Richard Turnill, managing director, is head of BlackRock's global equity team and manages BlackRock Global Income. Given the current market environment, he believes that it is important to focus on high-quality companies with sustainable business models whether the investments are domestic or overseas. He also comments that pharmaceutical companies are currently trading at several multiples higher than earnings and therefore present opportunities, but he notes that the financials sector has few attractive stocks.
1. Has the market volatility affected your view of corporate dividend growth? Do you expect boards to become more cautious given the uncertainty in the global marketplace?
We have seen evidence of increasing headwinds in Europe. As governments need to increase revenue to close budget gaps, there is potential for increased taxation and deterioration in set dividend payments. That said, the global economy is still growing and is on target for 3% growth this year. We believe that the way to navigate this environment is to focus on high-quality companies with sustainable business models, low standard deviation of cash flows, and strong balance sheets and that have consistently increased shareholder value through their dividend policy.
2. Your portfolio has a large exposure to firms outside of the United States. Is looking for income overseas different than at home, and where are you finding attractive dividend payers internationally?
Regardless of region, it is important to focus on quality, and we are finding more opportunities outside the United States that fit our criteria. Dividends paid by non-U.S. companies are 1%-2% higher on average compared with the those in the U.S. and have stronger potential for dividend growth. We currently have overweights in the United Kingdom and Europe. It is important to note that a European stock is not the same as the European economy. Companies in the portfolio have limited exposure to European macroeconomic risk and have revenues with global exposure.
In addition, our research has shown that a new area to explore is Japan. Historically, many management teams in Japan have implemented policies that are not accommodative or beneficial to shareholders, but as a result of increased pressure domestically and internationally, we are now finding that these policies are changing. Although there are significant strides still to be made, our research now shows that dividend yields in Japan have recently surpassed those in the U.S.
3. What impact, if any, do you expect the European sovereign debt crisis to have on your holdings in continental Europe?
During the last several months, we have pulled back our exposure in Europe as we currently see deterioration in outlooks for earnings. Our current holdings have minimal economic exposure to Europe but have global exposure from a revenue perspective. Many of the companies held in the portfolio also are benefitting from a weak euro.
4. You have several drug manufacturing companies ( GlaxoSmithKline (GSK), Sanofi (SNY), and Novartis (NOVN)) in the fund's top 10 holdings. Why were you attracted to this sector, and do you think these firms are still attractive today?
Pharmaceutical companies are currently trading at 8 times earnings. They have high dividends and high free cash flow, and the top nine largest pharmaceutical companies generated $100 billion in profit from $60 billion in research and development during the past year. Although some of these companies are facing patent expiries, we see future pipeline growth, growth in emerging markets, and the potential to reduce cost inefficiencies all resulting in increased profitability.
5. Financial-services stocks make up a relatively small portion of your portfolio. Why have you steered away from these holdings?
We look for quality companies with sustainable business models, strong balance sheets, a consistent track record in dividend distribution, and the ability to increase their dividend. We have found that there are a limited number of opportunities in the financials sector that fit our investment criteria.
This sector is also facing downward regulatory pressure and significant balance sheet issues that could result in additional capital raises. Political and economic headwinds also add to the difficulty to identify opportunities in this sector. Of the companies that we do own, they tend to have limited exposure to European macro risk, have well-established brands, market leadership positions within their respective countries, and relatively strong balance sheets.
