By Harvest Portfolios Group
Senior Portfolio Manager
One of the powerful attractions of multinational brands is that they are a reassuring purchase in good times and bad.
They stand for quality, consistency and reliability in any language or culture. Whether it is a box of Tide laundry detergent or a pair of Nike Air Max shoes, consumers trust the purchase to satisfy their needs. The pandemic has tested businesses in all regions and markets and many global brands have emerged from the challenge even stronger.
That is the message delivered in an interview by James Learmonth, senior portfolio manager at Harvest Portfolios Group. In a Q&A, he discussed the philosophy and outlook for the Harvest Brand Leaders Plus Income Fund ETF (HBF:TSX). The ETF has $265 million in assets and holds 20 of the largest global brands diversified by sector. Mr. Learmonth says despite the impact of the pandemic 13 of the 20 companies in the ETF raised their dividend in the past year, a testament to the importance of brand power.
“In times like these strong brands get even stronger,” he says. “It’s about quality and an ability to adapt to changing circumstances.”
Here is an edited transcript of the interview.
Why are global brands so powerful?
Brand leaders have been through multiple economic cycles, including ups and downs and have come out the other side stronger. They dominate their fields. They have high quality balance sheets and strong brand recognition. So, during a crisis they are able to do the sorts of things that contribute to loyalty and trust long after a crisis has passed.
We have seen this during the pandemic. For example, our ETF holds Nike and Apple. Both used their resources to design and make personal protection equipment (PPE). They donated to frontline workers at the beginning of the crisis when there was trouble securing that kind of equipment.
In Australia, McDonald’s used their supply chain to provide groceries to customers. So, people could go to a McDonald’s drive through, get a meal and also buy eggs and milk.
What is the Harvest Brand Leaders Plus Income ETF?
The Harvest Brand Leaders Plus Income ETF is an equally weighted portfolio of 20 companies selected from the world’s Top 100 Brands. It is designed to provide a consistent monthly income with an opportunity for growth.
Those 20 brands must generate a five-year return on equity growth that is higher than the average, have a price-earnings multiple that is lower than the average and a dividend yield that is higher than the average.
Harvest applies its covered call strategy in order to generate enhanced income. We sell a portion of the potential rise in stock price in exchange for a fee. The fee becomes part of the return. It limits the capital gain a bit, but it also acts as a cushion if share prices fall.
How have companies in the ETF adapted?
Well, Disney was affected immediately by the pandemic. Their theme parks were closed. Theaters were closed. They had started moving into streaming with Disney+, but the crisis gave them the opportunity and impetus to accelerate that. Subscriber numbers have been off the charts. It has not only helped them skirt the crisis but set them up for the future.
Nike ramped up its online platforms because people couldn’t go a store. These online tools are now a meaningful sales driver It expanded its loyalty program.
Most companies in the ETF increased their dividends in a difficult year
Yes. Of the 20 holdings in the ETF, only one suspended its dividend and that was Disney. But 13 of the 20 have raised their dividend during the pandemic. The average increase was 7.1%. Within that, Nike increased by almost 12%, United Health by almost 16% and Visa is up almost 13%.
What does that say?
It speaks to quality and financial strength. These companies are able to keep shareholder returns a priority.
Why do people equate brands with safety?
Consumers find comfort in a brand name. One company that comes to mind with high levels of trust is Procter & Gamble. It has brands like Cascade dishwasher detergent, Charmin toilet paper, Bounty paper towels, Mr. Clean, Crest toothpaste, Oral B and Pampers diapers.
Procter and Gamble has raised its dividend in each of the last 64 years, including this last one.
What do you see looking ahead?
We’re bullish on the year. In the U.S.’ they seem to be accelerating the vaccine push and opening up faster than here. We’re optimistic and think the ETF’s diversity and balance across styles is positioned for continued upside.
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