Kames Capital’s Peden highlights his perennial favourites for global income

Kames Capital’s Mark Peden co-manager of the Kames Global Equity Income Fund analyses some of the hardy perennials that consistently delivered good returns for the fund since its launch five years ago.
The first stock Peden highlights is the US multinational household name Johnson and Johnson. He says: ‘J&J is a true dividend aristocrat, it embodies so many of the attributes we look for in a stock. It’s been going for more than a century, it operates in 60 countries, has brand strength, product excellence and strong distribution. It’s hugely cash flow positive and it is keen to return excess cash to its shareholders. It’s a genuine force for good – making little products that help along the way, such as baby oil and band aids, all the way through to life changing drugs in the fields of immunology, neuroscience and oncology’.
His second choice is another US name, Lockheed Martin, best known for its strong position in aerospace and defence. ‘No government wants to fund its defence equipment or space program from the cheapest provider, it’s too big a risk. Everyone has Lockheed on speed dial for its contracts, its cumulative R&D spend, experience, patents and army of engineers, these give it an insurmountable market position,’ he says  Peden also points to Lockheed’s progressive dividend which has increased by 10% annually for 14 consecutive years. As if that was not enough, it has been buying back shares aggressively, meaning practically all the free cash flow has been returning to shareholders. Finally Peden highlights the fact that over 70% of its sales go to the US government. ‘If you take the approach that firms only really have the credit worthiness of the companies they supply, then the US government are an excellent customer to have.’
The third pick is Swedish retail bank Swedbank. “Too many banks have spent the past decade moving away from their core competencies, gearing up, losing control of costs and pushing capital ratios to the limit. Swedbank is guilty of none of those crimes. It’s a very well-run bank which sticks to its core areas and its home markets. It has a high return on equity, a dividend yield close to 6%, unusually low credit costs and it’s very well capitalised. Such is its financial strength its dividend policy sees 75% of its annual profit distributed to shareholders.’
Peden’s fourth favourite is Taiwanese semiconductor giant, TSMC, a global leader in its field which has seen its dividend more than double in the past five years. He says: ‘Semiconductors are the brains and memory of so many machines, there is no scope for error. TSMC can handle more volume, provide more accuracy and can build smaller products than its competition. In a world where miniaturisation is key, its ability to build smaller products than the competition is a differentiating factor. Some of its products are down to 5 billionths of a meter. That’s why it is a core supplier to Apple.’
His final choice is Japanese condominium manufacturer Daito Trust which is probably the least well known of his hardy perennials. ‘Most people know Japan’s high quality exporters such as Toyota and Sony, but there are several excellent domestic companies such as Daito, who construct condo’s for the rental market,’ he says. “We like the integrated model it operates as it finds the land, constructs the rental building, attracts the tenants and manages the property. The stock has also recent been boosted by changes to Japan’s inheritance laws which have made owning rental properties very tax efficient and created an unexpected boost for demand,’ he adds. The company aim to return 80% of profits to shareholders, last year that was 50% through a dividend and 30% through a stock buy.
Peden says that all these stocks also benefit from having a leading market positions, high barriers to entry, consistent excellence in execution, earnings growth, solid balance sheets and sustainable and progressive dividends. ‘No one is right all the time but we find that if we consistently stick to stocks which have these criteria, we outperform over the longer term’.
The £425million Kames Global Equity Income Fund was launched on 28 September 2012 and is currently ranked first quartile over three and five years.*