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International Income - Diversifying your dividends

Nicholas Hyett takes a look at three international stocks with the potential to diversify your dividend stream

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The UK stock market has one of the highest dividend yields of any major market. But that’s driven by a relatively small number of large income-paying stocks in industries like oil & gas and banking.

Looking abroad can help to diversify your income, even if you have to accept a lower average yield. Remember that investing in international companies exposes you to currency movements as well as currency conversion fees. No yields are guaranteed and they’re not a reliable indicator of future income. The value of your investment and any income from it will go down as well as up, so you could get back less than you invest. This article isn’t personal advice. If unsure, please seek advice.

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Mowi – 4.9% prospective yield

When looking abroad for companies to invest in, one of my personal criteria is for it to offer something you just can’t get at home. To accept the extra costs and currency risk I want something special.

Mowi meets that requirement nicely. The Norwegian group is the world’s leading producer of farmed salmon.

With the total wild fish catch rising only very slowly in recent years, aquaculture has become the leading source of fish for human consumption. The combination of growing populations and rising seafood consumption per capita means the scale of fish farming is going to have to increase dramatically if it’s to keep up with demand.

The turn towards more environmentally friendly sources of protein is also helpful, since fish is far less carbon intensive than meat, although no intensive agriculture is completely free of environmental cost.

We think Mowi’s well placed to benefit from the industry’s long-term growth drivers.

While revenues and margins are heavily impacted by the market price of salmon – which is out of Mowi’s control – increasing vertical integration has seen the group move into fish feed and consumer products. That’s helped it keep a lid on costs while also giving the group a greater share of the value chain.

Operating profit margins are expected to hover around the 20% mark over the next few years, with revenue growth in the mid- to high-single digits. However, the vertical integration programme has led to some significant capital expenditure in recent years, including a new fish food factory in Scotland. That’s weighed on cash conversion and also dividends, since the dividend policy states that it will pay out 75% of cash after operational and financial needs are met.

Top of the list of ‘needs’ is maintaining a healthy balance sheet. Fortunately a net debt to EBITDA ratio of less than one last year is fairly moderate, and as a result analysts expect the company to deliver a prospective yield of 4.9% this year.

See the latest Mowi share price, charts and how to trade

Harley-Davidson – 4.3% prospective yield

We’re generally not fans of vehicle manufacturers. They’re capital intensive businesses, which means cash generation is often poor, and brand loyalty is low generally, among the big car manufacturers in particular. However, Harley-Davidson is a bit different.

Harleys are all about the brand, or perhaps more accurately the lifestyle. That’s helped the company sustain an operating profit margin that’s in the mid-to-high teens, while Ford’s trundling along at around 5%. Unlike Ford Fiesta drivers, bikers are prepared to pay up for a Hog.

A 4.3% dividend yield, which is well covered by free cash flow, looks pretty healthy at first glance. But the group does have challenges.

Net debt is higher than we’d like. And with income from finance deals accounting for a large slug of revenue, an economic downturn could be very painful. Not only would slower economic growth hit sales of large ticket items, like motorbikes, but there’s potential for an uptick in loan defaults too.

The other big question is whether Harley-Davidson can continue to attract new riders. Its customers tend to be older recreational riders in a market where lighter bikes aimed at millennials and emerging markets are driving growth.

Harley-Davidson’s plans to address that particular challenge are ambitious. Management want 4m US riders by 2027, up from 3m at the moment, while international sales grow to 50% of revenue over the same period.

Success depends on new product launches in lighter classes and exploring opportunities in electric vehicles. The group’s also reaching out to new audiences through Harley-Davidson branded clothing stores in key Asian markets.

For us that’s what sets Harley-Davidson apart – the brand can appeal well outside its natural demographic niche, and as long as product development is up to scratch that should stand it in good stead. That’s not to say there won’t be some wobbles along the road though.

See the latest Harley-Davidson share price, charts and how to trade

Kellogg – 3.6% prospective yield

Kellogg will be a very familiar name to most people in the UK. Its Coco Pops, Corn Flakes and Special K dominate breakfast tables nationwide. It might be a bit of a surprise inclusion in this list though – it’s a consumer goods giant after all, and there’s no shortage of them listed in London.

However, a 3.6% prospective yield makes it stand out in the US. Meanwhile a concentrated portfolio, which focuses on breakfast goodies but also includes some surprises like Pringles and vegetarian burger brand Gardenburger, allows investors to take a fairly specific view.

However, sales have struggled in recent years, and margins have also been inconsistent. Management’s answer is to sell of a selection of fringe businesses, including the group’s biscuit brands, focusing the story on the breakfast and vegetarian categories.

We think that’s a positive.

Cereals have the potential to play nicely into the growing consumer interest in health and wellness. Disappointing cereal sales in the US means there’s work to do – especially as share has been lost to competitors in some key categories. Increased marketing investment could dent margins in the short term, but we think major brands still have long-term potential.

The success of Beyond Meat has shown there’s clear demand for high quality meat alternatives and Kellogg’s established brands in the segment should be a positive. Again more marketing investment is required, but the division has returned to share growth – which bodes well in what we expect to be a growing market.

That leads us onto the question of whether the dividend is sustainable. Net debt to cash earnings is also a little higher than we’d like, and dividend cover of 1.7 times last year isn’t huge. However consumer goods companies tend to have fairly reliable revenues even when times are tough and cash conversion is reasonable – both of which are sources of confidence, although as ever no dividend is guaranteed.

Overall then Kellogg is attractively positioned, with room for improvement. We suspect that might limit dividend growth in the near term, but we think there remains long-term potential here.

See the latest Kellogg share price, charts and how to trade

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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