Terry Smith is probably the most popular fund manager in the UK right now. His Fundsmith Equity fund, which invests on a global basis, has returned approximately 72% over the last three years. That’s a phenomenal performance.
The interesting thing about Smith’s investment strategy is that there’s nothing overly complicated about it. He simply buys high-quality companies that have competitive advantages, and holds them for a long time.
Do any FTSE 100 dividend stocks meet Smith’s criteria? Yes – here’s a look at two Footsie stocks that he currently owns.
One of his key FTSE 100 holdings is consumer goods champion Reckitt Benckiser (LSE: RB), which owns a powerful portfolio of health & hygiene brands such as Nurofen, Durex, and Harpic. At 31 October, Reckitt was the fifth-largest holding in his fund, and its half-year report shows that during the first six months of the year, Smith spent a whopping £233m on RB shares, making it the second-most purchased stock in the fund during the period.
When you take a closer look at Reckitt Benckiser, it’s not hard to see why Smith likes the stock. Not only is the company a proven long-term performer, but it also has a growth story going forward, as around 30% of sales come from the world’s emerging markets, so it looks well placed to benefit as wealth across emerging economies rises in the years ahead. Furthermore, return on equity is high (five-year average: 25%), and the company has a phenomenal dividend growth track record, having increased its payout by nearly 600% over the last 20 years.
Should private investors follow Smith and pile into Reckitt? Looking at the current valuation, Reckitt trades on a forward-looking P/E of 20.3, and sports a prospective yield of 2.5%. I don’t think those metrics are crazy, given the stock’s quality. However, with a little patience, I think the stock may be available a little cheaper than that in the months ahead, as investors panic about rising interest rates. So for now, I’m holding back and waiting for a more attractive entry point.
Another FTSE 100 stock that Smith holds is InterContinental Hotels (LSE: IHG), which owns an impressive portfolio of hotel brands including InterContinental, Holiday Inn and Crowne Plaza. According to Hargreaves Lansdown figures, IHG is the 10th-largest holding in the Fundsmith Equity fund right now.
I can see the appeal of owning this hotel stock. While shorter performance could be impacted by political or economic uncertainty, over the long term, growth of the hotel industry is likely to be driven by a number of powerful trends. For example, there’s the world’s ageing population to consider, with many over-60s likely to travel in retirement. Then, there’s rising wealth across the emerging markets, which should also be a growth driver for the travel industry over time. Throw in cheaper airfares and easier mobile bookings, and the outlook for the hotel industry looks quite favourable, in my view. But is the stock a ‘buy’ right now?
After trading up near £50 in June, IHG shares have pulled back recently and currently trade under £43, which translates to a forward P/E of 19.1. I think value is beginning to appear. But like Reckitt Benckiser, I think it could be worth waiting for a more attractive entry point here.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended InterContinental Hotels Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.