Along with Neil Woodford, Nick Train is one of the most well-known portfolio managers in the UK. Often dubbed ‘Britain’s Warren Buffett,’ Train’s track record is excellent, with his Lindsell Train UK Equity fund returning 123% for the five-year period to the end of August, significantly more than the 64% return from the FTSE All-Share Index.
Train’s investment philosophy is similar to that of Buffett’s. Not one to actively trade in and out of holdings, the portfolio manager seeks out high-quality companies and holds them for the long term. His portfolios are often highly concentrated and may only hold around 25 stocks.
Today, I’m looking at the top two holdings in the Lindsell Train UK Equity fund. Does it come as any surprise that both stocks are dividend growth stocks?
At the end of August, the top holding in the Lindsell Train UK Equity fund was Diageo (LON: DGE) (DGE.L), with a portfolio weight of a significant 10%. A portfolio weight of 10% suggests Train is confident in the alcoholic beverage manufacturer’s prospects. Indeed, in the portfolio’s July report, Train stated:
“We’ve bought a lot of Diageo shares in 2017 and think them undervalued.”
Diageo has an excellent dividend growth track record, having increased its dividend payout from 32.7p per share a decade ago, to 62.2p per share last year, a compound annual growth rate (CAGR) of 6.6%.
The company announced this morning, in a trading update:
“Underlying momentum and progress in implementing productivity gives us continued confidence in our ability to deliver sustainable growth. We re-affirm our expectation of mid-single digit top line growth and 175bps of organic operating margin improvement over the three years ending 30 June 2019.”
So is Diageo a buy for its dividend right now?
Not at the moment, in my view.
Diageo is a company that I rate highly, and I own the stock in my portfolio already. Diageo has a strong portfolio of brands such as Johnnie Walker, Tanqueray and Baileys, and because consumers drink no matter the economic conditions, the company is able to generate consistent sales over time. Significant exposure to the emerging markets should also provide growth going forward.
Yet after a two-year share price run of over 40%, I’m simply not seeing any value here at the moment.
The FY2017 dividend payout of 62.2p equates to a dividend yield of just 2.5% at present, which is a little underwhelming in my view. As a comparison, the FTSE 100 average trailing dividend yield is 2.9%, according to Stockopedia. I generally prefer to invest in companies with dividend yields of 3.5% or higher.
Furthermore, the forward looking P/E ratio of 21.4, while not outrageous, doesn’t offer much value in my view.
I plan to buy more Diageo shares for my portfolio at some time in the future, however, for now, I’m willing to wait for a more attractive valuation and dividend yield.
The next largest holding in the Lindsell Train UK Equity portfolio is Unilever (LON: ULVR) (ULVR.L) at 9.9%, which once again, is a very large holding for one stock.
Like Diageo, Unilever has a fantastic dividend growth history. The company is forecast to pay out €1.43 this year, a significant increase from the €0.75 the group paid back in FY2007 (CAGR 6.7%).
I don’t yet own Unilever shares, however, I would definitely like to add the stock to my personal portfolio at some stage during the future. With a portfolio of over 400 brands such as Dove, Persil and Domestos, and 60% of its sales generated from the emerging markets, this really is a stock you can buy and forget about, in my view.
Having said that, after a 66% rise in the share price over the last two years, the valuation and dividend yield does not jump out at me right now.
The forward looking P/E ratio is 22.2 times, and while the forecast yield of 2.9% this year (at current exchange rates) is not bad, I believe with a little patience, I should be able to buy the stock with a slightly higher yield, sometime in the future.
Disclosure: Edward Sheldon, CFA owns shares in Diageo.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.