North American income in action

Introducing two of the companies we have turned to for income in North America..

In the last half decade, investing in the US has almost become shorthand for investing in the Magnificent Seven. Before that, it was the FAANGs. But, with 493 other companies listed on the S&P 500, there is more to US equity than these tech giants.

For us, the clue is in the name. As managers of The North American Income Trust, our attention is naturally captured by names we think will literally pay dividends in the future. This in turn gives us a broader perspective on the index. Here, we discuss two very different businesses that capture that breadth.

Broadcom – a different take on the tech story

Broadcom is at the forefront of designing, developing, and supplying a range of semiconductor and infrastructure software solutions. These are a central part of new technology adoption, such as AI.

Our investment case: Broadcom is a leader in AI computing and networking. Its core business is the design and development of semiconductors and computing infrastructure software. Given the trajectory of technology adoption globally, we believe this means it is positioned for sustained growth.

This impression was deepened in 2023 when it acquired VMWare. VMWare provides services such as virtualisation – the ability to recreate a computer/desktop environment “virtually” – which is a core element of the cloud computing evolution. The acquisition improved operating margins in less than a year and increased revenue growth.

Broadcom’s numbers are impressive. It has grown its dividend for eight consecutive years. This reflects its profitability, which compares well to other technology companies. This financial profile, combined with the company’s sensible strategy, formed our investment case.

RTX – a military aviation leader in a deteriorating global climate

While RTX cannot be described as ‘low tech’, it operates in a very different environment to Broadcom. It provides a wide range of products, including aviation systems, communications and navigation equipment, to commercial and military clients.

Our investment case: our investment case is anchored in two main areas: the recovery of the commercial travel sector and a rise in profitability in its defence business.

Air travel is on the up. The International Air Transport Association (IATA) reported in January that 2024 passenger air traffic was 3.8% above pre-pandemic levels. As a result of the pandemic-related collapse in flying, many airlines delayed essential maintenance. Similarly, the supply constraints of 2021/2 have eased. Both these factors should drive revenue growth.

In the defence sector, RTX suffered a reduction in profitability for its fixed-priced contracts as a result of inflation. Now, its margins are improving and a rise in global conflicts has prompted an increase in defence spending.

We bought the company, as in our view its share price was low when compared to this future earnings potential. It has a clear commitment to helping shareholders, having grown its dividend and conducted share buybacks.

Glossary

Glossary

Dividend

A variable discretionary payment made by a company to its shareholders.

Inflation

The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.

Magnificent Seven

The term ‘Magnificent Seven’ refers to the seven major technology stocks – Apple, Microsoft, Nvidia, Amazon, Tesla, Alphabet and Meta – that have dominated markets in recent years.

Share buybacks

Where a company buys back their own shares from the market, thereby reducing the number of shares in circulation, with a consequent increase in the value of each remaining share. It increases the stake that existing shareholders have in the company, including the amount due from any future dividend payments. It typically signals the company’s optimism about the future and a possible undervaluation of the company’s equity.

Disclaimer

Janus Henderson Fund Managers UK Limited was appointed as the AIFM of the North American Income Trust with effect from 1 August 2024. Prior to that date, the North American Income Trust’s AIFM was abrdn Fund Managers Limited and all information contained in this document should be considered accordingly.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

Before investing in an investment trust referred to in this article, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

There is no guarantee that past trends will continue, or forecasts will be realised.

Marketing Communication.

Glossary

Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.

Specific risks

Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
Using derivatives exposes the Company to risks different from - and potentially greater than - the risks associated with investing directly in securities. It may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.

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