Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today is Sue Noffke, Manager of the Schroder Income Growth Fund, to give her three stock picks.
Sue Noffke: Hello, Emma.
Wall: So, what's the first stock you would like to highlight today?
Noffke: Royal Dutch Shell (RDSB).
Wall: Why do you like Royal Dutch Shell?
Noffke: Well, as a large integrated oil and gas play, it's the largest individual stock in the UK market. And I really like the aspect of how it has integrated its major acquisition of two years ago, what that does to the cash flow and the dividend-paying potential of that business. And it's quite a controversial stock. So, it was yielding nearly 9% in early 2016 when the oil price was low. And the reason why I like it still is it had a capital markets day just last week, it’s going to be reducing its scrip dividend, it's really getting on with repairing the balance sheet, making those asset sales, generating lots of production and that dividend is becoming much more secure in people's eyes that were very much skeptical about their ability to pay it.
Wall: I suppose this means that it's come to terms with, in fact learn to profit at, the oil price at this level because it was a real shock when it first came down, wasn't it?
Noffke: Absolutely. Oil prices bottomed close to $30 and they are back to about $60 now. And really, it's fundamentally changed the way these big oil companies have operated. So, a lot of costs have come out. They have got to stay out. People within the organisations have had to change the way they do business and that's quite exciting certainly as an investor and it's probably pretty exciting being an employee, too.
Wall: And what's the second stock today?
Noffke: Second stock is actually a sector, so it's a sub-sector of the UK equity market and it's housebuilders. I own both Bellway (BWY) and Taylor Wimpey (TW) within the portfolio. And again, quite controversial. Housing has the ability to generate a lot of individual noise. It's got a lot of government support; it's got very good supply/demand dynamics. And they have been quite cheaply rated, certainly, if one looks at price/earnings ratios and dividend yield. They have re-rated very well on good results over the last year after the Brexit disappointment which saw the shares collapse. They have been good contributors to the portfolio and I'm beginning to take some profits in those.
Wall: And what's the third and final pick?
Noffke: It's probably a name that not many viewers will have heard of. It's Intermediate Capital Group (DPW). It's a specialty financial company, has two components to it. It raises money for companies that can get bank finances, sort of intermediate mezzanine finance for them and it makes good margins on that. It's also been very successful at developing a fund management business of locked-in fixed capital, again no fee pressure unlike many other major fund management companies and it's been successful at growing that. So, it's been a great stock to have in the portfolio over the last six years and I continue to like it.
Wall: And which markets does it operate in? Is it a purely UK play or is it more global than that?
Noffke: No, it is pan-European. So, it has a big position in the European markets where a lot of companies are going to see data as the way to go forward.
Wall: Sue, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
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