Bennelong says sluggish growth a drag on large caps

Sluggish growth and intense competition is putting the dividends of some large caps at risk, says Julian Beaumont.

Bennelong Australian Equity Partners investment director Julian Beaumont

A combination of sluggish growth and intense competition is putting the dividends of some of Australia’s largest companies at risk, and investors must seek more flexible opportunities in the market, says Bennelong Australian Equity Partners’ investment director, Julian Beaumont.

“A lot of the large-cap companies are weak in terms of their growth outlook and their competitive positioning — and increasingly so. The competitive intensity of some of those industries will probably hold back some beloved companies, and investors need to really reflect on that in terms of the stability of dividends,” Mr Beaumont told The Australian.

“The banks, Telstra and the like have shown, particularly over the last reporting season, that they are coming into a period of much slower growth.

“That’s not just because they’re sensitive and exposed to the economy, it’s ­because competitive intensity is lifting for their industries.”

Last month, Telstra slashed its dividend by 30 per cent, sending its shares to a five-year low. A favourite for mum-and-dad investors for its reliable income stream, the telco is looking to build up its war chest to take on its cashed-up competitors.

Credit Suisse last week said the sharp drop in Telstra’s share price meant it was now in value territory, but Mr Beaumont remains unconvinced.

“There’s going to be a value opportunity there but their earnings are certainly under pressure. The fundamentals are constrained, the industry looks increasingly competitive and they have a number of other headwinds.”

Scentre Group, the owner and operator of Westfield shopping malls, is another company whose high payout ratio Mr Beaumont singled out as potentially coming under pressure.

Bennelong’s concentrated Australian equities fund is one of the best performers on the market, returning 19.7 per cent a year over five years. It’s underweight the banks, and holds ­“essentially none” of Telstra, the miners or insurers. “Where we see opportunities are in companies that might well be in boring industries, such as selling pizza or wine or skincare cream, but which have a strategy and competitive position that allows them to grow, and do so quite profitably,” he said.

Companies that Mr Beaumont says are propositions for longer-term growth include Flight Centre, Costa and beauty products company BWX. The fund upped its holding in Costa only last week, and now owns about 8 per cent of the fruit and veg company.

“We think it’s a good business. What was particularly attractive in the last result was guidance over a number of years towards 10 per cent growth. And that was something that we think is ­definitely achievable given what’s ahead of them and in terms of the growth in their particular ­markets,” Mr Beaumont said.

Flight Centre is a recent addition to the portfolio, with the fund scooping up about 5 per cent of the travel agency this year. Despite the bearish thesis that bricks-and-mortar travel agencies are on the way out, Mr Beaumont disagrees, saying the company has the potential to outperform earnings expectations. Flight Centre has been a star performer this year, with its share price putting on more than 70 per cent since March.

Domino’s is perhaps Bennelong’s best-known long-term buy. The fund got in early and bought when the shares were under $10 and the pizza maker delivered on its growth promise for several years. But in the past 12 months its share price has nearly halved, ­including a 20 per cent drop last month when its full-year earnings came in below guidance.

Despite talk of a lack of value in the market, opportunities exist, Mr Beaumont says. “There’s still good returns to be made out of equities, and while there’s a reasonably bearish sentiment towards the market, valuations aren’t overly stretched, particularly in the context of what else is available in other investments.”

While the fund has the ­capacity to increase its cash holdings, as many of its peers have done, that doesn’t exactly appeal. “If we did that it would mean we’re not working hard enough to find particular stock ideas.”