3 Stocks Comprising A Quarter Of Nick Train’s Top Investment Trust: Unilever Plc, Diageo Plc & Reed Elsevier plc

Dave Sullivan takes a look at the top three holdings of Nick Train’s Finsbury Income And Growth Trust plc (LON:FGT): Unilever Plc (LON: ULVR), Diageo Plc (LON: DGE) and Reed Elsevier Plc (LON: REL).

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Today I’m taking a look at Unilever (LSE: ULVR), Diageo (LSE: DGE) and Reed Elsevier (LSE: REL).  All of these are impressive companies in their own right.  Perhaps more importantly, I’ll look to identify why they occupy the top three positions in Nick Train’s Finsbury Growth & Income Trust (LSE: FGT). Taken together, they account for over 24% of the trust!  As can be seen from the chart below, the trust has comfortably outperformed the FTSE 100 over the last five years.

I always try to learn from investors who have performed consistently over the years: Mr Train has an impressive track record, so he certainly fits the bill.

The burning question is: how does he do it?  In short, he holds a concentrated portfolio of excellent companies, trades rarely and aims to receive an above-average dividend yield from the companies in which he invests.  Sounds simple, doesn’t it?  Well, let’s see what we can learn from his top three holdings.

Unilever

At 8.9% of the trust, Unilever is the top holding.  It is a global fast-moving consumer goods company.  Indeed, it would be difficult not to find one of its products around your house — think Cif, PG Tips and Persil.  It operates under four segments: Personal Care, Foods, Refreshment and Home Care. In short, this company sells its goods in 180 countries.  Whilst it is easy to become fixated on the lofty forward P/E of nearly 22 times earnings, I would suggest that you look at the quality measures:

  • Return on capital: 28.1% (Best in sector);
  • Return on equity: 36.9% (Best in sector);
  • Operating margin: 16.5% (3rd in sector).

I believe that these are the metrics focused on by Mr Train, together with the growing dividend yield, currently over 3%.

Diageo

Currently the second largest constituent of the trust at 7.9%, Diageo is engaged in drinks business, with brands in spirits, beer, wine and ready-to-drink products. It owns manufacturing production facilities across the globe, including maltings, distilleries, breweries, packaging plants, maturation warehouses, cooperages, vineyards, wineries and distribution warehouses. The company’s brands are also produced at plants owned and operated by third parties and joint ventures at a number of locations internationally: think Johnnie Walker, Smirnoff, Guinness and Bushmills.

Again, don’t be put off by the forward P/E of nearly 20 times earnings: it’s quality that we’re using to assess the company.  The metrics stack up well with return on capital of 11.1%, return on equity of 27.3% and an operating margin of 22.8%.  The interim dividend was also hiked by 9%

These are qualities that fit the bill perfectly for the manager of the trust.  He believes that, amongst other drivers of growth, the fall in the price of oil will see billions of consumers across the world with a few extra pounds, euros, dollars or yuan in their pockets.  He believes that this will bode well for these quality acts.

Reed Elsevier

Reed Elsevier is a Netherlands-based company holding shares in RELX Group. RELX Group is a global provider of information solutions for professional customers across industries. The company operates in four market segments: Scientific, Technical & Medical, providing information and tools to help customers improve scientific and healthcare outcomes; Risk and Business Information, providing data services and tools that combine proprietary, public and third-party information with technology and analytics to business and government customers; Legal, providing legal, regulatory, and news & business information to law firms and to corporate, government and academic customers; and Exhibitions, organising exhibitions and conferences.  At 7.3% of the trust’s portfolio, it is the third largest position.  Here, we have a global company with sector-leading quality metrics that show that it boasts a strong moat.  Combine that with a modest forward P/E of 13 times earnings, supported by a 3.5% yield and a £500 million share buyback planned for 2015 and it is easy to see the attractions here.

Is There Still An Investment Case?

Personally, I tend to agree with Mr Train that there are several factors that mean that equities in general could rise further from here:

  • Inflation remains low, meaning that interest rates could stay lower for longer that people believe;
  • The full impact of the oil price fall is yet to fully impact company results, meaning improved sales and operating profits;
  • Quality companies will continue to profit whatever the weather and raise their dividends above the rate of inflation, and this will make them attractive to investors seeking an income in a low-interest rate environment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dave Sullivan has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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