Simon Gergel's 3 Income Stock Picks

The Merchant Trust has grown its dividend for 34 years. Here, the fund manager Simon Gergel gives his three stock picks for UK equity income

Emma Wall 22 March, 2017 | 1:35PM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Simon Gergel, Manager of the Merchants Trust (MRCH) to give his 3 Stock Picks.

Hi Simon.

Simon Gergel: Hi Emma.

Wall: So, what's the first stock today?

Gergel: The first stock is Greene King (GNK), which is a pub company with 3,000 pubs and hotels, also has brewing brands such as Old Speckled Hen. It's – freehold pubs are great assets. They tend to have – if they are well invested, they tend to have a normal longevity. You see pub companies that have been around for decades, if not 100 of years.

And Greene King has a potential to significantly improve the estate. They bought a number of pubs from Spirit recently, which brought in brands like Chef & Brewer and they can optimize the estate, drive synergies, drive efficiencies and improve the growth and potentially the profits of the business.

So, we think Greene King is very well positioned. Interestingly the shares are quite depressed at the moment. People are worried a little bit about consumer spending. The impact of Brexit, and that's given an opportunity to build a position in a good company with a solid record at a sensible price. And the dividend yield on Greene King is about 5%. They have a history of growing the dividend every year, well progressive dividend for 60 years, which they are very proud of. And so, that fits very well with the objectives of the Merchants Trust in terms of high-dividend and dividend growth.

Wall: How can you be sure that those people who are concerned about consumer spending outright, because we have just seen this week the consumer spending has ticked down for the first time in a while, inflation is coming through, wage inflation perhaps not coming through, less positive economic outlook and yet you remain committed to the stock?

Gergel: Well, there are risks in terms of the outlook to spending and consumer spending might have a difficult period, but we've been through this before with this company and it has come through relatively well. That is because of your freehold assets that – if you get inflation coming to system over time, they can normally pass that onto customers. So, we just think the business over the medium to long-term will be resilient to different trends in the economy, whether the consumers have a good time or a bad time. I think over the long-term, Greene King has been through this cycle many times before.

Wall: And what's the second stock?

Gergel: The second stock is GlaxoSmithKline (GSK). Clearly, very well-known as pharmaceutical stock. It's being transformed by deal with Novartis in 2015, which has made them one of the leading consumer health companies in the world, brands like Sensodyne toothpaste and Voltarol, as well as one of the leading vaccines businesses in the world. And both consumer health and vaccines have enormous competitive advantages. It's very hard to break into that industry if you are not in it. And they have growth opportunities. So, those are really high-quality businesses.

And on the pharmaceutical side, you've got a broad portfolio of new products coming through which is offset – which will offset some of the pressure on one or two legacy big blockbuster drugs that may face patent protection. We have been through that process of historic drugs coming off patent and suffering competitive threat.

We are now coming through that and to a point where you are actually starting to see better growth in the pharmaceutical side. So, all-in-all, we've got a very strong business, sensible valuation, dividend yield approaching 5%, and it looks very well set for the future.

Wall: And what's the third and final stock?

Gergel: The third and final stock is called is Kier (KIE). It's a broad U.K. building construction company. It does everything from maintaining roads, building schools, working with water companies on their infrastructure. They also build houses for local authorities redeveloping land and so on.

They've got a good track record through the difficult period of construction side. We are now getting into a better part of the industry. We should have several years of growth. The Highways Agency has got enormous budget increase to improve the roads. We hearing government talking about infrastructure spending.

We have got big three Hs; Hinkley Point, HS2, Heathrow third runway. So, the outlook for construction spending should be good. Local authorities need to spend more and bring more houses through development on their old land that's being used for all the purposes. So, the top-down view of where we are in a construction cycle is very positive. The company is well-managed, well-financed, and has a good track record, and again, a good dividend yield and a sensible evaluation.

Wall: Simon, thank you very much.

Gergel: Thank you Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
GlaxoSmithKline PLC1,753.80 GBX-1.19Rating
Kier Group PLC79.00 GBX5.33
Merchants Trust Ord575.00 GBX0.00Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar