Fund Managers’ Favourites: Top Dividends Picks

Job Curtis, who manages the Gold-rated City of London Investment Trust, discusses his favourite dividend-paying UK companies

Alanna Petroff 5 October, 2012 | 11:06AM
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In the video series, "Fund Managers' Favourites", Morningstar speaks with UK-based fund managers to learn about their top investment picks. In this video, Morningstar journalist Alanna Petroff speaks with Job Curtis from Henderson Global Investors about three of his favourite dividend-paying UK companies.

Securities Mentioned in this Video:

City of London Investment Trust (CTY)
GlaxoSmithKline (GSK)
Centrica (CNA)
TUI Travel (TT.)

Video Transcript:

Alanna Petroff: Many of us are constantly on the hunt for dividend paying investments and who better to speak with about dividends than Job Curtis. He is from Henderson Global Investors and he runs the Gold-rated City of London Investment Trust. That trust has been raising its dividend for nearly five decades. So, he is certainly the go-to guy when it comes to dividends. He is also known as a cautious investor and he joins me now to talk about his investment strategy and his top equity picks. So, Job, tell me a little bit about your investment strategy?

Job Curtis: Well, as you say, I'm fairly conservative and I do look at the downside risk as well as the upside potential before I invest in a stock. So, I spend a lot of time analysing the companies. It’s valuation that's most important for me. I'm looking for companies with good cash flow because in order to pay dividends, you have to actually earn cash profits. In addition, I like companies with asset backing behind them, whether that's property or intangible assets like strong brands.

Petroff: Okay. And your top three picks are GlaxoSmithKline, Centrica and TUI Travel, which is a bit of a different choice for you, so we'll get to that in a moment, but let's go over GlaxoSmithKline first.

Curtis: Yes. Well, GlaxoSmithKline of course is well known to everybody as our leading pharmaceutical company. I think it is on a very interesting valuation at the moment. The dividend yields about 5.4% and the P/E is 12 times, roughly. I think the company is capable of EPS growth of high-single digit based on top line sales growth of about mid- single digit. And if they achieve that high-single digit EPS growth on top of the 5% dividend yield, that's on its own is an attractive return and I think in addition the stock will deserve to be re-rated.

My confidence is based on the fact that I think they've seen the worst of the patent expiries from their existing drugs and in addition they’ve got a good pipeline of new medicines under development, which I think are relatively low risk and will get approval from the authorities.

Glaxo is not just about medicines, it's also about vaccines. It's got a very strong vaccine business, also over-the-counter drugs and, in addition, health drinks. And their business in emerging markets is also growing rapidly. So altogether, I think it's an attractive stock at the moment.

Petroff: Okay. It sounds like its rather diversified then. Let's go over Centrica, in the utility sector. Why Centrica?

Curtis: Well Centrica is one of the leading UK utilities. It is the biggest supplier of gas and it is one of the biggest suppliers of electricity. So, it's a solid business, which is dominated by six companies in the UK.

What I particularly like about Centrica: it's got a very strong balance sheet for a utility, which gives it optionality. In addition, it's hedged its business because it's bought upstream gas assets in the North Sea, so it's not vulnerable to any sharp rise in the gas price. So, I think it's a strong business.

In North America, they've got a growing business there, which I think is not really affecting the share price. So, with a dividend yield of around 5%, I think Centrica again looks attractive.

Petroff: Okay. Moving on to TUI Travel. This is a bit of a different company.

Curtis: Yes.

Petroff: Why TUI?

Curtis: Yes. Well, TUI is not the sort of stock which you would normally have “Job Curtis” written on it. But having said that, it has net cash on its balance sheet, having reduced its debts over the last couple of years.

It's a leading tour operator and it's really emerged as very much the leader. I mean, when I looked at this sector back in the 1990s, there were three--sorry four--tour operating companies and TUI is now the leader. And Thomas Cook, obviously its main rival, has had well-known difficulties. TUI is number one or number two in the UK, Germany and all the other main Northern European markets.

It's basically been able to grab the best hotels because of the problems of some of its competitors and, in addition, it has a very important business on the internet for wholesale booking of hotel rooms, which hasn't really been reflected in the share price valuation. So it's fundamentally, I think, a strong business. We do like to take our overseas holidays, particularly when we've had a wet summer as we've had this year...

Petroff: Yes.

Curtis: No surprise that current trading, as shown in recent updates, has been strong for TUI Travel and they also are reporting good bookings into the winter and for next summer. It's obviously early stages yet. So I think it’s the market leader and well positioned in an attractive sector, which should benefit from possibly improving outlook for consumer spending in the UK.

Petroff: And just quickly, the dividend yield on that one?

Curtis: That is again around 5% and it's on a P/E of about 9.7 times.

Petroff: Okay. Now let's go over the key risks for each of these companies. They are not without their risks. For, Glaxo?

Curtis: Well, Glaxo, I think, the risk is I’ve underestimated problems on the pipeline, maybe they fail to get some drugs approved. Or even with existing drugs, maybe they hit patent expiries more quickly than I'm expecting. And I think the other issue with Glaxo is just health spending generally and they are already having acute pressure from governments in terms of spending in healthcare in Southern Europe and if that was to sort of grow in North America and the UK that would be a sort of fundamental pressure for Glaxo and the other leading pharmaceutical companies.

Petroff: And Centrica?

Curtis: Centrica, I think the more general risk on Centrica is the electricity market reform in the UK. I mean the government policy towards the electricity sector is somewhat unclear and obviously the government is trying to incentivise green or low carbon energy and there is a potential for Centrica to make quite a big investment in nuclear power with EDF and so there are risks attached to that strategy.

Petroff: TUI Travel, what's the key risk with that one?

Curtis: Well, the tour travel industry is notoriously difficult at times, and it is fundamentally low margin and subject to kind of quite high competitive pressures. In addition, the Internet is a structural factor, with people booking online and also booking cheap flights. So, certainly there are risks with TUI Travel, but I think that is well discounted in the share price at the current level.

Petroff: Okay. Thank you very much for coming in.

Curtis: Thank you.

Petroff: That was Job Curtis, from Henderson Global Investors and he runs the Gold-rated City of London Investment Trust. I'm Alanna Petroff. Thanks for joining us.

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
Rating
Centrica PLC85.32 GBX2.60Rating
City of London Ord420.50 GBX0.72Rating
GlaxoSmithKline PLC1,775.00 GBX-0.39Rating

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.