Nestle SA (NESN:VX; NSRGY:OTC) reported a strong first half with broad-based organic growth of over 8% across most regions and categories. Although costs increased—food, fuel, and transportation being their largest cost components—they were able to pass on most costs with sticky price increases. Overall, the operating margin at just under 17% declined by 50- basis points, but the company is looking for that new level to be
maintained for the rest of the year.
Once again, pet care led with the strongest growth, while coffee, a major category worldwide for Nestle, grew in a high single-digit rate. Most regions grew nicely, with the greater China region a laggard due to the renewed lockdowns.
Consistency Reigns at Nestle
Nestle is a very strong company that executes well across over 100 countries; it has a good balance sheet (although debt has increased, it retains almost Sfr40 billion of shares in L’Oreal). The company repurchased Sfr 6.9 billion of shares in the first half, a strong start to a three-year, Sfr 20 billion program.
The stock has rallied from Sfr106 in mid-June, with a current yield of 2.4%. Although we regard Nestle as a core holding, one that has seen consistent annual cash flow growth, and a dividend that has increased every year for the past quarter of a century, it is trading at the upper end of its valuation history, and though we are satisfied holders, we would wait to buy.
Hutchison Is Subject to China Jitters
Hutchison Port Holdings Trust (HPHT:Singapore) saw earnings-per-unit fall by nearly 7% in the first half, despite increased revenues. In the first half, Hong Kong saw lower volumes, and though some ports in China also had lower volumes—particularly Shanghai—others compensated; total China throughput fell by less than 1%. Towards the end of the quarter and more so since Chinese ports throughput has picked up significantly.
Although this trend will likely continue, absent a deepening of U.S.-China trade tensions, costs are also likely to continue to increase, largely because of fuel costs but also renewed covid measures which reduce productivity at ports. It should be noted that global port congestion is not necessarily a negative for Hutchison which benefits from higher storage fees for containers stuck in port.
The most significant risk for Hutchison would be a significant deterioration in trade between China and the U.S., as well as a general slowdown in the global economy. The contretemps over House Speaker Pelosi’s visit to Taiwan has hurt the stock, but presents us with an opportunity. It is trading at a single-digit price-to-earnings multiple, and yields over 8%. The 1H distribution was held at last year’s rate, while the 2H distribution is normally the larger of the two.
Buy HPHT for income.
Ares Is in a Strong Position
Ares Capital Corp. (ARCC:NASDAQ) reported a strong quarter, with earnings-per-share above analyst expectations, while the company provided a positive outlook on widening spreads amid market volatility. Most of Ares’ loans are floating rate, while most of its debt is a fixed rate. Book value declined modestly, as expected.
Following the quarter—as often happens if the quarter was positive—the company did a public offering, of eight million shares, with the proceeds to be used to repay some debt.
Trading a tad above book at 10 times earnings, it is yielding 8.7% (excluding occasional small special distributions). The stock has rallied from $17 in mid-June.
It is a strong hold, but we would wait to buy more.
TOP BUYS NOW in addition to the above, include Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE); Midland Exploration Inc. (MD:TSX.V); Franco-Nevada Corp. (FNV:TSX; FNV:NYSE); Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX); Barrick Gold Corp. (ABX:TSX; GOLD:NYSE); and Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE).
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