Dividends
“We are more bullish than bearish on equities at the moment. There are lots of big uncertainties in the world but we believe US equities are an attractive place to be. The companies are in great shape, profit margins are at an all-time high, balance sheets are robust and throwing off a lot of cash flow.
“One of the most powerful things going on for investors at the moment is dividends. Dividends are at attractive levels and can be a good driver of returns going forward. In the large cap blue chip space, which is where we think the best opportunities are, you can get great companies with around 3% dividend yields. When we combine the balance sheet strength, profitability, valuations and dividends we are pretty constructive on the large cap names.
“Earnings robustness is due to a number of reasons, including globalisation, which has two contributing elements. One is the growing demand from emerging markets which is driving revenue growth for the large multi-national companies. The other is the presence of low cost manufacturing which has improved the cost basis and profit margins for these companies.
These companies have significant cash flow which they are able to put to work to drive returns to shareholders, whether via dividends, buybacks, or mergers and acquisitions.
Looking Beyond the Current Uncertainties
“We are currently in a situation where there will be a lot of turbulence and volatility - investors need to expect that. Yet while we continue to be cautious, it is also important, to hold your nose a little bit and start investing based on a disciplined approach- it is time to start incrementally adding to equities.
“One does not have to take a lot of risk today in the equity market to get attractive investment opportunities. While we are actively buying stocks to take advantage of recent market weakness, we are buying names that we view as high quality and which enjoy relatively predictable and stable earnings streams.
“In 2000 large caps were trading at 30x earnings - they are now trading at 13x earnings. These large cap defensive names offer good return potentials without having to take a lot of risk. These include companies such as Johnson & Johnson and Procter and Gamble. Companies with relatively small economic sensitivity that are going to do relatively well, regardless of what happens. We think you can get attractive return potential without having to step too far onto the risk curve.
