Marcus Bogdan, Portfolio Manager of the Switzer Dividend Growth Fund (Quoted Managed Fund) recently spoke to Peter Switzer on Switzer TV to discuss his outlook on the 2021-2021 financial year and what that means for the portfolio.
Watch the full interview here:
Peter Switzer (PS): Joining me now is Marcus Bogdan from Blackmore Capital, and he actually manages the Switzer Dividend Growth Fund which specializes in looking for stocks that pay really good dividends. Marcus, thanks for joining us.
Marcus Bogdan (MB): Good to be here, Peter. Thank you.
PS: Let’s just go have a look at the outlook for financial year 22. Given the fact how a lot of big companies have now reported and given outlook statements. What’s the takeaway lesson?
MB: The takeaway is that the earnings are slowing. We had very, very strong results for 2021, earnings growth of 26%, similar uplift in dividends. The guidance and the outlook statements for 2022 were far more cautious, and that’s hardly surprising given that we’ve got Victoria and New South Wales in extended lockdowns. So, for the bulk of the first half of this new financial year, we’re going to have a significant compression in economic activity.
That’s why it’s important for us in the portfolio to have that bedrock of earnings, resilient type of companies. There are some really positive exceptions. We’ve had Woolworths giving guidance for four and a half percent revenue growth for the first eight weeks of this financial year, but clearly, there are a number of areas where they’re experiencing slower revenue growth. They’re seeing the impact of higher costs, and significant issues in supply chains. So, we’ve just got to navigate through that. We’re doing that through having those really strong, defensive, quality companies in the portfolio.
PS: Yeah, and I guess the important point for people who don’t fully understand, when we say FY22, we’re saying effectively 21-22 ending on June 30. Now the first half of 2022 of the calendar year, it’s going to be put better than the first half, as you pointed out, with all these lockdowns. Hopefully we’ll be out of lockdown in the first half, but they’ll be playing catch up. Let me roll you onto the next financial year, are you expecting to see a bit of a pickup because the improving economy in the first half of 2022 is likely to roll into the second half as well? I’m sort of seeing a bit of a dip in one year, but then a bit of a kick up in the year after.
MB: Yeah, absolutely. For the first six months of this financial year, just to be clear, that started on July one. When we expect to see a deterioration in earnings for the first half, but as you rightly say, and there is a clear roadmap here of vaccination rates, the potential for reopening, and we would expect to see far more normal conditions once we get to calendar 2022 January onwards to see that recovery there. Hopefully when we get to the next financial year, beginning in 2023, we will see a full year of normalized growth.
PS: Yeah, by then, I guess, all the problems of companies that suffered reduced dividends because of the fears and the restrictions around the Coronavirus, hopefully they’ll wait it out when more normal dividend types, which is going to be good for your fund.
MB: Yeah, absolutely. It’s also important to emphasize in the last reporting season with the uplift in dividends, paid by BHP and particularly CBA for the dividend growth, we had over 30% already driven by the miners and the banks. What we expect to see there is that those types of dividends will stabilize, but they’ll still be at higher rates. Then we’ll also see the catch-up in the other parts of the portfolio as well.
PS: Okay. Interestingly, you’re saying that the output portfolio is currently overweight healthcare. Healthcare, I think is going to head up. If you look at what the analysts are predicting, they’re pretty well at the predicted prices. Now, also healthcare aren’t great dividend payers in this country either. So, you must believe that healthcare will probably do better growth wise, which will help your fund?
MB: Yeah. there’s a couple of parts to it. There are some good dividends paying healthcare stocks, such as Medibank Private, which we’ve got in the portfolio and has done particularly well through COVID as people are leaning more into private health insurance. So that pays a dividend yield of around 4% fully franked. That’s a good dividend payer for investors. The other companies such as Healius, Ramsey, and CSL, we expect them to actually deliver stronger earnings per share growth through the cycle. That will translate into a higher growth rate for the dividends, as well. Plus, we do think that the medium to long-term prospects for healthcare remains really strong.
PS: Yeah, one of my favorite stocks is Macquarie. I bought it in 2008 at $26, which was economically gutsy when the GFC was pretty bad. I then worried when it went to $18, but thankfully Wayne Swan rescued the banks.
MB: And Macquarie has rebounded, reported brilliantly, this week.
PS: A, do you hold it in the portfolio? And, B, do you expect it to go higher?
MB: Yes, we do. We’ve been a long-term holder of Macquarie. To your point, if you’ve could have bought it in the heart of the GFC where those returns were really compressed and what you’ve seen there from the GFC to today, you’ve seen the return on equity for that business go from a mid-single digit to around 15% today. Importantly, Macquarie have been, great pivoters into areas of future growth. In those earlier periods you saw them doing incredibly well in infrastructure and being a global leader in that. Today, they are pivoting to green infrastructure and they’ll be a global leader in that area. The long-term prospects for Macquarie are still incredibly sound. It’s a core holding in the portfolio. And you did see yesterday, delivering results, which were well ahead of market expectations.
PS: One last one, mate. I’ve been following the theme this week, the value stocks over the next few years will probably do well. If you look at the history of stock markets after a crash and recession, often those stocks outperform growth stocks for number of years. If I had to ask you, what’s the one value stock either that you got in the portfolio or even outside the portfolio that you really liked, what would say?
MB: Well, there’s actually two parts to that. There is one health care company, which we would classify as value and that’s been Healius, second largest pathology company in Australia, on a price to book ratio, it looks particularly attractive. It’s done very well in COVID because they’re doing the COVID testing for pathology. We do think that their base businesses in both pathology and diagnostics will recover. We believe that the discount that company is trading at particularly relative to other health care companies, there’s a big discount there. We think that will close over time.
The second area in value that we like, which is very much out of favour is in the energy space. We have two names in the portfolio. They’re both in Ampol and Santos. As economic activity normalizes, we expect that those two companies will recover quite nicely.
PS: Marcus Bogdan, thanks for joining us.
MB: Thanks very much.
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