Three Corporate Veterans
16 May 2014
A professional investor tells MoneyWeek where she'd put her money now. This week: Gabrielle Boyle, manager of Trojan Capital Fund, Troy Asset Management.
Reprinted from Money Week
Saturday, 16 May 2014
In a world where cheap money has inflated and distorted asset prices, knowing where to invest to preserve and build capital for the long-term is a serious challenge. Our approach is to tread cautiously and invest in companies with high returns on capital sustained by durable competitive advantages, strong balance sheets and run by sensible managers. To paraphrase the great investor Sir John Templeton, there is no better way to prosper than to keep one's wealth in shares of companies that have the widest margins and rising profits.
American Express (US: AXP) is just such a company. Amex started life as an express mail business in New York in 1850. The first plastic card arrived in 1951 and credit cards have been issued since 1987. It is one of the best global franchises in financial services today and has compounded excellent returns over the long-term. Its pricing and market position is underpinned by strong brand loyalty, built up over decades through initiatives such as the famous rewards programme. Amex benefits from the ongoing growth of electronic payments. It has demonstrated strong operational efficiency, as cards in issue and card transactions have grown significantly faster than expenses over the past five years. Amex generates large amounts of cash and is committed to returning most of it to shareholders in the form of share buybacks and dividends.
Becton Dickinson & Company (US: BDX) is another great franchise. It is a global medical technology company that manufactures small medical devices and instrument systems and is the world market leader in syringe manufacturing. The business is based in the US but overseas sales account for 60% of revenues. Becton, having first been established in 1897, is another example of a company with longevity. The founding Becton family are still represented on the board. The majority of its sales come from disposable pieces of medical instrumentation, such as needles, syringes and catheters that typically cost less than $1. It enjoys strong pricing power, incredibly consistent operating margins of 20% and reliably delivers high returns on equity. The dividend has been increased for 40 consecutive years and has been paid consistently since 1926. The board has also used the ample free cash flows to buy back its own shares.
The Swiss food group Nestle (Zurich: NESN) is another example of a company with amazing longevity, having been founded in the late 19th century. It sells small, affordable products integral to the lives of people all over the world. It has more than 30 brands with revenues of more than $1 bn each, including Nescafe, Gerber baby food and KitKat, and it operates in 86 countries. Nestle is a steady cash machine with a consistent record of profit growth. Revenues grow in the mid-single digits, margins average around 15% and returns on equity are consistently in the high teens. It has very little debt and dividends have grown steadily for 20 years. Capital efficiency has improved recently and the latest move to sell part of its investment in the beauty company L'Oreal highlights the value imbedded in the group.
Valuations for these companies, all of which trade on price/earnings ratios of between 16 and 19 times, are not at bargain levels. But given their solid fundamentals and scope to compound excellent returns, long-term investors are likely to be well rewarded.