SAINTS 3 Income Stock Picks

Scottish American Investment Trust deputy fund manager Toby Ross picks three alternative global stocks for an income investor's portfolio

Emma Wall 20 April, 2017 | 4:27PM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Toby Ross, Deputy Manager of Scottish American Investment Trust, to give his three stock picks.

Hello, Toby.

Toby Ross: Hi, Emma.

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

Ross: So, the first stock is an American technology business called Analog Devices (ADI). You may not have heard of them, but they make a lot of very specialised semiconductors for lots of industrial and automated applications. So, if your car has a system that stops it swerving into the wrong lane, the semiconductor in that might well have been made by Analog.

When we're looking for stocks, we're really looking for businesses where there's a substantial growth opportunity over time and we think that's incredibly important and also, a cash-generative business model that also allows them to pay dividends along the way.

What we really like about Analog is, demand for their products is growing hugely over time. You're seeing more electronics and more applications all the time. But at the same time, they are really a design company. They don't own lots of factories and their key asset is people. It's these very specialised focused engineers. So, this means as well as seizing that growth opportunity they can also generate lots of cash for dividends and historically, they've done that.

It's particularly exciting at the moment because they've recently combined with another of our long-standing favorite Linear Technology and we think the combined entity is a very interesting one.

Wall: Now, the thing about tech stocks and in particular ones that are a component part of a larger beast, be it a mobile phone, be it a car, is that they can sometimes be at the whim of their client. We saw recently a chip company get into trouble because Apple just turned around and said, we're not going to use you anymore and the share price tanked overnight. How diversified is the client base of this company?

Ross: Enormously. And I think that's one thing that's really interesting about these businesses. Once they've got a relationship, it's very sticky. It lasts over a long time. But Analog's product catalog is 10,000 or more SKUs. So, it's hugely diversified.

Wall: What's the second stock today?

Ross: The second stock is actually an example of a consumer stock and what we look for in consumer businesses. So, the company is, AVI Group (AVI), which is a South African biscuit and tea manufacturer, which we've owned for several years.

What we really like about that is firstly they've got fantastic brands. So, you may not have heard of Five Roses tea. But if you were a South African consumer, you definitely would have done. They've been very well-managed over a long period. There's a big volume growth opportunity over time in that market and they've realized that over many years. And then the final thing we really like is that the management team has been very disciplined in what they do with cash. They've made a few very targeted acquisitions along the way.

But really, one risk in a consumer business is they are so easy to run that management gets bored. They start doing big acquisitions because they run out of ideas of things to do with the core business. AVI has basically said, all of its excess cash should go back to shareholders as dividends and they've just focused on running the core really well. So, it's the combination of great brands, demand growth and a management team that prioritises dividends and doesn't waste the cash that we really like.

Wall: What's the third and final stock?

Ross: The third one is actually close to home. It's Admiral Car Insurance (ADM). There are all A's today. Now, Admiral has got this great core franchise in the U.K. and that's built around the radical proposition that if you have happy employees who are motivated, then they will deliver better customer service over time, which seems like a crazy concept, but it seems to work for them.

But again, what we really like here is, you've got the founding management team at the helm. They own – coming on close to 15% to 20% of the business still. And they've been steadily putting down roots in overseas markets over time, growing in a very controlled measured way within places like Italy, Spain and the United States. They've been building out some longer-term growth opportunities. And we think some of those are at a tipping point now actually. They're going to start making a material difference over the next five years.

But crucially, because they understand the power of dividends and the importance of investing in a disciplined way, all the excess cash comes back to us as shareholders. So, it's that combination of a big growth opportunity but a disciplined management team at the helm who understand why dividends are important to shareholders. It's that combination that we really like.

Wall: Toby, thank you very much.

Ross: Thanks 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
Admiral Group PLC2,215.00 GBX1.89Rating
Analog Devices Inc160.64 USD-1.11Rating
AVI Ltd6,378.00 ZAC-0.50
Scottish American Ord475.00 GBX1.71Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar