual stock. It's trading on a pretty low P/E multiple. So the valuations are pretty attractive at about 13 times earnings. That's a lot lower than the market average at the moment and given that there is growth there, I think it's a stock that should well. It features heavily in my fund.
Wall: What's the second stock today?
Moore: The second stock I want to talk about is National Express (NEX). I think all of us would have travelled on a National Express coach from time to time. They also have buses in the U.K. That's what we know them for here in the U.K., but there is more to National Express than that.
They have been busy diversifying. So, there is a lot of talk about Brexit at the moment and that means for the U.K. economy. Bus and coaches aren't particularly sensitive to the U.K. economy anyway; it continues. But obviously, they've got more and more exposure to overseas.
They've got a big business in Spain, a coach business, which is doing pretty well, growing its earnings at the moment. And they've also got big business in the U.S., a school bus business. So, National Express is doing well overseas and they're also picking up new businesses such as German rail contracts.
So, for all the bad press that some of our rail companies get here in the U.K., some of them are actually busy expanding overseas and doing what they've already done here in the U.K. with their franchises and growing overseas. This is a success story, I think, for the U.K. and it's one that will continue to grow its dividend.
Wall: What's the third and final stock?
Moore: Final stock is one that people will know well, BT (BT.A), love it or hate it. I know it's had a lot of bad press recently in terms of open reach. They seem to have come to a deal with the regulator Ofcom and it looks likely that that will be resolved in the next few months. So that's a big headache the shareholders which is now going away.
And what the rest of the market has actually missed during this period of this regulatory uncertainty coupled with the fears over Brexit which have contaminated lots of companies is that actually BT has continued to grow its revenues and its earnings very, very rapidly over the last few months and years and one of the ways they have been doing that is they have been busy buying other businesses. So they bought a business called EE in the mobile space and what's really encouraging here is that they're able to cross-sell.
So bit like Saga cross-selling its home insurance and travel insurance with travel and investment services, you'll find that BT is cross-selling mobile with fixed line and broadband and now TV. And so, there is the concept called convergence and convergence is happening and the biggest beneficiary of that is actually BT who are able to take a bigger proportion of the customers' wallet each month and that's helpful for shareholders. And again, good strong dividend growth and that's something we'd like to see in our fund, companies that can grow their dividends year in and year out.
Wall: Tom, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
