The annual Evenlode Global Dividend Sustainability Report, compiled by portfolio managers Ben Peters and Chris Elliott, aims to identify quality compounding companies with resilient cash flows at attractive valuations.
The duo selects 10 companies with business models that enjoy ‘market-leading positions in their industries, attractive economics, good cash flow, strong barriers to entry, and good potential for medium-to-long-term growth’.
The companies’ performance is re-assessed yearly to re-establish their inclusion in the list.
This year, just one company has been changed.
Finding sustainable income in unpredictable times
“The last year has proven to be quite unlike any other experienced by dividend-seeking investors,” Peters explains. “Our list of companies aiming to deliver sustainable and growing dividends was not immune, with one of the 10 companies, Bureau Veritas, cancelling its dividend.”
Although the French testing, inspection and certification business, cancelled its dividend early in the pandemic; Peters reiterates, “if a company can’t afford to pay a dividend, then it shouldn’t”.
“If a good business needs to conserve capital through a time of crisis then it should cut its dividend if it pays one.”
It certainly hasn’t all been doom and gloom however – the remaining nine companies in Evenlode’s 2020 list have either maintained or increased their dividends through the pandemic, demonstrating a great deal of resilience in the face of adversity.
Peters goes on to explain, “the index has been powered on more by the big winners of the pandemic, specifically large technology companies that have benefitted from the accelerated trends towards digitisation, remote working and collaboration, and home shopping”.
It pays well to wait
According to Elliott, “the stability of the sustainable dividend list will continue to provide superior and lower volatility returns in the long run”.
“One of the benefits of a sustainable income stream is that one is ‘paid to wait’ for the underlying economics of a good business to do their work.”
Evenlode’s 2021 list features just one company change from the previous year: switching out PepsiCo for Nestle.
While the two companies are both high-quality businesses with similar yields, the duo noted Nestle’s larger cash flow as an important buffer against potential uncertainty.
Peters says: “The recent past has been a reminder that no approach to investing works perfectly over shorter time periods, however our list has delivered positive returns in absolute terms over the last year.
“With good corporate fundamentals, we believe the overall risk profile for the sustainable dividend list is lower than for the market. Over the long run, the stability of the sustainable dividend list continues to provide superior and lower volatility returns.”
Below is a brief summary of the 10 stocks:
The French company is one of the market leaders in the highly fragmented testing, inspection and certification industry (TIC). These services are vital to customers, helping them ensure the high quality of their products and suppliers. With the rise of social media, having an ethical supply chain has never been more important. The company dominates the niche of asset inspection for ship construction and industrial machinery, both examples where the cost of failure is very high. As demand for these services is set to grow over time, and although the coronavirus crisis did show some cyclicality for the business in its industrial customer base it also proved able to adapt to the conditions.
Cisco is the global market leader in the networking technologies. The core business of selling switches and routers is transitioning to longer term subscription purchase models. This provides a recurring stream of cash flows that can be used to pay dividends. The company has also expanded into providing security services, offering a one-stop shop for customers that have historically relied on a patchwork of products from up to 50 different suppliers. Cisco’s services include the ability to detect malicious threats in encrypted internet traffic, preserving privacy.
JOHNSON & JOHNSON
Often associated with its consumer products division, with iconic brands such as Listerine and Neutrogena, J&J is predominantly a pharmaceuticals and medical devices company. The company’s pharmaceutical division generates half of group revenues and has a strong position in immunology and oncology. The medical devices division is highly diversified, creating systems that aid surgery, diagnostics, wound care and vision.
Nestlé is a multinational consumer goods company, with over 8,000 products and 2,000 brands across a wide range of categories. Originally formed by the merger of milkchocolate and condensed milk companies (1905), Nestlé makes and sells confectioneries like KitKat, baby food, icecreams, cereals and coffees Nescafé & Nespresso amongst many other things. Over time Nestlé has expanded into other product lines; including noodles (Maggi), Waters (San Pellegrino), pet food (Purina) and nutrition.
Paychex is a US-focused provider of human resources services to small and medium sized businesses. A little over half of revenues are derived from payroll outsourcing, clearly an important function for any business and a task for which smaller firms are very willing to utilise a specialist. The other part of the business is other human resources services, such as pensions administration, and management of workplace policies. Once integrated into a client’s business renewal rates are extremely high. The business has proved resilient through the coronavirus crisis, helping its clients to navigate and cope with new legislation and governmental support.
The Anglo-Dutch media conglomerate provides information services to academics and businesses. Diversification and a large degree of subscriptionbased revenue give stability to Relx’s cash flows. The publishing business, Elsevier, has a portfolio of high-profile journals with an excellent reputation for publishing high-impact, academic research. Risk & Business Analytics provides analysis tools that help improve the efficiency of a range of businesses, from banks and insurers to farms. Similarly, the Legal division provides the LexisNexis database for lawyers, an irreplaceable resource in preparing a legal argument. The diversification of the business has come to the fore over the last year as revenues from its smallest division, trade exhibitions, dried up due to lockdown restrictions.
The Swiss pharmacology giant is at the forefront of development of personalised medicine. Roche are uniquely positioned, with an ability to leverage their diagnostics division and tailor treatments to patients, based on a specific biomarkers or protein expressions. This could result in a paradigm shift from the historic generalised treatment approach. Roche have invested heavily in the field of immuno-oncology. This has yielded breakthrough therapies that are enabling patients to live longer and allow Roche to capture market share.
Unilever’s consumer products are instantly recognisable to the 2.5 billion people who use them globally every day. Selling products from Dove to Domestos, Marmite to Magnums, this diversified consumer goods giant has a history stretching back to the 1880s. Over half of Unilever’s revenues are from emerging markets, providing a compelling opportunity for growth as the average salaries for consumers in these markets increase. With fewer people holidaying ice cream sales took a hit in 2020, but the diversified portfolio fared well overall.
Western Union is a leader in global money movement and payment services. The core segment, Consumerto-Consumer, enables global money transfers usually within minutes of transfer initiation. This utilises a physical network, with agent locations in more than 200 countries and territories, and a compliance network, used to prevent money laundering and fraud. The company is increasingly seeking to supplement these services with online money transfers. Cross-border remittances fell during the first wave of lockdowns in 2020, but have since rebounded as economies and workers developed ways to cope with the restrictions.
Wolters Kluwer is a Dutch information, software and services company servicing the professional service sectors. Its products and services help healthcare professionals to make decisions, accountants to manage compliance, and lawyers draft documents. Knowledge and content in the relevant sectors combined with increasingly cloud based delivery enable Wolters Kluwer’s products to become deeply embedded in their customers’ operations, demonstrated by 79% of revenues coming from recurring sources.