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Professional Investor - Netherlands
8 december 2022

The Dividend Letter: Focus on value for money

Each quarter we publish an entry on a specific theme relevant to our investment process. This time we discuss the focus on value for money.

Dark clouds are hanging over the consumer landscape. It is for a reason that cyclical consumer goods companies have been hit extra hard this year. However, falling share prices also lead to rising dividend yields, which means that we have more and more companies in our investment universe to choose from.

Tech stocks and cyclical consumer stocks have been hit particularly hard this year. The MSCI World had a negative total return of around 6% (in euros) until December, while cyclical consumer discretionary businesses lost more than 20%. This is in sharp contrast to the price development of defensive consumer stocks, such as Unilever and Danone, where these types of companies have seen a positive return of 5% this year. 

In order to invest in cyclical consumer companies, it is important to know how the consumer is doing now. A company that gives good insight into this is Target, a large American retail chain that sells a wide range of products, such as clothing, furniture, electronics but also food and cleaning products. A few weeks ago it released disappointing figures. The stock has already fallen more than 20% this year, which pushed the dividend yield above 2%, meaning that Target entered our investment universe of high dividend-yielding companies. 

Consumers are making choices
Target's recent earnings call revealed a number of interesting points about today’s American consumer. Firstly, consumers are making a clear distinction between what is essential and what is not: they are buying less of anything that isn’t a must-have. Food on the table is more important than a new sports outfit. After a year of high inflation, it is becoming increasingly difficult to rely on savings that were built up during the Coronavirus pandemic.

Surveys about the forthcoming holiday period show that consumers are planning to spend less on clothing and gifts. This is detrimental for retail chains and clothing brands because their highest turnover is typically generated in the fourth quarter.
In this high inflation environment, it makes sense that many consumers are becoming increasingly price-conscious. It is the reason that consumers are attracted more by promotions and that more and more own label products are bought instead of premium brands. For example, Walmart’s own label penetration in food categories increased by 1.3%, reflecting consumers’ focus on value for money. Defensive consumer companies are also aware of this. They are doing better than expected this year, but looking ahead, they are counting on their own volumes to take a hit.

Impact across income levels
It is not surprising that low-income groups have sharply reduced their cyclical consumer spending this year. They just don't have the money for that.

But wealthier consumers are now also changing their consumption behaviour. Typically, their wealth consists of an investment portfolio and real estate ownership. Poor investment returns and the pressure on the housing market have caused a mental blow this year. Walmart notes that more households with an income above $100,000 shop at this discount store. In other words, Walmart has managed to broaden their target group this year.

At luxury goods companies, the effect is not seen yet. Last month we attended a conference on luxury goods. At companies such as Kering, Pernod Ricard and Mercedes-Benz, the mood was still fairly positive. It turns out that the demand for expensive bags, premium drinks and luxury cars is still high. The real high-end customers continue to consume. It is therefore likely that the producers of luxury goods will again be slightly more recession-proof than companies that sell less luxurious products.
On the other hand, the luxury consumer set has expanded in recent years following the restrictions of the Coronavirus lockdowns, and the opportunities that some took of investing on the stock exchange rather than going out or travelling. These new customers are often younger and looking for aspirational products. But how long will they continue to buy luxury brands? With lower priced luxury products, we can already see that demand is starting to crack.

On a treasure hunt
To conclude, dark clouds are hanging over the consumer landscape, explaining why cyclical consumer companies are tightening their belts. They are now hiring fewer staff, having to prioritize projects, ordering fewer goods and selling more products on promotion to move their expensive inventory.

For the careful investor, there are attractive opportunities to buy companies that adapt to the changing environment accordingly. Quality companies that have lost market value are interesting to add to our portfolio. Earlier this year we bought Swedish-American Autoliv. They are the market leader in seatbelts, airbags and steering wheels. When their share price was under pressure, we decided to buy a stake in this high quality company.   

By taking the right actions, some consumer businesses will come out stronger. Lower share prices mean the dividend yield is higher, so there is a wider universe for us to choose from. That makes it more interesting for us to take a closer look at this sector. For our dividend funds, a company must have a minimum yield of 2% for us to invest in it. Our focus is on whether companies are able to generate a stable cashflow, make the right capital allocation decisions and are attractively valued. More and more quality consumer companies fit this bill.

Kempen Capital Management N.V. (KCM) 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.

This document is prepared by the fund managers of Kempen Global High Dividend strategy (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might currently hold shares in the subject company. 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 KCM 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. 

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 KCM.

The authors

Joris Franssen Van Lanschot Kempen

Joris Franssen

Head of Dividend Team

Reineke Davidsz Van Lanschot Kempen

Reineke Davidsz

Portfolio Manager

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance provides no guarantee for the future.

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