Category: Dividend Stocks

Companies return profits to shareholders through two main channels, capital gains and income. A high dividend yield indicates that a company is returning a large amount of cash to shareholders relative to the value of the company. This allows investors to maximize their income received relative to their investment amount. The gross dividend is calculated from the net dividend amount paid to shareholders plus the value of any attached franking credits associated with those dividends. A fully franked dividend will have franking credits equal to 30% of the gross dividend value, which can, therefore, represent a significant source of additional value.

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Dividend Stocks

While Inflation Runs Rampant, Pepsi’s Leading Snack and Beverage Mix Should Serve It Well

Business Strategy & Outlook

For many consumers, the Pepsi trademark elicits images of cola containers and ads extolling the brand’s taste superiority versus Coke. While PepsiCo is still a beverage behemoth, its business now extends beyond this industry, with Frito-Lay and Quaker products accounting for over half of sales and over 65% of profits. A diversified portfolio across snacks and beverages is the source of many of the company’s competitive advantages. Though management missteps have stymied performance in the past, the confluence of better execution and benefits inherent to its integrated business model has allowed Pepsi to reaccelerate profitable growth, and the plenty of room to run.

After years of sluggish sales growth and underinvestment, Pepsi has committed to reinvigorating its top line. To that end, it has made significant investments in manufacturing capacity (for example, production lines to meet demand for reformulated packaging), system capacity (route optimization and sales technology), and productivity (harmonization and automation). These investments as prudent and believe they will allow the company to strengthen key trademarks such as Mountain Dew and Gatorade, deepen its presence in growth markets like sub-Saharan Africa, and yield enough cost savings to reinvest and widen profits. Recent strategic pivots in the energy category (such as the Rockstar acquisition and Mountain Dew line extensions) should also underpin growth and margins.

Pepsi’s growth trajectory is not without risk, as the company faces secular headwinds such as shifts in consumer behavior. Additionally, changing go-to-market dynamics, such as online commerce that encourages real-time price comparisons and obviates the extent of Pepsi’s retail distribution advantage, allow for more nimble and aggressive competition. Still, the structural dynamics emanating from Pepsi’s scale, the cachet of its brands, and the breadth of its portfolio, which support its wide moat, should enable the company to maintain and augment its competitive positioning.

Financial Strengths

A Pepsi’s financial health as excellent. While leverage has ticked up due to recent acquisitions, the company still has a strong balance sheet with manageable debt levels and robust free cash flow generation. Strong interest coverage ratios also lend credence to the firm’s health in this regard. One cannot not foresee Pepsi having any issues meeting its contractual obligations for the foreseeable future, given the reliability of its business and its stalwart positioning across its categories. Historically, the company has regularly produced around $7 billion in free cash flow (high-single to low-double digits as a percentage of sales). Management has prioritized strategic investments across the business of late, which as prudent to aid its competitive standing over the long term. While capacity (particularly in snacking growth areas) and digital capability investments will remain elevated in 2022 and beyond, the free cash flow to normalize at or above historical levels, particularly as the company’s revenue management and supply chain digitization initiatives continue to bear fruit. Management’s guiding principle as it relates to debt levels is to maintain access to Tier 1 commercial paper. While the prerequisites for this status vary by rating agency, no one can impediments to Pepsi’s ability to continue relying on this short-duration paper, and the current leverage levels (around 2.5 times net debt/EBITDA) are appropriate for the firm. Moreover, the firm’s commercial paper access as one of the biggest testaments to its financial strength; this cheap financing should facilitate and perpetuate Pepsi’s financial flexibility. As exit the pandemic, liquidity should be of no concern to Pepsi investors–in addition to roughly $6 billion in cash at the end of fiscal 2021, the firm has undrawn credit facilities in excess of $7 billion.

Bulls Say

  • In still beverages—a category facing fewer secular challenges, particularly in the U.S.–Pepsi is a much more formidable competitor to Coca-Cola.
  • Pepsi’s global dominance in salty snacks may be underappreciated; with volume share more than 10 times that of the next-largest competitor, the firm benefits from unparalleled unit economics and go-to market optionality.
  • The firm’s consolidated beverage and snack distribution operations, combined with its direct store delivery capabilities, allow for better execution in merchandising.

Company Description

PepsiCo is one of the largest food and beverage companies globally. It makes, markets, and sells a slew of brands across the beverage and snack categories, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays, and Ruffles. The firm uses a largely integrated go-to-market model, though it does leverage third-party bottlers, contract manufacturers, and distributors in certain markets. In addition to company-owned trademarks, Pepsi manufactures and distributes other brands through partnerships and joint ventures with companies such as Starbucks. The firm segments its operations into five primary geographies, with North America (comprising Frito-Lay North America, Quaker Foods North America, and North America beverages) constituting around 60% of consolidated revenue.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

SL Green Realty Corp: The Manhattan net absorption rate remains negative as of first-quarter 2022

Business Strategy and Outlook

SL Green Realty is a real estate investment trust engaged in the acquisition, development, repositioning, ownership, and management of commercial real estate properties, principally office properties. Most of the companies’ properties are in the Manhattan area. The company held interests in approximately 35 million SF, which includes ownership interests in 26.7 million SF in Manhattan buildings and 7.2 million SF securing debt and preferred equity investments. The strategy of the company is to maintain a high-quality portfolio of buildings in desirable locations and focus on creating value through new developments, capital recycling, and joint venture investments. As an instance, SL Green’s $3 billion megaproject One Vanderbilt was completed amidst the pandemic and has already achieved high occupancy rates. 

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have created a challenging environment for office owners. Employees are still hesitant in returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rate for office spaces in Manhattan was recorded at 21% in first-quarter 2022, which is roughly 1000 basis points higher than pre-pandemic levels. On the supply side, approximately 17 million SF of office space, which amounts to around 4% of the total inventory is currently under construction in Manhattan and would be added to the market in upcoming years. It is alleged this additional supply to further pressure fundamentals in the market. The Manhattan net absorption rate remains negative as of first-quarter 2022 and rental growth figures are disappointing especially given the highly inflationary environment. 

Having said this, an increasing number of companies requiring their employees to return to the office can be seen. In the long run, it is anticipated that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centrepiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strength

It is likely, SL Green has relatively more debt compared with other office REITs especially after considering its share of debt in unconsolidated joint ventures. The firm owns a majority of its properties through unconsolidated JVs and these properties are significantly more leveraged than the firm’s balance sheet. However, it is bought to light that the unconsolidated JV debt is secured by the portfolio assets and have limited recourse to the parent company. The company’s share of debt which also includes its share of unconsolidated JV debt was $9.9 billion as of the end of first-quarter 2022, resulting in a debt/EBITDA ratio of 13.1 times. The current debt/EBITDA ratio is also high because of a lower base in the current challenging environment. It is held that, the figure should come down slightly over the next few years as fundamentals recover and EBITDA sees healthy growth. Having said this, it is absorbed that SL Green’s higher leverage implies a higher financial risk for the firm. The weighted average interest rate on the company’s debt was 3.11% and the debt maturity schedule shows that the maturities are adequately spread. Approximately 77% of the total debt is fixed-rate debt with the other 23% being floating rate debt. The debt service coverage ratio which is a ratio of EBITDA divided by interest and principal payments was 2.2 times as of the end of first-quarter 2022. The fixed-charge coverage ratio which is a ratio of EBITDA are divided by all fixed expenses (including interest) was 1.9 times as of the end of first-quarter 2022. The debt and fixed-charge coverage ratios are 3.8 times and 2.9 times, respectively, if only consolidated figures are considered. As a REIT, SL Green is required to pay out at least 90% of its income as dividends to shareholders. The FAD pay-out ratio which is a ratio of dividends to funds available for distribution was reported at 70% for the year 2021. This shows the firm is generating sufficient cash to cover its fixed expenses and pay out dividend.

Bulls Say’s

  • SL Green’s midtown focus allows it to access one of the most vibrant business districts in the world. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • The development pipeline of the company is poised to drive significant net operating income growth for SL Green. 
  • SL Green attracts the highest-quality tenants with the deepest pockets, greatly reducing risk across its portfolio.

Company Profile 

SL Green is one of the largest Manhattan property owner and landlord, with interest in around 35 million square feet of wholly owned and joint venture office space. The company has additional property exposure through its limited portfolio of well-located retail space. It operates as a real estate investment trust 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

No Change To Our Fair Value Estimate For Royal Bank Of Canada After Second-Quarter Earnings

Business Strategy & Outlook:   

It is expected that Royal Bank of Canada will remain a steady player in its retail and commercial Canadian banking operations. It also remains a major player in global capital markets. It is expected that this segment will continue to be a strong contributor to net income, and if anything, capital markets have been countercyclical for the bank during the pandemic as earnings have soared for the unit. The wealth-management segment also earns strong returns on equity, and large inflows have led to a top market position. RBC remains a top asset manager and gatherer in Canada, and is also experiencing outsize growth from City National, where cross-selling and client integration efforts have gone well. The banks’ distribution networks are arguably the most dominant in Canada, and the bank has the largest amount of assets under management among the Canadian banks. 

 RBC’s growth strategy in the U.S. through City National, focusing on wealth and commercial clients. The company believes this is a much more focused strategy than its previous attempts at growth in the U.S., and it is paying dividends. We think the bank has additional room for outsize growth as CNB grows and as the bank invests in additional wealth and investment banking staff. With the initial COVID-19-driven downturn in the past, 2021 turned into a year of recovery in profitability and lower-than-expected credit costs. So far, 2022 is showing a continuation of the positive credit environment and rate hikes are going to help net interest income, but fee growth is starting to slow.

Financial Strengths:  

 Royal Bank of Canada is seen as being in a strong overall financial health and do not believe any potential future issues will be an existential risk to the bank. The Canadian housing market is worth monitoring, but from company’s point of view this is more of a risk to the future growth rather than a major credit risk. According to the company RBC’s reported common equity Tier 1 ratio of 13.2% as of April 2022 remains satisfactory, arguably even representing overcapitalization. The bank also maintains one of the highest credit ratings (along with Toronto Dominion) of the big six banks. With its dividend payout ratio generally at a manageable levels in the mid-40s in a normal year, it is expected that the capital generation will continue to provide growth in its capital position, leaving room for future acquisitions or increased capital return to shareholders.

Bulls Say: 

  • Royal Bank of Canada’s worldwide scope in capital markets and wealth management provides a powerful and diversified stream of revenue. The ETF partnership with BlackRock further solidifies RBC’s overall dominance in financial services. This should lead to outsize fee income versus peers. 
  • The strength in its Canadian banking business, where returns on equity exceed 30%, should continue for some time. 
  • RBC’s latest expansion into the U.S. high-net-worth and commercial banking space should provide additional high-margin growth for the bank.

Company Description:  

Royal Bank of Canada is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation’s banking deposits. The bank derives two thirds of its revenue from Canada, with the rest primarily coming from the United States. It has done an admirable job of expanding its nonbank lines of business, running efficient banking operations, and generating some of the best returns for shareholders in the industry. The company believes RBC should remain one of the dominant Canadian banks for years to come, even as a more difficult macro backdrop pressures earnings growth in the medium term.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Williams-Sonoma could deliver an average adjusted return on invested capital

Business Strategy and Outlook

Williams-Sonoma has carved out a solid position in the $750 billion global home category and the $80 billion U.S. B2B industry. It has historically launched most of its brands organically in underserved segments and its brand intangible asset has been the supporting factor in its top- and bottom-line growth. Its ability to drive repeat business relies on customer loyalty and smart marketing and merchandising and the firm has access to some of the best analytics in retail. This should help Williams-Sonoma outperform its competitors and grow its market share, aided by new category expansions. 

In recent years, Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture and home furnishings, via B2B and marketplace efforts, categories with robust end markets that remain fragmented. These white-space business lines, along with faster growth from both franchise and the e-commerce channels (which accounted for 66% of 2021 sales) should help Williams-Sonoma near its $10 billion sales goal by 2024. 

Furthermore, the aforementioned categories have the ability to deliver better operating margins than the historical brick-and-mortar business (which is on track to decrease its store base by 25% between 2020 and 2025), allowing mix to offer a natural lift to profitability. Such efforts, along with lower costs from an improved supply chain (when COVID-19 constraints subside), better distribution network (from direct sourcing and furniture delivery operations), as well as higher productivity of its store fleet (as underperforming locations close and older leases are renegotiated) should allow for operating margins that are consistently at a midteens rate. Despite a solid competitive edge, it is not alleged that the company is insulated from the proliferation of e-commerce peers such as no-moat Wayfair pushing harder into the home furnishing space, bounding upside potential. Even with robust competition in the category, it is held narrow-moat Williams-Sonoma could deliver an average adjusted return on invested capital, including goodwill, averaging 30% over analysts’ forecast, well ahead of analysts’ 9% weighted average cost of capital estimate.

Financial Strength

Williams-Sonoma is in fine financial health, with plenty of cash on hand, ending its first quarter with $325 million on its balance sheet. Given the strong free cash flow it has been able to generate, it is unprobeable the firm will have to tap the equity or credit markets for liquidity anytime soon, and there is currently no long-term debt outstanding, liberating excess cash flow for a return to shareholders. Over the past five fiscal years, the company has produced cumulative free cash flow of $3.4 billion. Williams-Sonoma’s cash requirements are primarily for inventory, property, plant, and equipment, advertising and marketing, technology, share repurchases, and dividends, which is likely to mostly be funded by cash generated from operations. Free cash flow to equity has averaged about 10% of revenue during the past five years, which is likely to be decent for a company that can produce somewhat volatile results that are closely tied to the performance of the housing market. The company resumed share repurchases in the fourth quarter of 2020, and the board authorized a $1.5 billion share buyback program in March 2022, which should facilitate continued buybacks ahead (in fiscal 2021 the company repurchased $899 million in shares, well ahead of any other year in the past decade). Additionally, it pays a dividend of $0.78 per quarter, representing a payout that was raised 10% in March 2022, illustrating the board’s confidence in the strength of the underlying business. Over the next decade, it is projected, the firm to average 7%-8% EPS growth (increasing modestly faster than sales), bolstered by continued top-line growth, a favorable sales mix shift, and stringent cost controls. Williams-Sonoma is positioned to earn an average of around $1.1 billion in free cash flow (cash from operations minus capital expenditures) over the next five years.

Bulls Say’s

  • Less discretionary categories such as cookware and small appliances offer some resiliency amid macroeconomic cyclicality. Registries in categories such as wedding and baby offer a steady source of customers. 
  • The firm opened company-owned stores abroad in Australia in 2013 and has since expanded to the U.K. International opportunities (owned and franchised) could provide location and sales growth and elevated brand awareness. 
  • Around two thirds (or more) of sales has stemmed from the e-commerce channel in recent years, which helps minimize store expenses and maximize operating margins.

Company Profile 

With a wide retail and direct-to-consumer presence, Williams-Sonoma is a leader in the $300 billion domestic home category, focused on expanding its exposure in the B2B, marketplace, and franchise areas. Namesake Williams-Sonoma (175 stores) offers high-end cooking essentials, while Pottery Barn (188) provides casual home accessories. Brand extensions include Pottery Barn Kids (52) and PBteen. West Elm (121) is an emerging concept for young professionals, and Rejuvenation (9) offers lighting and house parts. Williams-Sonoma also has a business-to-business team that supports projects that range from residential to large-scale commercial. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Agilent Turns in Solid Fiscal Q2 Despite China Lockdown; Shares Still Mildly Rich

Business Strategy & Outlook

After its spin-out from Hewlett Packard in 1999 and its divestiture of the electronic measurement

business (Keysight Technologies) in November 2014, Agilent focuses on providing tools to analyze the

structural properties of various chemicals, molecules, and cells. Agilent is one of the leading providers of chromatography and mass spectrometry tools, which have applications in a variety of end markets,

including the healthcare, chemical, energy, food, and environmental fields. While healthcare-related

applications, including clinical diagnostics, remain Agilent’s largest end market, Agilent generates about

half of its sales from nonhealthcare fields. Agilent’s strategy revolves around placing analytical instruments and informatics with relevant customers and then providing related services and consumables such as chromatography columns and sample preparation tools, which account for the rest of Agilent’s sales. About half of Agilent’s sales recur naturally. However, even instrument sales can be relatively sticky at the end of the instrument’s life cycle, especially in the highly regulated pharmaceutical end market (about 35% of Agilent’s sales) and some of its other applications where intensive, time-consuming training is required to master the scientific analysis. Agilent aims to increase its exposure to these sticky customer relationships. Overall, the top-tier positions in most end markets, innovation, marketing operations, and ongoing cost controls should help Agilent grow revenue in the midsingle digits compounded annually and boost margins overall during the five-year forecast period. Overall, the double-digit earnings growth from Agilent, organically and with some share repurchases. While internal growth opportunities look solid, acquisitions should continue to boost its bottom-line growth prospects, as well.

Fair value and Profit Drivers

The rising fair value estimate to $115 per share from $107 to account primarily for cash flows generated in the past couple quarters and slightly higher profit expectations for 2022. The fair value implies a multiple of approximately 23 times fiscal 2022 expected earnings. After strong growth in the high teens on the top line and over 30% on the bottom line in fiscal 2021, Agilent’s growth trajectory to return to more normalized levels. Specifically, from fiscal 2021 to 2026, the expected 6% compound annual revenue growth, or within management’s 5% to 7% core revenue growth target. By end market from fiscal 2021 to 2026, Agilent’s growth to be led by biopharmaceuticals with 9% overall growth expected on strong biologic-related sales and solid growth in small molecules. The expect low- to mid-single-digit growth rates in Agilent’s other applied markets. On the bottom line, the adjusted EPS will rise roughly 11% compounded annually from fiscal 2021 to 2026, or well above sales growth primarily on margin expansion and share repurchases. The cost-control efforts to continue with the potential to improve margins primarily through expanding gross margins and control of the SG&A line. The expect share repurchase activities to account for about 200 basis points of Agilent’s annualized earnings growth prospects through 2026.

Bulls Say

  • Agilent’s innovation engine and cost control efforts have been on display through strong growth and margin expansion since spinning out its electronic measurement business Keysight in November 2014.
  • As a well-established leader in many of its core markets, regulatory concerns and customer familiarity with Agilent’s instrumentation and services can make market share gains for competitors difficult.
  • Agilent continues to increase its exposure to the sticky biopharmaceutical end market, including recent acquisitions in the emerging cell analysis field.

Company Description

Originally spun out of Hewlett-Packard in 1999, Agilent has evolved into a leading life sciences and diagnostics firm. Today, Agilent’s measurement technologies serve a broad base of customers with its three operating segments: life science and applied tools (45% of fiscal 2021 sales), cross lab (35% of sales consisting of consumables and services related to its life science and applied tools), and diagnostics and genomics (20%). Over half of its sales are generated from the biopharmaceutical, chemical, and energy end markets, but it also supports clinical lab, environmental, forensics, food, academic, and government-related organizations. The company is geographically diverse, with operations in the U.S. (34%) and China (20%) representing the largest country concentrations. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Link benefits from high customer switching costs and relatively low marginal costs, which underpin its narrow economic moat rating

Young woman trading stock market by touching.

Business Strategy & Outlook:   

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. It is considered the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years.

The corporate markets revenue grows at 3% per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare. The EBIT margins grow from 12% in fiscal 2021 to 21% by fiscal 2031 partly due to cost-cutting. Over the next decade, it is expected that an EPS CAGR, excluding amortization of acquired intangible assets, of 9%. The capital-light nature of the business model means cash conversion is expected to be strong, enabling dividends to be maintained and net debt gradually reduced, assuming no further acquisitions. Our discounted cash flow valuation assumes a weighted average cost of capital of 7.7%.

Financial Strengths:  

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say: 

  • It is expected Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage.
  • Our base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years. 
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Description:  

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Supported by Brand Investments, Narrow-Moat Hanesbrands Should Recover From Macroeconomic Challenges

Business Strategy & Outlook

Narrow-moat Hanesbrands is the market leader in basic innerwear (60% of its 2021 sales) in multiple countries. Its key innerwear brands like Hanes and Bonds (in Australia) achieves premium pricing. While the firm faces challenges from inflation, currency movement, shipping delays, and COVID-19, Hanes’ share leadership in replenishment apparel categories puts it in better shape than some competitors. In May 2021, the firm unveiled its Full Potential plan to expand global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced e-commerce, for example), and streamline its portfolio.

As part of Full Potential, Hanes intends to build on Champion’s increasing popularity in North America, Asia, and Europe. Although COVID-19 and the discontinuation of the C9 label at Target hurt sales in 2020, Champion resumed its growth path in 2021 as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. Moreover, Hanes recently found a new home for C9 as an exclusive brand for wide-moat Amazon. Hanes’ management forecasts Champion will reach $3.2 billion in global sales in 2024, up from more than $2 billion last year, which as an achievable goal.

Another key strategy for Hanes is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past four years. Hanes, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. The combination of strong pricing and production efficiencies should allow Hanes to maintain operating margins around 20% for its American innerwear business despite somewhat inconsistent sales.

Financial Strengths

Hanes racked up considerable amounts of debt during its acquisition spree in 2013-18, but its balance sheet is improving. The firm closed 2022’s first quarter with about $3.35 billion in debt, but it also had nearly $400 million in cash and $1 billion available under its revolving credit facility. Hanes will have significant cash available for debt reduction over the next few years, forecasting its total debt to drop to $2.6 billion by the end of 2024. The firm to meet its goal of bringing debt/EBITDA (3.7 times at the end of 2021) below 3 times by 2024. Although Hanes suspended its share buybacks due to the pandemic, repurchases have resumed in 2022. The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. It will repurchase about $300 million in shares per year in 2022-30. Hanes, unlike many peers, did not suspend its dividend due to the virus. Its annual dividend has been set at $0.60 per share since 2017, but it will be increased in 2023 and in the years that follow. An average annual dividend payout ratio of 32% over the next decade. Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. One cannot include acquisitions in model due to uncertainty about timing, size, and profitability.

Bulls Say

  • Hanes’ Champion is a contender in the hot but crowded athleisure space. The brand is already well known in North America and parts of Europe, and there is significant potential in China and other underpenetrated markets.
  • Hanesbrands has successfully introduced brand extensions that have allowed it to expand shelf space and increase price points in the typically staid category of basic apparel.
  • After a review, Hanesbrands announced a new strategic plan called Full Potential to boost growth and reduce expenses, which should benefit its brand strength.

Company Description

Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Maidenform, Bali, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Improving Economy Should Benefit Hawaiian Electric

Business Strategy and Outlook

Hawaiian Electric Industries derives approximately three fourths of consolidated earnings from an electric utility and the remaining from Hawaii-based American Savings Bank. The Hawaiian economy, driven in large part by tourism, affects both businesses. Utility regulation in Hawaii includes usage-decoupled ratemaking that for the most part shields utility earnings from lower sales due to residential rooftop solar growth. Last year, state regulators implemented a new performance-based ratemaking framework, including annual revenue adjustments, separate rate recovery for certain capital investments, and performance incentives. The five-year rate plan, up from the prior three-year rate plan, allows for annual revenue adjustments for inflation, operating efficiencies, and customer dividends. Separate recovery mechanisms for capital projects support the state’s renewable ambitions.

Existing rate adjustments for expenses such as purchased power, energy cost, renewable energy infrastructure, demand management, and pension, remain in place. New incentive mechanisms allow earnings upside, though strict operating efficiency targets could make this difficult. HEI’s base allowed return on equity is set at 9.5%, though returns are likely to be lower during the initial transition to the new rule making. At the end of March, returns were 8.1%. Earnings at the unit are supported by the subsidiaries’ plans to invest $1 billion to $1.3 billion through 2024, supporting the consolidated 5% earnings growth estimate. American Savings Bank provides low-cost capital for the utility. The bank has a history of maintaining a low risk profile and strong balance sheet. Loans are focused on high creditworthy counterparties, as evidenced by the low levels of loan losses during the pandemic. The bank’s earnings have quickly recovered from the pandemic. It is expected its earnings to grow at a mid-single-digit rate.

Shareholders were treated to a 3.2% dividend increase in the first quarter of 2019, the first increase in 20 years, and similar increases in 2020 and 2021. Its forecasted for 4% annual dividend growth over the next five years, slightly below the EPS growth estimate.

Financial Strength

HEI has a strong capital structure and good financial health. It is expected the utility to invest about $1.2 billion over the next three years, in line with management’s $1.0 billion to $1.3 billion range. Even with this investment, the HEI will be able to maintain a strong balance sheet. Ongoing modest equity issuances should result in a debt/total capital ratio around 50% and over 6.0 times EBITDA/net interest expense coverage for the foreseeable future. The company has manageable long-term debt maturities, it is anticipated it will be able to refinance as debt comes due. The dividends will grow in line with earnings and management will maintain its 60%-65% payout ratio. HEI’s dividend policy is supported by the predictable cash flow from the company’s underlying businesses.

Bulls Say’s

  • Performance-based ratemaking reduces earnings volatility while offering opportunities for management to earn incentives over its base allowed returns. Sales decoupling and automatic rate adjustments allow for increases in most O&M and rate base growth. 
  • It is expected HEI to invest nearly $1.2 billion over the next three years, supporting nearly 5% average annual earnings growth. 
  • American Savings Bank’s conservative loan book has resulted in lower loan losses than its peers. ASB’s steady cash flows help support investment at the utility.

Company Profile 

Hawaiian Electric Industries is the parent company of three Hawaii-based regulated utilities and Hawaii’s third-largest financial institution, American Savings Bank. The utilities provide electricity on the five islands of Oahu, Hawaii, Maui, Molokai, and Lanai. Nearly 40% of electricity in its service territory comes from renewable energy; this portion is growing rapidly as the state has set a goal of 100% by 2045.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Operational Challenges Hinder International Paper’s Ability to Capitalize on Strong Box Demand

Business Strategy & Outlook

 International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. A decade of consolidation in the corrugated packaging industry has allowed International Paper to raise prices and boost margins, but increased competitive intensity and rising input costs have weighed on profitability in recent years.

In International Paper’s largest segment, industrial packaging, the company manufactures containerboard. Roughly 80% of the company’s containerboard production is sent to International Paper’s box plants where it is converted into corrugated packaging. The remaining 20% is sold on the open market to local or regional box manufactures. This packaging is used in a variety of end markets, including food and beverage, e-commerce, paper products, and other goods. Corrugated boxes provide a strong yet lightweight packaging option that is cost-effective. This dynamic has made corrugated boxes a favorite in the packaging industry and is used in many different end markets. Roughly 85% of the sales in industrial packaging are in the United States. The cellulose fibers segment produces fluff, market, and specialty pulps. Fluff pulp is used to produce absorbent products such as baby diapers while market pulp is used to manufacture tissue and paper products. Fluff and specialty pulps account for about 80% of the cellulose segment. In 2021, International Paper spun off its printing paper segment, now known as Sylvamo. International Paper initially kept a 19.9% ownership stake in Sylvamo but has since sold roughly half its position in the company. IP’s management team has stated that they intend to monetize their remaining position in Sylvamo soon. International Paper also received a one-time dividend of $1.4 billion, which Sylvamo funded with debt. Following the completion of the spinoff, International Paper is primarily a containerboard business with some fluff pulp assets.

Financial Strengths

The international Paper has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Following the spinoff of the firm’s paper business, International Paper reduced its debt by $2.5 billion to shore up up its financial position and maintain its investment-grade credit rating. International Paper now has a net debt/EBITDA of roughly 1.6, down from 4.0 in 2016. Historically, International Paper has made acquisitions in both the industrial packaging and cellulose fibers industry. The any future acquisitions would be small as both industries are highly consolidated, with International Paper having the largest share in both markets. International Paper has roughly $5 billion of outstanding debt with staggered maturities through 2048. International Paper has ample liquidity, with over $1 billion of cash on hand and no outstanding borrowings on a $1.5 billion credit facility. International Paper has a history of strong free cash flow generation, and the firm to maintain its sound capital structure.

Bulls Say

  • After a decade of adjusting its business model to improve profitability, International Paper will enjoy solid returns as it now operates primarily as a containerboard company.
  • International Paper, WestRock and Packaging Corp. of America will remain disciplined in taking economic downtime when needed in order to safeguard prices.
  • International Paper’s exposure to emerging markets will provide excellent opportunities for growth in the coming years.

Company Description

International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. International Paper serves a variety of end markets, including industrial, consumer products, and manufacturing.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

GQG Partners Initiation: Strong Momentum And Upside Not Priced In

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Business Strategy & Outlook

GQG is a boutique manager of listed equities. As of April 2022, GQG manages USD 90 billion for institutional, wholesale and sub advised clients. GQG manages global, U.S., ex-U.S., and emerging market equities. The firm has a blended investment style: It is willing to pay up for quality growth companies, but also holds stocks trading at lower valuation multiples. GQG’s portfolios are concentrated and don’t resemble their benchmarks. Its strategies tend to outperform more during downturns than in bull markets. The firm is in the early innings of expanding out of its core U.S. market. GQG is growing its distribution in Australia, Canada, and the Middle East. It is particularly focused on exploiting the growth of Australia’s superannuation system. It also intends to grow its number of wholesale and subadvised mandates. More than 75% of FUM is U.S.-centred, and less-sticky institutional and subadvised money. 

Management prioritises organic growth over acquisitions. Rather than proliferating its offerings, GQG would sell new products only when its research efforts can be leveraged, with minimal incremental investment. For example, its concentrated global strategy is a subset of its global equity offering. The firm deliberately undercuts competitors on pricing and boasts below-average fees. Ongoing inflows and compounding of FUM is expected to drive earnings growth. A strong track record, expanding distribution and growing publicity beyond the U.S. are likely to support new business wins. There is ample capacity for the firm to onboard more clients as it mainly invests in large caps. Having bottom-quartile fees means GQG is well-positioned to withstand industry wide fee compression relative to other active managers. Moreover, there is still room for operating margins to expand as GQG’s expense needs—including remuneration—are not tied to revenue. However, investors should brace for periods of uneven performance given GQG’s portfolio and product concentration. The lack of product variety means GQG has limited levers to stem net outflows. GQG remains highly reliant on co-founder Rajiv Jain, so the group has much to lose if it cannot retain his services.

Financial Strengths

GQG’s strong financial health is underpinned by its conservative balance sheet with no debt and a healthy cash balance. Operations are funded by operating cash flows. Its 2021 initial public offering was a sell-down, with the proceeds raised mainly used to pay Rajiv Jain, Tim Carver, Pacific Current Group and internal employees. The firm has no intention (nor a need) to drawdown debt to fund its operating activities. Consistent earnings, strong cash flow conversion, and a strong balance sheet support GQG’s high dividend payout ratio target of between 85%-95% of distributable earnings (net income after tax plus tax benefit resulting from amortisation of the deferred tax asset). High dividend payouts are a key feature of the capital-light asset-management sector, delivering attractive shareholder returns while maintaining comfortable balance sheet settings. Notwithstanding the high payout ratio, GQG’s cash on balance sheet is projected to grow, enabling attractive dividends despite possible earnings volatility. 

Bulls Say

  • GQG’s enviable performance track record is supportive of further mandate wins. 
  • The firm is better placed than most active managers to withstand fee compression thanks to its highly competitive fee structure. 
  • There is further room for GQG to grow earnings. Penetration in certain strategy categories remain low, and it’s in the early innings of distributing outside the U.S. Its sheer scale of FUM means that earnings can grow from just compounding market returns.

Company Description

Established in 2016, GQG Partners Inc. is a global boutique asset management firm focused on active equity portfolios. The company offers investment advisory and portfolio management services. GQG Partners manages money for investors around the world. They include pension funds, sovereign funds, wealth management firms, and other financial institutions. Headquartered in Fort Lauderdale, Florida, GQG also has operations in New York, Seattle, London, Sydney, and other locations.

(Source: Morningstar)

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