Henderson: Buy Banks and Auto Stocks for Income

Silver Rated global equity income investor Alex Crooke reveals alternative sources of equity income as bond-proxies fall from favour

Karen Kwok 27 January, 2017 | 3:59PM

Looking for a long-term income investment? You could do worse than HSBC (HSBA), according to the Bankers Investment Trust (BNKR). The Silver Rated closed-end fund has is celebrating its 50th anniversary of annual dividend increases, and has continuously owned shares in the bank for 129 years and counting. In fact, HSBC is the only company that the Trust has held since launch in 1888, and the team still hold it in high regard.

"HSBC had a very good run last year. We are not inclined to buy more but I am a happy holder. As a global bank they are well-positioned to survive Brexit and their businesses in the Far East are growing well. It is a well-capitalised bank," said Alex Crookes fund manager of the trust.

HSBC is not the only bank Crookes likes. Speaking to Morningstar this week Crookes said he was "big on financial stocks", and is in the process of buying banks listed around the world, in particular those in Europe and the US. In Europe he prefers Northern European banks, a Dutch bank ING Group (INGA) and French banks.

European Banks Face Challenging Outlook

According to Stephen Ellis, director of financial services equity research with Morningstar, ING Group is making the best of a challenging European interest rate environment and it is posed to pay out a “hefty dividend payout ratio” of 40% in 2016. The bank currently yield 4.8%.

“Markets are still assuming banks in Europe are in a capital building mode. But I think the average returns are going to rise, so with that in mind banks in Europe still look cheap and they still worth buying,” said Crookes.

“We are convinced that the European Central Bank is not going to push rates up in the short term; I think rates will be very stable over the coming two years. The question is the profitability of the bank whether they will grow their lending. I think they will.”

Costs for banks are falling thanks to new technology, according to Crookes. This means banks need fewer branches and instead are serving more customers online.

James Davidson, portfolio manager of the JP Morgan global equity income fund agreed that banks costs are falling and that they should be able to offer attractive dividends regardless of what happens with rates.

Crookes also holds Lloyds Banking Group (LLOY) in his portfolio. Fines associated with the mis-selling of PPI insurance have already cost shareholders some £17 billion however Crookes believes the bulk of regulatory charges are over for Lloyds.

Looking at financial stocks in the US, Crookes holds credit card providers Visa (V) and American Express (AXP) as he thinks the US is rapidly moving from a cash-oriented economy to a cash-free one.

Looking to Auto Stock for Income

US vehicle sales totalled 17.6 million in 2016, beating 2015’s record of 17.5 million, according to the Autodata Corporation, the US automotive information services provider. Crookes believes that auto sales in the US are not yet at peak level, and as such auto stocks look cheap.

“Investors are expecting auto peak sales to fall from this level, but I think they can hold and in fact rise. As regulators support automakers in an effort to clean up diesel car sales, and instead to promote electric and green cars, this will lead to a stronger industry,” said Crookes.

However, concerns have been raised regarding the profits of automakers, thanks to restrictive trade restrictions imposed by President Donald Trump. This week Trump said he would cut regulation and taxes in order to encourage the car industry to invest in US production. But he has also threatened to impose 35% tariffs on imported vehicles, and been heavily critical of automakers’ decisions to build plants in Mexico.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
American Express Co109.46 USD-0.13
Bankers Ord832.00 GBX0.36
BP PLC524.90 GBX-0.40
HSBC Holdings PLC653.90 GBX-0.59
ING Groep NV10.84 EUR-0.86
JPM Global Equity Inc A Net Acc1.02 GBP0.60
Lloyds Banking Group PLC54.50 GBX-1.71
Visa Inc Class A140.18 USD-1.17

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk