Former Julian Robertson Alumni Likes Boring Dividend Paying Equities

David Snoddy from Nezu Asia makes the case for widely overpriced consumer staples and other stodgy names with real businesses, cash flows, and dividends. Historically, the safest stocks have never been so expensive.

Snoddy posits, I think very correctly, that the negative interest rate and negative rate environment has created an flight out of bonds into safe stocks, like GIS, CL and CLX. Moreover, these same stocks are viewed as defensive by many, which have attracted another school of investor, one interested in hedging or mitigating market risk.

“The guys that have been tooting the horn about defensive, high-yield stocks globally for the last two years, I think they’re missing that point,” Snoddy, 48, who ran the Tokyo office of Julian Robertson’s Tiger Management before setting up Nezu Asia, said in an interview last week. “It becomes more important how much yield I can get from this thing, because I can’t get it anywhere else.”

Snoddy uses Japan, a market he’s worked in for decades, to illustrate his point. He’s invested in Nippon Telegraph & Telephone Corp., the former monopoly carrier that still counts the state as its largest shareholder with a 35 percent stake. The company has an projected equity dividend yield of 2.5 percent, according to data compiled by Bloomberg. That compares with about 0.32 percent for Japan’s 30-year government bonds, while more than 70 percent of the nation’s sovereign debt trades at yields below zero.

“How different is your NTT credit risk relative to the Japanese government?” Snoddy said. But “it would take me about eight years of JGB 30-year yield to get one year of NTT yield. I think that’s a big difference.”

Snoddy favors an investing approach called growth at a reasonable price, with a focus on companies that generate cash flow to finance their own expansion, and says that attribute has become more important in the era of minus rates.

Many people “have been saying consumer defensives and quality companies are more expensive versus the market than they’ve ever been,” Snoddy said. “But that’s on a price-to-earnings or price-to-book basis. On a cash-flow basis I don’t know that’s necessarily true.”

For Snoddy, valuing companies against their profits doesn’t capture the whole picture. In the era of negative interest rates, defensives and other quality stocks with good dividends naturally have more worth, so measuring against cash flow is also important.

“If you think about what a global low-interest-rate environment does to the value of cash machines, then it makes sense that they would be more expensive,” he said.

Along the same thinking is why I am bullish on US treasuries. Why buy Eurobonds or JGBs when you can own a 30yr treasury for 2.63%? It’s not a bad yield, in this world of crazy.

This new reality poses significant risk to high growth and small cap stocks, who do not enjoy giant and predictable cash flows. Get it?

In my opinion, if you want to own stocks, make sure they are large cap and with giant free cash flows.

NOTE: Inside Exodus, I manage a growth at a reasonable price index, which is updated twice per annum. I will be revamping the 15 stock portfolio in June to focus on this exact theme.