Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give his three stock picks is Richard Buxton, Manager of the Merian UK Alpha Fund.
Hi, Richard.
Richard Buxton: Hi.
Wall: So, what's the first stock today?
Buxton: Well, all three of my stocks today are U.K. domestically-focused companies which in the light of Brexit uncertainty is interesting. So, the first is Tesco where newish Chief Executive Dave Lewis has been in there four years now. Here, it was signaled that it was going to be a five-year turnaround plan. I think that he has absolutely not put a foot wrong.
Everything is moving in the right direction in terms of he has got his pricing back and competitive, he has got consumers trust back, he has introduced new lines. And I think there's still all the benefits of the acquisition of Booker still to come through.
I met him again recently and what was very encouraging, he is already talking about what he can do for the next five years in terms of beginning to really drive the business forward. So, the balance sheet is strengthening day by day. So, I think there's a potential for it to become a really significant dividend payer over the course of the coming years.
Wall: And it is quite interesting what you say there. Over the last five years Tesco has had some significant challenges with the accounting concerns and also, with just sectorised structural stuff with the Lidl and Aldi. What does the next five years entail now that those sorts of things are slightly put to bed?
Buxton: Well, I think, yes, certainly the industry itself is getting more sensible. I mean, even the German discounters are slowing some of their expansion plans, reflecting the fact that we are essentially a mature economy. There is not that much growth to be had out of food retail. Clearly, a big influence will be whether the Sainsbury's-Asda merger is allowed or not and in what shape or form.
But if that is allowed to happen in whatever form, if some of the stores that they are required to sell are picked up by Morrisons, Aldi, Lidl, then again, it will become a much more sort of orderly market where they won't be constantly throwing down new space and sort of knock spots off each other. It will be a much more sort of sensible market. It will still be incredibly competitive. Don't get me wrong, but I just think that you won't have the persistency of the space race which was really a problem for the sector for many years.
Wall: And what's the second stock today?
Buxton: The second stock today is Whitbread which clearly having sold Costa Coffee to Coca-Cola for a very substantial price is now purely focused on hotels. It's the owner of Premier Inn, Britain's leading budget hotel brand. There's still lots of optionality for that business in terms of growth here in the U.K., but they have also started putting a toehold into the German market. The German market has lots of long-term opportunity for them.
It's a very fragmented market, lots of mom and pop operators, but a very budget orientated market as well. So, I think, the scope for them over the next five years to really begin to roll out Premier Inn in Germany gives this fabulous longevity.
Wall: And what's the third stock pick?
Buxton: The third stock is an old favorite of mine. It's Lloyds Bank. At the moment, it is sort of going up and down on Brexit news and perceptions. But I think, again, get beyond Brexit then actually the earnings power of this bank is in no way reflected in the valuation. It's a hugely capital generative bank now. The opportunity there for it to continue to both buy back shares and offer very significant dividend growth I don't think is reflected in the valuation. They still trade at a modest discount to book value.
Wall: And you hinted there – do you expect the dividend will be raised over coming years, because Lloyds used to be a stalwart of any income portfolio, but then it absolutely fell from favour?
Buxton: Yes, of course. No, I think, it very much will be able to crank out dividends. I mean, with the shares trading where they are today, I can understand why they are devoting some of the money to buying back stock. But I think at the fullness of time this is a bank that could be generating dividends of 5p a share perhaps, which you know, on today's 56p share price, you know, that's pretty compelling.
Wall: Richard, thank you very much.
Buxton: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
