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News of the Week – Unilever Delisting
Last week, Unilever (UNA.AS) (ULVR.L) made a significant decision to list its company solely in the UK, thereby creating a UK parent company. This move marks a historic moment for the company, particularly for those familiar with its extensive history. The European Dividend Growth Investor (DGI) community, known for its deep interest in dividend history, has long followed Unilever closely. With access to every annual report from the past 90 years, the European DGI has a unique perspective on the company’s evolution.
Historical Context of Unilever’s Dual Listing
The decision to end Unilever’s dual listing is noteworthy, especially when considering the company’s history during World War II. During this period, the dual listing actually played a crucial role in saving the company. Historical reports from that era reveal that the UK Board of Directors faced communication barriers with the Dutch Board, making it impossible to include the Dutch earnings in the annual reports. This situation continued for three to four years until the company began to rebuild after the war around 1946 or 1947. The current decision to consolidate under a single UK listing, therefore, carries significant historical weight.
Sentiment and Market Impact
There is considerable sentiment surrounding this move. Just two years ago, Unilever considered listing in the Netherlands, but significant resistance arose, partly due to attractive packages offered by politicians to keep the company in the Netherlands. This resistance highlights the importance of this week’s decision. For many, including European DGI, this development was the news of the week. While the impact on individual shareholders might be minimal, especially with the company remaining listed in Amsterdam, questions about potential currency impacts in future reports have emerged. Nonetheless, the decision to simplify the structure is fully supported, as it represents a major historical shift for the company.
News of the Week – Brexit’s Resurgence
Brexit has once again made headlines, a development that has particularly resonated in Ireland. After fading from the spotlight during the COVID-19 pandemic, Brexit’s resurgence has brought new concerns, especially for Ireland, which is more deeply impacted than any other region in Europe. Studies suggest that Brexit may have a more severe effect on the Irish economy than on the UK itself, a shocking revelation considering Ireland’s close economic ties with the UK.
Economic Impact on Ireland
Ireland exports 16% of its goods to the UK, and this figure is expected to drop by over 10%, potentially resulting in a loss of around 2.4 billion euros—a significant blow to the Irish economy. Brexit also complicates travel and trade within the geographical area, particularly in Northern Ireland. The beef industry, a major export for Ireland, faces particular challenges. The uncertainty surrounding Brexit makes it difficult for businesses, including those in the investment sector, to plan effectively. Many are now considering whether UK goods can be replaced with similar products from Europe, but numerous challenges remain.
Brexit’s Effect on Investment Portfolios
For investors like European DGI, Brexit isn’t a major concern due to limited exposure to UK markets. With a primary focus on US equities, which represent about 4% of the global economy, the potential impact on portfolios is minimal. However, for those in Ireland with investments in the UK stock market, diversification across asset classes and geographical regions is recommended to manage risk effectively.
News of the Week – Wirecards’ Troubles
Wirecard, (WDI:HAM) a German payment processing company, is facing serious trouble. Recently, it trended as the most traded company on the Giro stock broker platform, raising concerns among investors. European DGI, a platform focused on dividend growth investing, hopes that its followers were not heavily invested in Wirecard, given the company’s current struggles.
Market Volatility and Investor Caution
The situation with Wirecard serves as a stark reminder of the current market volatility, reminiscent of the challenges faced by Hertz, the car rental company. Navigating the financial landscape in the coming years will undoubtedly be difficult, presenting a true test for investors.
Main Topic – Portfolio Allocation
European DGI Portfolio Allocation Strategy
European DGI’s investment journey has been educational, with six years of experience shaping a well-thought-out allocation strategy. This strategy is guided by a few key principles aimed at maintaining direction and avoiding an overly diversified portfolio. To achieve this, a decision was made to limit the portfolio to around 40 companies, starting with an existing portfolio of 26.
Tiered System for Stock Allocation
To manage this structure, European DGI developed a tiered system: Tier 1, Tier 2, Tier 3, and Tier 4. The top 10 positions, making up about 40% of the portfolio, are considered the foundation or cornerstone. Tier 2 stocks are seen as challengers, with the potential to become foundational if one of the Tier 1 stocks underperforms. These make up about 3% per position. Tier 3 and Tier 4 stocks are those with different business models or those that are liked but not considered foundational.
Focus on Defensive Sectors
The portfolio is heavily weighted towards sectors expected to perform well over the next 20-30 years, particularly defensive sectors. For instance, 20% of the portfolio is allocated to consumer staples, and another 20% to healthcare, which has historically been one of the best-performing sectors. Information technology also plays a significant role, given its future potential, although not all companies in this sector are equally strong.
Portfolio Adjustments and Review
Every six months, European DGI reviews and adjusts the portfolio. The COVID-19 pandemic, for example, revealed weaknesses in some companies, such as Shell, prompting a spring cleaning in May. The goal is to maintain a balance that allows the portfolio to adapt over time. Even foundational stocks like Pepsi are scrutinized for sustainability, with potential downgrades if concerns about financial engineering arise.
US vs. European Stock Allocation
European DGI’s portfolio remains predominantly US-based, given the strong tradition of dividend growth investing in the US. However, there is a minimum requirement of 30% allocation to European stocks. After a recent review, nearly 45% of the portfolio is now in European stocks, reflecting the discovery of several promising companies. Despite this, the majority of the portfolio is expected to remain US-focused due to the consistent dividend growth opportunities available there.
Challenges with European Dividend Stocks
One challenge with European stocks is that most pay dividends annually rather than quarterly, which can complicate cash flow management. However, with proper financial discipline, this can be managed. European DGI has even designed a portfolio capable of generating 1,000 euros per month purely from European dividend stocks, proving that achieving monthly income in Europe is possible.
Comparing European and US Stock Performance
While European DGI has not individually compared the returns from European and US stocks, the focus remains on overall dividend growth. The portfolio averages around 6-7% growth in dividends per year, which meets the set criteria. The goal is to achieve dividend growth that outpaces inflation, with a preference for monitoring the entire portfolio’s performance rather than dissecting it by individual stocks or regions.
Top-Performing Stocks
Among European DGI’s top-performing stocks are Unilever in the EU and Microsoft in the US. Unilever’s strong brand portfolio and ongoing structural simplification suggest continued success, while Microsoft’s growth in cloud computing and enterprise services positions it as a standout performer. Both companies align with European DGI’s strategy of focusing on sectors expected to thrive in the long term.
We hoped you enjoy this episode and we see you all next week!
