Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: the processes, challenges, and philosophies and security selection. I'm David Cohne,
Speaker 1: I lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Michael Casper, us small cap
Speaker 1: and sector strategist at Bloomberg Intelligence. Mike, thanks for joining
Speaker 1: me today.
Speaker 2: Thank you, David.
Speaker 1: So, I know we're going to be talking about dividends today,
Speaker 1: but I did want to ask you about another type
Speaker 1: of shareholder benefit buybacks, specifically in the financial sector. Have
Speaker 1: there been a lot of repurchases in the sector and
Speaker 1: you know what could we expect going forward.
Speaker 2: Yeah, there's been quite a bit, especially within the larger
Speaker 2: banks in the US or we're talking about the six
Speaker 2: biggest banks. There was quite a large buyback from a
Speaker 2: few of them in the past quarter, in the past year.
Speaker 2: They're really returning capital back to shareholders and it's part
Speaker 2: of the reason that or at least it's exuding confidence
Speaker 2: in the industry that is now leading our financials industry scorecard.
Speaker 2: By the way, so we do these industry rankings intrasector
Speaker 2: for nine of the eleven GICK sectors. We kind of
Speaker 2: ignore real estate and utilities they're a little bit too
Speaker 2: small to do this kind of work on, but banks
Speaker 2: nonetheless rising to the top of our financials model. On
Speaker 2: the flip side, capital markets and insurance towards the bottom.
Speaker 2: Insurance obviously has some of those headwinds from the California
Speaker 2: fires and all the insurance payouts that they might have
Speaker 2: to make, especially amongst the P and C companies there.
Speaker 2: But valuations, all note are the one thing that kind
Speaker 2: of everybody points out to me as being a little
Speaker 2: bit stretched within the financial sector. It is one of
Speaker 2: the more expensive sectors relative to its most recent five
Speaker 2: year average, along with tech. It's actually one of two
Speaker 2: trading one standard deviation above the norm on its preferred
Speaker 2: valuation metric, which, by the way, we use we use
Speaker 2: price to book valuations for financials. But nonetheless, there's several
Speaker 2: significant fundamental tailwinds, and I think that the buybacks that
Speaker 2: we've seen in the sector are kind of exuding confidence
Speaker 2: in the sector. But pretty much everything clicking on, clicking
Speaker 2: on all cylinders outside of insurance fees looking great and
Speaker 2: interest income was looking pretty strong in the fourth quarter
Speaker 2: for banks, You've got M and A and IPO activity
Speaker 2: looking like it's going to pick up a little bit
Speaker 2: in twenty twenty five. So kind of a broad based
Speaker 2: rally within financials and everything looking good there and buybacks
Speaker 2: kind of exuding that confidence as well from management.
Speaker 1: Great. Well, I guess we'll segue into a different type
Speaker 1: of shareholder yield. So I'd like to welcome Christopher Bookbinder
Speaker 1: to Inside Active. Chris is a portfolio manager at Capital Group,
Speaker 1: including the Capital Group Dividend Value ETF tickers CGDV, a
Speaker 1: fun we'll actually be talking about today. So Chris, thank
Speaker 1: you so much for joining us today.
Speaker 3: Thanks for having me.
Speaker 1: So let's start with your career. How did you get
Speaker 1: into the investment business.
Speaker 3: Well, I was lucky enough to join Capital in nineteen
Speaker 3: ninety five into something called the Associates Program or TAP,
Speaker 3: which is an absolutely amazing two year rotational program where
Speaker 3: we also take a series of business school classes that
Speaker 3: are arranged by Capital. When I came out of TAP,
Speaker 3: I started out as an analyst covering the telecom industry
Speaker 3: in the late nineteen nineties. For those of you who
Speaker 3: may remember that period, that was the era of the
Speaker 3: TMT bubble, and so I got a front row seat
Speaker 3: to both the inflating and then the deflating of that bubble.
Speaker 3: And I will say I think there's some interesting parallels
Speaker 3: between the wave of investments we saw then and the
Speaker 3: wave of AI investments taking place now. My next industry,
Speaker 3: in addition to telecom, was the auto industry, and during
Speaker 3: the time I covered that industry, two of the three
Speaker 3: largest companies went bankrupt. And then for my sins, I
Speaker 3: started out as a portfolio manager in two thousand and seven,
Speaker 3: and I actually started in the predecessor fund to CGDV
Speaker 3: in October two thousand and seven, which happened to be
Speaker 3: the exact month the market peak before the fifty percent
Speaker 3: plus decline into the GFC. So I guess I've become
Speaker 3: a little bit of an expert in investing in challenging
Speaker 3: environments during my tenure at Capital Great.
Speaker 1: So if we focus in on CGDV, you know, we
Speaker 1: know it's a dividend fund, but what's the process for
Speaker 1: selecting stocks for the portfolio.
Speaker 3: Yeah, it's a great question, David. So the core of
Speaker 3: the CGDV investment process is the capital system, and the
Speaker 3: capital system is a multiple portfolio Manager system and CGDV.
Speaker 3: We have five portfolio managers, each of whom manages their
Speaker 3: sleeve of the fund as if it were their own fund.
Speaker 3: This PM team draws on the work of our global
Speaker 3: analyst team that's out beating the bushes to find insights
Speaker 3: and investment opportunities. We've got, you know, just under two
Speaker 3: hundred analysts around the world who are meeting with companies
Speaker 3: twenty one thousand meetings. I think last year alone, our
Speaker 3: pms in the fund averaged thirty two years of investment experience.
Speaker 3: And we've carefully selected the team to have complementary but
Speaker 3: different investment approaches. And what that means is that when
Speaker 3: one PM is zigging, the others will be zagging. That
Speaker 3: provides a level of inherent diversification. And then, as lead
Speaker 3: PM for the fund, I oversee the team make sure
Speaker 3: that the funds in line with our broad guidelines, which
Speaker 3: are essentially ninety percent of the companies have to be
Speaker 3: investment grade, ninety percent of the companies have to pay dividends.
Speaker 3: The aggregate portfolio needs to generate a yield that's thirty
Speaker 3: percent above the S and P five hundred that's before
Speaker 3: expenses and I'm also responsible for monitoring sort of overall
Speaker 3: risk and correlation within the fund.
Speaker 1: Great, so you mentioned yield and dividends. Are there specific
Speaker 1: dividend metrics you know a company will need to have
Speaker 1: to be or at least be an option for the
Speaker 1: portfolio A lot specifically, and I'd say, coming back to
Speaker 1: the couple system, each PM brings a slightly different lens
Speaker 1: to the fund. At the PM level, each PM has
Speaker 1: to generate a yield that's thirty percent above the market,
Speaker 1: but they can get there in different ways. Some of
Speaker 1: the pms tend to have every company in their portfolio
Speaker 1: is a dividend pair. Others might have up to ten
Speaker 1: percent of their portfolio and non dividend payers, but companies
Speaker 1: that we think might be dividend pairs in the future.
Speaker 1: If I think about my specific sleeve of the fund
Speaker 1: and my approach, I tend to be contrarian. I tend
Speaker 1: to focus on out of favor companies or industries with strong,
Speaker 1: strong underlying fundamentals but that are maybe obfuscated by the
Speaker 1: current environment. Again with a dividend paying lens around that
Speaker 1: set of companies. So you know, examples of my investment
Speaker 1: approach are we've got large holdings in the fund. I've
Speaker 1: had had large holdings in aircraft engine manufacturers, for instance,
Speaker 1: or cruise lines, both of which are dividend paying companies
Speaker 1: now are dividend paying industries now, but maybe weren't when
Speaker 1: we invested in them originally, and that the original investments
Speaker 1: are typically made in those companies during the depth of
Speaker 1: the pandemic.
Speaker 2: How do you identify stocks that might raise, cut or
Speaker 2: eliminate dividends? It does a cut automatically force you out
Speaker 2: of a position or do you reassess if you believe
Speaker 2: in the company's fundamentals.
Speaker 3: Yeah, well, it all starts with the fundamental research process
Speaker 3: for us. So you know, our analysts have long tenures
Speaker 3: and their job is really to become sort of the
Speaker 3: world's greatest expert in their industries. And so the starting
Speaker 3: screen for us is what wreck companies are analysts recommending
Speaker 3: and why? And then within that universe, as we focus
Speaker 3: on the sort of dividend payers or companies that we
Speaker 3: think have the opportunity to pay dividends in the future.
Speaker 3: Really what we're looking for are is sort of financial
Speaker 3: stability and intrinsic value. And intrinsic value might mean a
Speaker 3: low PE today, or it might mean a high PE,
Speaker 3: but you know, kind of tremendous return on invested capital,
Speaker 3: so that if you look three or forty years down
Speaker 3: the road, it actually does look quite an expensive within
Speaker 3: that set of companies. When when a company cuts their dividend.
Speaker 3: First of all, we're trying not to in this fund
Speaker 3: generally invest in companies that we expect to cut their dividends,
Speaker 3: but it does happen occasionally. As long as we're meeting
Speaker 3: the overall target of thirty percent above the S and
Speaker 3: P five hundred from an overall yield perspective, we have
Speaker 3: flexibility to hold those securities for a longer period of time,
Speaker 3: and in some cases, if we think that the dividend
Speaker 3: cuts are temporary, we will hold those companies. And you know,
Speaker 3: it's really about a view on the intrinsic value at
Speaker 3: that point.
Speaker 1: So I wanted to go back to what you mentioned.
Speaker 1: How you're looking at you know, possibly out of favorite companies,
Speaker 1: and you know you just mentioned you know, intrinsic value
Speaker 1: and PE are there if you're looking at valuations, Are
Speaker 1: there any things specific that you're looking for?
Speaker 3: Yeah, well, our approach to valuation is not one size
Speaker 3: fits all, So we acknowledge that in different industries and
Speaker 3: in different periods of time, there may be different approaches.
Speaker 3: You know, the topic of book value came up Earlierals
Speaker 3: tangible book values are really important metric that we pay
Speaker 3: attention to, but that's not so important in a number
Speaker 3: of other industries where intangible assets may be a much
Speaker 3: more important part of the value. I'd also say with
Speaker 3: a capital system, each of those five portfolio managers may
Speaker 3: take a slightly different approach to value. I tend to
Speaker 3: be a little bit more oriented towards kind of tangible
Speaker 3: valuation metrics like price to free cash flow, price to
Speaker 3: gap earnings over a reasonable timeframe three or four years.
Speaker 3: But again, when you get into certain periods of time
Speaker 3: where perhaps the company is making very large investments that
Speaker 3: are money losing and that causes the pe to be
Speaker 3: a rev very high. But those money losing investments, you
Speaker 3: can think of some of the large tech companies, for instance,
Speaker 3: that have big money losing divisions, those money losing investments
Speaker 3: might actually be creating a lot of value, and you
Speaker 3: don't want to kind of write that off completely. And
Speaker 3: so we take a flexible approach to thinking about valuation,
Speaker 3: and it is focused, as I said earlier, sort of
Speaker 3: on intrinsic value rather than just sort of what has
Speaker 3: the lowest pe or price to book today.
Speaker 2: And do you find any specific sectors really interesting within
Speaker 2: your style right now?
Speaker 3: I do so. The biggest sector, the second biggest sector
Speaker 3: in the fund overall, is healthcare right now, and that
Speaker 3: in my sleeve of the fund is actually the largest sector.
Speaker 3: And that's one that I think is particularly interesting for
Speaker 3: a couple of reasons. One, it's been quite out of
Speaker 3: favor now for a couple of years, you know, post
Speaker 3: pandemic has been one of the worst sectors of the market.
Speaker 3: And then after the election, I think, for a variety
Speaker 3: of reasons that I think are understandable in the moment
Speaker 3: but are probably likely to be poorly placed long term,
Speaker 3: the sectors sold off, you know, quite dramatically, even further.
Speaker 3: And some of that's been due to concern over the
Speaker 3: Trump administration's policies or potential policies. Some of it's been
Speaker 3: due to concerns after the assassination of the executive from
Speaker 3: United Healthcare, a great tragedy, but as a result, you've
Speaker 3: got companies that are and businesses that are really resilient,
Speaker 3: some of which, like in the case of you know,
Speaker 3: the leading companies in the GLP one sector have great
Speaker 3: growth prospects that fit very well for this fund, their
Speaker 3: dividend paying they've got strong balance sheets that are on
Speaker 3: sale and when on sale, and I'd say that's also
Speaker 3: attractive to me. What we tend to take a very
Speaker 3: long term perspective with our holdings. We do look at
Speaker 3: the environment and think about how well we are positioned,
Speaker 3: and it seems to me that we're going into a
Speaker 3: period of greater uncertainty, and healthcare traditionally is a very
Speaker 3: resilient sector during periods of uncertainty.
Speaker 1: You know, I wanted to ask you about geographics in
Speaker 1: terms of international holdings. Are you seeing less dividend opportunities
Speaker 1: outside of Canada and Europe?
Speaker 3: Well, so, CGDV is primarily a US fund. We're not
Speaker 3: allowed to have more than you know, kind of mandate,
Speaker 3: not more than ten percent of our holdings outside the US.
Speaker 3: So our international holdings tend to be global companies with
Speaker 3: substantial US businesses that just happen to be domiciled in
Speaker 3: another country. And so, you know, what are examples in
Speaker 3: the portfolio We've got an aerospace company, for instance, that
Speaker 3: happens to be domiciled in Europe, but it's a global business.
Speaker 3: We've got a tobacco company that happens to be domiciled
Speaker 3: in England, but it's got a very large US business,
Speaker 3: And so those are examples of our non US holdings.
Speaker 3: So it's really focusing on kind of global leaders, dividend payers,
Speaker 3: strong balance sheets that just happened to be domicil elsewhere.
Speaker 2: So we've seen some cash flush companies initiated dividend recently.
Speaker 2: What conditions do you think are necessary to spur some
Speaker 2: of these megacap companies, especially to returning from more capital
Speaker 2: to shareholders. Is it really a lack of investing opportunities
Speaker 2: down the road or something else.
Speaker 3: Well, if you look at some of the megatap mega
Speaker 3: megacap tech companies, excuse me, they have really begun to
Speaker 3: ramp their investments quite significantly recently in AI specifically, and
Speaker 3: you know, the beauty of the business model for many
Speaker 3: of these companies is that they can both ramp their
Speaker 3: investments dramatically, which they're doing, and at the same time
Speaker 3: they can continue to pay dividends and in many cases
Speaker 3: they're also buying backstock. So I think these are companies
Speaker 3: that do have the financial strength to do all three.
Speaker 3: I guess, you know. I think the big question in
Speaker 3: my mind is I think of that cohort is what
Speaker 3: will the returns on these investments in AI be over time?
Speaker 3: And I think that's you know, the jury's still out,
Speaker 3: but it is an area where I have some questions.
Speaker 2: And you're obviously a dividend manager first and foremost, but
Speaker 2: do you look at other capital allocations like buybacks or
Speaker 2: reinvesting in R and D as kind of a precursor
Speaker 2: to more dividends coming down the pike.
Speaker 3: Yeah, that's a good question, Michael. We think first about
Speaker 3: the fundamentals of the company, and so you know, we
Speaker 3: like to think about company is as if we were
Speaker 3: the owner of the entire company, although we obviously are not.
Speaker 3: And so if a company's got really attractive reinvestment opportunities
Speaker 3: or opportunities to earn high returns from R and D investment,
Speaker 3: we want them to make those investments. And once they
Speaker 3: make those investments, we're going to make a judgment about, Okay,
Speaker 3: can they continue to pay dividend? Do they have the
Speaker 3: financial strength to pay dividends and make those investments, and
Speaker 3: generally we're kind of looking at looking for companies in
Speaker 3: this fund that can do both, but we would never
Speaker 3: ask companies to increase the dividend, for instance, at the
Speaker 3: expense of a really high return internal investment.
Speaker 2: What do you see as the biggest macro risk right
Speaker 2: now to dividend investing?
Speaker 3: Yeah, well, dividend paying companies tend to come from all
Speaker 3: industries and sectors, and they tend to be financially stable,
Speaker 3: particularly if you layer on the sort of investment grade
Speaker 3: requirement we have in CGDV. So I think the biggest
Speaker 3: macro risk to dividend investing is probably more of a
Speaker 3: real relative performance risk. You know, if we get into
Speaker 3: environments where high multiple growth stocks that don't pay dividends
Speaker 3: dominate the market indices and have the best returns, it's
Speaker 3: it's really difficult for a fund like CGDV to you know,
Speaker 3: keep up in that environment. But other than that, we
Speaker 3: don't have a lot of macro concentration. You know, our
Speaker 3: largest sector is industrials, which is a quite diverse industry.
Speaker 3: Second is healthcare. We've already talked about that, and we
Speaker 3: do have technology companies and communications services companies. But they're
Speaker 3: you know, they're they have a lower representation in our
Speaker 3: fund than they do typically in the broad indices.
Speaker 2: And do higher for longer rates concern you.
Speaker 3: At all, Well, they do concern me for the economy
Speaker 3: and the market overall. And I guess i'd layer in
Speaker 3: that there's an element of policy uncertainty that seems to
Speaker 3: be happening right now, and I think that does create risk. Now, Frankly,
Speaker 3: this is a this is a fund that's set up
Speaker 3: structurally to do well in those kind of scoff environments,
Speaker 3: at least from a relative perspective. But you know, from
Speaker 3: an absolute perspective, there is some risk.
Speaker 2: But you're not concerned about the relative attractiveness of bonds
Speaker 2: versus the dividend asset cluss or anything like that, right.
Speaker 3: I'm not. And for this fund in particular, we're not
Speaker 3: investing solely in the highest dividend payers. So we're really
Speaker 3: trying to invest in companies that we think offer attractive
Speaker 3: intrinsic value that are dividend payers. And so even as
Speaker 3: rates rise, we think that if we're making the right
Speaker 3: fundamental decisions investments in the companies, we can continue to
Speaker 3: do well even in higher rate environments.
Speaker 2: And we kind of touched on some of the megacaps
Speaker 2: initiating dividend payouts with them kind of creeping into your universe.
Speaker 2: Are you worried about any kind of concentration risk building
Speaker 2: that's in there.
Speaker 3: Well, it's a little bit hard for us to have
Speaker 3: too much concentration in that area, largely because we're we're
Speaker 3: targeting a yield that's thirty percent of the market. Typically,
Speaker 3: those sort of megacap tech companies that have introduced dividends
Speaker 3: have relatively small yields, relatively modest payouts, and so you know,
Speaker 3: structurally it's just challenging. It would be challenging for this
Speaker 3: fund to be overrepresented in that set of companies. So
Speaker 3: I wanted to go back to the process a little
Speaker 3: bit because I wanted to talk about selling positions. How
Speaker 3: does that work with an approach, a team approach such
Speaker 3: as yours when you know different managers are managing different sleeves.
Speaker 3: Is it you know, your job as the lead manager
Speaker 3: to kind of make the final decisions or you know,
Speaker 3: or is kind of every manager have their own, you know,
Speaker 3: set of stocks and they make those decisions. So the
Speaker 3: answer is primarily the latter, in a little bit the former.
Speaker 3: So each manager manages their sleeve as if it is
Speaker 3: its own portfolio, kind of its own fund. And I
Speaker 3: do provide oversight along with a couple of different oversighted bodies.
Speaker 3: But unless we hit sort of limits in terms of
Speaker 3: individual stock position size in the fund, or we're out
Speaker 3: of line with our you know, kind of investment grade
Speaker 3: targets or income objectives, the pms have great discretion to
Speaker 3: manage their portfolio as they see fit.
Speaker 2: You know.
Speaker 3: I do also keep track of, you know, things like
Speaker 3: the correlation between pms, and we want to make sure
Speaker 3: that we're not all invest we're kind of rowing in
Speaker 3: the same direction at the same time. But as I
Speaker 3: mentioned earlier, we sort of carefully selected the team so
Speaker 3: that that we don't expect that to happen, and generally
Speaker 3: that has not happened. But the cell decision is really
Speaker 3: largely up to each individual PM.
Speaker 1: Okay, and so I actually have a follow up on
Speaker 1: that in terms of buying. If different managers are coming
Speaker 1: to I guess the same companies through different ways, how
Speaker 1: did how is that handled? Do you have a you know,
Speaker 1: you mentioned you know, a cap on certain positions.
Speaker 3: Well, so it's it's a good question, and I come
Speaker 3: back to sort of one of the structural setups is
Speaker 3: we don't want everybody, all the pms to sort of
Speaker 3: think about the world the same So often we won't
Speaker 3: be coming to the same conclusion at the same time,
Speaker 3: but in some cases we do, and we then will
Speaker 3: have larger positions in the fund. Now, you know, until
Speaker 3: those positions get to sort of outsize in our kind
Speaker 3: of risk framework, it really is not a problem and
Speaker 3: outsizees you know, we don't really let positions get above
Speaker 3: high single digits in this fund. That's kind of not
Speaker 3: consistent with the risk approach that we're taking. And if
Speaker 3: pms all reach the same conclusion, it probably means it's
Speaker 3: a really great investment opportunity.
Speaker 1: No makes sense. So we have one last question before
Speaker 1: we wrap up. Is there any advice you would give
Speaker 1: your younger self when it comes to investing.
Speaker 3: It's such a good question. I wish I could go
Speaker 3: back in a time machine and give give me this advice. Yes,
Speaker 3: absolutely so. One of my strengths as an investor is inventive,
Speaker 3: is investing in companies with good bones during periods of
Speaker 3: uncertainty when everyone else is quite concerned. One of my
Speaker 3: weaknesses as an investor has been that sometimes when that
Speaker 3: period of weakness passes and the market revalues the company
Speaker 3: back to sort of a fair value, I have often
Speaker 3: in the past sold some of my winners at that time.
Speaker 3: And what I've learned is that if we do a
Speaker 3: good job identifying companies with good bones during periods of
Speaker 3: uncertainty and on average I actually have working with our
Speaker 3: analyst team, those companies often then go on to become
Speaker 3: long term compounders. And by selling after the period of uncertainty,
Speaker 3: You're leaving a lot of opportunity on the table, as
Speaker 3: it were, for our investors. And so I've tried to
Speaker 3: be more disciplined about re underwriting companies after the periods
Speaker 3: of uncertainty of passed and really making sure I'm thinking
Speaker 3: expansively about what the opportunity set is for the on
Speaker 3: a longer term basis.
Speaker 1: That's great, Chris, Thank you again. This is this is
Speaker 1: a great discussion.
Speaker 3: I really appreciate you taking the time with me today, David,
Speaker 3: and thank you Michael.
Speaker 1: Michael, thanks for joining me today as well.
Speaker 2: Thanks again, David.
Speaker 1: Until our next episode. This is David Cone with Inside
Speaker 1: Act