Seeking Alpha

Best Income Ideas From Around The Web: December 9 Edition

by: SA PRO+ Income

eBay is now a stock for income funds.

In Consumer Goods, buy high quality on bad news.

The #1 U.S. plumbing supplier you have never heard of.

Benefit from the anti-plastic backlash and a 4.4% yield.

The fastest growing dividend stocks with yield >1%.

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(This article was published by Blue Sky Capital)

This is part of a biweekly series written for income investors. It aims to highlight the best income ideas from around the Web, including stocks, funds and general portfolio strategy.

eBay is Now a Stock for Income Funds

We are big fans of the team at Evenlode, whose flagship U.K. income fund has outperformed the benchmark in each of the last 5 years, so we start by looking at the Evenlode Global Income Fund's November update, where the team described the rationale for adding eBay (EBAY) to their portfolio last month.

eBay is a "value" opportunity in their view, with its share price having "tracked sideways" in the last couple of years despite the company's revenue growth. They believe that, while online marketplace is a "now-mature niche", it is one where eBay retains "a strong position" that will enable it to continue to grow, "albeit not as quickly as some in the ecommerce world".

The involvement of activist investors Elliott Management and Starboard Value this year has pushed eBay in the right direction, and has so far resulted in the addition of two Elliott appointees to the Board, the departure of CEO Devin Wenig, and the disposal of the non-core StubHub business. While eBay's current dividend implies a yield of only 1.6%, it has just been introduced this year and can potentially increase, as eBay "generates ample cash flow".

eBay 1-Year Share Price Performance & Key Statistics

Source: Seeking Alpha (06-Dec-19).

In Consumer Goods, Buy High Quality on Bad News

Like many income-focused investors, Evenlode's largest sector exposure is to Consumer Goods, at nearly 30% in each of their funds. So it is interesting to read how they have calibrated their holdings in this sector this year in their December global investment view.

During 2019, Evenlode has added Reckitt Benckiser (OTCPK:RBGPF) as a new holding and increased their position in Henkel (OTCPK:HENKY), while reducing the size of their stakes in P&G (PG) and PepsiCo (PEP). The underlying thinking is that, between four companies that "are of long-term high quality", higher returns can be made by "investing more in the ones that are currently doing less well", given investors' tendency to over-react to bad news.

More specifically, on Reckitt Benckiser, Evenlode believes that a previous over-focus on margins is now being corrected by a "new-found willingness to invest", which should help the company recover from its recent performance issues. And, on Henkel, in addition to expecting the business to recover after "investing more operating cost in sales and marketing", Evenlode also believes the deterioration in its adhesives business is merely cyclical and in line with the downturn among its industrial customers. Evenlode fund manager Ben Peters also touched on the strength of this business in an interview with Morningstar.

In Evenlode's opinion, P&G and Pepsi had gone through the same sequence of growth deceleration then investment-based recovery in the last few years, and are now fairly-valued, which makes them relatively less attractive.

Reckitt Benckiser has a dividend yield of 2.8%, while Henkel has one of 2.2%.

Reckitt Benckiser 1-Year Share Price Performance & Key Statistics

Source: Seeking Alpha (06-Dec-19).

Henkel 1-Year Share Price Performance & Key Statistics

Source: Seeking Alpha (06-Dec-19).

The #1 U.S. Plumbing Supplier You Have Never Heard of

Ferguson (OTCQX:FERGY), often compared with Home Depot (HD) and Lowes (LOW), appeared on many analysts' radars last week after its FY20Q1 results. While listed in the U.K., Ferguson generates nearly all its profits in North America, selling mostly plumbing goods but also involved in heating/ventilation, waterworks and industrial supplies.

Different analysts described different aspects of Ferguson's attractiveness. Kevin Godbold's article in Motley Fool focused on Ferguson's role as a scale leader and consolidator in its market segments in the U.S., as well as its strong organic growth in recent years. (However, in worrying about a repetition of Ferguson's 2008/9 downturn, he overlooked the company's subsequent disposal of its more cyclical businesses.) Interactive Investor's Keith Bowman wrote about the involvement of activist investor Nelson Peltz and the narrowing of Ferguson's valuation discount compared to U.S. peers once it has divested its U.K. business. Canaccord analysts also touched on how Ferguson could benefit if the U.S. economy remains strong in 2020.

Ferguson currently has a dividend yield of 2.4%.

Ferguson 1-Year Share Price Performance & Key Statistics

Source: Seeking Alpha(06-Dec-19).

Benefit from the Anti-Plastic Backlash and a 4.4% Yield

Another U.K. company that has come up on analysts' radars after recent results is DS Smith (OTC:DITHF), a supplier of cardboard packaging to businesses. It generates approx. 85% of its profits from Europe (including approx. 20% from the U.K.), and primarily serves the FMCG (Fast-Moving Consumer Goods) and Food industries (70% of its revenues combined).

Morningstar's Rodney Hobson wrote about the potential of DS Smith "to benefit from the trend towards sustainable packaging from paper and fibres", especially with the growing anti-plastic backlash (DS Smith has a plastics business but has agreed to sell it for £400m). He expressed surprise at the 7% drop in DS Smith's share price after results, especially as they were "perfectly satisfactory" and management predicted "sales volume will accelerate in the second half". He reminded readers that shares, while having recovered somewhat year-to-date to approx. 350p, remains far lower than the 590p peak reached in 2018.

DS Smith currently has a dividend yield of 4.4%.

DS Smith 1-Year Share Price Performance & Key Statistics

Source: Seeking Alpha (06-Dec-19).

The Fastest Growing Dividend Stocks with Yield >1%

For investors who are more pessimistic about the U.S. economy in 2020, analysts at UBS have screened for the most attractive dividend stocks whose valuation could benefit from slowing U.S. macro, as recounted by a Barron's article published on the NASDAQ website.

The UBS analysts started by screening for "Buy-rated stocks projected to have three-year compound dividend growth at least in the high single digits", and dividend yields of at least 1%. Additional criteria such as payout ratios were also used. The result was a list of 24 stocks.

Within this list, Citigroup (C) came top in projected 2019-21 annualised dividend growth, with a figure of 20%. (It currently has a dividend yield of 2.7%.) The next fastest-growing names were Eli Lilly (LLY) (2.2% dividend yield), Baxter International (BAX) (1.1%), Molson Coors (TAP) (4.5%) and Darden Restaurants (DRI) (2.9%).

Citigroup 1-Year Share Price Performance & Key StatisticsSource: Seeking Alpha (06-Dec-19).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.