Portfolio update – DuPont disposal & 3M purchase
Update on the latest changes to the Global Income & Growth Fund…
During January we initiated a position in 3M in the TB Saracen Global Income & Growth fund. We had looked at 3M in the past but preferred to hold on to our position in DuPont where we saw value creation from the spin-off of various divisions. The latest was Nutrition & Bioscience, which merged with IFF at the end of January. In the run up to this, DuPont shares saw a strong rise (+17% in the first two weeks of the year). It reached valuation levels which we thought were not justifiable anymore, namely 31x 2021 PE with a dividend yield below 1.5%.
It was time for us to dust down our 3M template.
3M is a direct competitor to DuPont in many areas like automotive, electronics and construction. What has drawn us to 3M is the strong margin profile, cash generation, return on invested capital (close to 20%) and an uninterrupted 62-year history of dividend growth. Combined with its leading position in its fields and high investments in R&D (6% of sales) and capex (5% of sales), 3M attracted a premium to peers in the past.
However, this has evaporated in recent months. The rational in the market was that it had done better during 2020 than in previous downturns and would therefore not see the usual early cycle rebound in 2021. We disagree. The main reason it has outperformed peers operationally during the pandemic is the strong demand for its face masks. The company also managed to cut costs further than expected. Going forward, we would expect areas not exposed to face masks to recover meaningfully as economic growth picks up. We have already seen good signs of improvement in the auto aftermarket and home improvement areas as well as tentative signs in elective surgery. Additionally, we expect demand for face coverings to remain high for at least another year. Many of the cost savings will be recurring and we expect margins to further improve, moving 3M well ahead of DuPont and other diversified chemical companies.
In short, we expect 3M’s operational performance to pick up during 2021 and 2022. We also expect the shares to close the discount to their peer group. Below 17x 2021 PE and with a 3.4% yield we saw a great entry point into this high-quality name. We sold our holding in DuPont to finance the purchase.
Graham Campbell (email@example.com)
Bettina Edmondston (firstname.lastname@example.org)
Important Information: The views and opinions contained herein are those of the author’s and may not necessarily represent views expressed or reflected in other Saracen Fund Managers Ltd communications, strategies or funds. This material is an opinion piece and intended to be for information purposes only. This material is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Saracen Fund Managers Ltd does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Saracen Fund Managers Ltd has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third-party data. The Prospectus and/or saracenfundmanagers.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.
Saracen Fund Managers Limited is Authorised and Regulated by the Financial Conduct Authority.