Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today to give his three stock picks is Sam Morse, Manager of the Fidelity European Values Trust.
Hi, Sam.
Sam Morse: Hi, Emma.
Wall: So, what's the first stock you'd like to highlight today?
Morse: Well, my first stock is a company that would be very well known to all of your viewers, Nestlé (NESN). Obviously, it has some very strong brands from Nescafé to Kit Kat which we all enjoy and has a fantastic track record in terms of innovation, if you just think of Nespresso, a company like that. It's in the top 20 of my fund. And interestingly, we've just celebrated the 25th anniversary at the investment trust and it was actually in the top 20 [holdings] when the fund was launched.
It's a company with a great track record in terms of dividends and dividend growth. It's grown its dividend every year over that 25-year period and it's actually delivered a very good shareholder return, about 15% per annum over 25 years compared to the stock markets, the European stock markets, have gone up about 9% per annum.
Now, I think, it's a particularly interesting juncture now to look at Nestlé because I think of late they slipped up a little bit in terms of operational execution and also, in terms of capital allocation. They've just appointed a new Chief Executive who has a good track record in both. So, I think, this is an interesting time to look at Nestlé. In terms of dividend yield, it pays you a 3% dividend yield and I think it will continue that good track record in terms of dividend growth.
Wall: And the accusation has been levied at stocks like Nestlé that they are bond proxies, that actually you can't get much capital growth and you just get kicked out a very nice yield year-after-year. But from that sounds of it, 15% a year capital growth is pretty nice and Nestlé perhaps doesn't fall into that?
Morse: Well, exactly. I think it's not normally given as an example because it's considered rather dull but maybe dependable. But actually, the 15% growth shows you that even a company with strong brands, strong performance can deliver very good returns over time. I think the point about it being a bond proxy, yes, if bond yields were to rise, the valuation would suffer.
But it's very important to remember that bond yields tend to rise because inflation is coming back and this is a company with fantastic pricing power. So, its margins will be held up nicely which won't be true of all the companies.
Wall: And what's the second stock today?
Morse: My second stock today is Fielmann (FIE). So, Nestlé is a very large company, Fielmann relatively small business. You can think of it almost as the spec savers of Germany. It's selling these retail spectacles in Germany. It actually has an amazing market share, about 50% market share by volume in Germany. It's a low-price retailer. So, it's got about a 25% market share by value.
It's a company that benefits from the aging demographics in Germany. Sadly, as we get older, we all need to wear more glasses. And it's also benefiting from another trend, which is, people like me who have two glasses, one for short vision, one for long vision, eventually give up on the hassle of having two and decide to go for one pair of multi-focals. These tend to be a bit more expensive and the gross margin on them are a little bit higher. So, that trend is beneficial over time to gross margins. They are also rolling out their space gradually. They've got quite a successful expansion going on right now into Northern Italy. So, it's a business with good growth potential. The dividend yield is reasonably attractive at around 3% and we think it can sustain high-single-digit growth in terms of dividends.
Wall: And what's the third and final stock today?
Morse: Well, my third and final stock is Sampo (SAMPO). It's a financial. They've been somewhat out of favor. But like Nestlé and Fielmann, it's a very resilient business model. In fact, the Chairman likes to describe it as a low-risk money machine and I think that's what's it's proved to be over the years. It's a company with a very good track record in terms of capital allocation.
Currently, the dividend yield is particularly attractive. I think that's because the financials were out of favor. It's about 5.5% dividend yield. And we think, although the dividend growth perhaps will be a little bit less exciting than Nestlé and Fielmann, it will still be able to grow the dividend between sort of 3% and 5% over the next few years to come. It's got a very strong market position in insurance in Scandinavia and these are very profitable insurance markets and it's got a big stake in a Swedish bank called Nordea who are undergoing a bit of a transformation in terms of their IT which we think will yield great benefits.
So, three stocks, Nestlé, Fielmann and Sampo, all very resilient business models that we think in the long term will give good rewards.
Wall: Sam, thank you very much.
Morse: It's my pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
