Holly Black: Welcome to the Morningstar series "3 Stock Picks." I'm Holly Black. With me is Ben Peters. He is Manager of the Evenlode Global Income Fund. Hello.
Ben Peters: Hi, Holly.
Black: So, your focus is on companies that will pay a reliable dividend, something that's potentially quite hard to find in the current environment. So, which is the first stock you'd like to talk about today?
Peters: Well, the first stock I'd like to talk about is Nestlé, the Swiss consumer goods giant, the world's largest food producer. Now, it has seen some disruption under the current conditions to its demand and certainly in the supply chain, but fundamentally, it's producing products that we are going to need, food, coffee, very important of course, and even more importantly, pet foods, so Purina and pet foods brand in there. We certainly aren't going to stop spending on our pets that (we can afford) through this crisis. So, they've seen robust demand. But some of its operations are being affected. About 10% of the business is out of home sales, so in shops, et cetera. So, that's being affected. But they are helping their customers in that they are allowing by extending payment terms, doing things like pausing rental payments for coffee machines and so on. So, hopefully, that will stand them in good stead for the long run. But in the meantime, robust demand and it should lead to a stable dividend.
Black: Let's not also forget that chocolate is definitely a key item on my shopping list certainly.
Peters: Absolutely.
Black: Is this the key when finding a company that can maintain its dividend though, one that I would keep using your product even when I'm locked up in my house for six weeks at a time.
Peters: Well, that certainly helps. And I think that that's certainly a theme – companies that can address consumers in their home where they can divert their supply chain into the home and away from sort of the on-trade, so pubs and bars and restaurants and things and that's certainly a big help. And of course, maybe really quite predicted that this was – prices were going to evolve in this way, but certainly the way you've got companies that can do that.
Black: Okay. What's stock number two?
Peters: The second company I'd like to talk about is Microsoft. So, Microsoft probably won't need any introduction. It's a software giant. And the big current thing with Microsoft is its Teams product which enables workplace collaboration, video conferencing facilities and amongst other services and that's seeing some really very rapid take up as you can imagine in the circumstances people working remotely and that sort of thing.
Now, with all these companies that are sort of arguably benefiting from the lockdown situation, when the lockdown ends, which it inevitably will, then that growth is going to slow. So, what's really important for a long-term investor is to think about what the longer-term demand profile is for a company's goods and services. And with Microsoft, it was already seeing very rapid take up with its Azure cloud operating system. The platform there, it's a fantastic product. It's in essentially a duopoly with AWS and there's a couple of other providers that can do a similar thing. But it's seen great take up of that, very much on trend with growing digitization around the world and that's really what's encouraging about Microsoft in the long term.
Black: Okay. And what is our final stock pick?
Peters: So, the final company is a Dutch media company called Wolters Kluwer. Wolters Kluwer provides information, data, analytics and software to a range of sectors from healthcare to tax accountancy and to the legal professions. So, it's a largely sort of dematerialised business. It delivers the software information digitally. Nearly 80% of the business is digital. It does have a smaller print publishing arm as well which has been shrinking over the last few years as you can imagine everything moving online. But it's a very robust and resilient business, partly because its revenues come predominantly from subscriptions but also the types of sectors that it's addressing are mission critical. People are still going to have pay tax; people are still going to have to file accounts. And they provide great data services to healthcare workers as well. So, the critical industries and they are servicing them with critical data and software products. So, again, the free cash flow should be very resilient there. There will be inevitably some disruptions in the more transactional business, but the free cash flow stream is healthy and that should support the dividend.
Black: So, this is the sort of company that has a very sticky customer base anyway. But I imagine this is kind of a real moment for them to prove themselves to a new band of customers as well and once they get those onboard, that's great for the future as well.
Peters: Well, I think that with these services if there's a threat of them being removed, then the people who already use them find that undesirable and they are very much the last thing to be removed. That will really cause – more cost of these services to their customers. But yeah, there's possible the opportunity to get some customers onboard and particularly onboard with cloud-enabled products and that's been the real drive now as they've gone from print publishing to software but then they also are making the move to software that can be stored on premises into the cloud and there's an opportunity there too.
Black: Well, Ben, thank you so much for your time. For Morningstar, I'm Holly Black.
