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.
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.
