April 16, 2025 • 21 mins
In the financial sector, the six largest banks have been returning capital to shareholders in the form of larger buybacks over the past quarter and year, indicating confidence in the industry. In this episode of Inside Active, host David Cohne, mutual fund and active management analyst with Bloomberg Intelligence, along with co-host Michael Casper, US small-cap and sector strategist at Bloomberg Intelligence, spoke with Christopher Buchbinder, a portfolio manager at Capital Group, including the Capital Group Dividend Value ETF (CGDV), about the Capital system of multiple portfolio managers and how it provides a level of inherent diversification. They also discussed why companies must generate a yield that’s 30% above the S&P 500 to be considered for the fund, why intrinsic value is key in assessing potential investments and why he thinks the health-care sector is particularly interesting right now. The podcast was recorded on March 4.
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Episode Transcript
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Speaker 1 (00:13):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael Casper, us small cap
and sector strategist at Bloomberg Intelligence. Mike, thanks for joining
(00:34):
me today.
Speaker 2 (00:35):
Thank you, David.
Speaker 1 (00:37):
So, I know we're going to be talking about dividends today,
but I did want to ask you about another type
of shareholder benefit buybacks, specifically in the financial sector. Have
there been a lot of repurchases in the sector and
you know what could we expect going forward.
Speaker 2 (00:51):
Yeah, there's been quite a bit, especially within the larger
banks in the US or we're talking about the six
biggest banks. There was quite a large buyback from a
few of them in the past quarter, in the past year.
They're really returning capital back to shareholders and it's part
of the reason that or at least it's exuding confidence
in the industry that is now leading our financials industry scorecard.
(01:15):
By the way, so we do these industry rankings intrasector
for nine of the eleven GICK sectors. We kind of
ignore real estate and utilities they're a little bit too
small to do this kind of work on, but banks
nonetheless rising to the top of our financials model. On
the flip side, capital markets and insurance towards the bottom.
Insurance obviously has some of those headwinds from the California
(01:38):
fires and all the insurance payouts that they might have
to make, especially amongst the P and C companies there.
But valuations, all note are the one thing that kind
of everybody points out to me as being a little
bit stretched within the financial sector. It is one of
the more expensive sectors relative to its most recent five
year average, along with tech. It's actually one of two
(02:01):
trading one standard deviation above the norm on its preferred
valuation metric, which, by the way, we use we use
price to book valuations for financials. But nonetheless, there's several
significant fundamental tailwinds, and I think that the buybacks that
we've seen in the sector are kind of exuding confidence
in the sector. But pretty much everything clicking on, clicking
(02:23):
on all cylinders outside of insurance fees looking great and
interest income was looking pretty strong in the fourth quarter
for banks, You've got M and A and IPO activity
looking like it's going to pick up a little bit
in twenty twenty five. So kind of a broad based
rally within financials and everything looking good there and buybacks
kind of exuding that confidence as well from management.
Speaker 1 (02:46):
Great. Well, I guess we'll segue into a different type
of shareholder yield. So I'd like to welcome Christopher Bookbinder
to Inside Active. Chris is a portfolio manager at Capital Group,
including the Capital Group Dividend Value ETF tickers CGDV, a
fun we'll actually be talking about today. So Chris, thank
you so much for joining us today.
Speaker 3 (03:06):
Thanks for having me.
Speaker 1 (03:08):
So let's start with your career. How did you get
into the investment business.
Speaker 3 (03:14):
Well, I was lucky enough to join Capital in nineteen
ninety five into something called the Associates Program or TAP,
which is an absolutely amazing two year rotational program where
we also take a series of business school classes that
are arranged by Capital. When I came out of TAP,
I started out as an analyst covering the telecom industry
(03:34):
in the late nineteen nineties. For those of you who
may remember that period, that was the era of the
TMT bubble, and so I got a front row seat
to both the inflating and then the deflating of that bubble.
And I will say I think there's some interesting parallels
between the wave of investments we saw then and the
wave of AI investments taking place now. My next industry,
(03:56):
in addition to telecom, was the auto industry, and during
the time I covered that industry, two of the three
largest companies went bankrupt. And then for my sins, I
started out as a portfolio manager in two thousand and seven,
and I actually started in the predecessor fund to CGDV
in October two thousand and seven, which happened to be
the exact month the market peak before the fifty percent
(04:18):
plus decline into the GFC. So I guess I've become
a little bit of an expert in investing in challenging
environments during my tenure at Capital Great.
Speaker 1 (04:28):
So if we focus in on CGDV, you know, we
know it's a dividend fund, but what's the process for
selecting stocks for the portfolio.
Speaker 3 (04:36):
Yeah, it's a great question, David. So the core of
the CGDV investment process is the capital system, and the
capital system is a multiple portfolio Manager system and CGDV.
We have five portfolio managers, each of whom manages their
sleeve of the fund as if it were their own fund.
This PM team draws on the work of our global
analyst team that's out beating the bushes to find insights
(04:58):
and investment opportunities. We've got, you know, just under two
hundred analysts around the world who are meeting with companies
twenty one thousand meetings. I think last year alone, our
pms in the fund averaged thirty two years of investment experience.
And we've carefully selected the team to have complementary but
different investment approaches. And what that means is that when
(05:18):
one PM is zigging, the others will be zagging. That
provides a level of inherent diversification. And then, as lead
PM for the fund, I oversee the team make sure
that the funds in line with our broad guidelines, which
are essentially ninety percent of the companies have to be
investment grade, ninety percent of the companies have to pay dividends.
The aggregate portfolio needs to generate a yield that's thirty
(05:38):
percent above the S and P five hundred that's before
expenses and I'm also responsible for monitoring sort of overall
risk and correlation within the fund.
Speaker 1 (05:48):
Great, so you mentioned yield and dividends. Are there specific
dividend metrics you know a company will need to have
to be or at least be an option for the
portfolio A lot specifically, and I'd say, coming back to
the couple system, each PM brings a slightly different lens
to the fund. At the PM level, each PM has
to generate a yield that's thirty percent above the market,
(06:10):
but they can get there in different ways. Some of
the pms tend to have every company in their portfolio
is a dividend pair. Others might have up to ten
percent of their portfolio and non dividend payers, but companies
that we think might be dividend pairs in the future.
If I think about my specific sleeve of the fund
and my approach, I tend to be contrarian. I tend
to focus on out of favor companies or industries with strong,
(06:33):
strong underlying fundamentals but that are maybe obfuscated by the
current environment. Again with a dividend paying lens around that
set of companies. So you know, examples of my investment
approach are we've got large holdings in the fund. I've
had had large holdings in aircraft engine manufacturers, for instance,
or cruise lines, both of which are dividend paying companies
(06:55):
now are dividend paying industries now, but maybe weren't when
we invested in them originally, and that the original investments
are typically made in those companies during the depth of
the pandemic.
Speaker 2 (07:05):
How do you identify stocks that might raise, cut or
eliminate dividends? It does a cut automatically force you out
of a position or do you reassess if you believe
in the company's fundamentals.
Speaker 3 (07:15):
Yeah, well, it all starts with the fundamental research process
for us. So you know, our analysts have long tenures
and their job is really to become sort of the
world's greatest expert in their industries. And so the starting
screen for us is what wreck companies are analysts recommending
and why? And then within that universe, as we focus
(07:36):
on the sort of dividend payers or companies that we
think have the opportunity to pay dividends in the future.
Really what we're looking for are is sort of financial
stability and intrinsic value. And intrinsic value might mean a
low PE today, or it might mean a high PE,
but you know, kind of tremendous return on invested capital,
so that if you look three or forty years down
(07:58):
the road, it actually does look quite an expensive within
that set of companies. When when a company cuts their dividend.
First of all, we're trying not to in this fund
generally invest in companies that we expect to cut their dividends,
but it does happen occasionally. As long as we're meeting
the overall target of thirty percent above the S and
P five hundred from an overall yield perspective, we have
(08:18):
flexibility to hold those securities for a longer period of time,
and in some cases, if we think that the dividend
cuts are temporary, we will hold those companies. And you know,
it's really about a view on the intrinsic value at
that point.
Speaker 1 (08:32):
So I wanted to go back to what you mentioned.
How you're looking at you know, possibly out of favorite companies,
and you know you just mentioned you know, intrinsic value
and PE are there if you're looking at valuations, Are
there any things specific that you're looking for?
Speaker 3 (08:47):
Yeah, well, our approach to valuation is not one size
fits all, So we acknowledge that in different industries and
in different periods of time, there may be different approaches.
You know, the topic of book value came up Earlierals
tangible book values are really important metric that we pay
attention to, but that's not so important in a number
of other industries where intangible assets may be a much
(09:08):
more important part of the value. I'd also say with
a capital system, each of those five portfolio managers may
take a slightly different approach to value. I tend to
be a little bit more oriented towards kind of tangible
valuation metrics like price to free cash flow, price to
gap earnings over a reasonable timeframe three or four years.
(09:31):
But again, when you get into certain periods of time
where perhaps the company is making very large investments that
are money losing and that causes the pe to be
a rev very high. But those money losing investments, you
can think of some of the large tech companies, for instance,
that have big money losing divisions, those money losing investments
might actually be creating a lot of value, and you
(09:52):
don't want to kind of write that off completely. And
so we take a flexible approach to thinking about valuation,
and it is focused, as I said earlier, sort of
on intrinsic value rather than just sort of what has
the lowest pe or price to book today.
Speaker 2 (10:08):
And do you find any specific sectors really interesting within
your style right now?
Speaker 3 (10:13):
I do so. The biggest sector, the second biggest sector
in the fund overall, is healthcare right now, and that
in my sleeve of the fund is actually the largest sector.
And that's one that I think is particularly interesting for
a couple of reasons. One, it's been quite out of
favor now for a couple of years, you know, post
pandemic has been one of the worst sectors of the market.
(10:34):
And then after the election, I think, for a variety
of reasons that I think are understandable in the moment
but are probably likely to be poorly placed long term,
the sectors sold off, you know, quite dramatically, even further.
And some of that's been due to concern over the
Trump administration's policies or potential policies. Some of it's been
due to concerns after the assassination of the executive from
(10:57):
United Healthcare, a great tragedy, but as a result, you've
got companies that are and businesses that are really resilient,
some of which, like in the case of you know,
the leading companies in the GLP one sector have great
growth prospects that fit very well for this fund, their
dividend paying they've got strong balance sheets that are on
(11:17):
sale and when on sale, and I'd say that's also
attractive to me. What we tend to take a very
long term perspective with our holdings. We do look at
the environment and think about how well we are positioned,
and it seems to me that we're going into a
period of greater uncertainty, and healthcare traditionally is a very
resilient sector during periods of uncertainty.
Speaker 1 (11:38):
You know, I wanted to ask you about geographics in
terms of international holdings. Are you seeing less dividend opportunities
outside of Canada and Europe?
Speaker 3 (11:49):
Well, so, CGDV is primarily a US fund. We're not
allowed to have more than you know, kind of mandate,
not more than ten percent of our holdings outside the US.
So our international holdings tend to be global companies with
substantial US businesses that just happen to be domiciled in
another country. And so, you know, what are examples in
(12:10):
the portfolio We've got an aerospace company, for instance, that
happens to be domiciled in Europe, but it's a global business.
We've got a tobacco company that happens to be domiciled
in England, but it's got a very large US business,
And so those are examples of our non US holdings.
So it's really focusing on kind of global leaders, dividend payers,
strong balance sheets that just happened to be domicil elsewhere.
Speaker 2 (12:35):
So we've seen some cash flush companies initiated dividend recently.
What conditions do you think are necessary to spur some
of these megacap companies, especially to returning from more capital
to shareholders. Is it really a lack of investing opportunities
down the road or something else.
Speaker 3 (12:51):
Well, if you look at some of the megatap mega
megacap tech companies, excuse me, they have really begun to
ramp their investments quite significantly recently in AI specifically, and
you know, the beauty of the business model for many
of these companies is that they can both ramp their
investments dramatically, which they're doing, and at the same time
(13:14):
they can continue to pay dividends and in many cases
they're also buying backstock. So I think these are companies
that do have the financial strength to do all three.
I guess, you know. I think the big question in
my mind is I think of that cohort is what
will the returns on these investments in AI be over time?
And I think that's you know, the jury's still out,
(13:36):
but it is an area where I have some questions.
Speaker 2 (13:39):
And you're obviously a dividend manager first and foremost, but
do you look at other capital allocations like buybacks or
reinvesting in R and D as kind of a precursor
to more dividends coming down the pike.
Speaker 3 (13:51):
Yeah, that's a good question, Michael. We think first about
the fundamentals of the company, and so you know, we
like to think about company is as if we were
the owner of the entire company, although we obviously are not.
And so if a company's got really attractive reinvestment opportunities
or opportunities to earn high returns from R and D investment,
(14:12):
we want them to make those investments. And once they
make those investments, we're going to make a judgment about, Okay,
can they continue to pay dividend? Do they have the
financial strength to pay dividends and make those investments, and
generally we're kind of looking at looking for companies in
this fund that can do both, but we would never
ask companies to increase the dividend, for instance, at the
(14:34):
expense of a really high return internal investment.
Speaker 2 (14:39):
What do you see as the biggest macro risk right
now to dividend investing?
Speaker 3 (14:44):
Yeah, well, dividend paying companies tend to come from all
industries and sectors, and they tend to be financially stable,
particularly if you layer on the sort of investment grade
requirement we have in CGDV. So I think the biggest
macro risk to dividend investing is probably more of a
real relative performance risk. You know, if we get into
environments where high multiple growth stocks that don't pay dividends
(15:06):
dominate the market indices and have the best returns, it's
it's really difficult for a fund like CGDV to you know,
keep up in that environment. But other than that, we
don't have a lot of macro concentration. You know, our
largest sector is industrials, which is a quite diverse industry.
Second is healthcare. We've already talked about that, and we
do have technology companies and communications services companies. But they're
(15:28):
you know, they're they have a lower representation in our
fund than they do typically in the broad indices.
Speaker 2 (15:35):
And do higher for longer rates concern you.
Speaker 3 (15:39):
At all, Well, they do concern me for the economy
and the market overall. And I guess i'd layer in
that there's an element of policy uncertainty that seems to
be happening right now, and I think that does create risk. Now, Frankly,
this is a this is a fund that's set up
structurally to do well in those kind of scoff environments,
(16:01):
at least from a relative perspective. But you know, from
an absolute perspective, there is some risk.
Speaker 2 (16:08):
But you're not concerned about the relative attractiveness of bonds
versus the dividend asset cluss or anything like that, right.
Speaker 3 (16:15):
I'm not. And for this fund in particular, we're not
investing solely in the highest dividend payers. So we're really
trying to invest in companies that we think offer attractive
intrinsic value that are dividend payers. And so even as
rates rise, we think that if we're making the right
fundamental decisions investments in the companies, we can continue to
do well even in higher rate environments.
Speaker 2 (16:37):
And we kind of touched on some of the megacaps
initiating dividend payouts with them kind of creeping into your universe.
Are you worried about any kind of concentration risk building
that's in there.
Speaker 3 (16:49):
Well, it's a little bit hard for us to have
too much concentration in that area, largely because we're we're
targeting a yield that's thirty percent of the market. Typically,
those sort of megacap tech companies that have introduced dividends
have relatively small yields, relatively modest payouts, and so you know,
(17:10):
structurally it's just challenging. It would be challenging for this
fund to be overrepresented in that set of companies. So
I wanted to go back to the process a little
bit because I wanted to talk about selling positions. How
does that work with an approach, a team approach such
as yours when you know different managers are managing different sleeves.
(17:30):
Is it you know, your job as the lead manager
to kind of make the final decisions or you know,
or is kind of every manager have their own, you know,
set of stocks and they make those decisions. So the
answer is primarily the latter, in a little bit the former.
So each manager manages their sleeve as if it is
(17:51):
its own portfolio, kind of its own fund. And I
do provide oversight along with a couple of different oversighted bodies.
But unless we hit sort of limits in terms of
individual stock position size in the fund, or we're out
of line with our you know, kind of investment grade
targets or income objectives, the pms have great discretion to
(18:17):
manage their portfolio as they see fit.
Speaker 2 (18:19):
You know.
Speaker 3 (18:19):
I do also keep track of, you know, things like
the correlation between pms, and we want to make sure
that we're not all invest we're kind of rowing in
the same direction at the same time. But as I
mentioned earlier, we sort of carefully selected the team so
that that we don't expect that to happen, and generally
that has not happened. But the cell decision is really
largely up to each individual PM.
Speaker 1 (18:41):
Okay, and so I actually have a follow up on
that in terms of buying. If different managers are coming
to I guess the same companies through different ways, how
did how is that handled? Do you have a you know,
you mentioned you know, a cap on certain positions.
Speaker 3 (18:59):
Well, so it's it's a good question, and I come
back to sort of one of the structural setups is
we don't want everybody, all the pms to sort of
think about the world the same So often we won't
be coming to the same conclusion at the same time,
but in some cases we do, and we then will
have larger positions in the fund. Now, you know, until
those positions get to sort of outsize in our kind
(19:22):
of risk framework, it really is not a problem and
outsizees you know, we don't really let positions get above
high single digits in this fund. That's kind of not
consistent with the risk approach that we're taking. And if
pms all reach the same conclusion, it probably means it's
a really great investment opportunity.
Speaker 1 (19:41):
No makes sense. So we have one last question before
we wrap up. Is there any advice you would give
your younger self when it comes to investing.
Speaker 3 (19:50):
It's such a good question. I wish I could go
back in a time machine and give give me this advice. Yes,
absolutely so. One of my strengths as an investor is inventive,
is investing in companies with good bones during periods of
uncertainty when everyone else is quite concerned. One of my
weaknesses as an investor has been that sometimes when that
(20:12):
period of weakness passes and the market revalues the company
back to sort of a fair value, I have often
in the past sold some of my winners at that time.
And what I've learned is that if we do a
good job identifying companies with good bones during periods of
uncertainty and on average I actually have working with our
analyst team, those companies often then go on to become
(20:35):
long term compounders. And by selling after the period of uncertainty,
You're leaving a lot of opportunity on the table, as
it were, for our investors. And so I've tried to
be more disciplined about re underwriting companies after the periods
of uncertainty of passed and really making sure I'm thinking
expansively about what the opportunity set is for the on
a longer term basis.
Speaker 1 (20:57):
That's great, Chris, Thank you again. This is this is
a great discussion.
Speaker 3 (21:02):
I really appreciate you taking the time with me today, David,
and thank you Michael.
Speaker 1 (21:06):
Michael, thanks for joining me today as well.
Speaker 2 (21:09):
Thanks again, David.
Speaker 1 (21:11):
Until our next episode. This is David Cone with Inside
Act
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael Casper, us small cap
and sector strategist at Bloomberg Intelligence. Mike, thanks for joining
(00:34):
me today.
Speaker 2 (00:35):
Thank you, David.
Speaker 1 (00:37):
So, I know we're going to be talking about dividends today,
but I did want to ask you about another type
of shareholder benefit buybacks, specifically in the financial sector. Have
there been a lot of repurchases in the sector and
you know what could we expect going forward.
Speaker 2 (00:51):
Yeah, there's been quite a bit, especially within the larger
banks in the US or we're talking about the six
biggest banks. There was quite a large buyback from a
few of them in the past quarter, in the past year.
They're really returning capital back to shareholders and it's part
of the reason that or at least it's exuding confidence
in the industry that is now leading our financials industry scorecard.
(01:15):
By the way, so we do these industry rankings intrasector
for nine of the eleven GICK sectors. We kind of
ignore real estate and utilities they're a little bit too
small to do this kind of work on, but banks
nonetheless rising to the top of our financials model. On
the flip side, capital markets and insurance towards the bottom.
Insurance obviously has some of those headwinds from the California
(01:38):
fires and all the insurance payouts that they might have
to make, especially amongst the P and C companies there.
But valuations, all note are the one thing that kind
of everybody points out to me as being a little
bit stretched within the financial sector. It is one of
the more expensive sectors relative to its most recent five
year average, along with tech. It's actually one of two
(02:01):
trading one standard deviation above the norm on its preferred
valuation metric, which, by the way, we use we use
price to book valuations for financials. But nonetheless, there's several
significant fundamental tailwinds, and I think that the buybacks that
we've seen in the sector are kind of exuding confidence
in the sector. But pretty much everything clicking on, clicking
(02:23):
on all cylinders outside of insurance fees looking great and
interest income was looking pretty strong in the fourth quarter
for banks, You've got M and A and IPO activity
looking like it's going to pick up a little bit
in twenty twenty five. So kind of a broad based
rally within financials and everything looking good there and buybacks
kind of exuding that confidence as well from management.
Speaker 1 (02:46):
Great. Well, I guess we'll segue into a different type
of shareholder yield. So I'd like to welcome Christopher Bookbinder
to Inside Active. Chris is a portfolio manager at Capital Group,
including the Capital Group Dividend Value ETF tickers CGDV, a
fun we'll actually be talking about today. So Chris, thank
you so much for joining us today.
Speaker 3 (03:06):
Thanks for having me.
Speaker 1 (03:08):
So let's start with your career. How did you get
into the investment business.
Speaker 3 (03:14):
Well, I was lucky enough to join Capital in nineteen
ninety five into something called the Associates Program or TAP,
which is an absolutely amazing two year rotational program where
we also take a series of business school classes that
are arranged by Capital. When I came out of TAP,
I started out as an analyst covering the telecom industry
(03:34):
in the late nineteen nineties. For those of you who
may remember that period, that was the era of the
TMT bubble, and so I got a front row seat
to both the inflating and then the deflating of that bubble.
And I will say I think there's some interesting parallels
between the wave of investments we saw then and the
wave of AI investments taking place now. My next industry,
(03:56):
in addition to telecom, was the auto industry, and during
the time I covered that industry, two of the three
largest companies went bankrupt. And then for my sins, I
started out as a portfolio manager in two thousand and seven,
and I actually started in the predecessor fund to CGDV
in October two thousand and seven, which happened to be
the exact month the market peak before the fifty percent
(04:18):
plus decline into the GFC. So I guess I've become
a little bit of an expert in investing in challenging
environments during my tenure at Capital Great.
Speaker 1 (04:28):
So if we focus in on CGDV, you know, we
know it's a dividend fund, but what's the process for
selecting stocks for the portfolio.
Speaker 3 (04:36):
Yeah, it's a great question, David. So the core of
the CGDV investment process is the capital system, and the
capital system is a multiple portfolio Manager system and CGDV.
We have five portfolio managers, each of whom manages their
sleeve of the fund as if it were their own fund.
This PM team draws on the work of our global
analyst team that's out beating the bushes to find insights
(04:58):
and investment opportunities. We've got, you know, just under two
hundred analysts around the world who are meeting with companies
twenty one thousand meetings. I think last year alone, our
pms in the fund averaged thirty two years of investment experience.
And we've carefully selected the team to have complementary but
different investment approaches. And what that means is that when
(05:18):
one PM is zigging, the others will be zagging. That
provides a level of inherent diversification. And then, as lead
PM for the fund, I oversee the team make sure
that the funds in line with our broad guidelines, which
are essentially ninety percent of the companies have to be
investment grade, ninety percent of the companies have to pay dividends.
The aggregate portfolio needs to generate a yield that's thirty
(05:38):
percent above the S and P five hundred that's before
expenses and I'm also responsible for monitoring sort of overall
risk and correlation within the fund.
Speaker 1 (05:48):
Great, so you mentioned yield and dividends. Are there specific
dividend metrics you know a company will need to have
to be or at least be an option for the
portfolio A lot specifically, and I'd say, coming back to
the couple system, each PM brings a slightly different lens
to the fund. At the PM level, each PM has
to generate a yield that's thirty percent above the market,
(06:10):
but they can get there in different ways. Some of
the pms tend to have every company in their portfolio
is a dividend pair. Others might have up to ten
percent of their portfolio and non dividend payers, but companies
that we think might be dividend pairs in the future.
If I think about my specific sleeve of the fund
and my approach, I tend to be contrarian. I tend
to focus on out of favor companies or industries with strong,
(06:33):
strong underlying fundamentals but that are maybe obfuscated by the
current environment. Again with a dividend paying lens around that
set of companies. So you know, examples of my investment
approach are we've got large holdings in the fund. I've
had had large holdings in aircraft engine manufacturers, for instance,
or cruise lines, both of which are dividend paying companies
(06:55):
now are dividend paying industries now, but maybe weren't when
we invested in them originally, and that the original investments
are typically made in those companies during the depth of
the pandemic.
Speaker 2 (07:05):
How do you identify stocks that might raise, cut or
eliminate dividends? It does a cut automatically force you out
of a position or do you reassess if you believe
in the company's fundamentals.
Speaker 3 (07:15):
Yeah, well, it all starts with the fundamental research process
for us. So you know, our analysts have long tenures
and their job is really to become sort of the
world's greatest expert in their industries. And so the starting
screen for us is what wreck companies are analysts recommending
and why? And then within that universe, as we focus
(07:36):
on the sort of dividend payers or companies that we
think have the opportunity to pay dividends in the future.
Really what we're looking for are is sort of financial
stability and intrinsic value. And intrinsic value might mean a
low PE today, or it might mean a high PE,
but you know, kind of tremendous return on invested capital,
so that if you look three or forty years down
(07:58):
the road, it actually does look quite an expensive within
that set of companies. When when a company cuts their dividend.
First of all, we're trying not to in this fund
generally invest in companies that we expect to cut their dividends,
but it does happen occasionally. As long as we're meeting
the overall target of thirty percent above the S and
P five hundred from an overall yield perspective, we have
(08:18):
flexibility to hold those securities for a longer period of time,
and in some cases, if we think that the dividend
cuts are temporary, we will hold those companies. And you know,
it's really about a view on the intrinsic value at
that point.
Speaker 1 (08:32):
So I wanted to go back to what you mentioned.
How you're looking at you know, possibly out of favorite companies,
and you know you just mentioned you know, intrinsic value
and PE are there if you're looking at valuations, Are
there any things specific that you're looking for?
Speaker 3 (08:47):
Yeah, well, our approach to valuation is not one size
fits all, So we acknowledge that in different industries and
in different periods of time, there may be different approaches.
You know, the topic of book value came up Earlierals
tangible book values are really important metric that we pay
attention to, but that's not so important in a number
of other industries where intangible assets may be a much
(09:08):
more important part of the value. I'd also say with
a capital system, each of those five portfolio managers may
take a slightly different approach to value. I tend to
be a little bit more oriented towards kind of tangible
valuation metrics like price to free cash flow, price to
gap earnings over a reasonable timeframe three or four years.
(09:31):
But again, when you get into certain periods of time
where perhaps the company is making very large investments that
are money losing and that causes the pe to be
a rev very high. But those money losing investments, you
can think of some of the large tech companies, for instance,
that have big money losing divisions, those money losing investments
might actually be creating a lot of value, and you
(09:52):
don't want to kind of write that off completely. And
so we take a flexible approach to thinking about valuation,
and it is focused, as I said earlier, sort of
on intrinsic value rather than just sort of what has
the lowest pe or price to book today.
Speaker 2 (10:08):
And do you find any specific sectors really interesting within
your style right now?
Speaker 3 (10:13):
I do so. The biggest sector, the second biggest sector
in the fund overall, is healthcare right now, and that
in my sleeve of the fund is actually the largest sector.
And that's one that I think is particularly interesting for
a couple of reasons. One, it's been quite out of
favor now for a couple of years, you know, post
pandemic has been one of the worst sectors of the market.
(10:34):
And then after the election, I think, for a variety
of reasons that I think are understandable in the moment
but are probably likely to be poorly placed long term,
the sectors sold off, you know, quite dramatically, even further.
And some of that's been due to concern over the
Trump administration's policies or potential policies. Some of it's been
due to concerns after the assassination of the executive from
(10:57):
United Healthcare, a great tragedy, but as a result, you've
got companies that are and businesses that are really resilient,
some of which, like in the case of you know,
the leading companies in the GLP one sector have great
growth prospects that fit very well for this fund, their
dividend paying they've got strong balance sheets that are on
(11:17):
sale and when on sale, and I'd say that's also
attractive to me. What we tend to take a very
long term perspective with our holdings. We do look at
the environment and think about how well we are positioned,
and it seems to me that we're going into a
period of greater uncertainty, and healthcare traditionally is a very
resilient sector during periods of uncertainty.
Speaker 1 (11:38):
You know, I wanted to ask you about geographics in
terms of international holdings. Are you seeing less dividend opportunities
outside of Canada and Europe?
Speaker 3 (11:49):
Well, so, CGDV is primarily a US fund. We're not
allowed to have more than you know, kind of mandate,
not more than ten percent of our holdings outside the US.
So our international holdings tend to be global companies with
substantial US businesses that just happen to be domiciled in
another country. And so, you know, what are examples in
(12:10):
the portfolio We've got an aerospace company, for instance, that
happens to be domiciled in Europe, but it's a global business.
We've got a tobacco company that happens to be domiciled
in England, but it's got a very large US business,
And so those are examples of our non US holdings.
So it's really focusing on kind of global leaders, dividend payers,
strong balance sheets that just happened to be domicil elsewhere.
Speaker 2 (12:35):
So we've seen some cash flush companies initiated dividend recently.
What conditions do you think are necessary to spur some
of these megacap companies, especially to returning from more capital
to shareholders. Is it really a lack of investing opportunities
down the road or something else.
Speaker 3 (12:51):
Well, if you look at some of the megatap mega
megacap tech companies, excuse me, they have really begun to
ramp their investments quite significantly recently in AI specifically, and
you know, the beauty of the business model for many
of these companies is that they can both ramp their
investments dramatically, which they're doing, and at the same time
(13:14):
they can continue to pay dividends and in many cases
they're also buying backstock. So I think these are companies
that do have the financial strength to do all three.
I guess, you know. I think the big question in
my mind is I think of that cohort is what
will the returns on these investments in AI be over time?
And I think that's you know, the jury's still out,
(13:36):
but it is an area where I have some questions.
Speaker 2 (13:39):
And you're obviously a dividend manager first and foremost, but
do you look at other capital allocations like buybacks or
reinvesting in R and D as kind of a precursor
to more dividends coming down the pike.
Speaker 3 (13:51):
Yeah, that's a good question, Michael. We think first about
the fundamentals of the company, and so you know, we
like to think about company is as if we were
the owner of the entire company, although we obviously are not.
And so if a company's got really attractive reinvestment opportunities
or opportunities to earn high returns from R and D investment,
(14:12):
we want them to make those investments. And once they
make those investments, we're going to make a judgment about, Okay,
can they continue to pay dividend? Do they have the
financial strength to pay dividends and make those investments, and
generally we're kind of looking at looking for companies in
this fund that can do both, but we would never
ask companies to increase the dividend, for instance, at the
(14:34):
expense of a really high return internal investment.
Speaker 2 (14:39):
What do you see as the biggest macro risk right
now to dividend investing?
Speaker 3 (14:44):
Yeah, well, dividend paying companies tend to come from all
industries and sectors, and they tend to be financially stable,
particularly if you layer on the sort of investment grade
requirement we have in CGDV. So I think the biggest
macro risk to dividend investing is probably more of a
real relative performance risk. You know, if we get into
environments where high multiple growth stocks that don't pay dividends
(15:06):
dominate the market indices and have the best returns, it's
it's really difficult for a fund like CGDV to you know,
keep up in that environment. But other than that, we
don't have a lot of macro concentration. You know, our
largest sector is industrials, which is a quite diverse industry.
Second is healthcare. We've already talked about that, and we
do have technology companies and communications services companies. But they're
(15:28):
you know, they're they have a lower representation in our
fund than they do typically in the broad indices.
Speaker 2 (15:35):
And do higher for longer rates concern you.
Speaker 3 (15:39):
At all, Well, they do concern me for the economy
and the market overall. And I guess i'd layer in
that there's an element of policy uncertainty that seems to
be happening right now, and I think that does create risk. Now, Frankly,
this is a this is a fund that's set up
structurally to do well in those kind of scoff environments,
(16:01):
at least from a relative perspective. But you know, from
an absolute perspective, there is some risk.
Speaker 2 (16:08):
But you're not concerned about the relative attractiveness of bonds
versus the dividend asset cluss or anything like that, right.
Speaker 3 (16:15):
I'm not. And for this fund in particular, we're not
investing solely in the highest dividend payers. So we're really
trying to invest in companies that we think offer attractive
intrinsic value that are dividend payers. And so even as
rates rise, we think that if we're making the right
fundamental decisions investments in the companies, we can continue to
do well even in higher rate environments.
Speaker 2 (16:37):
And we kind of touched on some of the megacaps
initiating dividend payouts with them kind of creeping into your universe.
Are you worried about any kind of concentration risk building
that's in there.
Speaker 3 (16:49):
Well, it's a little bit hard for us to have
too much concentration in that area, largely because we're we're
targeting a yield that's thirty percent of the market. Typically,
those sort of megacap tech companies that have introduced dividends
have relatively small yields, relatively modest payouts, and so you know,
(17:10):
structurally it's just challenging. It would be challenging for this
fund to be overrepresented in that set of companies. So
I wanted to go back to the process a little
bit because I wanted to talk about selling positions. How
does that work with an approach, a team approach such
as yours when you know different managers are managing different sleeves.
(17:30):
Is it you know, your job as the lead manager
to kind of make the final decisions or you know,
or is kind of every manager have their own, you know,
set of stocks and they make those decisions. So the
answer is primarily the latter, in a little bit the former.
So each manager manages their sleeve as if it is
(17:51):
its own portfolio, kind of its own fund. And I
do provide oversight along with a couple of different oversighted bodies.
But unless we hit sort of limits in terms of
individual stock position size in the fund, or we're out
of line with our you know, kind of investment grade
targets or income objectives, the pms have great discretion to
(18:17):
manage their portfolio as they see fit.
Speaker 2 (18:19):
You know.
Speaker 3 (18:19):
I do also keep track of, you know, things like
the correlation between pms, and we want to make sure
that we're not all invest we're kind of rowing in
the same direction at the same time. But as I
mentioned earlier, we sort of carefully selected the team so
that that we don't expect that to happen, and generally
that has not happened. But the cell decision is really
largely up to each individual PM.
Speaker 1 (18:41):
Okay, and so I actually have a follow up on
that in terms of buying. If different managers are coming
to I guess the same companies through different ways, how
did how is that handled? Do you have a you know,
you mentioned you know, a cap on certain positions.
Speaker 3 (18:59):
Well, so it's it's a good question, and I come
back to sort of one of the structural setups is
we don't want everybody, all the pms to sort of
think about the world the same So often we won't
be coming to the same conclusion at the same time,
but in some cases we do, and we then will
have larger positions in the fund. Now, you know, until
those positions get to sort of outsize in our kind
(19:22):
of risk framework, it really is not a problem and
outsizees you know, we don't really let positions get above
high single digits in this fund. That's kind of not
consistent with the risk approach that we're taking. And if
pms all reach the same conclusion, it probably means it's
a really great investment opportunity.
Speaker 1 (19:41):
No makes sense. So we have one last question before
we wrap up. Is there any advice you would give
your younger self when it comes to investing.
Speaker 3 (19:50):
It's such a good question. I wish I could go
back in a time machine and give give me this advice. Yes,
absolutely so. One of my strengths as an investor is inventive,
is investing in companies with good bones during periods of
uncertainty when everyone else is quite concerned. One of my
weaknesses as an investor has been that sometimes when that
(20:12):
period of weakness passes and the market revalues the company
back to sort of a fair value, I have often
in the past sold some of my winners at that time.
And what I've learned is that if we do a
good job identifying companies with good bones during periods of
uncertainty and on average I actually have working with our
analyst team, those companies often then go on to become
(20:35):
long term compounders. And by selling after the period of uncertainty,
You're leaving a lot of opportunity on the table, as
it were, for our investors. And so I've tried to
be more disciplined about re underwriting companies after the periods
of uncertainty of passed and really making sure I'm thinking
expansively about what the opportunity set is for the on
a longer term basis.
Speaker 1 (20:57):
That's great, Chris, Thank you again. This is this is
a great discussion.
Speaker 3 (21:02):
I really appreciate you taking the time with me today, David,
and thank you Michael.
Speaker 1 (21:06):
Michael, thanks for joining me today as well.
Speaker 2 (21:09):
Thanks again, David.
Speaker 1 (21:11):
Until our next episode. This is David Cone with Inside
Act
Host
Gina Martin Adams
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