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3 stocks

for global diversification

The UK stock market has lots of attractions, but there are one or two areas where options are thin on the ground.

Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice.


George Salmon

Equity Analyst

The UK stock market has lots of attractions, but there are one or two areas where options are thin on the ground.

Here, I take a look at some global giants that could help diversify a UK portfolio.

This article is not personal advice. You should choose investments based on your aims and attitude to risk. All investments can fall as well as rise in value so you could get back less than you invest. Yield figures are variable, not guaranteed or a reliable indicator of future returns. If you’re unsure about the suitability of an investment for your circumstances seek advice.

Alphabet

Technology is a growing part of the global economy.

Companies like Just Eat, Rightmove, Micro Focus and Sage mean the UK isn’t completely lacking in the sector, but on a global scale, these names don’t really get a look in.

Instead, the sector is dominated by a handful of big overseas players, including Alphabet, the owner of Google.

Alphabet makes most of its money through advertising. Its key product, Adwords, runs formulae to decide who to put in search results, and in what order. Companies will be willing to pay handsomely to appear at the top of the list when punters search for terms like ‘best mortgage provider’ on Chrome, or ‘restaurant near me’ on Maps.

As things stand, Google is in a strong position. We feel describing it as the go-to option for finding information online isn’t doing it justice.

The group fought off early pretenders Ask Jeeves and Yahoo, and has since fended off challenges from Microsoft and Apple. Yes, in 2014 Google agreed to pay $1bn a year to be the default browser on iPhones, but the fact Apple was willing to park the Safari project and let another company into its ecosystem was a major coup.

The deal with Apple forms part of what Google calls traffic acquisition costs, which topped $21bn last year. Google still earns attractive margins, and generates significant cash flows.

Rather than come back as dividends, 2018 will likely see more of this excess cash reinvested in capital expenditure. Capex is due to increase by around 50% to something like $20bn a year as Google weighs in on projects as diverse as driverless cars, cloud computing, YouTube and its own hardware.

It’ll lower margins in the near term, but the prospect of exciting growth projects, hopefully leading to steadier progress in the core division, should help support the price to earnings ratio of 23.5.

Alphabet share price and charts

Nestlé

There’s not much like Nestlé in the UK market. To be fair, its sheer scale means there aren’t that many companies like it anywhere.

A 1.7bn Swiss Franc (CHF) Research and Development budget, backed up by a CHF20bn plus marketing and administrative spend means Nestlé can create and sell new products in new ways, to new consumers.

As a result, sales have grown consistently in recent years, while Nestlé keeps an eye on cost control. Though they improved operating margins by 0.5 percentage points last year, it still feels like costs are too high. It’s aiming to drive margins up towards 18% by 2020 from 16.4% now. Achieving this could potentially add billions to profits.

Higher margins and rising sales have helped produce 23 consecutive years of dividend increases. This is an impressive record, but past success isn’t guaranteed to continue. The current prospective yield is 3.3%.

But there are one or two issues to address. Nestlé has the world’s biggest collection of food and drinks brands, but the portfolio has recently been hit by the trend for healthy living. Total sales growth slowed to just 2.4% last year, Nestlé’s weakest for over 20 years.

This trend has seen a few changes, notably the sale of US confectionery brands for $2.8bn. And some investors have been pushing for change, so there could be a few more disposals in the pipeline too. For example, the group’s EUR23bn holding in L’Oréal might be re-evaluated.

This doesn’t bother us too much. After all, Nestlé’s been around for 152 years and has time and again proven its ability to move with the times.

Nestlé share price and charts

Coca-Cola

Another company with a long and proud history is soft drink giant Coca-Cola.

At the risk of sounding a bit BBCish, we should point out there are other soft drinks options available. AG Barr, Britvic and Fever-Tree to name just three. But the UK names are all relatively niche, and rely on one or two key markets.

Coca-Cola is about as far from that as they come. It’s present in over 200 countries, and has 21 brands, generating revenues of over $35bn last year.

Coca-Cola is responsible for manufacturing the syrups, but uses hundreds of bottling partners for their distribution. This decentralised model helps generate impressive margins and strong cash flows.

Cash is then reinvested into marketing campaigns, which include a 68 year partnership with FIFA to sponsor the World Cup. Expect to see the familiar red and white logo entwined with the branding around this summer’s tournament.

Some have raised concerns around the impact sugary drinks can have on the consumer’s health, while sales in the Americas have been slightly behind expectations recently. This is partly why the shares have dropped from a high of over 24 times expected earnings to around 19.5.

It’ll also need to reverse a trend that has seen leverage steadily increase over the last 10 years. Higher debt isn’t a problem for a business with such dependable cash flows, but it clearly can’t keep adding leverage forever.

Investors shouldn’t forget that Coca-Cola is still a business that’s consistently managed to grow underlying revenues and market share. Coca-Cola’s management are confident 2018 will be another year of growth, and hope to extend the outstanding 56-year track record of increasing dividends although of course there are no guarantees. The prospective yield is currently 4%.

Coca-Cola share price and charts

Connected parties of the author hold shares in Alphabet.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters correct as at 23 May 2018. 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.

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