Finding investments that offer both a reasonable return and the ability to increase it by increasing income can be tricky for income fund managers. While these opportunities certainly exist, they tend to be less obvious than the “buzz stocks” of the day, such as tech stocks, which regularly have stunning valuations.
However, undiscovered standing stocks with good yields can sometimes be found in areas that may have been under pressure for years. Consolidation through mergers, failures and exits of companies from the market can create the conditions for very substantial improvement and growth in margins, even when a relatively small amount of demand returns and some pricing power returns.
These capital cycle investments tend to be higher yielding, underresearched, have low valuations, allow growing dividends, and can produce above-market total returns.
Inditex: fast fashion holds its own
Inditex (Madrid: ITX), the owner of retailer Zara, came under pressure from discount online clothing retailers and had to create its own substantial new internet presence. More recently, it has also suffered from reduced activity in China and Russia. To add to market concerns, the founder is now handing over management control to his daughter.
Nevertheless, compared to a happier pre-pandemic period, the company is in better shape than before, with a strong internet presence, better supply chains compared to competitors and generating cash flow and revenue. solid dividends. There is also far less competition from physical stores. A 5% and growing dividend yield is achievable in 2022.
UPM-Kymmene Oyj: the paper producer diversifies
UPM-Kymmene Oyj (Helsinki: UPM) is in a sector that I have always hated. The paper and pulp industry has always expanded capacity faster or based on demand, and frankly, Southern Europe, Latin America and Africa have competitive advantages in raw materials cheaper and faster growing. This still undermines Scandinavian forestry competitors.
However, UPM has taken the next logical step by building its new low-cost pulp mills in Uruguay and is moving away from simple commodities towards specialties such as wood-based fuels and labels, where it is now competitor Avery’s number two.
It derives all of its energy from non-fossil fuel sources, such as hydro, nuclear and biomass, and is now Finland’s second-largest electricity producer. Heavy investments have weighed on profits, but should contribute more and more in the coming years. Its 4% dividend yield looks attractive.
Technip Energies: adapting to a decarbonized future
Oil services is another dreadful industry with a very checkered history and facing an uncertain future. However, Technip Energies (Paris: TE) has mainly refocused on the construction of liquefied natural gas facilities, which are in great demand around the world given the concerns in Europe about the supply of Russian gas. It was hit hard by the unexpected loss of Russia as a customer, but replacement customers will pick up the slack in due course. These engineering skills are also very applicable to all kinds of decarbonization projects.
Meanwhile, its main competitor, Saipem, is struggling and may not survive without another massive injection of capital. A newly initiated dividend of 3.75% is a good start for Technip.