25 world-beating ‘Geico’ income stocks

The method is unique in three ways. First, in screening the constituents of the MSCI World Index, it is the only approach in these pages that looks across multiple exchanges. Second, it is the only stockpicking process we follow that is derived from an active management team working in the market today, namely that running Guinness Global Investors’ Global Equity Income fund (IE00BVYPNY24). Third, and in line with the Guinness fund’s focus, it is the only screen that considers 10 years of trading data.

Calling this the ‘Geico’ screen also allows me to make a not-too-subtle nod to the US auto insurer of the same name, one of the most famous companies in investing history.

Founded in 1936 by a husband-and-wife business team, in 1948 it was majority acquired by a coalition of investors led by the doyenne of value investing, Benjamin Graham. Three years later, the company’s consistent growth through rocky markets, sector-leading profitability, dividends and expansion prospects were all cited by Graham protégée Warren Buffett in an article for The Commercial and Financial Chronicle titled ‘The Security I Like Best’. Forty-four years later and still a fan, Buffett would acquire Geico as chief executive of Berkshire Hathaway (US:BRK.B).

Last year’s selections got off to an inauspicious start, as equities around the world sold off heavily in late September 2022 amid the chaos in the UK gilt market and rising fears around a global recession. Since then, the 25-stock portfolio has marched ahead of both its benchmarks. On a total return basis, the Geico screen finished the year up 10.5 per cent, compared with 7.9 per cent from the MSCI World index and 6 per cent from the GEI fund, which was included in our Top 50 Funds issue last week.

 

 

In fact, having watched the screen’s rolling return hit 15 per cent on four separate occasions, I feel a pang of disappointment that returns weren’t higher. However, the price of a concentrated portfolio is often the double-edged sword of higher volatility. Judging by the results so far, it’s been worth it, even after accounting for double-digit declines in five 2022 Geico stocks since the end of July.

 

Company	TIDM	Sterling total return (6 Sep 2022 to 6 Sep 2023)	2023 Tests Failed
Hermes	FR:RMS	44.9	–
Old Dominion Freight Lines	US:ODFL	44.5	PE
Rational	GE:RAA	40.4	–
Kuehne Und Nagel	SW:KNIN	30.8	FCF
Microsoft	US:MSFT	22.5	–
AO Smith	US:AOS	20.9	5yr PE, CROCI
L’Oreal	FR:OR	17.3	–
LVMH	FR:LVMH	16.1	CROCI
Snap-On	US:SNA	14.5	CROCI
Emerson Electric	US:EMR	14.4	PE, Debt, CROCI
Nemetschek	GE:NEM	13.2	–
Cintas	US:CTAS	11.8	–
Christian Hansen	DK:CHR	10.2	CROCI
Accenture	US:ACN	8.0	FCF
Expeditor International	US:EXPD	7.4	FCF
Ems-Chemie	SW:EMSN	4.5	FCF
Hoya	JA:7741	3.4	–
Skyworks Solutions	US:SWKS	2.9	CROCI
Cognex	US:CGNX	-0.8	FCF, CROCI
Schroders	SDR	-6.4	PE, CROCI
Zozo	JA:3092	-8.1	–
Coloplast	DK:COL	-9.1	Debt
Nike	US:NKE	-11.0	–
Marketaxess	US:MKTX	-12.0	–
St James’s Place	STJ	-18.8	CROCI
MSCI World (£)	–	7.9
Guinness Global Equity Income Acc (£)	–	6.0
GEICO	–	10.5
Source: LSEG, Investors’ Chronicle

 

Looking at the past year’s performance in greater detail, a few observations jump out.

First, just seven of the 25 stocks posted a negative total return, which should be considered a good hit rate in any year. Second, removing the only UK names in the portfolio – Schroders (SDR) and St James’s Place (STJ) – would have added two percentage points to the portfolio. Third, the fact those two companies were both once-prestige asset gatherers but are now struggling for momentum highlights a key risk with the screen: that long-term consistent returns on equity can always run out of road.

That’s not a brilliant omen for this year’s sole UK selection – retail investment platform provider Hargreaves Lansdown (HL.) – whose return on capital is now almost half its 10-year average. While this might still seem high at 35 per cent, it is amplified by Hargreaves’ light asset base. Indeed, for some sectors and businesses, the screen’s requirement for 10 unbroken years of 10 per cent returns on capital employed is easily surmountable.

This goes some way to explaining why 10 of last year’s selections made the cut this time round. Encouragingly, the average total return from these stocks was 12.2 per cent, while all but three have posted a positive total return in the past year.  

Among this year’s new entrants is Novo Nordisk (DK:NOVO-B), which this month supplanted 2022 Geico stock LVMH (FR:LVMH) as Europe’s largest listed company. The Danish pharmaceutical giant has seen its shares leap more than 40 per cent so far this year on the back of surging sales of its diabetes drug Wegovy, which has been hailed as a cure for everything from obesity to heart disease.

Other debutants include the building products groups Geberit (CH:GEBN) and Watsco (US:WSO), the investment managers SEI Investments (US:SEIC) and Partners Group (CH:PGHN) and supply chain group Fastenal (US:FAST).

 

Methodology

The reappearance of several of last year’s stocks is by design, rather than a bug in the methodology. Indeed, the managers of the Guinness Global Equity Income fund team like to hold stocks for at least three years, making an annual review a decent point to re-evaluate holdings and either ‘sell’ or ‘add’ stocks according to their pass rate.

The Geico screen criteria, which is applied annually to the constituents of the MSCI World Index and loosely map the Guinness team’s rules, are as follows:

Given all but 1 per cent of MSCI World constituents have a market capitalisation of at least $1bn, only the size test is somewhat redundant. The capital budgeting test, the only one that compares companies with one another, acts as a set filter rather than a determinant of quality attributes. It was the most common test failed by 2022’s selections.

Of the remaining five, while the aggregate outlook for free cash flow growth has improved and dividend payments are once again more ubiquitous, the proportion of stocks failing the valuation test more than doubled and balance sheets appear more leveraged.

That leaves the return test, which is still the toughest. I said above that some capital- or equity-light businesses and sectors find it easier to score highly on this measure. For most blue chips, however, an unbroken track record of at least 10 per cent returns on capital over a decade is hard to achieve.

 

 

Below are the stocks in full, as well as a downloadable spreadsheet showing a much wider range of operational and valuation metrics.

TIDM	Company Name	Sector	Exchange	Price	MC ($mn)	PE (x)	FCF Yield	FCF Yield (NTM)	FCF Yield (STM)	Div yield	ROCE	10y Av. ROCE	CROCI
US:MSFT	Microsoft	Packaged Software	NASDAQ	$332.88	2,473,219	34.4	2.4%	2.4%	3.2%	0.8%	38.8	33.0	23%
US:V	Visa	Miscellaneous Commercial Services	New York	$246.16	501,278	31.8	3.5%	3.5%	4.7%	0.8%	43.2	29.5	32%
US:UNH	UnitedHealth	Managed Health Care	New York	$476.94	441,792	21.3	–	–	–	1.2%	26.9	22.3	20%
DK:NOVO B	Novo Nordisk	Pharmaceuticals: Major	Copenhagen	DKK 1,311	428,511	6.4	2.4%	2.4%	3.1%	1.3%	72.0	72.7	60%
FR:OR	L’Oreal	Household/Personal Care	Paris	€ 398.15	231,093	39.5	3.0%	3.0%	3.7%	1.8%	22.5	15.0	17%
FR:RMS	Hermes	Apparel/Footwear	Paris	€ 1,831	204,384	51.7	1.8%	1.8%	2.4%	0.9%	30.8	27.0	27%
US:NKE	NIKE	Apparel/Footwear	New York	$100.18	153,282	31.0	3.1%	3.1%	3.7%	1.3%	34.6	34.0	18%
US:CTAS	Cintas	Other Consumer Services	NASDAQ	$495.73	50,437	38.2	2.6%	2.6%	3.4%	1.0%	37.4	27.2	22%
US:PAYX	Paychex	Data Processing Services	NASDAQ	$120.37	43,454	28.0	–	–	–	3.1%	47.3	41.7	38%
JA:7741	HOYA	Medical Specialties	Tokyo	¥16,105	39,650	0.3	2.9%	2.9%	3.6%	0.8%	20.8	18.3	19%
US:FAST	Fastenal	Wholesale Distributors	NASDAQ	$55.86	31,915	28.5	–	–	3.4%	2.6%	35.0	30.2	21%
CH:PGHN	Partners Group	Investment Managers	Zurich	CHF 1,011.5	30,319	28.2	–	–	5.1%	4.5%	37.8	40.8	29%
JA:6146	Disco	Industrial Machinery	Tokyo	¥28,280	20,935	0.3	2.3%	2.3%	2.5%	2.0%	25.8	16.5	21%
US:ROL	Rollins	Other Consumer Services	New York	$38.08	18,767	48.1	–	–	–	1.2%	31.0	30.8	28%
CH:GEBN	Geberit	Building Products	Zurich	CHF 449.6	17,081	25.7	4.0%	4.0%	4.3%	2.9%	40.5	33.1	23%
JA:4684	OBIC	Information Technology Services	Tokyo	¥25,300	15,243	0.3	2.3%	2.3%	–	1.2%	16.1	14.7	17%
US:WSO	Watsco	Building Products	New York	$354.92	13,866	24.3	3.8%	3.8%	4.4%	3.6%	30.9	18.7	24%
US:MKTX	MarketAxess	Investment Banks/Brokers	NASDAQ	$228.86	8,623	34.1	3.3%	3.3%	4.1%	1.0%	23.6	27.9	22%
GE:RAA	Rational	Industrial Machinery	Frankfurt	€ 659.50	8,478	38.4	2.2%	2.2%	2.8%	2.0%	29.0	31.9	18%
US:SEIC	SEI Investments	Investment Managers	NASDAQ	$60.83	8,051	20.6	–	–	–	1.4%	24.9	27.8	22%
SG:S68	Singapore Exchange	Investment Banks/Brokers	Singapore	SG$9.59	7,519	13.2	3.8%	3.8%	4.7%	3.4%	35.2	35.1	17%
GE:NEM	Nemetschek	Packaged Software	Frankfurt	€ 61.34	6,932	60.7	3.0%	3.5%	4.0%	0.9%	27.5	28.8	23%
JA:3092	ZOZO	Internet Retail	Tokyo	¥2,914	6,053	0.1	3.8%	3.8%	5.4%	2.2%	60.1	58.3	30%
NZ:SPK	Spark New Zealand	Major Telecommunications	Wellington	NZ$4.94	5,313	4.7	–	–	–	6.2%	66.5	28.8	17%
HL.	Hargreaves Lansdown	Investment Managers	London	733.8p	4,428	17.6	18.1%	18.1%	22.1%	5.0%	37.0	65.0	40%
Source: FactSet, as of 7 Sep 2023. NTM = Next 12 months; STM = Second 12 months (ie, one year from now); ROCE = return on equity ; CROCI = Cash return on capital invested.