Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me in the studio is Alasdair McKinnon. He is the Manager of the Scottish Investment Trust. Hello.
Alasdair McKinnon: Hi, Holly.
Black: So, you're going to tell us three stocks that you're quite excited about in the portfolio at the moment. Which one would you like to start with?
McKinnon: Well, sure. I thought the one we might start with is one we're probably most excited about at the minute, which is, Newcrest Mining (NCM), which is an Australian gold miner. Now, everyone knows what gold is. Newcrest Mining, though, is maybe not familiar to people in Europe as well as it might be, but it's actually one of the biggest gold companies in the world, third biggest. And it's one of the lowest cost gold operators in the world with its operations primarily based in Australia and Papua New Guinea.
Now, to buy a gold miner you actually have to like gold, and we do like gold. The reason we like gold is, we see it – now, going back in time 10 years immediately post the financial crisis, a lot of very clever people were worried about inflation for understandable reasons because basically we'd entered a new monetary era. But 10 years on we haven't really seen inflation in the official statistics at least. But we're now reaching a new era, we think, where we've got a new breed of politicians, some are already in office, maybe President Trump in America, who are less concerned about deficits, are more concerned about getting reelected by giving away stuff or cutting interest rates or printing money or whatever is they need to do. And when you look around the economy as well, it's obviously been very favorable for people with assets. But out with that, it's been quite a tough 10 years and there's definitely a mood – there's an intergenerational wealth gap and there's definitely a mood now that people are prepared to do a new way of running the economy. And we think that will really suit gold, because basically we see it as a currency that can't be printed. In contrast, all the government currencies we know, dollars, pounds, et cetera, which at the end of the day are government controlled and can print more of if it wants to. So, that's why we like gold.
Black: Now, that's quite a controversial one to start with. What's another stock in the portfolio that you like at the moment?
McKinnon: Well, perhaps less controversial would be GlaxoSmithKline (GSK). This is a well-known UK-listed pharmaceutical company. Now, it has kind of been out of favor for the best part of 20 years. The long story short is, all the big pharmaceutical companies in the 90s were really successful businesses. They were the growth stocks of their day. But they were all based on, in many cases, a handful of blockbuster drugs and these drugs have got 20 year of patent life from when they are first commercialized and when that drops off, they've got to try and replace them. Now, all the big pharma companies struggled, and Glaxo was no exception to do that.
Where they've got to though is, they've got a new leader in place, Emma Walmsley, who is kind of grasping a little bit because Glaxo boxed himself into a corner. They were paying a very high dividend yield and they hadn't really got away of moving forward. They were using most of their cash flow to pay the dividend and didn't really have a plan to move forward, the plan B so to speak. What Emma Walmsley has done is, she has said, right, the R&D pipeline, we were far too academic and we're going to commercialize it much more. She's brought in a new R&D chief who has got a good track record to commercialize it and there's also a plan to split the business. So, you'll have a – in two to three years' time you'll have a pure pharmaceutical business and you'll have a more consumer products type business because Glaxo also have some well-known consumer brands as well. The plan is the new consumer business will have more of the group's debt and it will then allow a pharmaceutical business that's got prospects again and then you'll have the more stable dividend-paying consumer business as well. So, this is why – and Glaxo just now pays about a 5% dividend yield and it looks – in the context of a wider market, it looks attractive to us.
Black: We've got gold, pharma. Where are we going for our third pick?
McKinnon: Our third pick would be one of the big oil companies, Royal Dutch Shell. Now, again, the story with the big oil majors is, not dissimilar to big pharma. They were kind of 1990's growth stocks in some ways where they were adjusting for a very low oil price environment. And then they struggled when the oil price went up a lot because they didn't have the reserves. And then, as humans and management teams, being management teams, they invested an awful lot of money right at the top of the oil cycle just when they shouldn't have basically. Now, Shell along with all the other oil majors got themselves in a bit of pickle because they were spending far too much money and investors got worried about their dividend-paying capacity. Investors got particularly upset with Shell when they bought BG Group about three years ago.
Now, bizarrely, we thought that for once the management teams had behaved in a very countercyclical way. Normally, management teams chase assets that have already gone up in price. But we thought that was a good deal, because we were buying at relative low point in a cycle, but they were slightly adding to stresses on the balance sheet at low point in the oil price. So, that upset a lot of other investors, but we saw that as a good opportunity. And the fruits of that are starting to come through. So, it was a really good countercyclical deal. They absolutely slashed the expenditure. The dividend is now as safe as any dividend can be. They are paying (indiscernible) 6% dividend yield. And they've sort of committed to return quite a significant amount of cash, about $120 billion they were talking about, to investors over the next – by 2025. So, we think that Shell is in an interesting position there.
Black: Well, thanks so much for sharing those with us.
McKinnon: Thanks very much.
Black: And thanks for joining us.
