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Professional Investor - Netherlands
24 August 2023

Off the beaten path

Dividend investing is often associated with slightly boring, low-growth, old-economy companies. That does not necessarily have to be the case in reality. Beyond the ordinary, there are many high dividend yielding companies ready to be explored. In this dividend letter we discuss how we source out-of-the-ordinary ideas, which in turn lead to a diverse and distinct portfolio with an attractive dividend yield.

Idea generation is key to any investor’s process, but it can differ widely from one stock picker to another. Our focus is on finding companies with strong cash flow generation, sound capital allocation at an attractive valuation. To find these investment opportunities, we do our deskwork and legwork. The former includes reading company filings, newsletters, industry journals, investing-related websites and broker research. The latter means we visit company headquarters, stores and production facilities, as well as attend conferences to meet company management, industry experts and fellow investors. 

When screening our investment universe, we keep an open mind as to which companies could fit our criteria. We believe that going off the beaten path will lead to more interesting opportunities than merely focusing on the well-known mega-caps, such as JP Morgan, Johnson & Johnson and Nestlé. You could say that we scout the neglected parts of the dividend universe. This includes sourcing ideas outside of the main American and European regions, beyond the typical defensive sectors and ahead of corporate changes. 

Heading East
One example of a dividend company that was relatively undiscovered by the market until recently is Lite-On Technology Corp. Lite-On is a Taipei-listed technology company manufacturing opto-semiconductor, power supply management and key electronic products, that was included in our Global High Dividend portfolio several years ago. The Taiwanese location was likely a key reason for Western institutional investors to not even consider an investment in Lite-On. 

We were originally attracted to the idea because it was optically cheap with a sub-10 times price-to-earnings ratio and a high-single-digit dividend yield. On top of these low multiples, the company had also amassed a large cash position. This substantial cash position makes them less vulnerable to the swings in the electronics cycle . We were also interested in Lite-On because it was planning to improve its profit margins by increasing efficiency and by selling more higher margin products. 

Year-to-date the shares have more than doubled*. This has three important reasons. First of all, investors are increasingly convinced that the growth and margin expansion is sustainable. Second, some of Lite-On’s end markets appear to be improving, which bodes well for future earnings. Third, the shares gained substantial popularity on the back of enthusiasm for anything related to generative artificial intelligence (AI). Lite-On is expected to benefit as generative AI servers require more power products. Lite-on has a well-positioned cloud power business, which accounts for 25% of revenues. Two of the large cloud computing companies are Lite-On’s clients. Lite-On has a 30% global market share. Increased demand for its cloud power products may drive significant growth of Lite-On’s cloud power solutions business. After the strong rise in the company’s shares, they still “only” trade at 18 times expected 2024 earnings* and the dividend yield is around 5.5%*. The shares have clearly been discovered by more investors. 

Beyond traditional industries
Financials, health care and consumer staples companies are well represented in the dividend universe. Beyond those, interesting investment opportunities may arise in non-traditional industries. Luxury companies, for example, operate in an attractive industry but they rarely have a high dividend yield. When a company does, it might be a good time to research such a company. One example of an non-traditional dividend portfolio holding, is Kering. Kering is a luxury goods company with a dividend yield nearing 3% and trading at a significant discount to its peers*. 

In total Kering owns 13 brands, of which Gucci, Saint Laurent and Bottega Veneta are the largest. Following massive success between 2016-2019, momentum at its key brand Gucci weakened and started to underperform peers. As a result, the shares also started to underperform and the dividend yield became more attractive. 

Following the deterioration of the business, the company made several changes to address the issues. Gucci’s lead designer and several top managers within the Group were replaced. These changes will not immediately ignite an improvement in business results. However, with Gucci being one of the oldest luxury brands, founded in 1921, it remains an iconic brand that has proven itself to be able to renew and reinvent itself. We added Kering earlier this year to our Dividend portfolios.

Ahead of corporate change 
Another fertile ground are companies that undergo extraordinary corporate change. These events can change the status quo dramatically, but investors may not be aware of or underestimate the potential impact it can have on a company’s valuation. Examples of special situations include spin-offs, corporate reorganizations, and large share repurchases. Another form of corporate change, which is applicable to Ferguson, is the change of the listing location of a company. Ferguson is a distributor of heating, ventilation, air conditioning, and industrial supplies. It sells products targeting residential and commercial construction.
Known as Wolseley until 2017, the British company had acquired a large number of distribution businesses in the US and in Europe over the decades leading up to the financial crisis in 2008. To shore up its finances, it sold multiple businesses outside the UK and North America. In 2021, the company sold off Wolseley UK. As a consequence, it became a North American distributor with a UK-listing.
At that time, UK-listed distributors were trading at much lower multiples than their US-listed peers. Enter the activist investor: Trian Partners acquired a position in Ferguson, and convinced management to move its main listing from the UK to the US. The argument that the shares would re-rate made sense to us. After doing our homework, we believed that the shares were substantially undervalued. We established our position in the summer of 2022. Subsequently, the shares have indeed re-rated from a P/E multiple of 12 to a P/E multiple of 17*.
Open eyes and ears
The dividend universe offers a wide range of companies beyond the traditional and well-covered regions, sectors and companies. Opening up to that part of the market can lead to interesting additions to investors’ portfolios.
In short, we can describe our idea generation as flexibly value-oriented, keeping our eyes and ears open, and looking beyond traditional dividend companies. Some of the fund’s best ideas could only be discovered by having this investor mindset. Ultimately that leads to a portfolio which is differentiated from dividend benchmarks and other dividend products.
* Based on Bloomberg data as of 18/8/2023. 

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Van Lanschot Kempen Investment Management N.V. (VLK IM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets.

Kempen (Lux) European High Dividend Fund, Kempen (Lux) Global High Dividend Fund and Kempen (Lux) Global Value Fund (the “Sub-Fund”) are a sub-fund of Kempen International Funds SICAV (the “Fund”), domiciled in Luxembourg. These Funds is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Van Lanschot Kempen Investment Management NV is the management company of the Fund. Van Lanschot Kempen Investment Management NV is authorised as management company and regulated by the Dutch Authority for the Financial Markets (AFM). 

The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager VLK IM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. The fund holds shares in Ferguson, Kering and Lite-On This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. 

This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. 

The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of VLK IM. 

Reineke Davidsz Van Lanschot Kempen

Reineke Davidsz

Portfolio Manager

Robert van den Barselaar Van Lanschot Kempen

Robert van den Barselaar

Portfolio Manager

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