Fund manager Don Taylor lays out three scenarios for the U.S. economy, only one of which would appeal to the majority of investors, but that happens to be the one he thinks is most likely.
The first scenario has the economy growing too rapidly and inflationary pressures building up, which is not good news for the U.S. stock market. Recent events suggest that this is unlikely. The second scenario has the U.S. housing market slowing sharply, and the impact of that walloping the economy as a whole and even possibly sending it into a recession. That too would be bad for stocks.
"I think the much more likely scenario is a slowdown to below-trend growth, which will enable the Fed to stop raising interest rates," said the senior vice-president of Franklin Advisory Services LLC, based in Fort Lee, N.J. That scenario "would allow multiples to expand and stocks to do well," he said.
The U.S. Federal Reserve Board left its benchmark lending rate unchanged on Aug. 8, the first pause in two years.
The performances of the Franklin Templeton U.S. Rising Dividends Fund, which is available to Canadians, and the long-standing Franklin Rising Dividends Fund on which it is modelled, and which is available only to U.S. investors, aren't tied to the economy as much as many other mutual funds.
"The criteria leads us to companies that tend to be less cyclical, less volatile in their operating results," Mr. Taylor said. He has been the lead manager on the Canadian fund, previously known as the Bissett American Equity Fund, since the name change in October, 2005. The $491-million fund is flat year to date in Canadian dollars. The fund fell lost 5.4 per cent in the 12 months ending July 31, and 1.07 per cent in the past three years.
The $2.5-billion (U.S.) fund has produced an average annual return of 11.3 per cent in U.S. dollars over the 10 years Mr. Taylor has been running it.
Stock picks for the funds are limited to companies that have increased their dividends in at least eight of the past 10 years, but many have been boosting them much longer. The average for the portfolio as a whole is 25 years and some stocks such as Procter & Gamble Co. and Dover Corp. are members of the 50-year club, he said.
Companies also needed to have at least doubled their dividends over the past 10 years, have a strong balance sheet and a payout ratio of less than 65 per cent. The average payout ratio for the portfolio is 31 or 32 per cent. Stock prices also factor in, with potential candidates limited to those trading in the lower half of their own price-to-earnings range over the past decade.
About 200 to 300 names fit the criteria, from which about 65 have been selected for the Canadian portfolio.
Among the shares he likes is General Electric Co. (GE-NYSE). Fairfield, Conn.-based GE is a "perfect example of what we are trying to do," Mr. Taylor said. The company today is in "much better shape" than it was in 2000, when the shares were changing hands at $60 (U.S.). They now trade at $33.71, and despite the decline have provided an average annual compound total return of just under 11 per cent over the past 10 years, he said.
GE makes products such as aircraft engines, power generators, locomotives, water infrastructure equipment and health technology equipment.
GE has a "very strong position" in those global markets, which offer it "lots of opportunity to continue to do well," he added. Moreover, those fields come with a large service component, which is another plus for GE, he added. He expects GE's bottom line can increase by around 10 per cent a year over the long term.
Carlisle Cos. Inc. (CSL-NYSE) is a smaller diversified industrial firm that is involved in the commercial roofing market, among others. The non-residential roofing market "looks like it has a lot of legs," Mr. Taylor said. Carlisle, which is headquartered in Charlotte, N.C., has increased its dividends for 29 consecutive years although increases in recent years have been in single digits, he added. "With the acceleration of the growth rate, I think we will start seeing much bigger dividend increases," he said. The shares are currently trading at $83.55.
Duluth, Ga.-based Roper Industries Inc. (ROP-NYSE), another pick in the diversified industrials sector, has "a lot of different businesses that have good secular growth rates and aren't particularly economically sensitive," he said. Furthermore, they do "generate a lot of cash [and]aren't capital intensive," he added. Among the products that Roper provides are toll road equipment and automatic meter-reading equipment. It also serves selected segments of the medical diagnostics and scientific research markets. The shares closed yesterday at $47.37.
Pick of the dividend crop
Top 10 holdings as of July 31, 2006
|1||Carlisle Cos. Inc.||4.19%|
|2||American International Group Inc.||4.05|
|3||United Technologies Corp.||4.01|
|5||General Electric Co.||3.96|
|6||Roper Industries Inc.||3.85|
|9||Erie Indemnity Co., A||3.52|
|10||Old Republic International Corp.||3.46|