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Written by the Mackenzie Global Equity & Income Team
What changes have we made to the Mackenzie Global Dividend Fund?
We added Ferguson to the portfolio in Q4. Ferguson is a top distributor of products related to infrastructure, plumbing and HVAC with a large and fragmented supplier and customer base. Ferguson discloses fill rates that are consistently above 95% making them best in class based on our research. We believe Ferguson is optimally positioned to take advantage of increasing US infrastructure spending and heat pump penetration with an advanced distribution center buildout that will provide next day capabilities for 95% of its SKU count. Additionally, Ferguson trades at an attractive 5% free cash flow yield which is significantly higher than other industrial distribution peers of similar or even lesser quality. We believe this valuation gap will close now that the company has divested its manufacturing skewed European business and after Ferguson fully domiciles in the United States.
We initiated a position in Veolia in the fourth quarter, a France-domiciled utility with operations around the world. Veolia is a leader in water, waste and energy management, areas that should enjoy growth in the coming decades due to the ongoing demands that come from global warming and water scarcity. Veolia provides drinking water and sanitation to around 100M people. Veolia also produces 44 terawatt hours of electricity, enough to cover approximately one third of the annual need of a large province or states such Ontario and New York. It recovers about 61M tons of waste every year. The company is a leader in the circular economy, with an ambition to facilitate energy decarbonization globally through innovations across both its existing businesses and several new ones (e.g., carbon capture). It is well-diversified across its customer base (the top 50 contracts account for <15% of their portfolio) with 70% of their contracts indexed to inflation. After a near-death experience during the Global Financial Crisis due to over-leverage, the company spent the following decade paying down debt and selling off non-core assets which amounted to one-third of the group. This enabled the company to take advantage of industry upheaval during the pandemic when their main rival - Suez SA – was forced into a distressed sale because of…leverage. The transaction allowed Veolia to effectively rid itself of a chief competitor while gaining world class water technology assets. The company should enjoy several years of double-digit earnings growth as this transaction bears fruit and GDP+ growth for many years beyond that. We paid ~13.5x forward earnings for the business that along comes with a 5% dividend yield.
We sold our position in Crown Castle, the largest US focused communications tower REIT and initiated a position in American Tower, the largest global tower REIT. We purchased Crown Castle in 2020, with a thesis that data demand growth in the US would lead to increased tower densification and growth in the 5G small cells business. Today, US tower growth continues, but the economics behind the US small cell business is increasingly uncertain. American Tower on the other hand does not have a small cells business, instead focusing on towers exclusively, both in the US and internationally. We believe this swap increased the portfolio quality despite similar valuations.
We sold our position in Kenvue, the former J&J consumer health business spinout. Despite leading brands in strong categories, Kenvue faced short term scrutiny over potential litigation in its Tylenol segment. We remain excited about the global consumer health category, leading to our new position in Haleon. Haleon is a consumer health powerhouse, with category leading brands and market positions in Oral Health (Sensodyne), Vitamins, Mineral and Supplements (‘VMS’, Centrum), Pain Relief (Advil, Voltaren), Digestive Health (Tums), and Respiratory Health (Theraflu). The company was created by combining GSK’s consumer health division, with Novartis’ Consumer Health division (through a joint venture in 2015, and a buyout in 2018) and Pfizer’s Consumer Health division (similarly through joint venture with Pfizer 2018 and a buyout in 2019). The combination was then spun out into an independent publicly listed company. Haleon has a savvy management, meaningful competitive advantages, and barriers to entry. Lastly, Haleon generates very strong free cash flows with many very attractive opportunities into which it can deploy that capital.
Corteva is one of the world’s largest agricultural companies focused on seeds and crop protection. The stock was spun-off from our holding in Dupont, and we meaningfully increased our position in 2020 driven by our view that the market was underappreciating its trait technologies and innovation-driven new product launch cycle, while PFAS-related environment liabilities was discounted in current valuation. The thesis has largely played out, with Corteva generating double-digit revenue growth and strong earnings uplift. We had been gradually taking profits in the stock and completely exited our position last quarter.
Eurofins was sold in the fourth quarter. Since our first purchase on Dec 20, 2018, our holding compounded at 11.3% (USD$), which is slightly below the MSCI World’s return for the same period. However, the fund took profits at higher valuations, so the capital weighted return is probably breakeven or slightly better. Our sale was due to other attractive opportunities, as well as the company pushing out the timeline for key targets they had expressed confidence about in prior communications.
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