Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall, and I'm joined today by Stephen Bailey, Manager of the Liontrust Macro Equity Income Fund.
Hello, Stephen.
Stephen Bailey: Hi.
Wall: So what's the first stock you would like to highlight today?
Bailey: I think GlaxoSmithKline (GSK) has its detractors. Currently, when you look at the valuation of the Company, it's exceptionally modest. There has been a clamour from activist investors to sort of split the Company up. And I would suggest that that’s certainly a strategy that is likely to be followed, but perhaps not for a couple of years as yet.
You look at the components of their business and you actually realize they have a very, very robust global healthcare business, a very robust HIV business. When you analyze the sort of the valuations that these standalone companies could attain, you realise that there is a lot of hidden value in Glaxo. And of course, in the meantime, you've got to stop paying 5.5% in terms of dividend.
It's paid quarterly to investors which I think is also very attractive in this modern world. At the end of the day, some of the detractors were highlighting that dividend was uncovered last year. That's a very sort of a short-term event. It is actually going to be covered in 2016. I would suggest that these levels, it's very attractive.
Wall: And you say that it's good value and it has got further to grow. Is that growth purely from the fact that it will rerate to fair value or are there fundamentals within the company that are offering growth as well?
Bailey: Fundamentally, I think there are some very attractive parts to SmithKline. It has got a very attractive portfolio of drugs in the pipeline. And I think that's often overlooked. I think at the moment, now you are looking at a year of change as you are with AstraZeneca. And I think it is a question of actually the business returning to growth as we see new drugs come to market replacing those drugs that have recently gone off patent.
Wall: And what's the second stock you would like to highlight today?
Bailey: Legal & General (LGEN). Legal & General is part of a sort of broader theme on aging populations and indeed the incentives we are seeing and the encouragement that's being given to individual to save and invest for their future. And I think Legal are the forefront of this market. They have got a very, very cost effective investment management arm. They have obviously exposed to the well-placed pensions.
Recently, they have actually gone into PRS, Private Rented Sector. And I think it is a very inventive business, which is adapting to the time. And I think from an investment perspective, you have got very highly cash generative business and the yield is actually in excess of, I think, 5.8% currently. And I think cheaply rated on a PE of 12, it suffered, I think, as most financials have ahead of Brexit. But I think, as I say, it's offering excellent value.
Wall: And a lot of this sector got really bashed last year when we had the news or the year before rather what the pension freedoms were going to come into play and potentially taking away some of that market, that retirement market. Have you seen that sort of all level out now? Or it's looking at other opportunities?
Bailey: Yeah. I think the second part of your statement there was the correct way of looking at it. I think initially everyone was worried this is going to be a very costly change for the industry, but they have all adapted to it accordingly. And, of course, Legal have actually decided to go into the bulk annuity business, which is exceptionally attractive as far as we are concerned and, of course, corporates are going to continue to seek to sort of shift responsibility from their balance sheet and of course, the likes of Legal & General are actually best prepared to take that off of them.
Wall: What's the third and final stock today?
Bailey: AT&T (T). As you know, we have got a very global outlook on our Macro Income Fund. AT&T is the American equivalent of British Telecom. Been unloved for years, but I guess that’s because it hasn't really been able to sort of demonstrate any kind of top line growth. Aside from that, it has still increased the dividend in 32 years on the trot. And currently, the stock ran about 4.8%.
And I think for U.K. investors, it's an interesting proposition, particularly as you've got dollar priced assets. And I think our concerns are that we are suggesting we are going to have a Remain vote on the June 23rd. But I think regardless of the outcome of the Brexit vote, at the end of the day, I think sterling will come under pressure in the second half of this year, because we still have some huge question marks with regards to the budget deficit. And I think at the time, we are going to be also looking at maybe a leadership challenge for the government. So I think investors are going to start to turn their focus away from the question of Brexit and actually on to sterling.
Wall: Stephen, thank you very much.
Bailey: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
