You might say John Snyder invests the old-fashioned way -- if it didn't seem so sensible right now.
Snyder, who has managed the
(SOVIX Quote)John Hancock Sovereign Investors fund for almost 18 years, invests primarily in "dividend performers," or stocks of companies that have raised their dividends for at least 10 consecutive years. There are about 300 of them out there and they're primarily giants like
Citigroup (C Quote)
,
Johnson & Johnson (JNJ Quote)
and
General Electric (GE Quote)
. (Check out the latest Mergent's Dividend Achievers to review the full roster.)
As you might imagine, the list includes precious few cratered tech faves and keeps Snyder's style decidedly low-octane. His fund eked out a 6% gain in 1999 when the average tech fund rang up a 137% return. Then again, the fund has had only one down year on his watch -- a 2% dip in 1994.
Today he sees a winded economy and corporate earnings even lower than we feared. Still, he's putting his cash to work and whittling his fund's stake in the bond market. What's he buying? What kind of returns should stock investors expect and why should we buy stocks at all today? Read on.
1. Coming off one of the stock market's worst weeks in 50 years, what's the case for investing in dividend performers today?
Dividend performers tend to have consistent earnings and very good balance sheets. They are companies that have increased their dividends historically and to do that you need to have predictable earnings growth. Johnson & Johnson, for example, has been able to increase their dividend for the last 30 years because they've been able to increase earnings pretty much year after year after year. If they weren't growing earnings, they would not be able to do it.
2. Some might say companies that consistently raise their dividends are sleepy, slow growers because they're not putting that money back into their business. What's your response?
Talking With:
John Snyder |
| Fund: (SOVIX Quote)John Hancock Sovereign Investors |
| Managed Since: 1984 |
| Assets: $1.8 billion |
| 1-Year Return: -6%/Beats 65% of Peers |
| 5-Year Return: 9.1%/Beats 54% of Peers |
| Maximum Load/Sales Charge: 5% |
| Expense Ratio: 1.05% |
Top-Three Holdings:
Baxter International(BAX Quote)
Citigroup(C Quote)
Johnson & Johnson (JNJ Quote) |
| Sources: Morningstar and John Hancock Funds. Returns through Sept. 18. |
People say these companies raise their dividends because they have nothing else to do with their money. Well, I don't think that
Home Depot (HD Quote)
would necessarily agree with that assessment. I don't think
AIG (AIG Quote)
would agree with that assessment. I also don't think that Jack Welch, or General Electric, would agree with that assessment. The thing is, these companies have enormous, strong balance sheets, and so they're able to pay out increasing dividends to shareholders rather than throwing the money away. They've got the cash to invest in their businesses. They have the cash to buy [their own] stock.
3. People are probably looking at these companies because of their stability. What are a few that you find particularly interesting today?
I would start with
American Home Products (AHP Quote)
in the pharmaceutical area. American Home is a much better company today than it's ever been. They've got a high return on equity, very predictable. And although the valuation is not on the cheap side, I think it's reasonably valued here, and I think they'll do quite well.
I think the financial sector is one of the more attractive areas today, particularly with interest rates coming down. I have very large positions in companies like
Fannie Mae and
Freddie Mac. Over time, whether rates go up or down and regardless of the housing market, these two companies have had very reliable, consistent earnings. The stocks are selling at a very deep discount to the market and they've got great balance sheets.
I also think AIG is just a phenomenal company. They've taken a hit because of the terrorist attacks, but they've got a great business model and they're a very well-managed company. I would also put Citigroup in this group. That's one of my larger positions and I think they'll do quite well.
McGraw-Hill (MHP Quote)
is another company I like. They own Standard & Poor's, but they're also one of the leaders in textbooks. They've come down a lot too, but I think the company should do reasonably well.
4. Like most outfits, these businesses will be affected by the health of the economy. What's your read there?
The industrial side of the economy had been getting weak probably for about a year ahead of these attacks, and [information technology] spending obviously has come down. Also, the global economy has continued to weaken. I don't think there's upside here for the economy. It's downside and how much downside, no one really knows.
Steady Eddie
The fund doesn't shoot the lights out, but it's only had three down years in the past 25 |
 |
| Source: Morningstar. Returns through Sept. 6. |
The one thing that's held strong has been consumer spending. The consumer has held the economy together. But with what happened on Sept. 11 and with layoffs that just go on and on, that's going to create greater uncertainty in consumers' minds and may impact their spending patterns. They represent 75% of the economy and I don't think the Fed lowering interest rates is necessarily going to make John Doe go out and spend more money.
In that environment, [corporate] earnings and the rate of [economic] growth that people were expecting in 2002 will be ratcheted down. The other variable that you have right now is -- because of the turmoil in the financial markets -- how many corporations are going to be able to get capital, especially smaller ones?
I think all this plays into the hands of quality, larger companies. They'll take advantage of this weakness and make acquisitions. They could be able to buy companies that are trading for 25 cents on the dollar.
5. This year investors have kept a lot of their money in the bank. What do you say to them and can you blame them given the market's swoon?
Well, they're assuming that they can time the market. If you're doing that, you've got to be right twice. You've got to be right on when you sell, but you also have to be right when you buy. I've never met anyone who's been able to do that consistently. You accumulate wealth by being a long-term investor.
Investing is a marathon, it's a long-term thing. If you buy high-quality, consistent companies, you have less risk. If I am wrong about buying General Electric at
32 or something like that, what will eventually bail me out is that increasing dividend stream and that predictable earnings stream that I liked in the first place.
6. What returns should we expect over the next year or two as we make our plans?
I would expect returns somewhere around 10%. I think stocks are still the place to be, particularly given the other options. After the attacks the Fed cut interest rates and you've got all of this money, billions and billions of dollars sitting in money-market funds. Six months ago people were making 4% there or something like that, so they could postpone a decision. Now those rates are going down quickly. I'm not sure where they're going to go, but when you start getting 2.5% on a money market fund, you begin to say, where else can I put my money? Well, I can put it in long-term Treasuries at 5.5%, but I'm not sure how good of an option that is. So I think that equities are still the place to be.
Snyder's 10 Faves
These were the fund's ten top picks at the end of August |
| Stock |
Percentage of Fund Assets |
YTD Return |
| Baxter International |
4% |
20% |
| Citigroup |
3.4 |
-22.3 |
| Johnson & Johnson |
3 |
4.8 |
| Chevron |
3 |
6.2 |
| ExxonMobil |
2.8 |
-7.7 |
| IBM |
2.7 |
13.8 |
| Fannie Mae |
2.7 |
-6.9 |
| JP Morgan Chase |
2.4 |
-21.6 |
| General Electric |
2.4 |
-28.9 |
| Kimberly-Clark |
2.2 |
-11.2 |
| Source: Morningstar. Holdings through Aug. 31. Performance through Sept. 18. |
That said, diversification in equities is really important. Some people are expecting the tech returns they saw in 1999 to come back, but they really need to pay attention to valuations and balance sheets. What people don't understand is that [the gains] we saw in '98, '99, and the first part of 2000 were unprecedented in the history of the stock market. So to think that all that's going to come back quickly, well, history would suggest that that will not happen.
7. Given your style, you haven't usually owned much tech. What's your take on that sector now?
I think two things will happen in the next 30 days that will weigh on the tech sector. One is preannouncements. You're going to get more companies that are going to preannounce [their earnings projections], and their guidance is not going to be good. Is that in the market? I don't know and I think it's a dangerous thing to say. The other thing you'll see is mutual funds booking losses before the end of October. I think that those two items are going to still weigh on the technology sector.
After that, they'll probably have a pretty good year-end bounce. There are two variables here, longer term. One is that we don't know really what the secular growth rate of
Cisco (CSCO Quote)
is. People sort of make life easy for themselves and they look back the last five years and say, well, this was the company's earnings growth rate, so if we give that a haircut and project out the next five years, then here's the rate that the company will grow.
But when you're doing that, you're looking at the latter part of the 1990s where you had demand you probably won't see again. You had Y2K, you had the buildout of the Internet and you had cheap and abundant capital. Anyone could get money and that contributed to a lot of that growth. How much, I don't have a clue. But the risk here, longer term, is that the expectations are still that these companies will grow earnings at 25%, 30%, 40%. Well, maybe they can, but I think there's a risk to making that call. The other point is that although these stocks have come down a lot, the reality is that the earnings have come down as much as these stocks' prices.
I assume that Cisco is a survivor. But for the people who bought Cisco in early 2000, I think it's going to be a very, very long period time before Cisco gets even close to where it was before.
8. What's another big, can't-miss tech company?
Besides Cisco?
EMC (EMC Quote)
. I mean, storage is obviously an important area, but people were paying 100 and 200 times earnings for that company. What are the barriers to entry? The storage area is becoming a commodity business and it's becoming much, much, much more competitive. So prices go down and margins get crunched. I'm not saying these are not good companies. They are good companies.
But you can be a great company and not a great investment.
That's exactly right. A lot of people still have the attitude, "I know that if I hang in here, I'm going to make 100% next year." And maybe they will, but I don't think that's the case.
9. Your fund usually has some money in bonds. What's the usual range and where are you today?
The range typically has been around 5% on the low side and 15% on the high side. It's currently about 12%, but I'm bringing those numbers down now.
So you're a buyer of stocks at today's levels?
Yes, I think that there have been people selling based upon emotions. But emotions don't drive the market in the long run, it's fundamentals. So there really are some good values out there today.
10. Three companies you'd buy today and hold for five years?
I'd start with Citigroup. General Electric would be the second one. The third would be AIG.
What made you pick these companies?
The unifying factors for these companies are that they basically dominate their respective industries, are global in nature and are extremely well-managed.
