Two Defensive Investments With Solid Yields

Source: Adrian Day   02/27/2022

Adrian Day reviews two of his global investments, “one with a rock-solid dividend the other with an attractive if less certain yield.”

There is a lot going on in the world and markets right now. Many investors want to be more defensive and emphasize dividends at a time like this. Last week, we discussed two of our favorite high-yielding investments, Ares Capital (ARCC, Nasdaq, 21.25) and Gladstone Investment (GAIN, Nasdaq, 14.79), each yielding close to 8% and both good buys now. Today, I discuss two more defensive companies with good dividends.

Nestle SA (NESN:VX; NSRGY:OTC) (NESN, Switzerland, 11516) saw organic sale growth of 7.5% for the year, double the previous year’s and the fastest in five years. The company is targeting 4–6% growth rate for the longer term. Pet food was very strong, as were frozen food and ready meals, and coffee, amid stay-at-home restrictions during the Covid pandemic. Offsetting that, baby food was weak. (I’m not sure what it says about the human race when we spend more on pets than on babies.)

CEO Mark Schneider said he was optimistic that the company can maintain its profit margins as price increases offset higher input costs, expecting an underlying operating profit margin of 17%. This is down on the previous number, but due largely to a lag in implementing price increases. Despite higher prices, Nestle has experienced little “downtrading” by the consumer, other than in a few specific areas. Premium products in particular have held up well.

More small “niche” acquisitions ahead
Despite a large war chest, boosted by $10 billion from the sale of a stake in L’Oreal, Schneider said the company would likely continue with small and medium-sized acquisitions rather than one large one. In fact, the proceeds from the L’Oreal stake — Nestle still holds about 20% of the French cosmetics maker — will go towards a new Chf 20 billion stock buyback program which will run for two years.

Nestle stock has been strong for several years, up 30% in the last 12 months, despite a pullback this year. The yield of 2.4% is essentially its lowest for 14 years despite another increase in the dividend, as the stock has risen faster than the payout. We are holding; Nestle is a solid company but the stock is expensive. However, for investors looking for defensive investments, this is a reasonable time to buy Nestle.

Attractive dividend at Hutchison, likely to stay
Hutchison Port Holdings Trust (HPHT:Singapore) (HPHT, Singapore, US$0.245) said revenue jumped 24% on a 3.5% increase in port throughput year-on-year, higher than expected, enabling a boost in the first distribution this year. Higher average revenue per container and lower finance costs contributed to the income gain. But the biggest factor was higher storage income due to heavy port congestion, which the company think will continue into the year.

The company expect revenue this year to maintain last year’s level, with port congestion reducing volume but offset by higher storage income. The distribution for this year will be a minimum of 14.5 HK cents, the same as last year. The forward yield is nearly 8.5%. Buy but don’t chase.

IT’S RARELY a good idea to react to markets. We shall have more comments in coming days as the situation becomes clearer.

Originally published on Feb. 24, 2022.

Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

Disclosures:
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Nestle, Ares, Gladstone. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management, which is unaffiliated with Adrian Day’s newsletter, hold shares of the following companies mentioned in this article: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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