Commentary
The fund rose 0.7% in September while the MSCI World High Dividend Yield Index rose 0.8%. The largest negative contributors to performance were, in order of impact, IWG (-21.0%, total return in local currency), Allegiant Travel (-13.5%) and JD Wetherspoon (-4.4%). There was no fundamental news for IWG during the month. The shares performed well in August and saw its largest outside shareholder reduce their position during the month.
Allegiant performed poorly on the back of continued concerns about falling ticket prices in the US market and rising oil prices. The month also saw the company reinstate founder and executive chairman, Maurice Gallagher, as CEO. When Gallagher stepped back from CEO in June 2022, we considered it to be bad news, so we consider having Gallagher back as the pilot of Allegiant good news. The shares are back below 1x price to book and under 9x earnings, it has rarely been cheaper on both metrics.
The largest positive contributors to performance were BP (+9.0%) on higher oil prices, North West Company (+13.4%) and Svenska Handelsbanken (+6.8%).
North West Company (NWC), the Canadian based retailer, announced quarterly results. These were better than both we and the market expected. This was mostly driven by the strong performance of the Canadian General Merchandise business. NWC sells both food and general merchandise, but the latter is much higher margin. The shift to a higher share of general merchandise sales helped gross margins increase to 33.1% compared with 31.2% in the prior quarter and 31.8% in the prior year.
The company is confident that it can sustain these higher margins and on this basis the shares trade at 12x earnings compared to its historical average of above 15x earnings while the dividend yield is around 4.5% and growing.
Last week, Philip Morris International (PMI) held its first investor day since 2021. We have not written about PMI for some time, mainly because the company has delivered in line with our expectations. Following the investor day, we feel an update is timely.
Since purchasing PMI in May 2018, the share price has appreciated 13%. Including dividends, total return is 55% (8.5% annualised). For comparison, the benchmark is up 38% during the period. While the total return since the original purchase has been satisfactory, we believe PMI is not being rewarded for its successful transformation towards smoke-free products.
As a reminder, PMI’s portfolio comprises two categories: traditional cigarettes and smoke-free products. Traditional cigarettes are sold primarily under the brands Marlboro, Chesterfield, Parliament, L&M and Philip Morris. These products are sold in markets outside the US and China with PMI having c. 25% market share. The cigarette business is a stable cash cow which enables PMI to pay a healthy dividend while investing for growth. Smoke-free primarily includes heat-not-burn and oral nicotine products sold under the companies’ IQOS and ZYN brands. The heat-not-burn and oral nicotine categories are rapidly growing because of the health benefits compared to traditional cigarettes. The U.S. Food and Drug Administration (FDA) has classified versions of both IQOS and ZYN as Modified Risk Tobacco Products. IQOS and ZYN are the clear market leaders within the heat-not-burn and oral nicotine categories, respectively.
A key part of our investment thesis in 2018 was PMI being well positioned to grow its smoke-free products. This part of the thesis has played out: smoke-free products have grown from less than 5% of revenues in 2017 to more than 35% in 2023. With IQOS and ZYN now comprising a large part of PMI’s revenues and growing +20% p.a., they are expected to drive overall revenue growth for PMI in years to come.
At the recent investor day, PMI outlined its 2024-26 targets: 6-8% revenue CAGR and 9-11% EPS CAGR with smoke-free products comprising two-thirds of revenues by 2030. PMI currently trades at 15x earnings and a 5.6% dividend yield. Even without any re-rating, we expect total return in the mid-to-high teens through a combination of earnings growth and dividends. Further, the current valuation at 15x earnings is in line with history which we believe fails to recognise the significant portfolio transformation that has taken place over the last five years.
The upside of the portfolio is 79%. This compares favourably with the long-term average of 40%. The fund is trading on a price-to-earnings multiple of under 10x compared with the MSCI World on 18x and provides a dividend yield of nearly 3%.
Russian holdings
Please note that on 3rd March 2022 the Fund’s investment in Lukoil ADR listed on the London Stock Exchange (LSE) was suspended from trading. Our Valuation Committee considered it was in the Fund’s best interests that the holding of Lukoil ADR be fair value priced (FVP) at zero. In June 2022, we elected for the holding to be converted into local shares (Lukoil PJSC).
Given the current international sanctions on Russian securities and cash balances, we believe that if lifted and the Fund was able to access the local market, the holding in Lukoil PJSC (with a current FVP of zero) would represent 13% of the Fund and cash dividend of 2.1%. On 22nd August 2023 a Reuters article suggested that Lukoil was planning to repurchase 25% of its shares from foreign shareholders. The repurchase price would be at least a 50% discount from the quoted price. We continue to monitor the situation closely.
Portfolio Management
We are excited to announce that Jacob Laursen joined Sam Ziff as co-manager of our Global Equity Income strategy as of October 1st 2023. Jacob has been increasingly involved in the portfolio construction aspects of this strategy for some time, and we are delighted to formalise his position as Portfolio Manager.
Richard Garstang will relinquish his role as co-manager on this strategy. Richard will continue to contribute to the strategy through on-going idea generation, company analysis and being part of the broader investment debate.
Sam Ziff will also join the Global Equity strategy as an Associate Portfolio Manager. In this role, Sam will participate in the portfolio construction and risk management aspects for the strategy. Nigel Waller and Andrew Goodwin will remain the co-managers for this strategy.
Newsletter changes
We are moving to Quarterly Newsletters. These will now encompass a fuller write up of what has been happening in the portfolio over the previous quarter. In between these Quarterlies, we will produce a monthly fact sheet. These will not have a written piece but will have comprehensive facts on the fund. Why have we done this? We have a longer-term outlook, have low turnover and things don’t change an enormous amount month to month. We felt that readers would learn a lot more from a fuller review of portfolio movements on a quarterly basis.
If you have any questions, please contact Ed Troughton or James Lindsay.
Commentary
The fund rose 0.7% in September while the MSCI World High Dividend Yield Index rose 0.8%. The largest negative contributors to performance were, in order of impact, IWG (-21.0%, total return in local currency), Allegiant Travel (-13.5%) and JD Wetherspoon (-4.4%). There was no fundamental news for IWG during the month. The shares performed well in August and saw its largest outside shareholder reduce their position during the month.
Allegiant performed poorly on the back of continued concerns about falling ticket prices in the US market and rising oil prices. The month also saw the company reinstate founder and executive chairman, Maurice Gallagher, as CEO. When Gallagher stepped back from CEO in June 2022, we considered it to be bad news, so we consider having Gallagher back as the pilot of Allegiant good news. The shares are back below 1x price to book and under 9x earnings, it has rarely been cheaper on both metrics.
The largest positive contributors to performance were BP (+9.0%) on higher oil prices, North West Company (+13.4%) and Svenska Handelsbanken (+6.8%).
North West Company (NWC), the Canadian based retailer, announced quarterly results. These were better than both we and the market expected. This was mostly driven by the strong performance of the Canadian General Merchandise business. NWC sells both food and general merchandise, but the latter is much higher margin. The shift to a higher share of general merchandise sales helped gross margins increase to 33.1% compared with 31.2% in the prior quarter and 31.8% in the prior year.
The company is confident that it can sustain these higher margins and on this basis the shares trade at 12x earnings compared to its historical average of above 15x earnings while the dividend yield is around 4.5% and growing.
Last week, Philip Morris International (PMI) held its first investor day since 2021. We have not written about PMI for some time, mainly because the company has delivered in line with our expectations. Following the investor day, we feel an update is timely.
Since purchasing PMI in May 2018, the share price has appreciated 13%. Including dividends, total return is 55% (8.5% annualised). For comparison, the benchmark is up 38% during the period. While the total return since the original purchase has been satisfactory, we believe PMI is not being rewarded for its successful transformation towards smoke-free products.
As a reminder, PMI’s portfolio comprises two categories: traditional cigarettes and smoke-free products. Traditional cigarettes are sold primarily under the brands Marlboro, Chesterfield, Parliament, L&M and Philip Morris. These products are sold in markets outside the US and China with PMI having c. 25% market share. The cigarette business is a stable cash cow which enables PMI to pay a healthy dividend while investing for growth. Smoke-free primarily includes heat-not-burn and oral nicotine products sold under the companies’ IQOS and ZYN brands. The heat-not-burn and oral nicotine categories are rapidly growing because of the health benefits compared to traditional cigarettes. The U.S. Food and Drug Administration (FDA) has classified versions of both IQOS and ZYN as Modified Risk Tobacco Products. IQOS and ZYN are the clear market leaders within the heat-not-burn and oral nicotine categories, respectively.
A key part of our investment thesis in 2018 was PMI being well positioned to grow its smoke-free products. This part of the thesis has played out: smoke-free products have grown from less than 5% of revenues in 2017 to more than 35% in 2023. With IQOS and ZYN now comprising a large part of PMI’s revenues and growing +20% p.a., they are expected to drive overall revenue growth for PMI in years to come.
At the recent investor day, PMI outlined its 2024-26 targets: 6-8% revenue CAGR and 9-11% EPS CAGR with smoke-free products comprising two-thirds of revenues by 2030. PMI currently trades at 15x earnings and a 5.6% dividend yield. Even without any re-rating, we expect total return in the mid-to-high teens through a combination of earnings growth and dividends. Further, the current valuation at 15x earnings is in line with history which we believe fails to recognise the significant portfolio transformation that has taken place over the last five years.
The upside of the portfolio is 79%. This compares favourably with the long-term average of 40%. The fund is trading on a price-to-earnings multiple of under 10x compared with the MSCI World on 18x and provides a dividend yield of nearly 3%.
Russian holdings
Please note that on 3rd March 2022 the Fund’s investment in Lukoil ADR listed on the London Stock Exchange (LSE) was suspended from trading. Our Valuation Committee considered it was in the Fund’s best interests that the holding of Lukoil ADR be fair value priced (FVP) at zero. In June 2022, we elected for the holding to be converted into local shares (Lukoil PJSC).
Given the current international sanctions on Russian securities and cash balances, we believe that if lifted and the Fund was able to access the local market, the holding in Lukoil PJSC (with a current FVP of zero) would represent 13% of the Fund and cash dividend of 2.1%. On 22nd August 2023 a Reuters article suggested that Lukoil was planning to repurchase 25% of its shares from foreign shareholders. The repurchase price would be at least a 50% discount from the quoted price. We continue to monitor the situation closely.
Portfolio Management
We are excited to announce that Jacob Laursen joined Sam Ziff as co-manager of our Global Equity Income strategy as of October 1st 2023. Jacob has been increasingly involved in the portfolio construction aspects of this strategy for some time, and we are delighted to formalise his position as Portfolio Manager.
Richard Garstang will relinquish his role as co-manager on this strategy. Richard will continue to contribute to the strategy through on-going idea generation, company analysis and being part of the broader investment debate.
Sam Ziff will also join the Global Equity strategy as an Associate Portfolio Manager. In this role, Sam will participate in the portfolio construction and risk management aspects for the strategy. Nigel Waller and Andrew Goodwin will remain the co-managers for this strategy.
Newsletter changes
We are moving to Quarterly Newsletters. These will now encompass a fuller write up of what has been happening in the portfolio over the previous quarter. In between these Quarterlies, we will produce a monthly fact sheet. These will not have a written piece but will have comprehensive facts on the fund. Why have we done this? We have a longer-term outlook, have low turnover and things don’t change an enormous amount month to month. We felt that readers would learn a lot more from a fuller review of portfolio movements on a quarterly basis.
If you have any questions, please contact Ed Troughton or James Lindsay.