Ave Maria funds are not the usual socially responsible investment funds whose managers avoid companies involved in firearms, defense, alcohol, tobacco and gambling and instead invest in environmentally responsible companies. Ave Maria practices morally responsible investment as set by its Catholic advisory board comprised of Coach Lou Holtz (University of Notre Dame football), Larry Kudlow (CNBC host), Thomas Monaghan (founder, Domino's Pizza) and Michael Novak (author and theologian), among others. They avoid investing in companies that are involved in:
Abortion, including any company that has donated to Planned Parenthood,
Embryonic stem-cell research, and
Pornography, including movie studios that have subsidiaries making porn.
Despite these restrictions, as of March 31, 2013, the Ave Maria Rising Dividend Fund had outperformed the S&P 500 for the three month, 1-year, 3-year, 5-year and since inception periods. In addition, Morningstar rates the fund five out of five stars in the large-cap blend category. Five of the largest holdings of the fund as of March 31, 2013, were Johnson Controls (JCI), Exxon Mobil (XOM), United Parcel Service (UPS), Emerson Electric (EMR) and Lowe's (LOW), which together comprise 14% of the assets of the Ave Maria Rising Dividend fund.
Johnson Controls is not a household name as it operates in three major segments:
Building efficiency - designs, manufactures and services heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment;
Power solutions - global manufacturer of lead-acid automotive batteries for ground transportation vehicles, and
Automotive - supplier of interior systems.
The company has a market capitalization of $25.4 billion and an enterprise value of $31.9 billion. The company is negatively affected by the "sequestration" in the U.S. and the economic situation in Europe and as a result in the most recent quarter sales declined by 1.3% to $10.4 billion compared to the same quarter in 2012. However, due to restructuring initiatives in the automotive segment, pricing increases and costs savings in the building efficiency business, and lack of acquisition costs and completion of vertical integration in the power solutions division, Johnson Control should be able to finish its fiscal year on a strong note.
In addition, the company has significant operations in China, which is still one of the fastest growing large markets. At Auto Shanghai 2013, Johnson Controls introduced smart seating systems with lower mass and complexity but better design and functionality, a new luxury interior concept, and innovative energy storage solutions for conventional, hybrid, and electric vehicles. Also, Shanghai Yanfeng Johnson Controls Seating Co., a joint venture between Johnson Controls and Yanfeng Visteon, is the largest automotive seating supplier in China. The company plans to build ten additional auto seating plants in China in the next five years.
Exxon Mobil does not need an introduction as it is the largest integrated oil and gas company in the U.S. and the largest company by revenue. Its 2010 acquisition of XTO Energy increased Exxon exposure to natural gas, which has recently started to rise following five years of declines. More recently, Exxon is exploring a partnership with Rosneft for exploration of the Russian Arctic and the Point Thomson project in Alaska. In its latest quarter ended March 31, 2013, the company's revenues declined over 10% but its earnings increased by less than one percent due to good expense management. About 73% of Exxon's revenues are derived from its upstream (exploration and production) segment, 15% from downstream (refining and processing) and the remaining 12% from its chemicals business. Exxon should benefit if demand for refining and processing of oil and natural gas increases. The company did suffer a setback with its recent Mayflower oil spill in Arkansas. Also, recently, the New York City Pension Funds requested that Exxon provide data about its fracking activities. The funds hold about $1 billion of Exxon shares.
UPS is the world's largest package carrier and is benefiting from the secular change to internet-based shopping. A hiccup for the company was the European Commission decision to block its planned $7 billion acquisition of Amsterdam-based TNT express, which also cost UPS $268 million in termination and investment banking fees. On the positive side, UPS was able to renew its contract with the Teamsters for another five years. For the rest of the year, UPS should benefit from growth in e-commerce and international package shipping as well as from price increases in the U.S.
During its most recent quarter ended on March 31, 2013, it recorded an increase in revenues of about 2.3% compared to the same period in 2012. Its three segments (U.S. domestic package, international package and supply chain and freight) all experienced rise in revenues while operating profit in the international package and supply chain and freight declined but these declines were offset by the increased operating profit at the U.S. domestic package business. UPS could see increased pressure later in the year when all 52 states begin to require all online retailers to charge sales tax, which could slow down the growth in e-commerce.
Similar to Johnson Controls, Emerson Electric is not a name that rings a bell for most consumers. In fact, both companies are somewhat similar as evidenced by the 2012 Emerson Electric acquisition of Johnson Controls' marine controls business. Emerson Electric operates in five major segments: process management (31% of Q1 '13 sales), industrial automation (21%), network power (25%), climate technologies (15%) and commercial and residential solutions (8%). Emerson has recently under-delivered in operations due to increased competition from ABB (ABB), Danaher (DHR), Honeywell (HON) and Rockwell Automation (ROK).
Emerson Electric could benefit from a rebirth of U.S. manufacturing based on innovation and technology and using local sources of energy (natural gas and oil), according to this interview with its CEO David Farr. Also, a consolidation in a number of areas where Emerson Electric operates could benefit the company by improving economies of scale and competitiveness and being accretive to its earnings. Even without acquisitions and consolidation, Emerson is a solid investment as it has first-class technology and product offerings in a number of areas.
Lowe's and Home Depot (HD) are the leading home improvement retailers in the U.S. In addition, Lowe's has 34 stores in Canada and five in Mexico. Most recently, Lowe's is expanding into such innovative areas as do-it-yourself home-control and home monitoring systems and is benefiting from the housing recovery and the reconstruction efforts following super-storm Sandy. Finally, Lowe's should be able to perform well in the next few quarters from lower results in the same period in 2012.
On the negative side, a slow down in home improvement and a secular movement from rural areas and suburbs to cities does not bode well for Lowe's and the do-it-yourself home improvement areas in general. If more people move into apartments, they will spend less on gardening, hardware and general repairs. However, in the short-term Lowe's is likely to benefit from improvements in the unemployment rate and low commodity and energy prices. When energy and commodity prices are lower, consumers and businesses have more disposable income to spend on their homes and yards.
It seems like some of the top holdings of the Ave Maria Rising Dividend fund operate in a diverse set of industries. What makes these five companies unique is that they are leaders (#1 or #2) in their areas of expertise that include lead-acid automotive batteries, oil and gas exploration and production, package delivery and home improvement. As seen from the table below, Johnson Controls offers the most attractive investment opportunity based on price-to-earnings-to-growth ratio, which is below one and shows significant value. For investors looking to invest in dividend paying companies, Exxon, UPS and Emerson Electric offer the best yields. Finally, all companies, with the exception of UPS, have price-to-book value ratios that are relatively low, underlying the fund's tilt toward value stocks. To finalize, investors looking to invest in morally appropriate companies (as defined by the Catholic church) should consider the five companies.
1-year total return