Jennifer Chang
Recently, Jennifer Chang, a Portfolio Manager at Schafer Cullen Capital Management, joined the firm’s founder and CEO Jim Cullen to discuss their High Dividend Equity Strategy. Chang pointed to some attractive opportunities including Medtronic (NYSE:MDT) and Siemens (OTCMKTS:SIEGY).
In the interview, Ms. Chang explained that in a typical equity income strategy, oftentimes you’re concentrated in some of the bond proxy, low beta defensive sectors, but they have a very balanced portfolio with exposure to all 11 sectors of the market.
“We have exposure to REITs and utilities, but our largest exposure from an absolute basis is financials. And so, within financials, we own a good number of the large cap banks and high-quality insurance companies.
We have high exposure to industrials because within industrials we see a lot of long-term secular tailwinds, like globalization and decarbonization, that will benefit a lot of our companies.”
Ms. Chang went on to discuss medical device company Medtronic.
“The first one I want to highlight is Medtronic (NYSE:MDT). It’s one of the largest medical devices companies. They have businesses in cardiovascular, neuroscience, surgical and diabetes therapies. And it trades at a very attractive valuation, 16 times 2024 earnings with a 3.2% dividend yield. The stock is off about 35% from its 2021 highs.
A couple of industry issues are impacting medical devices. The first is that across the board, there is a negative sentiment on medical devices from the impact of GLP-1 weight loss drugs. The thinking is that those drugs will potentially negatively impact medical device demand.
A lot of the analysts and experts that we talk to don’t necessarily see it that way. There’s still a lot of unmet need that medical device companies will address. And with a general population that is slimmer, that actually increases the population that is able to go through a lot of these elective procedures.
A couple of years ago, the company had some quality issues in their diabetes manufacturing units, but that has since been resolved. And overall, management is very optimistic about their growth. They’re projecting top line growth annually for the next couple of years of around 5%.
And we think the medical device business generally has a very high barrier to entry and is an attractive industry for a couple of reasons. First, you don’t have the patent cliff issues that reside within a lot of the pharmaceutical companies. And the other is that the medical device business is generally under the radar from a lot of political targeting and health care reform concerns, especially from politicians targeting kind of big pharma in election years.”
Next, she discussed Siemens and why she finds it attractive right now.
“Siemens (OTCMKTS:SIEGY) is another company that we own in the portfolio. It’s a German industrial conglomerate and it’s benefiting from long tail secular trends in digitization, automation and decarbonization.
The company has been pioneering the industrial Internet of Things with their digital twin and next generation automation equipment. And they’ve also developed a lot of cloud applications to reduce the carbon footprint of supply chains for their customers.
The stock trades at around 16 times 2024 earnings with a 3% dividend yield. And when you look at peers in the U.S. and Europe, Siemens is actually trading at a five to 10 multiple point discount to many of them.
The company now generates greater than 10% free cash flow margins. They’ve closed that gap versus global peers through a series of portfolio divestitures and business unit restructuring that has improved its free cash flow profile, yet it still trades at a considerable discount to peers.
And lastly, the two largest segments are leveraged to strong top line growth and margin improvement over time.
First and foremost, digital industries is the business unit which is a leading automation equipment and software provider. They have significant scale in program logic controls, and it’s underpinned by a large installed base of equipment.
The company has invested in a full suite of software solutions, and it now generates about EUR5 billion in revenue. And they should realize the benefit from Software as a Service — SaaS — transition. This SaaS transition will improve margins over time.
The second business unit that is showing a lot of promise is their smart infrastructure unit and their medium voltage business, which is seeing strong demand from data center, U.S. manufacturing reshoring and smart building solutions.
And then within that, the electrification subsegment also continues to be a growth engine, especially from Europe, because they have a greater required plan for energy transition.”
Read about more recommendations from Portfolio Manager Jennifer Chang in the complete interview, exclusively in The Wall Street Transcript.
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