Saxo Morningstar High Dividend USD Q1 2020 commentary

SaxoSelect Commentaries

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Instruments traded
Asset classesGlobal equities (excluding emerging markets)
Investment styleHigh quality stocks offering attractive dividends
Dividend Yield 5.5%
Quarterly return-28.2% (net of fees)
Annualised volatility (since inception)

Market overview

“Stocks had their worst first quarter since the Great Depression in 1933”. The current investment environment is volatile and unprecedented and stocks have fallen significantly, with losses incurred across most major markets. Companies with high debt or direct exposure to the economic downturn—like travel, hospitality, energy, financials and leisure companies—have been hit particularly hard. Cash, government bonds and the US dollar have acted as a stabiliser, but that’s little consolation for the unique circumstances we find ourselves in.  

The catalyst of this downturn is COVID-19. Social distancing has led to a record-breaking rise in jobless claims, along with deep recessionary signals and even liquidity concerns. These are true risks to the financial system, sparking an offsetting response of boundless stimulus from both governments and central banks. The silver lining is that expected returns are rising in a forward-looking context. 

In the short term though, businesses are struggling, profits are plummeting and dividends are getting cut. Many are describing COVID-19 as a black swan; it meets the classical definition of an unforeseen event with a low probability of occurring. This has been exacerbated by the breakdown in oil negotiations between Saudi Arabia and Russia, causing the oil price to slide. It is little wonder that fear has gripped the public at large. So, while there is undoubted confidence of surpassing the prior heights in the long run, the uncomfortable reality is that the near-term future carries heightened uncertainty that must be navigated. 

Portfolio performance

Inception (July 2018)-19.10%

(Performance is net of all fees)

Top Performers

  • Roche Holding AG is a Swiss biopharmaceutical and diagnostic company. The Morningstar investment team thinks that Roche's drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages. Roche's biologics focus and innovative pipeline are key to the firm's ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. More than 80% of Roche's pharmaceutical sales are from biologics, which provides a buffer against traditional generic competition. Roche is expanding outside of oncology and its diagnostics business is also strong. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment. The share price went up 3.86% in the last quarter and according to Morningstar proprietary analysis, the stock trades at a 13% discount to fair value.
  • General Mills Inc is a leading global packaged food company that produces snacks, cereal, convenient meals, yogurt, dough, baking mixes and ingredients, pet food, and premium ice cream. The Morningstar investment team thinks that General Mills will report outsize returns for the next 10 years, rendering the firm a narrow moat, stemming from its preferred status with retailers, brand equity, and cost edge. In the past few years, the firm has held or gained share in most categories in which it competes, and many of its brands command a price premium. These strong brands have resulted in solid relationships with its retail partners and a scale-based cost advantage. The share price went down by 0.56% in the last quarter and according to Morningstar proprietary analysis, the stock trades at a 6.85% premium to fair value.

  • Dominion Energy Inc is an integrated energy company which operates one of the US’s largest natural gas storage systems and is 53% owner of the under-construction Atlantic Coast Pipeline. Annual dividend increases have averaged 9% over the past five years, and are expected to continue at 2.5% per year through 2024. The Morningstar investment team believes the dividend is secure, and 2023 would represent 20 straight years of increases. In the near term, Dominion will likely experience a significant reduction in commercial and industrial customer usage following stay-at-home orders for a number of states due to COVID-19. However, Dominion should not be affected as much as other utilities, as it does not serve heavy industrial regions. The share price went down 11.7% in the last quarter and according to Morningstar proprietary analysis, the stock trades at a 12% discount to fair value.

Worst Performers

  • MPLX LP Partnerships Units is a partnership that owns both pipelines and gathering and processing assets with extensive holdings in the Appalachian region. MPLX recently completed a period of significant change and can now pursue an expansion program for its new assets as well as its existing core portfolio of gathering and processing assets in the Appalachian region. The Morningstar Investment team is less optimistic about the near-term 2020 growth prospects for Appalachian gas production; however, MPLX still has plenty of opportunities to unlock within its newly enlarged portfolio of assets. The share price went down 51.6% in the last quarter and according to Morningstar proprietary analysis, the stock is severely undervalued and trades at a 40% discount to fair value.

  • ING Groep NV has market-leading banking operations in the Netherlands and Belgium, and a range of digital banks across Europe and Australia. Its global wholesale banking operation is primarily focused on lending. Low -currently negative- interest rates are likely to negatively impact ING's earnings for the foreseeable future. However, in the Morningstar investment team’s opinion, ING is one of the most attractive banking jurisdictions in Europe and the third most profitable bank in the Eurozone that its covers. ING has generated a consolidated average ROE of 11% over the last three years and its return on equity for its Dutch banking operations is 16% in the first nine months of 2019, which is substantially ahead of the 6% return on equity of the consolidated Eurozone banking system as calculated by the ECB. The share price went down 56.3% in the last quarter and trades at a deep discount of 68% of fair value.

  • Unibail-Rodamco-Westfield is one of the world's largest REITs, with EUR 65 billion of property in shopping centres, offices, convention/exhibition centres, etc. A coronavirus-driven shutdown will hit earnings in 2020 and add to the challenge of growing sales versus digital retail. The transition of the portfolio to focus more on premium malls is weighing on earnings growth as the group sells weaker, but higher-yielding malls. Development remains a long-term earnings catalyst. The Morningstar investment team expects yields for the developments currently under way and those in the near-term pipeline to vary between 5% and 8% and hence increase earnings and value. The share price went down 60.4% in the last quarter and according to Morningstar proprietary analysis, the stock trades at a 50% discount to fair value.


Yes the weight of negative sentiment is telling, however, a more balanced view provides reasons to be more optimistic over a longer-term horizon. Periods of loss, while painful, are part of an investor’s journey, with the opportunity to buy quality assets at heavily discounted prices. Current analysis of investor activity  suggests that the investor response has, in many cases, been emotive. As such, where only months ago investors had to look very hard for value, there is now opportunity knocking, across both stocks and fixed income. This is not to say that there won’t be further declines in the near-term, but seeing better value provides a compelling reason to buy discerningly for those focused on delivering longer-term outcomes.  


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