M&G's Rhodes: 'Expensive' US Market Offers Plenty Of Cheap Stock Opportunities

Corporate earnings continue to rise and dividends, the ultimate sign of management confidence, remain in good health.

The abundance of growth across countries and sectors should provide comfort to investors who are seeking not only income, but attractive total returns from equities.

Being selective is key in the current market environment of extremes.

Investors have been willing to pay increasingly high multiples for the fastest-growing companies, most clearly demonstrated by the fortunes of US large-cap technology, to the extent that valuations appear to be unsustainable over the long term.

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At the other end of the spectrum, there are a plethora of companies that operate in more unfashionable industries but offer exceptional value.

Highly cash generative businesses with decent long-term prospects are available at bargain prices in many sectors, most notably those with cyclical exposure.

There are also opportunities in defensive areas of the market, specifically among companies that can sustain long-term growth.

Healthcare offers the most favourable combination of growth and value, as do Unilever and PepsiCo in consumer staples. Investors should be wary of buying defensive stocks for the sake of safety, without heed to company fundamentals.

The dividend cut from Kraft Heinz in the US earlier in the year is testimony to the fact that excessive debt can have damaging consequences for shareholders.

Closer to home, Vodafone's more recent demise illustrates the same point. Sustainable dividend growth must be at the forefront of investors' minds to avoid potential pitfalls.

Geographically, we continue to favour North America where the breadth of the market continues to offer a compelling array of opportunities.

What is driving 'extreme price swings' in equity markets?

US dividends continue to grow in 2019, despite the one-off benefits of tax reform not being repeated, and we see plenty of cheap stocks in what is widely regarded as an expensive market.

There is a mismatch between the top-down and the bottom-up. Robust dividend growth is not confined to the US, however, and we are excited by the potential upside we see across the globe.

Stuart Rhodes is manager of the M&G Global Dividend fund

Bull Points

• The global dividend backdrop remains healthy

• The extremes in valuations present long-term opportunities

Bear Points

• The disconnect between fundamentals and share prices may persist

• Excessive debt may lead to dividend cuts